Class Action Waivers in Arbitration Table of Contents

Transcription

1 Class Action Waivers in Arbitration Table of Contents Webinar PowerPoint Presentation Faculty Bios A Discussion of Class Action Waivers and California Laws: How has the California Supreme Court Reacted to Concepcion? CLASS ACTION WAIVERS IN EMPLOYMENT ARBITRATION: A Brief Summary of Issues Before (And Perhaps Soon-To-Be Before) The United States Supreme Court CLASS, COLLECTIVE, AND REPRESENTATIVE ACTIONS IN EMPLOYMENT ARBITRATION SELECTED ISSUES Opp to Mtn to Compel Arbitration

2 Class Action Waivers in Arbitration Where Are We Now? May 11, 2017 (1:00 PM to 2:30 PM (ET)) Sponsored jointly by the Section of Labor and Employment Law and the Section on Dispute Resolution George W. Abele, Paul Hastings Pamela L. Hemminger, Law Offices of Pamela L. Hemminger, AAA Arbitrator Monique Olivier, Duckworth Peters Lebowitz Olivier LLP Deborah C. Saxe, JAMS Arbitration, Mediation, and ADR Services

3 DISCOVER BANK AND CONCEPCION

4 Discover Bank Credit card holder filed class action in court alleging that Discover Bank misrepresented its practice with respect to the assessment of late payment fees Credit card agreement required arbitration of disputes, said the FAA applies, and expressly prohibited the arbitration of any claim as a representative or member of a class or in a private attorney general capacity Bank filed motion to compel arbitration on an individual basis 3

5 Trial court: Discover Bank class action waiver is unconscionable under CA law enforced arbitration agreement without waiver (permitting cardholder to seek class wide relief in arbitration) Court of Appeal: reversed, holding that FAA 2 preempts CA rule that class arb. waivers are unconscionable compelled arbitration on an individual basis 4

6 Discover Bank FAA Section 2: A written provision in any... contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract... shall be valid, irrevocable, and enforceable save upon such grounds as exist at law or equity for the revocation of any contract Enacted because of judicial hostility to arbitration 5

7 CA Supreme Court: Discover Bank Class arbitration is well accepted under CA law Class arb. waiver in a consumer K of adhesion is against CA public policy, and therefore unconscionable, if (1) disputes predictably involve small amounts of damages, and (2) it is alleged that the party with the superior bargaining power has carried out a scheme to deliberately cheat large numbers of consumers out of individually small sums of money 6

8 Discover Bank CA Supreme Court (cont d): No FAA preemption because, under CA law, (1) unconscionability is a ground for the revocation of any contract, and (2) the principle that class action waivers sometimes are unconscionable applies to contracts generally it applies equally to class action litigation waivers in contracts without arbitration agreements as it does to class action waivers in contracts with such agreements 7

9 Discover Bank CA Supreme Court (cont d): rejected the Court of Appeal s conclusion that Arbitrators should not be trusted with class wide claims because there is no avenue for judicial review of a multi-million dollar class arbitration award [T]here is nothing to indicate that class action and arbitration are inherently incompatible 8

10 Discover Bank CA Supreme Court (cont d): The Court of Appeal s conclusion regarding the unsuitability of arbitration to class actions reflects... the very mistrust of arbitration that has been repudiated by the U.S. Supreme Court Reversed Court of Appeal decision Result: case compelled to arbitration without class action waiver 9

11 Concepcion Acknowledged that the Discover Bank rule applies equally to arbitration and non-arbitration Ks Held: Discover Bank rule is preempted by FAA 2 anyway because it stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress the FAA precludes a state court from finding an arbitration provision unconscionable based on the need to protect small-dollar claims that might otherwise slip through the legal system

12 Concepcion U.S. Supreme Court (cont d): Class arbitration, to the extent it is manufactured by Discover Bank rather than consensual, interferes with the fundamental attributes of arbitration and thus creates a scheme inconsistent with the FAA because the switch from bilateral to class arb. sacrifices the principal advantage of arbitration its informality because class arb. requires procedural formality and makes the process slower, more costly, and more likely to generate procedural morass than final judgment

13 Concepcion class arb. greatly increases risks to Ds because the absence of a multilayered judicial review makes it more likely that errors will go uncorrected and the risk of error may be unacceptable when damages owed to thousands of claimants are aggregated and decided at once it is hard to believe that Ds would bet the Co. with no effective means of review, and even harder to believe that Congress would have intended to allow state courts to force such a decision

14 New way to read FAA 2: Concepcion A written provision in any... contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract... shall be valid, irrevocable, and enforceable save upon such grounds as exist at law or equity for the revocation of any contract UNLESS the result of applying those grounds is inconsistent with the fundamental attributes of arbitration

15 ITALIAN COLORS

16 Italian Colors Arbitration agreement between American Express and merchants who accept Am. Ex. cards said there shall be no authority for any claims to be arbitrated on a class action basis Merchants filed a class action in Court claiming that Am. Ex. was violating the Sherman Act by abusing its monopoly power in the market for credit cards to force merchants to accept credit cards at rates approx. 30% higher than the fees for competing credit cards

