Posts belonging to Category Caselaw Developments

In a recent ruling involving employer-employee arbitration agreements, the California Court of Appeal has again demonstrated the continuing vitality of California’s unconscionability doctrine, despite the U.S. Supreme Court’s aggressively pro-arbitration ruling in AT&T Mobility v. Concepcion. See Jara v. JP Morgan Chase Bank, No. B234089 (Cal. Ct. App. Jul. 30, 2012) (order affirming denial of motion to compel arbitration) (available here).

Just as it did in Sparks v. Vista Del Mar, the Second Appellate District upheld a trial court ruling that an arbitration agreement between the defendant employer and plaintiff employee was both procedurally and substantively unconscionable. Order at 5-7. The plaintiff, then 60 years old and of Mexican and Filipino background, filed a complaint against her former employer, JPMorgan, alleging harassment and wrongful termination. JPMorgan moved to compel arbitration based on a company-drafted arbitration agreement which was among the many papers signed by Jara at the outset of her employment. The trial court denied JPMorgan’s motion and the Court of Appeal affirmed.

The panel found that the at-issue arbitration agreement lacked mutuality and impermissibly limited discovery, to the extent that “[t]he discovery limits imposed upon Jara here, combined with other one-sided and harsh terms, constituted substantive unconscionability.” Id. at 7. The court also agreed that the plaintiff’s assent to the standard JPMorgan arbitration agreement was obtained by procedurally unconscionable means: “We conclude that the agreement is procedurally unconscionable because it was presented on a take it or leave it basis and did not include copies of the arbitration rules.” Id.

While the panel acknowledged that the evidence as to procedural unconscionability was rather meager, they nonetheless found that, “[w]here, as here, the arbitration agreement is permeated with substantive unconscionability, a minimal showing of procedural unconscionability is sufficient to render the agreement unenforceable.” Id.

A federal judge has denied Microsoft’s motion to dismiss a putative class action alleging that Microsoft sent spam text messages to consumers.  See Smith v. Microsoft Corp., No. 11-1958 (S.D. Cal. Jul. 20, 2012) (order denying motion to dismiss) (available here).  Microsoft had argued that the plaintiff could not establish “actual harm” and therefore did not satisfy federal Article III standing requirements.  Smith and other recent rulings, most prominently the U.S. Supreme Court’s ruling in Edwards v. First Am. Corp. (available here), have caused legal observers to revise expectations of a tighter Article III standing jurisprudence leading to more early dismissals in federal court.

The Smith action alleges that Microsoft sent unsolicited text messages to consumers promoting its popular Xbox gaming platform, in violation of the Telephone Consumer Protection Act (TCPA).  Microsoft sought an early dismissal of the action on the ground that the named plaintiff lacked Article III standing because he could not show that he suffered actual economic injury.  In particular, Microsoft emphasized that the named plaintiff had not incurred any additional cell phone charges due to the texts.  However, Judge Janis Sammartino rejected Microsoft’s argument, ruling that the TCPA confers standing irrespective of whether a plaintiff incurs charges or other direct pecuniary detriment, thus allowing the putative class action to proceed without proof of additional charges being incurred attendant to the spam messages. 

The ruling’s underlying reasoning has a potentially wide reach.  In addition to grounding her ruling in the TCPA’s overt language and legislative history, Judge Sammartino analogized it to other statutes designed to promote similar privacy protections, referencing the Wiretap Act (addressed in In re iPhone Application Litigation, 2012 WL 2126351 (N.D. Cal. 2012)), the Video Privacy Protection Act (addressed in In re Hulu Privacy Litigation, 2012 WL 2119193 (N.D. Cal. 2012)), and the Stored Communications Act (addressed in Gaos v. Google, Inc., 2012 WL 1094646 (N.D. Cal. 2012)).  Order at 9. 

The Smith action seeks statutory damages pursuant to the TCPA (which provides for a minimum of $500 per violation) as well as injunctive relief that would proscribe “all wireless spam activities” by Microsoft.

Defendants who believed that the U.S. Supreme Court’s AT&T Mobility v. Concepcion decision marked the beginning of a golden era for arbitration are finding it more difficult to enforce arbitration clauses than anticipated, particularly where state law unconscionability doctrines are implicated.  Most recently, California’s Court of Appeal (Second Appellate District) has affirmed a trial court ruling denying the defendant’s petition to compel the arbitration of wrongful termination claims based on an arbitration clause set forth in the defendant’s employee handbook.  See Sparks v. Vista Del Mar Child and Family Servs., __ Cal. App. 4th __ (Cal. Ct. App. 2012) (available here).

