ADR Case Updates
"Unconscionability Requires A Substantial Degree Of Unfairness Beyond 'A Simple Old-Fashioned Bad Bargain'" — California Supreme Court Upholds Class Action Waivers Finding Arbitration Clause In Car Sale Contract Not Unconscionable, And More, 09/09/2015
In Sanchez v. Valencia Holding Company, LLC (2015) 190 Cal. Rptr. 3rd 812, Gil Sanchez filed a class action against Valencia Holding Company following a dispute over the sales of a "preowned" Mercedes-Benz S500V. The sales contract included an arbitration provision and a class action waiver. Valencia moved to compel arbitration. The court denied the motion finding the class action waiver was prohibited under California law thereby making the entire arbitration clause unenforceable. Subsequently, in AT&T Mobility LLC v. Concepcion, 563 U.S. __, 131 S. Ct. 1740 (2011), the United States Supreme Court held that the Federal Arbitration Act (9 U.S.C. § 1 et seq.) required enforcement of class waivers in consumer arbitration agreements and preempted any state law to the contrary. The California Court of Appeal declined to address whether the class waiver was unenforceable, but held the arbitration agreement as a whole was unconscionable and, therefore, unenforceable.
Reversed. Various California decisions have defined unconscionability as "overly harsh," "unduly oppressive," or "unreasonably favorable." These "nonexclusive formulations … capture the notion that unconscionability requires a substantial degree of unfairness beyond 'a simple old-fashioned bad bargain.'" This unconscionability standard must be the same for arbitration and nonarbitration agreements. While Concepcion does not immunize adhesive arbitration processes from principles of state law unconscionability, the subject agreement did not rise to the level of being unconscionable. California's anti-class action waiver holdings are preempted by Concepcion and the FAA. Therefore, the Court of Appeal erred in finding that the agreement was unconscionable.
Error To Stay PAGA Suit While Compelling Plaintiff To Arbitrate Individual Claim
In Williams v. Superior Court (Pinkerton Governmental Services, Inc., Real Party in Interest) (2015) 237 Cal. App. 4th 642, Andre Williams filed a single-count representative action pursuant to the Private Attorney General Act, Labor Code § 2699 et seq. (PAGA) against his employer, Pinkerton Governmental Services, Inc., alleging that Pinkerton failed to provide off-duty rest periods as required by the Labor Code. Pinkerton moved for an order enforcing Williams' waiver of his right to bring a representative PAGA claim or, alternatively, for an order staying the PAGA claim until the "individual claim" was arbitrated pursuant to an arbitration agreement between the parties. The trial court declined to enforce the waiver, but granted the alternative relief. Williams petitioned for Writ of Mandate seeking reversal for the trial court order under the California Supreme Court holding in Iskanian v. CLS Transportation Los Angeles, LLC (2014) 59 Cal. 4th 348, 384.
Writ Granted. The trial court erred in staying the PAGA "rest period controversy" while compelling plaintiff to arbitrate his individual claim. Under Iskanian, the waiver of a right to a representative PAGA claim in any forum is unenforceable. Moreover, Williams' single cause of action under PAGA may not be split into an arbitrable "individual claim" and a nonarbitrable representative claim. A PAGA claim by its very nature is not an individual claim.
In Suit Alleging Misclassification Of Employee As Independent Contractor, Employer's 14-Month Delay In Compelling Arbitration Did Not Constitute Waiver Of Its Right To Arbitrate
In Khalatian v. Prime Time Shuttle, Inc. (2015) 237 Cal. App. 4th 651, Prime Time Shuttle, Inc., owned and operated an airport charter transport business. Valo Khalatian worked for Prime Time as an airport shuttle van driver. He entered into an Owner-Operator Sub-Carrier Agreement with Prime Time. The agreement provided for binding arbitration of any dispute relating to the agreement, specifically disclaimed an employer-employee relationship, and described Khalatian as an independent contractor. Nevertheless, Khalatian filed suit against Prime Time alleging that he was an employee misclassified as an independent contractor and seeking wage-and-hour damages under the Labor Code and for wrongful termination. Fourteen months later, Prime Time moved to compel arbitration. The trial court denied the motion concluding that Prime Time waived its right to arbitrate by engaging in litigation.
Reversed and remanded. Prime Time did not waive its right to arbitration notwithstanding the fourteen-month delay after the complaint was filed before moving to compel arbitration. Plaintiff could not demonstrate prejudice from the delay, "which is determinative." In light of public policy that favors arbitration, and because there was no evidence of bad faith, the fourteen-month delay was insufficient to support a waiver. The trial court erred in denying the motion to compel arbitration.
