Arbitration agreements, with or without express class action waivers, seem to come in an almost infinite variety of forms. Since the threshold premise of AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011), is that courts are to enforce the agreement made, each case must focus on the contract terms.
The objective of this article and accompanying self-study test is to provide bench officers and practitioners with a decision tree analyzing the scope and enforceability of arbitration agreements under the Federal Arbitration Act, 9 U.S.C. Section 1 et seq. Readers will learn about the latest developments in this area of law, and the conflicting authorities in this difficult and continually changing legal landscape.
1. Does the FAA apply, i.e., is there coverage?
The answer is more often than not "yes" unless you have a worker exempted by the narrowly interpreted "employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce" exception in FAA Section 1. A moving party requesting arbitration has an affirmative burden of proof, and the lack of any showing can lead to denial. Lane v. Francis Capital Management LLC
, 224 Cal. App. 4th 676 (2014). For the meaning of the FAA coverage term "contract evidencing a transaction involving commerce," see Allied-Bruce Terminix Companies Inc. v. Dobson
, 513 U.S. 265 (1995).
2. What does the alleged arbitration agreement say?
What claims are submitted? What alternative processes, if any, are overtly barred? Who is the provider? What is said about finality? Any discussion of class or representative claims as allowed or prohibited? Are the rules of procedure designated?
3. Who decides whether the arbitration agreement is unenforceable in the first instance?
If the agreement delegates the question expressly to the arbitrator, it is enforceable. Malone v. Superior Court
, 226 Cal. App. 4th 1551 (2014) (writ to challenge enforcement of express delegation clause by trial court denied). Malone
held AT&T Mobility LLC v. Concepcion
overruled a line of California authority to the contrary, including Ontiveros v. DHL Express (USA) Inc.
, 164 Cal. App. 4th 494 (2008), Murphy v. Check 'N Go of California Inc.
, 156 Cal. App. 4th 138 (2007), and Bruni v. Didion
, 160 Cal. App. 4th 1272 (2008). See Malone v. Superior Court
; see also Tiri v. Lucky Chances Inc.
, 226 Cal. App. 4th 231 (2014) (reversing denial of motion to compel arbitration and directing arbitrator, not trial court, to determine enforceability of arbitration agreement, also finding Ontiveros
were overruled). If the agreement is silent on delegation, the trial court decides the question. Ajamian v. CantorCO2e LP
, 203 Cal. App. 4th 771 (2012) (court decides absent "clear and unmistakable" evidence of delegation to arbitrator).
4. Who decides whether plaintiff's claim is "arbitrable" on a class basis?
This is the show-stopper if the court rules that only an individual claim will be submitted to arbitration. Conversely, the defendant faces substantial uncertainty (and thus risk) if the question is reserved for the arbitrator. This question is a close variant on Question #3, but not exactly the same question. The U.S. Supreme Court has not yet resolved this issue. It was flagged - but not resolved - in footnote 2 of its decision in Oxford Health Plans LLC v. Sutter
, 133 S. Ct. 2064 (2013):
"Those questions - which 'include certain gateway matters, such as whether parties have a valid arbitration agreement at all or whether a concededly binding arbitration clause applies to a certain type of controversy' - are presumptively for courts to decide
. Green Tree Financial Corp. v. Bazzle
, 539 U.S. 444, 452 (2003) (plurality opinion). A court may therefore review an arbitrator's determination of such a matter de novo absent 'clear and unmistakabl[e]' evidence that the parties wanted an arbitrator to resolve the dispute. AT&T Technologies, Inc. v. Communications Workers
, 475 U.S. 643, 649 (1986). Stolt-Nielsen made clear that this Court has not yet decided whether the availability of class arbitration is a question of arbitrability.
See 559 U.S. at 680. But this case gives us no opportunity to do so because Oxford agreed that the arbitrator should determine whether its contract with Sutter authorized class procedures
In the meantime, lower courts have grappled with the issue, and we have a split of California appellate authority on a key question. If there is an express delegation of the issue (or even just a delegation of Issue #3 above) to the arbitrator, this issue likely goes to the arbitrator under Malone
. If, as is more common, the arbitration agreement is silent on the question, there was briefly a split of authority: Under Sandquist v. Lebo Automotive Inc.