17 Italian Colors Am. Ex. moved to compel arbitration under the FAA Merchants argued that the arb. agreement was unenforceable because the cost of expert analysis necessary to prove their antitrust claims would greatly exceed the maximum recovery for any individual P Second Circuit agreed with Ps and found Concepcion inapposite because it addressed federal preemption of state laws U.S. Supreme Court reversed

18 U.S. Supreme Court: Italian Colors The FAA does not permit courts to invalidate a contractual waiver of class arb. on the grounds that the cost of individual arb. exceeds the potential recovery Overarching principles of FAA: Arb. is a matter of K and courts must rigorously enforce arb. agreements according to their terms

19 Italian Colors U.S. Supreme Court (cont d): These rules apply to claims alleging violation of federal statutes unless the FAA s mandate has been overridden by a contrary congressional command Antitrust laws do not evidence an intention to preclude a waiver of class action procedure and, in fact, do not mention class actions Antitrust laws do not guarantee an affordable procedural path to the vindication of every claim

20 Italian Colors U.S. Supreme Court (cont d): Congressional approval of FRCP Rule 23 does not establish an entitlement to class proceedings for the vindication of statutory rights Sherman Act was enacted before the advent of Rule 23, which was designed to allow an exception to the usual rule that litigation is conducted by and on behalf of the individual named parties only It would be remarkable for a court to erase the expectation that arbitration would be pursuant to the usual rule

21 Italian Colors U.S. Supreme Court (cont d): The judge-made effective vindication exception to the FAA, which invalidates (on public policy grounds) arb. agreements that operate as a prospective waiver of a party s right to pursue statutory remedies would cover a provision forbidding the assertion of certain statutory rights in arb. and might cover filing and admin. fees attached to arb. that are so high as to make access to the forum impracticable

22 Italian Colors U.S. Supreme Court (cont d): The effective vindication (of statutory rights) doctrine does not apply because the fact that it is not worth the expense involved in proving a statutory remedy does not constitute the elimination of the right to pursue that remedy As in Concepcion, rejected the argument that class arbitration is necessary to prosecute claims that might otherwise slip through the legal system

23 THE NLRA AND CLASS ACTION WAIVERS

24 Section 7 The National Labor Relations Act Employees shall have the right to self-organization, to form, join or assist labor organizations, to bargain collectively through representatives of their own choosing, and to engage in other concerted activities for the purpose of collective bargaining or other mutual aid or protection Section 7 rights apply to union and non-union employees Section 8(a)(1) It shall be an unfair labor practice for an employer (1) to interfere with, restrain, or coerce employees in the exercise of the rights guaranteed in section

25 NLRB: D.R. Horton Rule How did the NLRB apply the NLRA in the context of class action waivers in arbitration agreements? NLRB: The right to participate in a class or collective action is protected concerted activity under section 7. D.R. Horton, 357 N.L.R.B. No. 184 (2012) Arbitration agreements banning class actions violate the NLRA, when required as a condition of employment. Many ALJs extended D.R. Horton to voluntary arbitration agreements

26 NLRB: D.R. Horton Rule D.R. Horton, Inc. v. NLRB, 737 F.3d 344 (5th Cir. 2013) Fifth Circuit largely rejected Board s decision. On petition for review, we disagree and conclude that the Board's decision did not give proper weight to the Federal Arbitration Act. We uphold the Board, though, on requiring Horton to clarify with its employees that the arbitration agreement did not eliminate their rights to pursue claims of unfair labor practices with the Board

27 Initial Reactions to D.R. Horton Iskanian v. CLS Transportation Los Angeles, LLC, 59 Cal. 4th 348 (June 23, 2014) Relying on Concepcion, the Fifth Circuit rejected the argument that the Board's rule fell within the savings clause of the FAA. A rule that is neutral on its face but is applied in a fashion that disfavors arbitration is not a ground that exists for the revocation of any contract within the meaning of the savings clause.... The Fifth Circuit concluded that the Board's rule... would significantly undermine arbitration's fundamental attributes by requiring procedural formality and complexity, and by creating greater risks to defendants

28 Initial Reactions to D.R. Horton We agree with the Fifth Circuit that, in light of Concepcion, the Board's rule is not covered by the FAA's savings clause. We thus conclude, in light of the FAA's liberal federal policy favoring arbitration (Concepcion, supra, 563 U.S. at p. [131 S. Ct. at p. 1745]), that sections 7 and 8 of the NLRA do not represent a contrary congressional command overriding the FAA's mandate. This conclusion is consistent with the judgment of all the federal circuit courts and most of the federal district courts that have considered the issue

29 NLRB: D.R. Horton Is Alive And Well Murphy Oil USA Inc., 361 NLRB No. 72 (October 28, 2014) This case turns on the issue decided in D. R. Horton. The Respondent urges us to overrule that decision, which has been rejected by the U.S. Court of Appeals for the Fifth Circuit.... We have independently reexamined D. R. Horton, carefully considering the... adverse judicial decisions.... Today we reaffirm that decision. The Board is not required to acquiesce in adverse decisions of the Federal courts in subsequent proceedings not involving the same parties. As the Seventh Circuit explained, because only the Supreme Court is authorized to interpret the Act with binding effect throughout the whole country, the Board is not obliged to accept [the] interpretation of any court of appeals

