By Hon. William F. Highberger
Trial courts continue to receive very inconsistent direction from the U.S. Supreme Court, the California appellate courts and the National Labor Relations Board, regarding the proper interpretation and application of the Federal Arbitration Act, 9 U.S.C. Section 1 et seq., to state trial court cases. Because the arbitration alternative has so much impact on case value and because it is also intimately tied up with whether a case can proceed on a class or "representative" basis, this is a highly important topic.
The objective of this article and self-study test is to review the state of the law regarding compelling arbitration under the Federal Arbitration Act. Readers will learn about the latest U.S. and California Supreme Court cases on the topic, and the way the NLRB has handled these issues.
The Supremacy Clause
"When state law prohibits outright the arbitration of a particular type of claim, the analysis is straightforward: the conflicting rule is displaced by the FAA." AT&T Mobility LLC v. Concepcion, 131 S.Ct. 1740 (2011). In Marmet Health Care Ctr., Inc. v. Brown, 132 S.Ct. 1201 (2012), the Supreme Court rejected West Virginia's Supreme Court's reliance on "public policy" to prohibit mandatory arbitration of personal injury claims against nursing homes and to decide whether the arbitration clauses in its case were unenforceable under state common law principles that were not specific to arbitration and preempted by the FAA. The U.S. Supreme Court stated:
"State and federal courts must enforce the Federal Arbitration Act (FAA), 9 U.S.C. [Section] 1 et seq., with respect to all arbitration agreements covered by that statute. Here, the Supreme Court of Appeals of West Virginia, by misreading and disregarding the precedents of this Court interpreting the FAA, did not follow controlling federal law implementing that basic principle. The state court held unenforceable all predispute arbitration agreements that apply to claims alleging personal injury or wrongful death against nursing homes.
"The decision of the state court found the FAA's coverage to be more limited than mandated by this Court's previous cases. The decision of the State Supreme Court of Appeals must be vacated. When this Court has fulfilled its duty to interpret federal law, a state court may not contradict or fail to implement the rule so established. See U.S. Const., Art. VI, cl. 2. ...
"The state court considered whether the state public policy was preempted by the FAA. The state court found unpersuasive this Court's interpretation of the FAA, calling it 'tendentious' ... , and 'created from whole cloth' .... It later concluded that 'Congress did not intend for the FAA to be, in any way, applicable to personal injury or wrongful death suits that only collaterally derive from a written agreement that evidences a transaction affecting interstate commerce, particularly where the agreement involves a service that is a practical necessity for members of the public' .... The court thus concluded that the FAA does not preempt the state public policy against predispute arbitration agreements that apply to claims of personal injury or wrongful death against nursing homes.
"The West Virginia court's interpretation of the FAA was both incorrect and inconsistent with clear instruction in the precedents of this Court."
The "Savings Clause"
In the last decade, a number of California appellate cases, led by decisions authored by now retired California Supreme Court Justice Carlos Moreno, have found compulsory arbitration clauses "unconscionable" and thus unenforceable. The holdings, based on "unconscionability" or reliance on "general state law contract principles," have been the stated basis for nonenforcement of contracts otherwise covered by FAA, and have relied on the FAA's "savings" clause that allows courts to refuse to enforce arbitration contracts based "upon such grounds as exist at law or in equity for the revocation of any contract." FAA, Section 2.
In Discover Bank v. Superior Court, 36 Cal.4th 148 (2005), overruled by AT&T Mobility LLC v. Concepcion, 131 S.Ct. 1740 (2011), Justice Moreno wrote for the majority: "[S]uch class action or arbitration waivers are indisputably one-sided. ... Such one-sided, exculpatory contracts in a contract of adhesion, at least to the extent they operate to insulate a party from liability that otherwise would be imposed under California law, are generally unconscionable."
In Gentry v. Superior Court, 42 Cal.4th 443 (2007), Justice Moreno wrote, "[t]he principle that in the case of certain unwaivable statutory rights, class action waivers are forbidden when class actions would be the most effective practical means of vindicating those rights is an arbitration-neutral rule: it applies to class waivers in arbitration and nonarbitration provisions alike. [Citation.] 'The Armendariz requirements are ... applications of general state law contract principles regarding the unwaivability of public rights to the unique context of arbitration, and accordingly are not preempted by the FAA.'" (Referring to Armendariz v. Foundation Health Psychcare Servs., Inc., 24 Cal.4th 83 (2000).)
Finally, in Moreno v. Sonic-Calabasas A, Inc., 51 Cal.4th 659 (2011), summarily vacated and remanded for further consideration sub nom. Sonic-Calabasas A, Inc. v. Moreno, 132 S.Ct. 496 (2011), Justice Moreno wrote, "The doctrine of unconscionability cannot be used, however, in a way that discriminates against arbitration agreements. ... [O]ur conclusion that [waivers of employees' rights to administrative hearings regarding wage claims] are contrary to public policy and unconscionable does not discriminate against arbitration agreements."
And Back in Washington
Even as California courts set up roadblocks to mandatory arbitration and class action waivers accomplished by mandatory arbitration, the U.S. Supreme Court has enforced mandatory arbitration clauses and overruled lower courts routinely to do so. Although in 2003 the U.S. Supreme Court contemplated in an oddly decided 4-1-3-1 decision in Green Tree Fin. Corp. v. Bazzle, 539 U.S. 444 (2003), that class arbitration could be allowed under the FAA if the contract authorized such a proceeding, the majority in 2010 in Stolt-Nielsen SA v. Animal Feeds Int'l Corp., 130 S.Ct. 1758 (2010), came out soundly against implying any right to class arbitration under the FAA if a contract was silent on authorizing such a right. The majority decision recited at length all the due process horrors that attach to submitting high-stakes class action claims to arbitration subject to limited judicial review and with broad arbitrator discretion to ignore otherwise controlling law.