Third-Party Is Not Entitled To Protection Of Broad Release Contained In Settlement Agreement Between Two Contracting Parties Where Contract Was Ambiguous As To Effect Of Release Clause
In Epic Communications, Inc. v. Richwave Technology, Inc. (2015) 237 Cal. App. 4th 1342, Epic Communications was the successor to OEpic, Inc. OEpic entered into a design services agreement with ALi Corp. Shyh-Chyi Wong signed a nondisclosure agreement on ALi's behalf as associate vice president of its "RF/Communications" unit. Wong later formed Defendant Richwave Technology, Inc., a "spin-off" of the RF Unit. ALi assured OEpic that Richwave would abide by their agreements and OEpic continued to transfer intellectual property to Wong's group. Richwave later declined any need of OEpic's services, causing OEpic's successor, Epic Communications, to sue various parties for breach of the design services and nondisclosure agreements. Following an arbitration between Epic and ALi that was decided in Epic's favor, ALi and Epic entered into a confidential settlement agreement with a broad release provision. Richwave moved for summary judgment against Epic claiming the release in the settlement agreement between Epic and ALi release all claims that Epic held against Richwave. The trial court agreed and entered judgment in favor of Richwave.
Reversed. While the language of a contract governs its interpretation, the meaning must be determined from the entire agreement, not just from any one or more isolated provisions. Several sections of the settlement agreement are inconsistent with the broad language of the release. The release was only one provision in a very lengthy and complex contract between two sophisticated businesses. Although the recitals mentions Richwave, the purpose of the agreement was too narrow to cover the claims Epic asserted against Richwave. In addition, the subsequent conduct of the parties appears inconsistent with an intent to release unaffiliated third parties like Richwave. In light of these ambiguities, the trial court erred by granting summary judgment in favor of Richwave, a stranger to the contract who raised the release as a defense.
Arbitrator, Not Court, Should Decide Issues Of Arbitrability Where Parties Clearly And Unmistakably Agree To Arbitration Rules That Delegate Issues Of Arbitrability To Arbitrator
In Brennan v. Opus Bank, 796 F. 3d 1125 (9th Cir. 2015), Carey Brennan was employed in a management position with Opus Bank. His employment agreement included an arbitration clause as well as a delegation provision specifying that disputes would be arbitrated pursuant to the Rules of the American Arbitration Association (AAA). Following his termination, Brennan sued Opus in federal district court under diversity jurisdiction. Opus moved to compel arbitration. Brennan opposed the motion by arguing the arbitration clause was unconscionable and, therefore, unenforceable. In granting the motion and compelling arbitration, the district court applied federal law and determined that the arbitrator should decide the issue of unconscionability. Brennan appealed claiming California law applied and that the court, not the arbitrator, should decide the issue of unconscionability.
Affirmed. Unless parties clearly and unmistakably designate that nonfederal arbitrability law applies, the Federal Arbitration Act (FAA, 9 U.S.C. § 1 et seq.) applies to contracts like the one in this case. Brennan's employment agreement did not clearly and unmistakably provide that California's law of arbitrability should apply. Therefore, the FAA controlled. Moreover, the delegation provision in Brennan's employment contract clearly and unmistakably delegated to the arbitrator the issue of whether the arbitration clause was enforceable (which would, ipso facto, encompass unconscionability). This is because the delegation provision incorporated the AAA rules that provide the "arbitrator shall have the power to rule on his or her own jurisdiction, including objections" regarding the validity of the arbitration agreement. Therefore, the district court did not err in dismissing Brennan's action in favor of arbitration.
Former Employees' Claims Against Neiman Marcus Will Proceed In Court Because Delegation Clause And Arbitration Agreement Are Unconscionable And Unenforceable Under California Law
In Pinela v. Neiman Marcus Group, Inc. (2015) 238 Cal. App. 4th 227, plaintiffs Juan Carlos Pinela and Bernadette Tanguilig brought a putative class action against their former employer, Neiman Marcus Group, Inc. (NMG), based upon various wage-and-hour claims under the California Labor Code. NMG moved to compel arbitration under its mandatory arbitration agreement that delegated enforceability questions to the arbitrator and included a choice of law clause adopting Texas law (where NMG was headquartered). The trial court initially granted the motion except as to the claim under the Private Attorney General Act, Labor Code § 2699 et seq. On reconsideration, the trial court denied the motion, finding that the arbitration agreement was illusory and, therefore, unenforceable.
Affirmed. "Unconscionability has both a 'procedural' and 'substantive' element, the former focusing on 'oppression' or 'surprise' due to unequal bargaining power, the latter on 'overly harsh' or 'one-sided results.'" Here, the arbitration agreement was procedurally unconscionable because the delegation clause was a contract of adhesion presented on a "take-it-or-leave-it basis." So also, the agreement was substantively unconscionable since the Texas choice of law provision eliminated plaintiffs' ability to contend the delegation clause was unconscionable under California law. Such a limitation is "plainly obnoxious" to California public policy. Finally, shortening the statute of limitations and allowing the imposition of fees and costs on the plaintiffs are likewise substantively unconscionable. For those reasons, the arbitration agreement as a whole was unenforceable since it was unconscionable, not because it was illusory.
The California opinions are posted at: click here, the Ninth Circuit opinions at: click here.
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