Further nuances to PAGA and arbitration clauses in Esparza v. KS Industries, L.P.

Iskanian v. CLS Transportation Los Angeles, LLC, 59 Cal. 4th 348 (2014) held that PAGA representative claims for civil penalties are not subject to arbitration.  In Esparza v. KS Industries, L.P. (August 2, 2017), the Court of Appeal (Fifth Appellate District) tackled the question of whether any claims asserted under PAGA can be "individual" claims, and, if so, how are they treated for purposes of arbitration agreements. The issue arose, in particular, because it appeared that the plaintiff asserted, within the PAGA claim, a claim to recover wages under Labor Code section 558, which, unlike the other PAGA penalties (in the sense of the word meaning something akin to a fine) sought, would result in the recovery of the underlying wages owed, with no portion going to the State from the recovered wages.  The Court directed the plaintiff on remand to declare unequivocally whether only penalties would be sought or whether, in addition, individual recovery claims would be pursued.  The Court concluded that such individual recovery claims would be severed and arbitrated.

Don't see the Fifth Appellate District having to wade into these issues regularly, so hat tip to that District for getting into the PAGA mix.

The trial court was technically affirmed, but the holding and directions on remand make this one a win for defendant/respondent, who was represented by Call & Jensen, John T. Egley and Jamin S. Soderstrom.

In Mohamed v. Uber Technologies, Inc., the Ninth Circuit adds to the list of decisions severing PAGA claims from claims sent to arbitration

Mohamed v. Uber Technologies, Inc. (9th Cir. Dec. 21, 2016) isn't the first decision to hold, in the face of a motion to compel arbitration in a wage and hour suit, that (1) PAGA claims should be severed from the rest of the claims and proceed in Court, and (2) the arbitrability of all other claims was for an arbitrator to determine.  The Court said:

In Iskanian v. CLS Transp. L.A., LLC, 327 P.3d 129 (Cal. 2014), the California Supreme Court held that where “an employment agreement compels the waiver of representative claims under the PAGA, it is contrary to public policy and unenforceable as a matter of state law.” Id. at 149. We have held that the Federal Arbitration Act does not preempt this rule. Sakkab v. Luxottica Retail N. Am., Inc., 803 F.3d 425, 427 (9th Cir. 2015). 

Slip op., at 21.

Court of Appeal holds that monetary value of accrued vacation need not appear on wage statements until payment is due

In Soto v. Motel 6 Operating, L.P. (Oct. 20, 2016), the Court of Appeal (Fourth Appellate District, Division One) held in a PAGA action that Labor Code § 226(a) "does not require employers to include the monetary value of accrued paid vacation time in employee wage statements unless and until a payment is due at the termination of the employment relationship." Slip op., at 2.  The Court easily concluded that the disclosure of such information on wage statements on a regular basis was not required by the current law.  Nothing to see here, folks. Move along.

Spencer C. Skeen, Jennifer L. Santa Maria, and Sarah A. Williams of Ogletree, Deakins, Nash, Smoak & Stewart represented Motel 6 Operating, L.P.

Another PAGA versus arbitration decision, this time from the Second Appellate District in Perez v. U-Haul Co. of California

Law is driven as much by unforeseen consequences as it is by any rational planning. The Labor Code Private Attorneys General Act of 2004 (PAGA) is exhibit one.  Over the last five or so years, inexorable advance of the Federal Arbitration Act looked as if it would cut a fatal swath through many class actions. But, somewhat unexpectedly, PAGA has served as a counterpoint in the wage & hour sector.  In Perez v. U-Haul Co. of California (Sept. 16, 2016), the Second Appellate District, Division Seven, affirmed the trial Court's ruling that U-Haul could not assert an arbitration agreement to compel the plaintiffs to individually arbitrate whether they qualified as “aggrieved employee[s],” to determine in arbitration whether they had standing to pursue a PAGA claim.

The Court agreed with Williams v. Superior Court, 237 Cal. App. 4th 642 (2015), which also held that California law prohibits the enforcement of an employment agreement provision that requires an employee to individually arbitrate whether he or she qualifies as an “aggrieved employee” under PAGA, and then (if successful) to litigate the remainder of the “representative action in the superior court.”  Slip op., at 11-12.  The Court concluded by dismissively rejecting the notion that the FAA can apply to claim belonging to a governmental entity or its designated proxy.

Gregg A. Farley, of the Law Offices of Gregg A. Farley, and Sahag Majarian, of the Law Offices of Sahag Majarian, represented Plaintiff and Respondent Sergio Lennin Perez; Larry W. Lee and Nicolas Rosenthal. of the Diversity Law Group, and Sherry Jung, of the Law Offices of Sherry Jung, represented Plaintiff and Respondent Erick Veliz.

Ninth Circuit examines arbitration and PAGA claims in Mohamed v. Uber Technologies, Inc.

