United States: California Appellate Court Issues Major Decision On Enforceability Of Arbitration Agreements In Employment Context

Originally published June 6, 2012

Keywords: FAA, California Supreme Court, consumers, claims

In AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011), the US Supreme Court held that the Federal Arbitration Act (FAA) preempts the rule established by the California Supreme Court in Discover Bank v. Superior Court, 113 P.3d 1100 (Cal. 2005), under which most agreements that require consumers to arbitrate their claims against businesses on an individual basis were deemed unconscionable.

Since Concepcion was decided, plaintiffs' lawyers have tried to distinguish it or limit its scope in a variety of ways. Generally, they have been unsuccessful. But some California state courts have been receptive to one argument or another. On June 4, 2012, however, a California appellate court roundly rejected virtually every argument for evading Concepcion that has been ventured by the plaintiffs' bar.

The case—Iskanian v. CLS Transp. Los Angeles, LLC, ___ Cal. Rptr. 3d ___, 2012 WL 1979266 (Cal. Ct. App. June 4, 2012)—is a putative class action alleging, among other things, that the defendant failed to pay overtime and provide required meal and rest breaks. The named plaintiff's employment agreement contains a provision requiring disputes to be arbitrated on an individual basis.

Initially, the trial court granted the defendant's motion to compel arbitration. The Court of Appeal then granted a writ and ordered the trial court to reconsider in light of the California Supreme Court's intervening decision in Gentry v. Superior Court, 165 P.3d 556 (Cal. 2007), which held that lower courts should refuse to enforce agreements that require arbitration of employment disputes on an individual basis whenever class-wide arbitration "would be a significantly more effective way of vindicating the rights of affected employees than individual arbitration." Concluding that it could not succeed under the Gentry standard, the defendant withdrew its motion to arbitrate and proceeded to defend the case. After the superior court certified a class, the US Supreme Court decided Concepcion. Soon thereafter, the defendant renewed its motion to compel arbitration. The trial court again granted the motion, and the plaintiff appealed.

The Court of Appeal rejected the plaintiff's argument—made routinely in post-Concepcion litigation—that the defendant had waived its right to compel arbitration by withdrawing its initial motion and resisting class certification. The court began by pointing out that "[u]nder both the FAA and state law, a finding of waiver is disfavored." It then explained that the defendant "acted consistently with its right to arbitrate" by initially moving to compel arbitration and withdrawing its motion only after suffering a reversal on appeal following issuance of Gentry. The court agreed that, under Gentry, it would have been futile to continue seeking to compel arbitration. The Court of Appeal further explained that "[m]erely participating in litigation does not result in waiver," and "[t]he fact that [the plaintiff] conducted discovery and submitted extensive briefing in connection with his class certification motion is not particularly germane since, even outside the context of competing arbitration agreements, class certification is not definitively final—defendants may make successive motions to decertify."

The Court of Appeal also made short work of another recurring argument of the plaintiffs' bar—that Concepcion does not apply in cases arising in state court. The argument is premised on the fact that Justice Thomas, one of the members of the five-Justice majority in Concepcion, expressed the view in prior cases that the FAA does not apply in state court. Plaintiffs' lawyers have urged state courts to presume that Justice Thomas would join the four Concepcion dissenters in rejecting an FAA-preemption argument in the event that a state court were to refuse to enforce an agreement to arbitrate claims on an individual basis. The Court of Appeal responded that "[t]his is pure speculation, and it is belied by Justice Thomas's concurring opinion in Concepcion, which contains no indication that the holding should apply only in federal court (indeed, Justice Thomas asserted that the FAA has a broader preemptive effect than found by the majority)." It further pointed out that "following Concepcion, the United States Supreme Court has granted petitions for writ of certiorari vacating judgments arising in state courts, and directing the courts to consider Concepcion."

On the merits, the Court of Appeal rejected every argument raised by the plaintiff. To begin with, the court rejected the notion that Concepcion held only that the FAA preempts Discover Bank, while leaving in place the supposedly more nuanced Gentry standard. The court squarely held that "the Concepcion decision conclusively invalidates the Gentry test," reasoning that "Concepcion thoroughly rejected the concept that class arbitration procedures should be imposed on a party who never agreed to them." As the court explained, "[a] rule like the one in Gentry—requiring courts to determine whether to impose class arbitration on parties who contractually rejected it—cannot be considered consistent with the objective of enforcing arbitration agreements according to their terms."

The court also squarely rejected the subsidiary argument that Concepcion does not apply when the plaintiff desires to pursue a class action in order to "vindicate statutory rights," stating that this rationale is "irrelevant in the wake of Concepcion," which held that "States cannot require a procedure that is inconsistent with the FAA, even if it is desirable for unrelated reasons." The Court of Appeal next rejected the plaintiff's reliance on the NLRB's ruling in D.R. Horton, Inc., 357 NLRB 184 (Jan. 3, 2012). In D.R. Horton (which is now on appeal to the Fifth Circuit), the NLRB ruled that arbitration clauses that require employees to forgo class actions constitute unfair labor practices because they interfere with employees' ability to engage in concerted activities for "mutual aid or protection." The court first observed that the NLRB's ruling is not entitled to deference because it implicates the FAA, a statute that the NLRB is not charged with interpreting. The court proceeded to reject the NLRB's analysis, explaining that "[i]n reiterating the general rule that arbitration agreements must be enforced according to their terms, Concepcion ... made no exception for employment-related disputes." It further concluded that "the NLRB's attempt to read into the NLRA a prohibition of class waivers is contrary to another recent United States Supreme Court decision"—CompuCredit Corp. v. Greenwood, 132 S. Ct. 665 (2012)—in which the Court reiterated that, absent a contrary congressional command, agreements to arbitrate federal claims must be enforced according to their terms. Because the NLRB "identified no 'congressional command' in the NLRA prohibiting enforcement of an arbitration agreement pursuant to its terms," the court explained, the NLRB's ruling "does not withstand scrutiny in light of Concepcion and CompuCredit."

The Court of Appeal likewise refused to follow the decision of a divided panel from a different district in Brown v. Ralphs Grocery Co., 128 Cal. Rptr. 3d 854 (2011). The majority in Brown held that claims under the Private Attorney General Act (PAGA) for civil penalties on behalf of all affected employees are non-arbitrable notwithstanding Concepcion. The Iskanian court accepted the plaintiff's premise that "PAGA was enacted with the intent of promoting the public interest" and that it "expressly provides for representative actions so that aggrieved employees can pursue violations that state agencies lack the funding to address."

Nevertheless, the court concluded, the Supreme Court "has spoken on the issue, and we are required to follow its binding authority." Under Concepcion, "any state rule prohibiting the arbitration of a PAGA claim is displaced by the FAA." And that is so even though the arbitration provision prohibits representative actions, thereby precluding one employee from recovering PAGA penalties on behalf of all other employees. "[G]iving effect to the terms of the arbitration agreement here, [the plaintiff] may not pursue representative claims against [his employer]"—whether under PAGA or under California's infamous Unfair Competition Law.

This decision indicates that the California appellate courts may finally be bringing California into line with Supreme Court arbitration precedents. Given how definitively the court rejected so many of the post- Concepcion arguments that have been advanced by the plaintiffs' bar, there is good reason for optimism that state trial courts will begin enforcing arbitration agreements that require individual arbitration—just as their counterparts on the federal bench have been doing.

Counsel for the plaintiffs has indicated an intention to seek review by the California Supreme Court. A petition for review would be due on July; the decision whether to grant review would be issued by mid-October.

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