30 THE CIRCUIT SPLIT Murphy Oil USA, Inc. v. NLRB, 808 F.3d 1013 (2015) Lewis v. Epic Systems Corp., 823 F.3d 1147 (7th Cir. 2016) Morris v. Ernst & Young LLP, 834 F.3d 975 (9th Cir. 2016) Patterson v. Raymours Furniture Co., 659 Fed. Appx. 40 (2nd Cir. 2016)

31 Murphy Oil USA v. NLRB 5th Circuit followed its earlier decision in D.R. Horton, Inc. v. NLRB. Does not defer to the NLRB, finding that the case involved laws other than the NRLA, and the court was required to evaluate the laws in context and to accommodate two statutory schemes. Finds no substantive right to collective action. FAA s saving clause is inapplicable because the waiver provision is unenforceable

32 Lewis v. Epic Systems Corp. 7th Circuit adopts reasoning of the NLRB in D.R. Horton Requiring employees to sign arbitration provisions banning them from participating in class or collective actions violates their rights under section 7 of the NLRA to engage in concerted activity. Section 7 unambiguously covers participation in class or collective actions. Even if ambiguity, the NLRB s interpretation is entitled to Chevron deference. Rejects employer s argument that FAA preempts the NLRA because FAA s savings clause permits invalidation of arbitration provisions on grounds that would apply to any contract, such as illegality

33 Morris v. Ernst & Young LLP Employees signed arbitration provisions requiring all disputes to be brought in arbitration through separate proceedings. 9th Circuit reversed district court s order compelling case to arbitration, deferring to and agreeing with the NLRB s interpretation of the NLRA and following the 7th Circuit in Lewis. Arbitration provision violated employees rights under section 7 to engage in concerted activity for mutual aid and protection. Ruling is not hostile to arbitration because it would apply equally to a provision that banned collective proceedings in court or in any other forum

34 Patterson v. Raymours Furniture Co. 2nd Circuit concluded it was required to follow its earlier opinion in Sutherland v. Ernst & Young LLP, 726 F.3d 290 (2d Cir. 2013). Sutherland declined to follow the NLRB s decision in D.R. Horton that a waiver of the right to pursue a FLSA claim collectively in any forum violates the [NLRA]. The Court noted that if we were writing on a clean slate, we may well be persuaded, for the reasons forcefully stated in Lewis and Morris to join the Seventh and Ninth Circuits and hold that the waiver of collective action is unenforceable

35 SCOTUS to Decide Four petitions for certiorari were filed: one petition from employees, two from employers, and one from the NLRB itself. Epic Sys. Corp. v. Lewis, No (petition filed Sept. 2, 2016 by employer) Ernst & Young U.S. LLP v. Morris, No (petition filed Sept. 8, 2016 by employer) NLRB v. Murphy Oil USA, No (petition filed Sept. 9, 2016 by Solicitor General on behalf of NLRB) Patterson v. Raymours Furniture Co., No (petition filed Sept. 22, 2016 by employees)

36 SCOTUS to Decide On January 13, 2017 the Court collectively granted certiorari to Murphy Oil, Ernst & Young, and Epic Systems. On February 9, the Court announced the cases would not be argued in the current term (ending June 30, 2017)

37 Question Presented Ernst & Young: Whether the collective-bargaining provisions of the National Labor Relations Act prohibit the enforcement under the Federal Arbitration Act of an agreement requiring an employee to arbitrate claims against an employer on an individual, rather than collective, basis. Murphy Oil: Whether arbitration agreements with individual employees that bar them from pursuing workrelated claims on a collective or class basis in any forum are prohibited as an unfair labor practice under 29 U.S.C. 158(a)(1), because they limit the employees' right under the National Labor Relations Act to engage in "concerted

38 Question Presented activities" in pursuit of their "mutual aid or protection," 29 U.S.C. 157, and are therefore unenforceable under the saving clause of the Federal Arbitration Act, 9 U.S.C. 2. Epic Systems: Whether an agreement that requires an employer and an employee to resolve employmentrelated disputes through individual arbitration, and waive class and collective proceedings, is enforceable under the Federal Arbitration Act, notwithstanding the provisions of the National Labor Relations Act

39 Meanwhile, at the NLRB... NLRB s Office of the General Counsel issued guidance on pending cases (January 26, 2017) In light of the grant of certiorari..., the General Counsel has re-evaluated his prior position of proceeding on these matters. GC s guidance on pending unfair labor practice case: In cases alleging that the employer is either maintaining and/or enforcing an agreement prohibited by Murphy Oil, Regions, after determining the cases have merit, are directed to propose that the parties enter informal settlement agreements conditioned on the Agency prevailing at the Supreme Court

40 Meanwhile, at the NLRB... In situations involving opt in/opt out clauses in mandatory arbitration agreements or where it is argued that some other feature of these agreements renders them distinguishable from Murphy Oil, Regions are directed to hold such cases in abeyance. Other cases may be held in abeyance or motions to stay may not be opposed... and will be considered on a case-by-case basis