The Ninth Circuit tackles a complicated set of arbitration issues in Mohamed v. Uber Technologies, Inc. (9th Cir. Sept. 7, 2016).  Among other things, the panel held that the District Court erred when it decided the question of arbitrability, since the question of arbitrability was delegated under the agreement to an arbitrator.  But the panel agreed that the defendants could not compel arbitration of the PAGA claim asserted in the case, severing that claim for further proceedings in before the trial court.  Finally, the panel agreed that a separate defendant not party to the arbitration agreement could not assert a right to enforce the agreement as an agent of Uber.

Analysis of Iskanian v. CLS Transportation Los Angeles LLC

Next up on the update list is Iskanian v. CLS Transportation Los Angeles LLC (June 23, 2014). In Iskanian, a limousine driver filed a class action lawsuit on behalf of himself and similarly situated employees for his employer’s alleged failure to compensate its employees for, among other things, overtime and meal and rest periods.  Plaintiff also asserted a PAGA claim. The employee had entered into an arbitration agreement that waived the right to class proceedings. The defendant moved to compel arbitration. After the court granted the motion, Gentry v. Superior Court (2007) 42 Cal.4th 443 (Gentry) was decided and the Court of Appeal issued a writ of mandate directing reconsideration in light of Gentry. On remand, the defendant withdrew the motion and the plaintiff moved for certification. A class was certified.

After the United States Supreme Court issued AT&T Mobility LLC v. Concepcion (2011) 563 U.S. __ [131 S.Ct. 1740] (Concepcion) and invalidated Discover Bank v. Superior Court (2005) 36 Cal.4th 148 (Discover Bank), CLS renewed its motion to compel arbitration. The trial court granted the renewed motion.

On appeal, the Court of Appeal agreed that Concepcion invalidated Gentry.  The court also declined to follow a National Labor Relations Board ruling that class action waivers in adhesive employment contracts violate the National Labor Relations Act.  With respect to the PAGA claim, the Court of Appeal construed the plaintiff’s position to be that PAGA does not allow representative claims to be arbitrated, holding that the FAA precludes states from withdrawing claims from arbitration and that PAGA claims must be argued individually, not in a representative action, according to the terms of the arbitration agreement.

The Supreme Court granted review, examining (1) whether a state’s refusal to enforce such a waiver on grounds of public policy or unconscionability is preempted by the FAA, and (2) whether the FAA precludes the California Legislature from deputizing private litigants to pursue claims on behalf of the State.

While the plaintiff argued that Gentry survives Concepcion because it does not state a categorical rule such as that articulated in Discover Bank, the Court disagreed:

[T]he fact that Gentry’s rule against class waiver is stated more narrowly than Discover Bank’s rule does not save it from FAA preemption under Concepcion.  The high court in Concepcion made clear that even if a state law rule against consumer class waivers were limited to “class proceedings [that] are necessary to prosecute small-dollar claims that might otherwise slip through the legal system,” it would still be preempted because states cannot require a procedure that interferes with fundamental attributes of arbitration “even if it is desirable for unrelated reasons.”  (Concepcion, supra, 563 U.S. at p. __ [131 S.Ct. at p. 1753]; see American Express Co. v. Italian Colors Restaurant (2013) 570 U.S. __, __ & fn. 5 [133 S.Ct. 2304, 2312 & fn. 5] (Italian Colors).)  It is thus incorrect to say that the infirmity of Discover Bank was that it did not require a case-specific showing that the class waiver was exculpatory.  Concepcion holds that even if a class waiver is exculpatory in a particular case, it is nonetheless preempted by the FAA.  Under the logic of Concepcion, the FAA preempts Gentry’s rule against employment class waivers.

Slip op., at 7-8. Next, the Court concluded that the reasoning in Sonic II was insufficient to save Gentry:

Sonic II went on to explain that “[t]he fact that the FAA preempts Sonic I’s rule requiring arbitration of wage disputes to be preceded by a Berman hearing does not mean that a court applying unconscionability analysis may not consider the value of benefits provided by the Berman statutes, which go well beyond the hearing itself.”  (Sonic II, supra, 57 Cal.4th at p. 1149, italics added.)  The Berman statutes, we observed, provide for fee shifting, mandatory undertaking, and several other protections to assist wage claimants should the wage dispute proceed to litigation.  (Id. at p. 1146.)  “Many of the Berman protections are situated no differently than state laws concerning attorney fee shifting, assistance of counsel, or other rights designed to benefit one or both parties in civil litigation.”  (Id. at p. 1150; see, e.g., Lab. Code, § 1194, subd. (a) [one-way fee shifting for plaintiffs asserting minimum wage and overtime claims].)  The value of these protections does not derive from the fact that they exist in the context of a pre-arbitration administrative hearing.  Instead, as Sonic II made clear, the value of these protections may be realized in “potentially many ways” through arbitration designed in a manner “consistent with its fundamental attributes.”  (Sonic II, at p. 1149; see ibid. [“Our rule contemplates that arbitration, no less than an administrative hearing, can be designed to achieved speedy, informal, and affordable resolution of wage claims . . . .”].)