AT&T Mobility was decided only one year later and Justice Scalia's decision basically leveraged off Stolt-Nielsen's holding that class arbitration without specific contractual authorization was a bad idea. AT&T Mobility was also based on a somewhat unique record that created a very pro-consumer process for arbitration of individual claims. Only time will tell if a later U.S. Supreme Court majority limits the logic of that decision to its unique facts. The reasoning of AT&T Mobility soundly rejected reliance on the "savings" clause of the FAA to allow state-law impediments to enforcement of arbitration.
As analyzed by Justice Scalia in American Tel. & Tel. Co. v. Central Office Tel., Inc., 524 U.S. 214 (1998):
"This saving clause permits agreements to arbitrate to be invalidated by 'generally applicable contract defenses, such as fraud, duress, or unconscionability,' but not by defenses that apply only to arbitration or that derive their meaning from the fact that an agreement to arbitrate is at issue. [Citation].
"As we have said, a federal statute's saving clause '"cannot in reason be construed as [allowing] a common law right, the continued existence of which would be absolutely inconsistent with the provisions of the act. In other words, the act cannot be held to destroy itself." [Citation].'"
Since AT&T Mobility was decided slightly more that one year ago, the U.S. Supreme Court has issued another decision after full briefing and argument overturning a decision protecting federal statutory claims from mandatory arbitration and three summary "G/V/R" orders (standing for Granting the cert. petition, Vacating the lower court decisions summarily without need for any further briefing or argument, and Remanding for further consideration by the lower court) rejecting decisions from California, Florida, and West Virginia that appeared to flout the highest court's reading of the FAA.
NLRB Takes a Different View of Class Action Waivers
A very different view of the propriety of class action waivers has recently come from the NLRB. The board issued D.R. Horton, Inc., 357 NLRB No. 184, 192 LRRM (BNA) 1137, 2012 NLRB Lexis 11, 2012 WL 36274, in a very odd procedural posture - with only two members acting for what should be a five-person body. The board found that enforcement of mandatory arbitration with a class action waiver violated nonunion employees' Section 7 rights under the National Labor Relations Act, 29 U.S.C. Section 157.
There is a question with respect to the precedential value of D.R. Horton, because in New Process Steel v. NLRB, 130 S.Ct. 488 (2010), the U.S. Supreme Court had held that a prior attempt to issue a board decision with only two members acting was invalid for lack of the needed minimum quorum under 29 U.S.C. Section 153(a) and (b).
Moreover, because D.R. Horton is the result of the balancing of two different federal statutes, it does not encounter the kind of supremacy clause problems that apply to efforts to rely on state "public policy" or similar state law reasons to reject arbitration or class action waivers. But federal law questions are suitable issues for the U.S. Supreme Court to review, and the Supreme Court does not appear to have ever extended the NLRA to apply in such a context totally devoid of union involvement.
Further, NLRB decisions are not self-enforcing. 29 U.S.C. Section 160(e) and (f). D.R. Horton has filed a petition to vacate with the 5th U.S. Circuit Court of Appeals. Whether the NLRB's ruling will stand remains open to question, both on its legal merits and the no-quorum issue. The NLRB decision itself is presumably no more than potentially persuasive, but not controlling, authority in state court since it is not from the U.S. Supreme Court on a federal law question.
While Back Here
The California Supreme Court must now revisit its holding in Sonic-Calabasas A, in response to the G/V/R order from the U.S. Supreme Court. The state high court has more recently granted review to consider the impact of the FAA on the enforceability of an arbitration agreement in Sanchez v. Valencia Holding Corp., 2012 Cal. Lexis 4111 (S199119), a case where the trial court and appellate court had each refused to enforce a contractual term for individual-only arbitration.
The latest development is the issuance of Iskanian v. CLS Transp. Los Angeles, LLC, 206 Cal.App.4th 949 (2012), which refused to invalidate an individual-only arbitration claim under Labor Code Section 2698. Iskanian is in conflict with contrary decisions in Brown v. Ralphs Grocery Co., 197 Cal.App.4th 489 (2011), rev. denied, cert. denied, and Reyes v. Macy's Inc., 202 Cal.App.4th 1119 (2011). Iskanian also expressly held that the test in Gentry v. Superior Court, 42 Cal.4th 443 (2007), for invalidating arbitration clauses is no longer valid.
Given the express conflict between Iskanian and the contrary published decisions in Brown and Reyes, and given the holding in Iskanian that Gentry is no longer good law, it is not surprising that a petition for review was filed in Iskanian with the California Supreme Court on July 16. This means that we now have three important arbitration cases awaiting decision in the coming months. Also, most recently on July 18, another Court of Appeal issued an opinion largely agreeing with Iskanian, though not reaching the issue of whether Gentry remains good law. (See Nelsen v. Legacy Partners Residential, 2012 Cal.App. LEXIS 821 (2012).) Hopefully when the California Supreme Court issues opinions on some or all of these cases it will provide coherence and consistency to a body of law that is presently so disjointed.