41 What is the US Government s View? Office of the Solicitor General submitted an extension of the briefing schedule (April 21, 2017) Initial schedule April 28, 2017: Opening briefs July 27, 2017: Response briefs Government s requested extension: June 9, 2017: Opening briefs September 15, 2017: Response briefs Updated schedule June 9, 2017: Opening briefs August 9, 2017: Response briefs Employers will file opening and reply briefs Employees/Government will file response briefs

42 What is the US Government s View? Solicitor General s rationale for the requested extension: The two courts of appeals to adopt the Board s position have done so based in part on deference to the Board. (citing Ernst & Young and Epic) Appointment by the President of two additional members [to the Board] therefore could affect the Board s position on the question presented, which in turn could affect the Court s disposition of these cases. In light of recent developments, the current briefing schedule is no longer adequate for the government. To complete the process of determining the position of the United States, the Acting Solicitor General must fully assess the legal issues that these cases present and consult with new leadership within the government

43 What is the US Government s View? The May 12 deadline for opening briefs would provide insufficient time for the Acting Solicitor General to complete internal consultation and, if found appropriate, to prepare a brief supporting the position in the opening briefs. (Emphasis added.) Because the two courts of appeals that upheld the Board s current position have relied in part on principles of administrative deference, a change in the government s position could affect the framework for analysis presented to the Court for decision. Solicitor General suggests oral argument date in November or December

44 REPRESENTATIVE ACTIONS -- PAGA

45 Representative Actions -- PAGA California Labor Code Private Attorneys General Act of 2004 ( PAGA ) (California Labor Code 2698 et seq.). aggrieved employee may bring civil action personally and on behalf of other employees to recover civil penalties for Labor Code violations. 75 percent goes to the Labor and Workforce Development Agency; 25 percent goes to the aggrieved employees. Iskanian v. CLS Transportation Los Angeles LLC, 59 Cal.4 th 348 (2014) -- a pre-dispute representative action waiver violates public policy and agreement is not enforceable

46 Representative Actions PAGA PAGA claims are unwaivable statutory rights. Waiver is contrary to public policy. No FAA preemption because FAA aims to ensure an efficient forum for the resolution of private disputes, whereas PAGA action is a dispute between an employer and the state Labor and Workforce Development Agency. The FAA was not intended to govern disputes between the government in its law enforcement capacity and private individuals

47 Representative Actions PAGA In Sakkab v. Luxottica Retail North America, Inc. (9 th Cir. 2015) 803 F.3d 425, 427, 9 th Circuit agreed that Iskanian rule invalidating pre-dispute waivers of PAGA claims, is not preempted by the FAA. Can PAGA claims be litigated in arbitration? Iskanian did not decide issue. No, according to California courts of appeal, e.g. Betancourt v. Prudential Overall Supply (2017) 9 Cal. App. 5 th 439, 448. Yes, according to 9 th Circuit in Sakkab and Valdez v. Terminix (9 th Cir. 2017) 2017 U.S. App. LEXIS 3881 (unreported)

48 Representative Actions PAGA Per 9 th Circuit: The Iskanian rule does not prohibit the arbitration of any type of claim. Sakkab at 434. Per 9 th Circuit reasoning, a rule prohibiting arbitration of PAGA claims and restricting adjudication to the court may be preempted by the FAA. Are post-dispute waivers unenforceable? We have not interpreted Iskanian as prohibiting arbitration of all PAGA claims. Hypothetically, a PAGA plaintiff might consent to arbitration after the filing of a complaint. Betancourt at

49 Representative Actions PAGA [E]mployees are free to choose whether or not to bring PAGA actions when they are aware of Labor Code violations. [Citation.] But it is contrary to public policy for an employment agreement to eliminate this choice altogether by requiring employees to waive the right to bring a PAGA action before any dispute arises. [emphasis added] (Iskanian at 383.) Referred to as the voluntary post-dispute waiver exception in Williams v. Superior Court (2015) 237 Cal. App. 4 th 642, Implications for settlement agreements broadly releasing all claims

50 MCGILL (The next U.S. Supreme court case?)

51 McGill Credit card agreement provided that all claims are subject to arbitration and expressly waived right to bring claims on a class or representative basis in arbitration or in court. Plaintiff filed class action in court re: Citibank s marketing of a credit protector plan. Among other things, Plaintiff sought an injunction prohibiting Citibank from continuing to engage in allegedly illegal and deceptive marketing practices

52 McGill California Supreme Court s Broughton-Cruz rule makes agreements to arbitrate claims for injunctive relief designed to protect the public by stopping certain ongoing unlawful consumer practices unenforceable. Trial court: because of Broughton-Cruz rule, P must arbitrate all claims other than her claim for public injunctive relief, which will be litigated in court after the arbitration

53 McGill Court of Appeal: Broughton-Cruz rule is preempted by FAA because, as made clear in Concepcion, it preempts all state law rules that prohibit arbitration of a particular kind of claim because an outright ban, no matter how laudable the purpose, interferes with the FAA s objective of enforcing arbitration agreements according to their terms

