Let's Make A Deal: What You Need to Know About Drafting and Enforcing Arbitration Agreements. April 15, 2015

Transcription

1 Let's Make A Deal: What You Need to Know About Drafting and Enforcing Arbitration Agreements April 15, 2015

2 What Types of Disputes Are Arbitrable? Nearly any type of claim arising out of any contractual relationship, including: Consumer Financial Services Employment International 2

3 What Types of Disputes Are Not Arbitrable? Outside the scope of the agreement Claims by government agencies not a party to the agreement (e.g., EEOC) Statutory claims when the statute 1. prohibits arbitration (Sarbanes-Oxley and Commodity Exchange Act whistleblower claims. Dodd-Frank added anti-arbitration provisions to both acts in 2010.); or 2. provides an exclusive remedy and exclusive forum Workers compensation claims for employee injuries in the workplace must go the Workers Compensation Appeals Board Unemployment insurance claims must go to the Employment Development Department 3

4 Arbitration Has Won Out: Class Action Waivers Class Action Waivers: Preclude a party to an arbitration agreement from proceeding on a class, collective, or representative basis in court or in arbitration. AT&T Mobility LLC v. Concepcion, 563 U.S. 321(2011): - Challenge to class action waiver in a consumer contract between customers and AT&T based on state law rules imposing greater restrictions on enforceability of arbitration agreements. - U.S. Supreme Court holds that any state-law rule that stands as an obstacle to the accomplishment and execution of the full purposes and objectives of... [the FAA] is preempted.... [Arbitration agreements may not be invalidated by] defenses that apply only to arbitration or that derive their meaning from the fact that an agreement to arbitrate is at issue. No more arbitration agreement-specific defenses; regular contract defenses apply (e.g., fraud in the inducement, duress). 4

5 Class Action Waivers Are Here To Stay American Express Co. v. Italian Colors Restaurant, 133 S. Ct (2013): - Challenge to a contractual class action waiver provision in an arbitration agreement between merchants and American Express Plaintiffs cost of individually arbitrating federal statutory claim for violations of antitrust laws exceeded the potential recovery on an individual basis. Under pre-existing law, courts may not enforce arbitration agreements where they would prevent effective vindication of federal statutory rights by acting as a prospective waiver of a party s right to pursue statutory remedies. - However, in Italian Colors, the U.S. Supreme Court held that it does not matter if enforcing a class action waiver would bar effective vindication of a federal statutory right (e.g., antitrust rights) as a practical matter. So long as it is not a prospective waiver of the statutory right, the class action waiver is enforceable. 5

6 Is California Different When It Comes To Class Action Waivers? Sonic-Calabasas A, Inc. v. Moreno, 57 Cal. 4th 1109 (2013): - California Labor Code provides employees a right to a hearing before the Labor Commissioner for certain violations of Labor Code ( Berman hearing ) - In Sonic, California Supreme Court held that the FAA preempts prior state law rule categorically prohibiting waiver of a Berman hearing in a predispute arbitration agreement. Such waivers are not per se unconscionable. However, Supreme Court suggested that Berman waivers (among other things) could be unconscionable if an agreement was otherwise unreasonably onesided in favor of the employer. 6

7 What About California s Private Attorneys General Act? Iskanian v. CLS Transportation Los Angeles, LLC, 59 Cal. 4th 348 (2014): - Under the Labor Code Private Attorneys General Act ( PAGA ), employees can recover civil penalties for Labor Code violations on behalf of themselves and other aggrieved employees PAGA actions are not class actions; they are representative actions brought as enforcement actions on behalf of the state.. - In Iskanian, the California Supreme Court held: 1. Gentry v. Superior Court, 42 Cal.4th 443 (2007), which prohibited class action waivers in employment arbitration agreements, was overruled. 2. Class action waivers do not violate the National Labor Relations Act. 3. However, PAGA representative action waivers are unenforceable; PAGA is not preempted by the FAA. 7

8 The Last Somewhat Open Issue... McGill v. Citibank, N.A. (Cal. Ct. App. 2014): - Broughton-Cruz Rule: California Supreme Court had ruled that arbitration provisions are unenforceable as against policy if they require arbitration of Unfair Competition Law, False Advertising Law, or Consumer Legal Remedies Act claims for injunctive relief brought in public s benefit. - In McGill, California Court of Appeal held that, consistent with Concepcion, Broughton-Cruz Rule is preempted by the FAA. California Supreme Court granted review. 8