The opinion, certified for partial publication, noted that “the United States Supreme Court in Concepcion did not eliminate state law unconscionability as a defense to the enforcement of arbitration agreements subject to the Federal Arbitration Act” (slip op. at 7), with a bulky string citation to multiple precedents also holding that Concepcion did not nullify California’s unconscionability doctrine as applied to contracts purporting to require arbitration.  In addition to the authorities cited in Sparks, the decision echoes the unconscionability analysis of a recent federal district court ruling, Trompeter v. Ally Financial Inc.  No. 12-00392 (N.D. Cal. June 1, 2012) (order denying motion to compel arbitration) (Wilken, J.) (“Multiple elements render the agreement procedurally and substantively unconscionable, such that the arbitration agreement is void under California law.”) (available here).

Applying California’s unconscionability doctrine, the Sparks panel found the at-issue arbitration clause to be both procedurally and substantively unconscionable.  Procedural problems identified by the court include the following: (1) the arbitration clause was included within a lengthy employee handbook and not specifically called to the attention of plaintiff; (2) the plaintiff did not acknowledge or agree to arbitration; (3) the handbook stated that it was not intended to create a contract; and (4) since the handbook could be amended unilaterally by defendant, any agreement therein would be illusory.  Slip op. at 12-14.  As to substantive issues, the court found that the arbitration clause required employees to relinquish administrative and judicial rights under federal and state statutes, and it made no provision for discovery.  Id. at 14.  In addition, the rules referred to in the arbitration clause that would govern the arbitration process were not provided to plaintiff.  Id. at 2.

Sparks is notable for deciding an issue of considerable practical importance: whether an employer’s placement of an arbitration clause in an employee handbook suffices to bind employees to arbitrate.  The court’s answer is unequivocal, and speaks to the broader issue of fairness in the imposition of mandatory arbitration agreements: “The increasing phenomenon of depriving employees of the right to a judicial forum should not be enlarged by imposing upon employees an obligation to arbitrate based on one obscure clause in a large employee handbook distributed to new employees for informational purposes.”  Id. at 12-13.

The California Court of Appeal ruled in April that, under Texas Law, an arbitration clause used by upscale department store Neiman Marcus in connection with its employment agreement is illusory and unenforceable, and ordered that the underlying case be heard in a court of law, rather than in arbitration.  See Peleg v. Neiman Marcus Group, Inc., 140 Cal. Rptr. 3d 38 (Cal. Ct. App. 2012) (available here).

In the underlying action, the plaintiff had alleged that Neiman Marcus, his former employer, discriminated against him on multiple grounds, including his national origin, sexual orientation, and religion.  See Peleg at 42.  Neiman Marcus responded by moving to compel arbitration on the basis of a mandatory arbitration agreement that the plaintiff, like most Neiman Marcus employees, had purportedly agreed to.  Id. at 43-44.  The defendant’s motion was granted, and the parties began the arbitration process.  After the arbitrator failed to give the plaintiff a requested continuance and in essence ended his case on a procedural technicality, he sought relief in the courts, arguing that the Neiman Marcus arbitration agreement was illusory and unenforceable, chiefly because Neiman Marcus could unilaterally modify or revoke the agreement, with the changes applying to any cases filed within 30 days, without providing a “savings clause” for claims that were known or had accrued at the time.  Id.

The California Court of Appeal for the Second Appellate District reversed the trial court and the arbitrator, holding that the unilateral modification provision rendered the agreement illusory and unenforceable.  The majority explained that “an arbitration contract containing a modification provision is illusory if an amendment, modification, or revocation . . . applies to claims that have accrued or are known to the employer. . . . [O]therwise, the employer could amend the contract in anticipation of a specific claim, altering the arbitration process to the employee’s detriment and making it more likely the employer would prevail.”  Id. at 42.

The Court of Appeal rejected the defendant’s argument that the arbitration clause’s 30-day notice period precluded the arbitration clause being declared unenforceable.  As the panel’s majority explained, the notice provision “merely indicates when a contract change will take effect.”  Id. at 58.

The Peleg ruling is expected to be influential. Indeed, just this week, Judge Kramer of the San Francisco Superior Court followed Peleg in denying two motions to compel arbitration by Neiman Marcus (in the coordinated cases, Neiman Marcus v. Monjazeb and Neiman Marcus v. Tanguilig), following on nearly 400 pages of collective briefing and four hearings.