54 California Supreme Court: McGill No need to decide if FAA preempts the Broughton-Cruz rule. Broughton-Cruz rule applies only when the parties have agreed to arbitrate requests for public injunctive relief. Credit card agreement at issue in McGill prohibited the P from seeking public injunctive relief in any forum. Class action waiver in McGill is unenforceable under California Civil Code 3513, which provides that a law established for a public reason cannot be contravened by a private agreement

55 McGill California Supreme Court (cont d): FAA 2 permits state courts to invalidate arbitration agreements based on generally applicable state law contract defenses (such as Cal. Civ. Code 3513). A provision in any contract even one with no arbitration provision that purports to waive, in all for a, the statutory right to seek public injunctive relief under California s Consumers Legal Remedies Act and/or similar state statutes is invalid and unenforceable under CA law

56 McGill The new McGill rule making unenforceable any agreement purporting to preclude a consumer from bringing claims for public injunctive relief in any forum does not interfere with any of arbitration s attributes because the parties agreed to exclude claims for public injunctive relief from arbitration, and it does not, contrary to the parties agreement, require the arbitration of claims for public injunctive relief

57 AGREEMENTS THAT DO NOT CONTAIN EXPRESS CLASS / COLLECTIVE / REPRESENTATIVE ACTION WAIVERS

58 No Express Waiver Language Who decides whether class action permitted when the arbitration agreement does not mention class, group, or representative actions and does not expressly state who should decide the issue? Answer is unclear. General Rule: Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79 (2002) The question whether the parties have submitted a particular dispute to arbitration, i.e., the question of arbitrability, is an issue for judicial determination UNLESS the parties clearly and unmistakably provided otherwise

59 No Express Waiver Language Procedural questions are not questions of arbitrability and, therefore, always are to be decided by the arbitrator. Absent express delegation, if arbitration agreement does not expressly permit or prohibit class arbitration, is the question whether the parties agreed to class arbitration a question of arbitrability for the court or a procedural question for the arbitrator?

60 No Express Waiver Language The U.S. Supreme Court has not answered this question. In Green Tree Financial Corporation v. Bazzle, 539 U.S. 444 (2003) plurality stated that arbitrator should decide whether class arbitration is permitted where the arbitration agreement is silent on that point. But Court later has stated that question of who decides whether class arbitration is permissible remains open

61 No Express Waiver Language Stolt-Nielsen S.A. v. AnimalFeeds International Corp., (2010) 559 U.S. 662, 680 ( [T]he parties appear to have believed that the judgment in Bazzle requires an arbitrator, not a court, to decide whether a contract permits class arbitration. [citation.] In fact, however, only the plurality decided that question. But we need not revisit that question here....[emphasis added.] See Oxford Health Plans, LLC v. Sutter (2013) 133 S.Ct. 2064, 2068, n.2 (Stoldt-Nielsen made clear that this Court has not yet decided whether the availability of class arbitration is a question of arbitrability [citation.]

62 No Express Waiver Language Note Alito concurring opinion -- Contract does not authorize arbitrator to decide whether to conduct class arbitration. Questions whether absent class members who did not consent to class arbitration would be bound by arbitrator's ultimate resolution of case. Court to Decide. See Opalinski v. Robert Half International, Inc., 761 F.3d 326, 332 (3d Cir. 2014) cert. denied, March 9, 2015; Webb Communities, Inc. v. Pultegroup, Inc. (4 th Cir. 2016) 817 F.3d 867, 873 ( [W]hether an arbitration clause permits class arbitration is a gateway question of arbitrability for the court. ); Reed Elsevier, Inc. ex rel. LexisNexis Div. v. Crockett, 734 F.3d 594, 597 (6th Cir. 2013), cert. denied, 134 S. Ct (U.S. 2014); Huffman v. Hilltop Companies, LLC., 747 F.3d 391 (6th Cir. 2014)

63 No Express Waiver Language Even if the issue whether an agreement permits class arbitration is the type of gateway issue that ordinarily is for the court, the parties may agree that this gateway issue is to be determined by the arbitrator. To establish exception, it must be shown by clear and unmistakable evidence that the parties intended to delegate the issue to the arbitrator. First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 944 (1995)

64 No Express Waiver Language The current AAA Employment Arbitration Rules and Mediation Procedures, Rule 6, provides inter alia: a. The arbitrator shall have the power to rule on his or her own jurisdiction, including any objections with respect to the existence, scope or validity of the arbitration agreement. A number of courts have held that express incorporation of AAA rules constitutes clear and unmistakable evidence of intent that an arbitrator is to decide questions of arbitrability. E.g. Terminix International v Palmer Ranch Limited Partnership (11 th Cir. 2005) 432 F.3d 1327, 1332 ( By incorporating the AAA Rules, including Rule 8, into their agreement, the parties clearly and unmistakably agreed that the arbitrator should decide whether the arbitration clause is valid. ) and

65 No Express Waiver Language Contec Corp. v. Remote Solution, Co. (2d Cir. 2005) 398 F.3d 205, 208 ("when... parties explicitly incorporate rules that empower an arbitrator to decide issues of arbitrability, the incorporation serves as clear and unmistakable evidence of the parties' intent to delegate such issues to an arbitrator"). Contra, Reed Elsevier, Inc. v. Crockett (6th Cir. 2013) 734 F.3d 594, 599 (language of an arbitration clause providing for resolution under AAA commercial rules did not clearly and unmistakably assign to an arbitrator the question of whether the agreement permitted classwide arbitration.);

