Posts belonging to Category Caselaw Developments

Just as a conflict emerged within the California Court of Appeal as to the validity of California’s unconscionability doctrine following the U.S. Supreme Court’s AT&T Mobility v. Concepcion decision, a similar clash may be developing among California’s federal courts.  Northern District Judge Claudia Wilken has denied a defendant’s attempt to compel arbitration, chiefly on the ground that the at-issue arbitration agreement is unconscionable under California law.  See Trompeter v. Ally Financial Inc., No. 12-00392 (N.D. Cal. June 1, 2012) (order denying defendant’s motion to compel arbitration and motion for stay) (available here).

In Trompeter, Judge Wilken rejected the argument that the Federal Arbitration Act (FAA) preempted plaintiffs’ unconscionability claims and that the court therefore had no discretion to deny enforcement of the at-issue arbitration agreement.  Judge Wilken instead determined that “[m]ultiple elements render the agreement procedurally and substantively unconscionable,” and found the agreement to be void under California law.  Order at 17.  Judge Wilken specifically distinguished Kilgore v. KeyBank, National Ass’n, 673 F.3d 947 (9th Cir. 2012), in which the Ninth Circuit dismissed state public policy interests prohibiting the arbitration of particular types of claims and held that the FAA trumped such rationales.

Looking ahead to the probable review of this issue by the California Supreme Court, the Trompeter ruling gives encouragement to those who have advocated a narrow application of Concepcion, embodied most prominently in Brown v. Ralphs Grocery Co., 197 Cal. App. 4th 489 (2011).  By contrast, the recent Iskanian decision (expected to be taken up by the California Supreme Court) embraced an expansive reading of Concepcion. See Iskanian v. CLS Transp. Los Angeles, LLC, ___ Cal. App. 4th ___ (2012).

California’s Second Appellate District has affirmed a trial court’s order which interpreted AT&T Mobility v. Concepcion, compelled arbitration, and dismissed the claims of a certified class. This ruling has created a split that the California Supreme Court might ultimately have to resolve. See Iskanian v. CLS Transp. Los Angeles, LLC, ___ Cal. App. 4th ___ (2012), available here.

The Court of Appeal held that “the Concepcion decision conclusively invalidates the Gentry test [promulgated in Gentry v. Super. Ct., 42 Cal. 4th 443 (2007)].” Slip op at 8. In Concepcion, the U.S. Supreme Court expressly overruled the California Supreme Court decision in Discover Bank v. Super. Ct., a consumer class action in which the at-issue arbitration agreement had been stricken as unconscionable. Whether Concepcion also pertained to wage and hour class actions remained unclear, as it was Gentry that had articulated the unconscionability test applicable in the context of wage and hour claims. In holding Gentry overruled, Iskanian is in conflict with at least two other Court of Appeal decisions.

First, Brown v. Ralphs Grocery Co. (197 Cal. App. 4th 489 (2011)) held that claims for civil penalties brought pursuant to PAGA, the California Labor Code’s Private Attorneys General Act, are outside the ambit of Concepcion, and the California Supreme Court subsequently declined to review Brown, rendering the decision final. Yet the Iskanian court rejected this decision, the three-judge panel noting, “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.” Slip op. at 15.

Second, although the Second Appellate District held in Kinecta Alternative Financial Solutions, Inc. v. Super. Ct. (___ Cal. App. 4th ___ (2012)) that Gentry “appears to remain the binding law in California,” the Iskanian panel unequivocally states in its holding that Gentry was overruled by Concepcion. See slip op. at 8.

The Iskanian court also rejected the National Labor Relations Board’s decision in D.R. Horton (357 NLRB No. 184 (2012)), which held that a mandatory waiver of class claims imposed by an employer, requiring that individual arbitration be the sole means of resolving employment-related disputes, violated the National Labor Relations Act. See slip op. at 11-12.

A petition for review and spirited exchange of amicus briefs are expected.