Slip op., at 9-10.  Since Sonic II did not prohibit the use of an arbitration procedure that satisfied the Berman statutes, the Court concluded that Sonic II survived Concepcion, unlike Gentry, which directly compared class actions that interfered with arbitration to the arbitration procedure.

Next, the Court considered the holdings of D.R. Horton Inc. & Cuda (2012) 357 NLRB No. 184 [2012 WL 36274] (Horton I) and the subsequent decision by the Fifth Circuit (Horton II). The Court concluded that the NLRA did not overrule the FAA, consistent with other courts considering the issue:

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 the NLRA do not represent “a contrary congressional command” ’ overriding the FAA’s mandate.  (CompuCredit v. Greenwood, supra, 565 U.S. at p. __ [132 S.Ct. at p. 669.)  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.  (See Sutherland v. Ernst & Young, LLP (2d Cir. 2013) 726 F.3d 290, 297 fn. 8; Owen v. Bristol Care, Inc. (8th Cir. 2013) 702 F.3d 1050, 1053–1055; Delock v. Securitas Sec. Servs. USA, Inc. (E.D.Ark. 2012) 883 F.Supp.2d 784, 789–790; Morvant v. P.F. Chang’s China Bistro, Inc. (N.D.Cal. 2012) 870 F.Supp.2d 831, 844–845; Jasso v. Money Mart Express, Inc. (N.D.Cal. 2012) 879 F.Supp.2d 1038, 1048–1049; but see Herrington v. Waterstone Mortg. Corp. (W.D.Wis. Mar. 16, 2012) No. 11-cv-779-bbc [2012 WL 1242318, at p. *5] [defendant advances no persuasive argument that the Board interpreted the NLRA incorrectly].)

Slip op., at 21. At this juncture, and given the composition of the U.S. Supreme Court, it is exceedingly unlikely that the conclusion of Horton I will be accepted.

After analyzing and rejecting the plaintiff’s waiver argument, the Court turned to the PAGA claim. After the Court explained the history of the statute, the first question examined was whether an employee’s right to bring a PAGA action is waivable. Concluding that PAGA rights could not be waived, the Court said:

The unwaivability of certain statutory rights “derives from two statutes that are themselves derived from public policy.  First, Civil Code section 1668 states:  ‘All contracts which have for their object, directly or indirectly, to exempt anyone from responsibility for his own fraud, or willful injury to the person or property of another, or violation of law, whether willful or negligent, are against the policy of the law.’  ‘Agreements whose object, directly or indirectly, is to exempt [their] parties from violation of the law are against public policy and may not be enforced.’  (In re Marriage of Fell (1997) 55 Cal.App.4th 1058, 1065.)  Second, Civil Code section 3513 states, ‘Anyone may waive the advantage of a law intended solely for his benefit.  But a law established for a public reason cannot be contravened by a private agreement.’ ”  (Armendariz v. Foundation Health Psychcare Services, Inc. (2000) 24 Cal.4th 83, 100 (Armendariz).)

Slip op., at 34.  The Court then said, “Notwithstanding the analysis above, a state law rule, however laudable, may not be enforced if it is preempted by the FAA.” Examining that second question, the Court held that the PAGA right is not a “private” right, existing only as a grant of a public right:

We conclude that the rule against PAGA waivers does not frustrate the FAA’s objectives because, as explained below, the FAA aims to ensure an efficient forum for the resolution of private disputes, whereas a PAGA action is a dispute between an employer and the state Labor and Workforce Development Agency.

Slip op., at 36-37. This distinction, which was uncertain until this decision, was the source of inconsistent outcomes when other courts examined the issue of whether PAGA claims were subject to arbitration agreements.

Justice Chin authored a concurrence, though he restated his disagreement with the contention that Sonic II survived Concepcion.

Justice Werdegar concurred with the majority opinion regarding PAGA, but dissented as to the enforceability of any clause depriving employees of the right to engage in concerted action: “Eight decades ago, Congress made clear that employees have a right to engage in collective action and that contractual clauses purporting to strip them of those rights as a condition of employment are illegal.  What was true then is true today.” Werdegar diss. & conc., at 1.  Justice Werdegar strongly defended the right to engage in concerted activity, despite the FAA:

An arbitration agreement “shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract” (9 U.S.C. § 2, italics added).  Here, we deal with a provision—the waiver of the statutorily protected right to engage in collective action—that would be unenforceable in any contract, whether as part of an arbitration clause or otherwise.  The FAA codifies a nondiscrimination principle; “[a]s the ‘saving clause’ in § 2 indicates, the purpose of Congress in 1925 was to make arbitration agreements as enforceable as other contracts, but not more so.”