(2014), originally published at 228 Cal. App. 4th 65, pet. rev. granted
(Nov. 12, 2014), the court would decide the class versus individual arbitration issue. Under Network Capital Funding Corp. v. Papke
, 230 Cal. App. 4th 503 (2014), and Garden Fresh Restaurant Corp. v. Superior Court
, 2014 Cal.App.LEXIS 1043 (2014) (the only citable cases), the trial court decides the question.
5. How do you test the "arbitration agreement" in isolation, as compared to the overall agreement?
In theory you can have an enforceable arbitration agreement even if you would find the contract, as a whole, or key terms therein, unenforceable (because the arbitrator can address the same question in due course). Nitro-Lift Technologies LLC v. Howard
, 133 S. Ct. 500 (2012); Buckeye Check Cashing Inc. v. Cardegna
, 546 U.S. 440 (2006); Prima Paint Corp. v. Flood & Conklin Mfg. Co.
, 388 U.S. 395 (1967).
Cases like Concepcion
have not told us the extent to which a court can look beyond the arbitration agreement itself (and its practical impacts) to the contract as a whole to test an assertion that under the "general state law contract principles" the court is being asked to enforce an unconscionable contract. There are, of course, many reasons not dependent on "unconscionability" analysis why a contract, as a whole, may be unenforceable even if the arbitration clause survives analysis, but this is uncharted territory.
Sonic-Calabasas A Inc. v. Moreno
, 57 Cal. 4th 1109 (2013) (Sonic II
), suggests that evaluation of unconscionability factors in the entirety of the bargain: "[T]he unconscionability inquiry requires a court to examine the totality of the agreement's substantive terms as well as the circumstances of its formation to determine whether the overall bargain was unreasonably one-sided." In recapping the holding and reasoning of Sonic-Calabasas A Inc. v. Moreno
, 51 Cal. 4th 659 (2011) (Sonic I
), the California Supreme Court in Sonic II
states the contrary proposition, however, with seeming approval: "[W]hen a party subject to an arbitration agreement challenges the contract as a whole and not merely the arbitration clause, it is the arbitrator who decides the validity of the contact." Accord Preston
; see also Buckeye Checking Cashing Inc. v. Cardegna
, 546 U.S. 440 (2006).
The first published California case to deal with this issue is Phillips v. Sprint PCS
, 209 Cal. App. 4th 758 (2012), where an order compelling arbitration was affirmed notwithstanding such challenges to the contract as a whole: The challenged provisions limit the time period for bringing claims against Sprint and the amount and type of recoverable damages. The trial court found that "[p]laintiff's arguments are to the effect that these provisions render the contract itself - not just the arbitration clause - unconscionable. Consequently, these issues are for the arbitrator, not the court, to resolve." The trial court was correct.
6. Is the challenge to enforcement of the arbitration clause "categorical" or "case-specific"?
as rejecting "categorical" rules prohibiting enforcement of arbitration agreements while allowing case-specific challenges to enforcing arbitration agreements to proceed. Reliance on "categorical" rules prohibiting enforcement of arbitration agreements is preempted by the holdings of both Concepcion
and Sonic II
. Under Sonic II
, it would appear that case-specific challenges are still viable. Plaintiffs' challenges to arbitration agreements and the way in which consent was obtained are likely to be case-specific and one-off going forward, making outcomes less predictable. See Carmona v. Lincoln Millennium Car Wash Inc.
, 226 Cal. App. 4th 74 (2014), for a good example of how a combination of negative factors supported a case-specific ruling that an arbitration clause was unenforceable. A showing that the weaker party to the adhesion arbitration agreement had language problems in understanding the transaction seems to be a particularly compelling factor to support rejection of the agreement notwithstanding the FAA. See, e.g., Millenium Car Wash
7. Has the party opposing arbitration shown the agreement is "unconscionable" or otherwise contrary to public policy on a case-specific basis?