66 No Express Waiver Language Ajamian v. CantorCO2e, L.P., 203 Cal.App.4th 771, 790 (court in dicta seriously question[ed] whether incorporation of AAA rules provided clear and unmistakable evidence. The California Supreme Court approach -- Sandquist v. Lebo Automotive, Inc. (2016) 1 Cal.5 th 233 Who decides is a matter of contract interpretation State law governs contract interpretation Broad language re scope of claims evidences intent that arbitrator decide whether class claims are available Criticizes reasoning of Reed Elsevier and Opalinski Does not apply clear and convincing standard

67 Interpreting the Agreement In Oxford Health Plans v. Sutter, the Supreme Court addressed the issue whether an arbitrator exceeded his authority under the FAA when he interpreted the arbitration agreement at issue to permit class arbitration. Oxford argued that under Stolt-Nielsen vacatur under FAA 10(a)(4) is appropriate when an arbitrator imposes class arbitration without a sufficient contractual basis

68 Interpreting the Agreement The Supreme Court held that Oxford misread Stolt- Nielsen. We overturned the arbitral decision there because it lacked any contractual basis for ordering class procedures, not because it lacked, in Oxford's terminology, a sufficient one. The Court held that So long as the arbitrator was "arguably construing" the contract which this one was a court may not correct his mistakes under 10(a)(4). [citation omitted]. The potential for those mistakes is the price of agreeing to arbitration

69 Interpreting the Agreement While the majority of the Court refused to state whether or not it agreed with the arbitrator s decision, Justice Alito in his dissent had no such compunction, citing Stolt-Nielsen and stating: If we were reviewing the arbitrator's interpretation of the contract de novo, we would have little trouble concluding that he improperly inferred [a]n implicit agreement to authorize class-action arbitration... from the fact of the parties' agreement to arbitrate

70 Interpreting the Agreement AAA or JAMS -- specific rules exist governing clause construction awards. These are the AAA Supplementary Rules for Class Arbitration and the JAMS Class Action Procedures Rules provide for the issuance of a partial final clause construction award subject to court review. If it is determined that the matter will proceed as a purported class action, the rules provide for a class determination award, also subject to judicial review

71 Interpreting the Agreement The JAMS rules state that the criteria of Federal Rule of Procedure 23(b) are to be applied. The AAA Rules specify specific criteria. The Rules also contain provisions for class notice and for settlement

72 Interpreting the Agreement Common arguments that class action is permitted: Broad nature of clause Any claim... Arbitrator has the authority to award any relief available in a court or under applicable law. Expresio unius est exclusio alterius that which is not included is excluded. Applicable when certain claims/procedures expressly excluded. Employer drafted agreement, so it should be construed against the employer as the drafter. Presumption in favor of arbitration

73 Interpreting the Agreement Common arguments that class action is not permitted. Class action is simply a procedural device -- the any dispute language applies only to substantive claims Class action is not a remedy within scope of broad remedies clause. Virtually all agreements contain some version of the broad language, such that interpreting it as permitting class actions is to hold that virtually all agreements permit class actions. Supreme Court has emphasized the substantial differences between bilateral and class arbitration and that it should not be inferred since most

74 Interpreting the Agreement agreements contain broad language to interpret it to permit class arbitration is, in effect, to draw the foreclosed inference. See Alito s dissent in Oxford Health Plans v. Sutter Two Party Limitation argument -- Some decisions have focused on language in arbitration agreements identifying only two parties to the agreement leading to conclusion that there was no intent to permit class actions). See Kinecta Alternative Financial Solutions, Inc. v. Superior Court (2012) 205 Cal. App. 4th

75 STRATEGIC CONSIDERATIONS

76 Employees Strategic Considerations While cases pending Continue to oppose motions to compel Preserve arguments regarding NLRA If waivers invalidated Strong ground to oppose motions in the employment context Battle over class arbitration v. class action? If waivers upheld Continue to oppose motions to compel on other grounds

77 Strategic Considerations Employers While cases pending before Supreme Court Existing arbitration agreements with class action waivers Distinguish your agreement from Murphy Oil Newly implemented arbitration agreements Consider drafting agreements that address the potential that waivers are found invalid Consider whether silence on the waiver issue is best» Be sure to carefully draft any such agreement Pending litigation: Consider seeking a stay

78 Strategic Considerations If waivers are invalidated Consider adding opt-out or opt-in provisions or other drafting strategies Consider whether your agreement may result in class arbitrations, and whether you want that result If waivers are upheld Consider revisions to existing arbitration agreements or implementation of new arbitration agreements

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88 A Discussion of Class Action Waivers and California Laws: How has the California Supreme Court Reacted to Concepcion? American Bar Association Section of Labor and Employment Law and Section on Dispute Resolution May 10, 2017 Deborah Crandall Saxe JAMS 555 W. Fifth Street 32 nd Floor Los Angeles, CA