Werdegar diss. & conc., at 9. Justice Werdegar’s dissenting opinion as to the interaction of the NLRA, the Norris-Laguardia Act and the FAA is an exceptional defense of the position advocated by the plaintiff and in Horton I. If nothing else, it is worth a thorough reading by practitioner in the wage and hour field.

BREAKING NEWS: Iskanian v. CLS Transportation Los Angeles, LLC eulogizes Gentry and buttresses PAGA

The California Supreme Court has just issued its opinion in Iskanian v. CLS Transportation Los Angeles, LLC (June 23, 2014). In a nutshell, here's the scorecard:

• The question is whether a state's refusal to enforce such a waiver on grounds of public policy or unconscionability is preempted by the FAA. We conclude that it is and that our holding to the contrary in Gentry v. Superior Court (2007) 42 Cal.4th 443 (Gentry) has been abrogated by recent United States Supreme Court precedent. 

• [W]e conclude that an arbitration agreement requiring an employee as a condition of employment to give up the right to bring representative PAGA actions in any forum is contrary to public policy. In addition, we conclude that the FAA's goal of promoting arbitration as a means of private dispute resolution does not preclude our Legislature from deputizing employees to prosecute Labor Code violations on the state‘s behalf. Therefore, the FAA does not preempt a state law that prohibits waiver of PAGA representative actions in an employment contract.

Slip op., at 1-2. Tough day to be opposed to the FAA's all-consuming rights grab. But the PAGA ruling is a small salve.

Decertification reversal in suitable seating case

Rage, rage against the dying of the light. Chastise the universe for failing you, and sometimes it responds. Just earlier today I decried the absence of any decisions having anything to do with the subjects usually covered here. But soft! what light through yonder window breaks? It is an opinion, and suitable seating is the sun. In Hall v. Rite Aid Corporation (May 16, 2014), the Court of Appeal (Fourth Appellate District, Division One) reversed a trial court order decertifying a suitable seating claim.

The plaintiff successfully certified a class action alleging failure to provide suitable seating. Later, defendant Rite Aid moved for decertification, citing to other decisions and to evidence it offered. The trial court granted the motion to decertify and denied the cross-motion to permit the matter to proceed as a non-class representative action. (Oh my gosh, this is already exciting!) Based on the analytic framework of Brinker ("O, speak again, bright angel! for thou art As glorious to this night, being o'er my head As is a winged messenger of heaven Unto the white-upturned wondering eyes Of mortals that fall back to gaze on him When he bestrides the lazy-pacing clouds And sails upon the bosom of the air."), the Court of appeal concluded that the trial court erroneously considered the merits of the action, rather than whether the action was amenable to class treatment.

The decertification train got rolling after Rite Aid cited the recently decided matter of Duran v. U.S. Bank Nat. Assn., 203 Cal. App. 4th 212 (2012) (review granted).  Rite Aid then pounced, asking the trial court to sua sponte decertify.  The trial court declined, but briefing was requested. Rite Aid then submitted federal court decisions and declarations from cashiers that had opted out of the action, along with other evidence. In spite of numerous bases for opposition, the trial court granted the motion to decertify and denied the motion to permit the case to proceed as a representative action.

The Court began its review by thoroughly analyzing Brinker and its progeny. Describing several of those subsequent decisions, the Court said:

Subsequent cases have concluded, considering Brinker, that when a court is considering the issue of class certification and is assessing whether common issues predominate over individual issues, the court must "focus on the policy itself" and address whether the plaintiff's theory as to the illegality of the policy can be resolved on a class-wide basis. (Faulkinbury v. Boyd & Associates, Inc. (2013) 216 Cal.App.4th 220, 232 (Faulkinbury); accord, Bradley, supra, 211 Cal.App.4th at pp. 1141-1142 ["[o]n the issue whether common issues predominate in the litigation, a court must 'examine the plaintiff's theory of recovery' and 'assess the nature of the legal and factual disputes likely to be presented' "]; Benton v. Telecom Network Specialists, Inc. (2013) 220 Cal.App.4th 701, 726 (Benton) ["under Brinker . . . for purposes of certification, the proper inquiry is 'whether the theory of recovery advanced by the plaintiff is likely to prove amenable to class treatment' "].) Those courts have also agreed that, where the theory of liability asserts the employer's uniform policy violates California's labor laws, factual distinctions among whether or how employees were or were not adversely impacted by the allegedly illegal policy does not preclude certification. (See, e.g., Bradley, supra, at pp. 1150-1153 [where theory of liability was employer's uniform policy violated labor laws by not authorizing employees to take meal and rest breaks, class certification is proper and fact some employees in fact took meal and rest breaks is a damage question that " 'will rarely if ever stand as a bar to certification' "].)