As noted above, broad-brush rules categorically refusing to enforce all arbitration agreements of a certain type have been held preempted by the FAA under Concepcion
and Sonic II
, so a successful challenge must be tethered to the particular facts and circumstances of a given case. A useful analogy is to think of the difference between a constitutional challenge to a statute "on its face" versus a challenge to such a statute "as applied." Doing so can help focus the nature of the inquiry here. The court is only interested in a case-specific "as applied" analysis because a "facial" challenge to an arbitration clause's enforceability would be preempted.
Under Sonic II
, the test for unconscionability appears to be whether the clause, in actual operation, is "unreasonably one-sided" in favor of the party which drafted it. Many considerations are listed in Sonic II
which might be considered when evaluating mandatory arbitration in lieu of the informal "Berman
hearing" under Labor Code Section 98 before a labor commissioner, including the procedural informality of the proceeding and whether the party was assisted by an interpreter.
8. Do private attorney general act (Labor Code Section 2698 et seq.) (PAGA) claims get special treatment? Yes, unless your are in federal court.
State trial court judges now have clear guidance via Iskanian v. CLS Transportation Los Angeles LLC
, 59 Cal. 4th 348 (2014), that PAGA claims are exempt from coverage by the FAA, essentially as a matter of public policy. However, at least six federal district court decisions decided post-Iskanian
reach the opposite conclusion. See, e.g., Lucero v. Sears Holdings Mgmt. Corp.
, 2014 U.S. Dist. LEXIS 168782 (S.D.Cal. Dec. 2, 2014); Mill v. Kmart Corp.
, 2014 U.S.Dist.LEXIS 165666 (N.D.Cal. Nov. 26, 2014); Langston v. 20/20 Companies Inc.
, 2014 U.S.Dist.LEXIS 151477 (C.D.Cal. Oct. 17, 2014); Chico v. Hilton Worldwide Inc.
, 2014 U.S.Dist.LEXIS 147752 (C.D.Cal. Oct. 7, 2014); Ortiz v. Hobby Lobby Stores Inc.
, 2014 U.S.Dist.LEXIS 140552 (E.D.Cal. Oct. 1, 2014); and Fardig v. Hobby Lobby Stores Inc.
, 2014 U.S.Dist.LEXIS 139359 (C.D.Cal. Aug. 11, 2014). A petition for certiorari was denied on Jan. 20, 2015, in Iskanian
, so it will be interesting to see if this impacts how federal courts are treating the PAGA issue.
9. If the arbitration agreement is a slight bit "unconscionable," should you blue pencil it under Armendariz v. Foundation Health Pyschcare Services Inc., 24 Cal. 4th 83 (2000), rather than denying it effect?
This seems to be virgin territory in the argument over the effectiveness of class action waivers. Simply put, if a slight fix works to make the arbitration clause not
unconscionable, does the author of the adhesion contract get this benefit (and with it the elimination of class action exposure) or not? Note, however, that Sonic II
as dictating that one certain mistake to avoid is judicial imposition of new terms to an existing agreement, e.g., the concept of court-imposed, mandatory "class arbitration" enunciated in Discover Bank
, i.e., "procedural rules that are inconsistent with fundamental attributes of arbitration, even if such rules are 'desirable for unrelated reasons.'" So the rule appears to be that a court can delete a clause, but not add a clause.
10. How to apply D.R. Horton and Murphy Oil USA Inc.? Or not?
In D.R. Horton Inc.
, 357 NLRB No. 184 (2012), the National Labor Relations Board held that an employer's use of a Mandatory Arbitration Agreement violated workers' right to engage in collective activity protected by National Labor Relations Act Section 7, the core right enshrined in federal labor law. The California Supreme Court in Iskanian
, like many other courts, has expressly rejected the NLRB's interpretation of this statute. But, the board doubled-down on its decision recently in Murphy Oil USA Inc.
, 361 NLRB No. 72 (Oct. 28, 2014), restating its view that class action waivers violate federal law notwithstanding these many rejections of their logic.