9 Hurdles to Enforcement Although arbitration is broadly permitted, there are significant pitfalls that must be avoided. - Lack of agreement - Scope is too narrow - Unconscionability - Additional defenses: waiver, mistake, lack of capacity, undue influence, duress, illegality and fraud. 9

10 Drafting An Enforceable Arbitration Agreement There must be an actual agreement to arbitrate. At a minimum, the agreement should specify: - the disputes to be resolved, - the parties to participate, and - the forum and rules for the arbitration. 10

11 Scope: The Ninth Circuit s View arising under or out of an agreement - Only requires arbitrating disputes relating to the interpretation and performance of the contract itself, but not tort claims. Any dispute arising under this Agreement shall be settled by arbitration - Boat owner sued for indemnity and contribution alleging the salvage company s gross negligence exposed boat owner to liability for resulting environmental damage. Claims were not arbitrable because the dispute involved a tort claim and did not turn on the performance under the contract. Cape Flattery Ltd. v. Titan Maritime, LLC, 647 F.3d 914, 924 (9th Cir. 2011). any controversy or claim arising out of this [Licensing] Agreement shall be settled by arbitration. - Misappropriation of trade secrets was not arbitrable because it was based on defendants' improper continued use of trade secrets without a license and therefore constituted a wrong independent from any breach of the agreement. Tracer Research Corp. v. Nat'l Envtl. Servs. Co., 42 F.3d 1292, 1295 (9th Cir. 1994). 11

12 The California Court of Appeal takes a different approach than the Ninth Circuit. - (a)ny dispute or other disagreement arising from or out of this Consulting Agreement - All claims were arbitrable including fraudulent inducement and negligent misrepresentation claims arising out of the formation of the agreement, as well as derivative tort claims of breach of fiduciary duty, interference with contractual relations and conversion. EFund Capital Partners v. Pless, 150 Cal. App. 4th 1311, 1322 (2007). Other circuits have similarly rejected the Ninth Circuit s reasoning. Cape Flattery, 647 F.3d at 923 (identifying cases from numerous circuits disagreeing with the Ninth Circuit). The solution: Scope: California s View - Use broad language like arising out of or relating to The Ninth Circuit reasoned this language, the standard language recommended by AAA, is broader than arising under. 12

13 Avoid The Unconscionability Trap Defeating arbitration requires both procedural and substantive unconscionability Measured on a sliding scale (need to have some degree of both to defeat enforcement) Unanswered questions What constitutes unconscionability in California? 13

14 Procedural Unconscionability Procedural unconscionability concerns the manner in which the contract was negotiated and the respective circumstances of the parties at that time, focusing on the level of oppression and surprise involved in the agreement. Chavarria v. Ralphs Grocery Co., 733 F.3d 916, 922 (9th Cir. 2013). - a standardized contract, drafted by the party of superior bargaining strength, that relegates to the subscribing party only the opportunity to adhere to the contract or reject it. - when a contract binds an individual to later-provided terms. - imposed upon employees as a condition of their continued employment. 14

15 California Supreme Court is reviewing the standard for substantive unconscionability. Sanchez v. Valencia Holding Co., Case No. S (rev. grntd. 3/21/12). Various formulations include: - overly harsh, - unduly oppressive, - so one-sided as to shock the conscience and - unfairly one-sided Substantive Unconscionability Mutuality is paramount must contain a modicum of bilaterality 15

16 Examples of Substantive Unconscionability Only the weaker party's claims are subject to arbitration without reasonable justification for that lack of symmetry One sided attorneys fees provision Adhesive contract authorizing dominant party to choose a biased arbitrator Certain cost sharing provisions A damages limitation clause under which the customer does not even have the theoretical possibility he or she can be made whole A $50,000 threshold for an arbitration appeal in employment contract disputes An arbitrator selection process that assures employer gets to select the arbitrator Unreasonably shortening the limitations period, particularly for statutory wage and hour claims 16