Slip op., at 13. Once the Court turned to plaintiff's theory, it wasted no time in applying the mandates of Brinker (and I sense no trace of bitterness):

Our review of Brinker, which is binding on this court (Auto Equity Sales, Inc. v. Superior Court (1962) 57 Cal.2d 450), compels the conclusion the trial court erroneously based its decertification order on its assessment of the merits of Hall's claim rather than on the theory of liability advanced by Hall. We are instructed under Brinker that the starting point for purposes of class certification commences with Hall's theory of liability because, "for purposes of certification, the proper inquiry is 'whether the theory of recovery advanced by the plaintiff is likely to prove amenable to class treatment.' " (Benton, supra, 220 Cal.App.4th at p. 726.) Here, as in Brinker and its progeny, Hall alleged (and Rite Aid did not dispute) that Rite Aid had a uniform policy of the type envisioned by Brinker: Rite Aid did not allow its Cashier/Clerks to sit (and therefore provided no suitable seats for its Cashier/Clerks) while they performed check-out functions at the register. Hall's theory of liability is that this uniform policy was unlawful because section 14 mandates the provision of suitable seats when the nature of the work reasonably permits the use of seats, and the nature of the work involved in performing check-out functions does reasonably permit the use of seats. Hall's proffered theory of liability is that, regardless of the amount of time any particular Cashier/Clerk might spend on duties other than check-out work, Rite Aid's uniform policy transgresses section 14 because suitable seats are not provided for that aspect of the employee's work that can be reasonably performed while seated.

Slip op., at 18-19. The Court then dismissed Rite Aid's arguments on appeal:

Rite Aid's arguments on appeal largely ignore the analysis of Bradley, Benton and Faulkinbury. Instead, Rite Aid asserts the trial court properly reached the merits of (and correctly rejected) Hall's theory of liability when it ruled on the decertification motion because Brinker cannot be read to permit a plaintiff to "invent a class action by proposing an incorrect rule of law and arguing, 'If my rule is right, I win on a class basis.' "

Slip op., at 20.

The Court found it unnecessary to address the representative action theory and declined the plaintiff's request to address the correct standard applicable to section 14's seating mandate.

I remarked on a number of occasions during Class Re-Action podcast episodes that Brinker's true impact was in the certification sphere, not the wage & hour issues it addressed. Q.E.D. Well, that's insanely smug and pretentious. But, you know, scoreboard.

PAGA claims of multiple employees are not a "common and undivided interest"

In  Urbino v. Orkin Servs. of California, Inc. (9th Cir. Aug. 13, 2013), the Ninth Circuit took up the question of whether PAGA claims aggregate for purposes of CAFA's damage prerequisite.  Plaintiff, a California citizen, worked in a nonexempt, hourly paid position for defendants, each of whom is a corporate citizen of another state, in California. Alleging that defendants illegally deprived him and other nonexempt employees of meal periods, overtime and vacation wages, and accurate itemized wage statements, plaintiff filed a representative PAGA action.  Defendants removed.  Plaintiff moved to remand.  The district court was obligated to decide whether the potential penalties could be combined or aggregated to satisfy the amount in controversy requirement. If they could, federal diversity jurisdiction would lie because statutory penalties for initial violations of California’s Labor Code would total $405,500 and penalties for subsequent violations would aggregate to $9,004,050. If not, the $75,000 threshold would not be met because penalties arising from plaintiff’s claims would be limited to $11,602.40.  Acknowledging a split of opinion, the district court found PAGA claims to be common and undivided and therefore capable of aggregation.

The Court examined the "common and undivided interest" exception to the rule that multiple plaintiffs cannot aggregate claims.  Observing that common questions do not create that common and undivided interest, the Court said:

But simply because claims may have “questions of fact and law common to the group” does not mean they have a common and undivided interest.  Potrero Hill Cmty. Action Comm. v. Hous. Auth., 410 F.2d 974, 977 (9th Cir. 1969). Only where the claims can strictly “be asserted by pluralistic entities as such,” id., or, stated differently, the defendant “owes an obligation to the group of plaintiffs as a group and not to the individuals severally,” will a common and undivided interest exist, Gibson v. Chrysler Corp., 261 F.3d 927, 944 (9th Cir. 2001) (quoting Morrison v. Allstate Indem. Co., 228 F.3d 1255, 1262 (11th Cir. 2000)).

Slip op., at 8.

The defendants then argued that the interest asserted by plaintiff was not his, but was actually the state's interest.  The Court's majority did not find that argument compelling:

To the extent Plaintiff can—and does—assert anything but his individual interest, however, we are unpersuaded that such a suit, the primary benefit of which will inure to the state, satisfies the requirements of federal diversity jurisdiction. The state, as the real party in interest, is not a “citizen” for diversity purposes. See Navarro Sav. Ass’n v. Lee, 446 U.S. 458, 461 (1980) (courts “must disregard nominal or formal parties and rest jurisdiction only upon the citizenship of real parties to the controversy.”); Mo., Kan. & Tex. Ry. Co. v. Hickman, 183 U.S. 53, 59 (1901); see also Moor v. Cnty. of Alameda, 411 U.S. 693, 717 (1973) (explaining that “a State is not a ‘citizen’ for purposes of the diversity jurisdiction”).