89 TABLE OF CONTENTS Page Introduction 1 Keating Discover Bank Armendariz Gentry Italian Colors Sonic II Iskanian Sanchez McGill

90 The Federal Arbitration Act, 9 U.S.C. 9 ( FAA ), was enacted in 1925 in response to widespread judicial hostility to arbitration agreements and to place arbitration agreements on the same footing as other contracts. See Hall Street Associates, L.L.C. v. Mattel, Inc., 552 U.S. 576 (2008); Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20, 24 (1991). Its primary substantive provision is Section 2, 9 U.S.C. 2, which provides: A written provision in any... contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract... shall be valid, irrevocable and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract. The United States Supreme Court has described Section 2 of the FAA as reflecting both a liberal federal policy favoring arbitration, Moses H. Cone Memorial Hospital v. Mercury Construction Corp., 460 U.S. 1, 24 (1983), and the fundamental principle that arbitration is a matter of contract, Rent-A-Center, West, Inc. v. Jackson, 561 U.S. 63 (2010). In line with these principles, courts must place arbitration agreements on the same footing as other contracts, Buckeye Check Cashing, Inc. v. Cardegna, 446 U.S. 440, 443 (2006), and enforce them according to their terms, Volt Information Sciences, Inc. v. Board of Trustees of Leland Stanford Junior University, 489 U.S. 468, 478 (1989) ( Volt ). The final phrase of Section 2 of the FAA permits arbitration agreements to be declared unenforceable upon such grounds as exist at law or in equity for the revocation of any contract. This saving clause permits arbitration agreements 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 arbitration agreement is at issue. See Doctor s Associates, Inc. v. Casarotto, 517 U.S. 681, 687 (1996). The California Supreme Court has had a particularly difficult time applying Section 2 of the FAA in consumer and employment cases involving class arbitration waivers in adhesive take it or leave it arbitration agreements. California courts favor class actions in such cases and have long been troubled by class action waivers in adhesion contracts because they deprive the party with the weaker bargaining power of the opportunity to pursue a class action in any forum. 1

91 The plaintiff cannot bring class claims in court because he/she/it has agreed to arbitrate all claims and, because of the class arbitration waiver, also cannot bring a class proceeding in arbitration. As long ago as 1982, the California Supreme Court opined that class arbitration waivers in adhesive agreements may be unenforceable because they unconscionably insulate the drafters from any form of class proceeding. See Keating v. Superior Court, 31 Cal.3d 584, 614 (1982), rev d on other grounds sub nom. Southland Corp. v. Keating, 465 U.S. 1 (1984) ( Keating ). It continued this theme in Discover Bank v. Superior Court, 36 Cal.4 th 148 (2005) ( Discover Bank ), and Gentry v. Superior Court, 42 Cal.4 th 443 (2007) ( Gentry ), overruled by Iskanian v. CLS Transportation Los Angeles, LLC, 59 Cal.4 th 348 (2014), where it held that, under certain circumstances, class arbitration waivers in adhesive consumer and employment arbitration agreements are unconscionable and therefore unenforceable under California law. In both Discover Bank and Gentry, the California Supreme Court found that its rulings did not run afoul of Section 2 of the FAA because, under California law, unconscionability is a generally applicable contract defense that may be applied to invalidate any contract. The U.S. Supreme Court in AT&T Mobility v. Concepcion, 563 U.S. 333, (2011) ( Concepcion ), acknowledged that the Discover Bank rule applied equally to arbitration and non-arbitration contracts. It nonetheless found that California s Discover Bank rule was preempted by Section 2 of the FAA because: Although 2 s saving clause preserves generally applicable contract defenses, nothing in it suggest an intent to preserve state-law rules that stand as an obstacle to the accomplishment of the FAA s objectives..... The overarching purpose of the FAA... is to ensure the enforcement of arbitration agreements according to their terms so as to facilitate streamlined proceedings and, therefore, [r]equiring the availability of classwide arbitration [when the arbitration agreement expressly forbids such proceedings] interferes with fundamental attributes of arbitration and thus creates a scheme inconsistent with the FAA. Concepcion, 563 U.S. at Consistent with this view, the Court in Concepcion noted that parties to an arbitration agreement may agree to arbitration pursuant to the Federal Rules of Civil Procedure, or pursuant to a discovery process rivaling that in litigation. Id. at 351. However, in 2