17 Unconscionability After Concepcion: California Supreme Court Unconscionability is a valid defense, but questions remain. A facially neutral state-law rule designed to protect an individual litigant s rights is not preempted simply because its evenhanded application would disproportionately impact arbitration agreements. - A state-law rule is preempted when it interferes with fundamental attributes of arbitration such as its lower costs, greater efficiency and speed. Sonic-Calabasas, 57 Cal. 4th at The California Supreme Court may provide clarity. - Sanchez v. Valencia Holding Co. is set for oral argument on May 5 before the California Supreme Court. - According to the petition for review, This Court needs to resolve the post-concepcion California substantive unconscionability standard [and] needs to provide guidance as to just when and how businesses can tailor arbitration provisions to their particular circumstances. Until it does so, confusion will reign 17

18 Unconscionability after Concepcion: The Ninth Circuit Mortensen v. Bresnan Commc'ns, LLC, 722 F.3d 1151, 1159 (9th Cir. 2013) - FAA preempted Montana s reasonable expectations/fundamental rights rule. - We take Concepcion to mean what its plain language says: Any general statelaw contract defense, based in unconscionability or otherwise, that has a disproportionate effect on arbitration is displaced by the FAA. Chavarria v. Ralphs Grocery Co., 733 F.3d 916, 927 (9th Cir. 2013) - Employment arbitration agreement was unconscionable under California law because it contained an unfair procedure for selecting an arbitrator and because employee was responsible for half of the cost of the arbitration. - The Court distinguished Mortensen and held that the Supreme Court's holding that the FAA preempts state laws having a disproportionate impact on arbitration cannot be read to immunize all arbitration agreements from invalidation no matter how unconscionable they may be, so long as they invoke the shield of arbitration. 18

19 There May Be Additional Requirements For Arbitration of Unwaivable Rights In addition to the generally applicable unconscionability standards, Armendariz requires five items for arbitration of unwaivable rights including claims under FEHA and for wrongful termination in violation of public policy. - (1) The agreement must provide for adequate discovery. - (2) It must require a written decision allowing limited judicial review. - (3) The agreement must permit the types of relief that would be available in court. - (4) It must limit the employee's forum costs. - (5) It must provide for a neutral arbitrator. Do these five requirements survive Concepcion? - Numerous courts continue to follow Armendariz. See Lara v. Onsite Health, Inc., 896 F. Supp. 2d 831, 845 (N.D. Cal. 2012) and Woods v. JFK Mem'l Hosp., Inc., 2014 WL , at *7. - Compare James v. Conceptus, Inc., 851 F. Supp. 2d 1020, 1033 (S.D. Tex. 2012) and Beard v. Santander Consumer USA, Inc., 2012 WL , at *9 (E.D. Cal. Apr. 16, 2012). 19

20 Is the Arbitration Agreement Void or Severable? Courts have discretion to sever unconscionable provisions. - The overarching inquiry is whether the interests of justice would be furthered by severance and whether the agreement is permeated by unconscionability. Courts will not rewrite or add terms to an unconscionable arbitration provision. Relevant factors include: - The number of unlawful provisions - Whether the problem can be cured by severing or whether it would require adding additional terms. 20

21 Should You Elect Arbitration? The Traditional Balancing No jury Pros Efficiency of proceedings (limited time for hearing) No (or limited) discovery Reduced costs Choice of arbitrator(s) with particular expertise Confidentiality Cons Tendency for a split the baby approach Summary judgment rare, although possible No appeal except in limited circumstances Cost of compelling arbitration Cost of the arbitrator(s) 21

22 Considerations and Best Practices in Drafting Select the right provider - Consider specifying the number of arbitrators (3 for commercial arbitrations) - Consider arbitrator panels available (Lawyers? Former judges?) Specify your preferred discovery rules Include class/collective/representative action waiver (Concepcion) - Provision regarding adjudicative body to determine whether class arbitration may proceed in absence of class action waiver (Oxford Health) Expressly authorize summary judgment/adjudication Include a fee/cost provision - But... employers must pay costs unique to arbitration in California employment discrimination arbitrations Clearly reference applicable rules and forum to avoid unconscionability arguments Include choice-of-law provision for court to use in evaluating the existence of an agreement 22