Slip op., at 9.   By the way, this cleverly avoids deciding an unnecessary issue that is of some consequence in the world of arbitration.  It does, however, suggest a point upon which the California Supreme Court will likely have to express an opinion when it decides whether PAGA claims are excused from arbitration clause enforcement or, alternatively, from arbitration clauses that preclude “class” claims.

The dissent, like the majority opinion, is also relatively short, but it is also well argued.

Thanks to the tipster for directing me to the decision (since I don't know whether you want to be identified, you remain anonymous).

NOTE:  This is an updated version of an earlier post on this case.  The older post has been removed. 

Confusion surrounding arbitration agreements rapidly escalating in California following conflicting decisions in Hoover, Iskanian

I've been working on a project involving arbitration issues.  My uncertainty about whether to keep all of my powder dry, so to speak, caused a fair bit of my delay in commenting about two relatively new arbitration decisions from California Courts of Appeal.  In Hoover v. American Income Life Insurance Company (June 13, 2012), the Court of Appeal (Fourth Appellate District, Division Two) affirmed a trial court's denial of a motion to compel arbitration.  In Iskanian v. CLS Transportion Los Angeles, LLC (June 4, 2012), the Court of Appeal (Second Appellate District, Division Two) affirmed a trial court order granting a motion to compel arbitration and dismissing class claims.  Looks like the unremarkable results of Courts of Appeal deferring to finding of trial courts, right?  No.  So very wrong.  What these two actually do is create an explicit rift on the issue of whether statutory rights, at least in the labor context, are subject to individual arbitration.  In the process, the Iskanian Court rejects its sister-division's holding in Brown v. Ralphs Grocery Co., 197 Cal. App. 4th 489 (2011) that Concepcion does not apply to PAGA's representative claims.  The Iskanian Court also refused to follow the NLRB's D.R. Horton decision that protects an employee's right to pursue class claims as a form of concerted activity.  The two cases also disagree as to the reach of Concepcion and Stolt-Neilsen. In sum, the relative clarity that existed in California following Gentry and Discover Bank is now a distant memory.  The California Supreme Court will need to resolve these issues soon, regardless of whether the United States Supreme Court takes on any of these issues in the future.

Hoover concerned a dispute as to whether an individual was misclassified as an independent contractor rather than an employee.  Hoover framed where its analysis would go very early in the opinion, with this footnote:

The conclusions we reach here avert any dependence, as urged by AIL, on two recent United States Supreme Court opinions, addressing the issue of class arbitrations for antitrust claims and consumer sales contracts. (Stolt-Nielsen S.A. v. AnimalFeeds International Corp. (2010) ___ U.S. ___, 130 S.Ct. 1758; AT&T Mobility LLC v. Concepcion (2011) ___ U.S. ___, 131 S.Ct. 1740.) “AT&T does not provide that a public right . . . can be waived if such a waiver is contrary to state law.” (Brown v. Ralphs Grocery Co. (2011) 197 Cal.App.4th 489, 500, 502-503.) We also do not need to address the unconscionability argument and the continuing viability of Armendariz v. Foundation Health Psychcare Services, Inc. (2000) 24 Cal.4th 83.)

Hoover slip op., at 3 n. 2.  From this we know that (1) Hoover views Concepcion and Stolt-Nielsen as limited to consumer sales contracts and antitrust issues respectively, and (2) Hoover views Brown v. Ralphs as correctly decided.

Hoover first discusses (extensively, if you are interested) the concept of waiver following too great a delay in moving to compel arbitration.  That discussion doesn't pave a lot of new ground.

Hoover gets interesting when it talks about the Labor Code claims asserted in the matter:

As a general rule, state statutory wage and hour claims are not subject to arbitration, whether the arbitration clause is contained in the CBA or an individual agreement. The CBA cannot waive the right to sue under applicable federal or state statutes because these statutory rights “devolve on petitioners as individual workers, not as members of a collective organization.” (Barrentine v. Arkansas-Best Freight System, Inc. (1981) 450 U.S. 728, 745, overruled on other grounds in Gilmer v.  Interstate/Johnson Lane Corp. (1991) 500 U.S. 20; Zavala v. Scott Brothers Dairy, Inc. (2006) 143 Cal.App.4th 585, 592 [rule applicable to wage claims under Labor Code and IWC wage orders].)

Hoover slip op., at 15-16.  Continuing, Hoover held:

An individual arbitration agreement also does not apply to an action to enforce statutes governing collection of unpaid wages, which “may be maintained without regard to the existence of any private agreement to arbitrate. . . .” (§ 229.) The intent is to assure a judicial forum where there exists a dispute as to wages, notwithstanding the strong public policy favoring arbitration. (Ware v. Merrill Lynch, Pierce, Fenner & Smith, Inc. (1972) 24 Cal.App.3d 35, 43; Flores v. Axxis Network & Telecommunications, Inc. (2009) 173 Cal.App.4th 802, 811.) An exception to the general rule occurs when there is federal preemption by FAA, as applied to contracts evidencing interstate commerce. (Perry v. Thomas (1987) 482 U.S. 483, 490.)