92 its view, this kind of arbitration is not arbitration as envisioned by the FAA, lacks its benefits, and therefore may not be required by state law. Id. The Supreme Court s view that class arbitration is not arbitration as envisioned by the FAA seems to derive from the facts that the FAA was enacted in 1925 and, by comparison, class arbitration is a relatively recent development. Id. at 349. According to the Court in Concepcion, class arbitration, to the extent it is manufactured by Discover Bank rather than consensual, interferes with the fundamental attributes of arbitration and thus creates a scheme inconsistent with the FAA because (1) the switch from bilateral to class arbitration sacrifices the principal advantage of arbitration it s informality and makes the process slower, more costly, and more likely to generate procedural morass than final judgment, (2) class arbitration requires procedural formality, (3) class arbitration greatly increases risks to defendants because the absence of multilayered judicial review makes it more likely that errors will go uncorrected and the risk of error may become unacceptable when damages allegedly owed to thousands of claimants are aggregated and decided at once. Id. at The Court said it found it hard to believe that defendants would bet the company with no effective means of review, and even harder to believe that Congress would have intended to allow state courts to force such a decision. Id. at 351. Concepcion seems to have raised more questions than it answered. Its meaning was hotly debated by U.S. Supreme Court Justices in American Express Co. v. Italian Colors, U.S., 133 S.Ct (2013) ( Italian Colors ), and by California Supreme Court Justices in Sonic-Calabasas A v. Moreno, 57 Cal.4 th 1109, cert. denied, 134 S.Ct (2014) ( Sonic II ). This paper provides a chronological overview of the California and U.S. Supreme Court decisions dealing with class arbitration waivers under California law before and after Concepcion. It includes descriptions of the California Supreme Court s decisions in Armendariz v. Foundation Health Psychcare Services, Inc., 24 Cal.4 th 83 (2000) ( Armendariz ) and Sonic II, which do not involve class arbitration waivers, but provide necessary background for understanding Iskanian v. CLS Transportation Los Angeles, LLC, 59 Cal.4 th 348 (2014), cert. 3

93 denied, 135 S.Ct (2015) ( Iskanian ), Sanchez v. Valencia Holding Co., LLC, 61 Cal.4 th 899 (2015) ( Sanchez ), and McGill v. Citibank, N.A., No. S224086, Cal.4 th (April 6, 2017) ( McGill ). Keating: Keating involved a dispute between Southland Corporation ( Southland ), owner and franchisor of 7-Eleven convenience food store operations, and its California franchisees. The franchise agreement required the parties to submit all disputes to arbitration, but was silent on the availability of classwide arbitration. Southland contended that the disputes should be submitted to arbitration on an individual (that is, franchisee-by-franchisee) basis. The franchisees, who had sued Southland in both individual and class actions on a variety of grounds, contended, among other things, that the arbitration provisions were not enforceable on adhesion grounds, that their statutory claims against Southland for alleged violations of California s Franchise Investment Law, Cal. Corp. Code 31000, et seq., were not subject to arbitration, and that any arbitration should proceed on a classwide (not individual) basis. The trial court granted Southland s motions to compel arbitration of all claims other than those based on the Franchise Investment Law, but did not pass on the franchisees request for class certification. Southland appealed the order to arbitrate insofar as it excluded the Franchise Investment Law claims and the franchisees appealed the order to arbitrate. The California Court of Appeal affirmed the trial court s order to arbitrate and reversed the trial court s decision as to the Franchise Investment Law claims, finding that those statutory claims, like the franchisee s other claims, should be submitted to arbitration. The California Supreme Court held that adhesion contacts are fully enforceable in California unless certain other factors are present which, under established legal rules legislative or judicial operate to render them otherwise. See Keating, 31 Cal.3d at 594 (citing Graham v. Scissor-Tail, Inc., 28 Cal.3d 807, 819 (1981)). It said: Generally speaking, there are two judicially imposed limitations on the enforcement of adhesion contracts or provisions thereof. The first is that 4

94 such a contract or provision which does not fall within the reasonable expectations of the weaker or adhering party will not be enforced against him..... The second a principle of equity applicable to all contracts generally is that a contract or provision, even if consistent with the reasonable expectations of the parties, will be denied enforcement if, considered in its context, it is unduly oppressive or unconscionable. Keating, 31 Cal.3d at 594 (citations omitted). The California Supreme Court reversed the Court of Appeal s decision to include the Franchise Investment Law claims in arbitration. The Franchise Investment Law contains a provision (Cal. Corp. Code 31512) voiding [a]ny condition, stipulation or provision purporting to bind any person acquiring any franchise to waive compliance with any provision of this law or any rule or order hereunder. The California Supreme Court interpreted Section to require judicial consideration of claims brought under the Franchise Investment Law. The California Supreme Court gave lip service to Section 2 of the FAA, saying it would take it into account. Keating, 31 Cal.3d at However, it flatly rejected the argument that Section 2 preempts all state laws or policies restrictive of arbitration, whatever the basis for that law or policy might be, and whether or not there is federal jurisdiction over the underlying controversy. Id. at 599. The U.S. Supreme Court reversed, holding that Section 2 of the FAA preempts section of the California Franchise Investment Law, as interpreted by the California Supreme Court. It said that, in enacting Section 2, Congress declared a national policy favoring arbitration and withdrew the power of the states to require a judicial forum for the resolution of claims... the contracting parties agreed to resolve by arbitration. Keating, 465 U.S. at 9. 1 Keating is the first U.S. Supreme Court decision to hold that the FAA is applicable in state courts and preempts contrary state law. 1 See also Preston v. Ferrer, 552 U.S. 346 (2008) (when state law prohibits outright to arbitration of a particular type of claim, the conflicting rule is displaced by the FAA) (reversing the California Supreme Court); Perry v. Thomas, 482 U.S. 483, 489 (1987) (the FAA withdrew the power from the states to require a judicial forum for the resolution of claims which the contracting parties agreed to resolve by arbitration ) (reversing the California Supreme Court). 5