Hoover slip op., at 17.  Statutory claims for unpaid wages may proceed in court, regardless of an agreement to arbitrate.  Zowwee!  But wait - there is an exception for contracts related to interstate commerce.  Does Hoover fit into that exception?  No, says the Hoover Court:

Based on this record, it cannot be said the subject agreement involves interstate commerce. AIL had the burden to demonstrate FAA coverage by declarations and other evidence. (Shepard v. Edward Mackay Enterprises, Inc. (2007) 148 Cal.App.4th 1092, 1101; Woolls v. Superior Court (2005) 127 Cal.App.4th 197, 213-214.) The only established facts are that Hoover was a California resident who sold life insurance policies. Even though AIL is based in Texas, there was no evidence in the record establishing that the relationship between Hoover and AIL had a specific effect or “bear[ing] on interstate commerce in a substantial way.” (Citizens Bank v. Alafabco, Inc. (2003) 539 U.S. 52, 56-57.) Hoover was not an employee of a national stock brokerage or the employee of a member of a national stock exchange. (Thorup v. Dean Witter Reynolds, Inc., supra, 180 Cal.App.3d at p. 233; Baker v. Aubry (1989) 216 Cal.App.3d 1259, 1266.) Unlike the plaintiff in Giuliano v. Inland Empire Personnel, Inc. (2007) 149 Cal.App.4th 1276, 1287, Hoover did not work in other states or engage in multimillion dollar loan activity that affected interstate commerce by negotiating with a bank that was headquartered in another state. Under these circumstances, if the FAA did not apply, the exception favoring federal preemption and arbitration did not operate.

Hoover slip op., at 17-18.  So that's going to get some unmentionables in a twist.

Iskanian is, at least in spirit, the antimatter to Hoover's matter.  Iskanian involves a certified class that avoided arbitration once before, when the issuance of Gentry caused the reversal of the trial court's first Order compelling arbitration.  Following Concepcion and Stolt-Nielsen, the defendant in Iskanian tried again.  This time, the Iskanian Court affirmed the second Order compelling individual arbitration.  In the process, the Court gave Concepcion and Stolt-Nielsen the broadest possible constructions, held Gentry overruled, disregarded Brown v. Ralphs and rejected protections supplied by the NLRA and preserved by D.R. Horton.

First, regarding Gentry, Iskanian said:

Now, we find that the Concepcion decision conclusively invalidates the Gentry test. First, under Gentry, if a plaintiff was successful in meeting the test, the case would be decided in class arbitration (unless the plaintiff could show that the entire arbitration agreement was unconscionable, in which case the agreement would be wholly void). But Concepcion thoroughly rejected the concept that class arbitration procedures should be imposed on a party who never agreed to them. (Concepcion, supra, 131 S.Ct. at pp. 1750-1751.) The Concepcion court held that nonconsensual class arbitration was inconsistent with the FAA because: (i) it “sacrifices the principal advantage of arbitration—informality—and makes the process slower, more costly, and more likely to generate procedural morass than final judgment”; (ii) it requires procedural formality since rules governing class arbitration “mimic the Federal Rules of Civil Procedure for class litigation”; and (iii) it “greatly increases risks to defendants,” since it lacks the multilevel review that exists in a judicial forum. (Id. at pp. 1751-1752; see also StoltNielsen S. A. v. AnimalFeeds Int'l Corp. (2010) 130 S. Ct. 1758, 1775 [“a party may not be compelled under the FAA to submit to class arbitration unless there is a contractual basis for concluding that the party agreed to do so”].) This unequivocal rejection of court-imposed class arbitration applies just as squarely to the Gentry test as it did to the Discover Bank rule.

Iskanian slip op., at 8-9.  But the Court wasn't done:

Third, the premise that Iskanian brought a class action to “vindicate statutory rights” is irrelevant in the wake of Concepcion. As the Concepcion court reiterated, “States cannot require a procedure that is inconsistent with the FAA, even if it is desirable for unrelated reasons.” (131 S.Ct. at p. 1753.) The sound policy reasons identified in Gentry for invalidating certain class waivers are insufficient to trump the far-reaching effect of the FAA, as expressed in Concepcion. Concepcion's holding in this regard is consistent with previously established law. (See Perry v. Thomas, supra, 482 U.S. at p. 484 [finding that § 2 of the FAA preempts Lab. Code, § 229, which provides that actions for the collection of wages “may be maintained 'without regard to the existence of any private agreement to arbitrate'”]; Southland Corp. v. Keating (1984) 465 U.S. 1, 10-11 [holding that the California Supreme Court's interpretation of the Franchise Investment Law as requiring judicial consideration despite the terms of an arbitration agreement directly conflicted with section 2 of the FAA and violated the Supremacy Clause]; Preston v. Ferrer (2008) 552 U.S. 346, 349-350 [holding, “when parties agree to arbitrate all questions arising under a contract, state laws lodging primary jurisdiction in another forum, whether judicial or administrative, are superseded by the FAA”].)

Iskanian slip op., at 9-10.  In its analysis, the Iskanian Court selectively disregarded valid federal law recognizing that vindication of statutory rights remains a basis for declining to enforce an arbitration agreement.  And all of this leaves unanswered the true foundational question: how does the federal government have the constitutional authority over a state's distribution of disputes alleging state law violations in state courts?  Even Concepcion cannot be viewed as answering that question, as it was decided in federal courts over which the federal government does have jurisdiction.  Anyhow, Iskanian had more carnage to release...

Next, the Iskanian Court rejected D.R. Horton, but without any cogent analysis as to why it was incorrectly decided. In D.R. Horton, the NLRB held that a mandatory, employer-imposed agreement requiring all employment-related disputes to be resolved through individual arbitration (and disallowing class or collective claims) violated the NLRA because it prohibited the exercise of substantive rights protected by section 7 of the NLRA.  Section 7 provides in part that employees shall have the right “to engage in . . . concerted activities for the purpose of collective bargaining or other mutual aid or protection . . . .”  (29 U.S.C. § 157.)   The NLRB found that “employees who join together to bring employmentrelated claims on a classwide or collective basis in court or before an arbitrator are exercising rights protected by Section 7 of the NLRA.”  However, that holding was not new to D.R.Horton, as Iskanian implies.  Rather, decades of authority confirm that class and collective actions constitute protected concerted activity.  That, at least, is well-settled.

Next, Iskanian declares that since D.R. Horton analyzes laws beyond the NLRA, the Court would not defer to it.  Problematically, declining to defer is different than independently reaching the same result following a review of the relevant authority.  Here, Iskanian seems to view a right to decline to defer as a right to choose the alternative construction, absent any analysis.  Instead, the Court said:

The D.R. Horton decision identified no “congressional command” in the NLRA prohibiting enforcement of an arbitration agreement pursuant to its terms. D.R. Horton’s holding—that employment-related class claims are “concerted activities for the purpose of collective bargaining or other mutual aid or protection” protected by section 7 of the NLRA, so that the FAA does not apply—elevates the NLRB's interpretation of the NLRA over section 2 of the FAA. This holding does not withstand scrutiny in light of Concepcion and CompuCredit.

Iskanian slip op., at 13.  Iskanian is simply wrong.  D.R. Horton provided a very detailed discussion of the fact that the FAA does not authorize agreements that violate federal law, including the NLRA and related statutory provisions.  The NLRB was working squarely within its area of expertise when it concluded that an agreement interfering with section 7 rights was unenforceable as an illegal contract.  The fact that the agreement was an arbitration agreement is irrelevant.  Illegal contracts are unenforceable.  Concepcion did not change contract law precluding enforcement of illegal agreements.  Moreover, the NLRB noted in D.R. Horton that the Norris-LaGuardia Act was enacted after the FAA.  Thus, it cannot be said that the FAA "overruled" the NLRA.  Rather, if anything, the NLRA limited the FAA in that it defined a new zone of contracts that were illegal.  Iskanian Court don't care!

Next, Iskanian opined that Brown v. Ralphs was wrongly decided:

In finding that Concepcion did not apply to PAGA representative claims, the Brown majority wrote: “[Concepcion] does not purport to deal with the FAA's possible preemption of contractual efforts to eliminate representative private attorney general actions to enforce the Labor Code. As noted, the PAGA creates a statutory right for civil penalties for Labor Code violations 'that otherwise would be sought by state labor law enforcement agencies.' . . . This purpose contrasts with the private individual right of a consumer to pursue class action remedies in court or arbitration, which right, according to [Concepcion], may be waived by agreement so as not to frustrate the FAA—a law governing private arbitrations. [Concepcion] does not provide that a public right, such as that created under the PAGA, can be waived if such a waiver is contrary to state law.” (197 Cal.App.4th at p. 500.)

Respectfully, we disagree with the majority's holding in Brown. We recognize that the PAGA serves to benefit the public and that private attorney general laws may be severely undercut by application of the FAA. But we believe that United States Supreme Court has spoken on the issue, and we are required to follow its binding authority.

Iskanian slip op., at 15.  Again, Iskanian avoids any analysis of authority that might undercut its decision.  Vindication of statutory rights is currently a recognized basis for declining to enforce an arbitration agreement.  All Iskanian does is point at Concepcion and declare that it is following it.  In doing so, Iskanian goes too far and creates a rift in California law that requires immediate attention by the California Supreme Court.

Two cases, two contrary sets of conclusions.