Citing the California Supreme Court’s recent Brinker decision, Judge John A. Kronstadt has certified a class of approximately 1300 insurance adjusters who alleged misclassification and related wage violations by their employer, the insurance company Allstate, including off-the-clock work, unpaid overtime, and untimely final wages. See Jimenez v. Allstate Ins. Co., No. 10-08486 (C.D. Cal. Apr. 18, 2012) (order on motion to certify class action) (available here). Judge Kronstadt employed the Brinker court’s reasoning, which resulted in the denial of certification of the off-the-clock class in that case, to certify the Jimenez off-the-clock class. Order at 10-11. Unlike the situation in Brinker, although Allstate had facially compliant policies, Judge Kronstadt found that there was an informal systematic company policy to pressure or require employees to work off-the-clock. Id.

Jimenez is notable both in its application of substantive state law as articulated in Brinker and its adherence to the (still relatively new) class certification procedural criteria set forth in Wal-Mart v. Dukes, 131 S. Ct. 2541 (2011). In considering the plaintiffs’ allegation that Allstate, notwithstanding its written policies compliant with California overtime laws, “turn[ed] a ‘blind eye’ to unpaid overtime actually worked” (Order at 8-9), the Jimenez court found that whether Allstate had an “unofficial policy” of discouraging the reporting of (and compensation for) overtime work constituted a common question capable of class-wide adjudication (Order at 9). As in Brinker, the existence of facially compliant policies did not suffice to establish compliance with the law: “Although Defendant has presented testimony that its official policies are lawful, this showing does not end the inquiry. Plaintiff’s theory is that Defendant has a common practice of not following its official policy regarding overtime.” Order at 10.

Jimenez thus follows the Brinker holding that employers may not insulate themselves from liability by issuing a compliant written policy but failing to follow either that policy or the applicable law the policy purports to reflect.

The California Court of Appeal has issued a unanimous decision reinforcing that California’s unconscionability doctrine is still substantially intact, notwithstanding the U.S. Supreme Court’s ruling in AT&T Mobility v. Concepcion.  See Samaniego v. Empire Today LLC, ___ Cal. App. 4th ___ (Cal. Ct. App. 2012) (available here).  The Court of Appeal affirmed the trial court’s ruling that the at-issue arbitration clause was “highly unconscionable from a procedural standpoint” and exhibited “strong indicia of substantive unconscionability,” while denying the defendant’s motion for reconsideration in light of Concepcion.  See slip op. at 3-4.

The action arose when plaintiffs, installers for prominent carpet company Empire, brought claims alleging that they had been misclassified as independent contractors, and challenged the mandatory arbitration provision which was part of an agreement that Empire required the plaintiffs to execute both at the inception of their employment and, again, during their employment.  Id. at 2-3.  The court gave particular emphasis to the procedural unconscionability of the agreement, noting that it was presented to plaintiffs only in English, though some had only a rudimentary grasp of the language and others could not read English at all.  Id. at 2.  Additionally, “[t]he contracts were offered on a non-negotiable, take it or leave it basis, with little or no time for review.  The Agreement is 11 single-spaced pages of small-font print riddled with complex legal terminology.  The arbitration provision is set forth in the 36th of 37 sections.”  Id.

The arbitration clause was also deemed substantively unconscionable, as it shortened the statute of limitations to sue under the contract from one year to six months and contained a unilateral fee-shifting provision which required employees to pay Empire’s attorneys’ fees.  Id. at 3.  Similarly, claims to enforce non-compete agreements — which, as a practical matter, are only brought by employers — were excluded from the arbitration clause’s ambit.  Id.

The court found its analysis unaltered by Concepcion, noting that the Supreme Court’s decision “explicitly reaffirmed that the FAA ‘permits agreements to arbitrate to be invalidated by “generally applicable contract defenses, such as fraud, duress, or unconscionability,’” and “arbitration agreements remain subject, post-Concepcion, to the unconscionability analysis employed by the trial court in this case.”  Id. at 11-12 (internal citations omitted).  California federal courts have also stricken unconscionable arbitration clauses.  See, e.g., Chavarria v. Ralphs Grocer Co., No. 11-CV-02109, 2011 U.S. Dist. LEXIS 104694 (C.D. Cal. Sept. 15, 2011).

The Samaniego ruling comes on the heels of the Consumer Financial Protection Bureau’s announcement that it has undertaken a critical examination of the impact of mandatory arbitration agreements on consumers. See http://s559594427.onlinehome.us/impactlitigation/2012/04/27/federal-consumer-protection-agency-to-assess-impact-of-mandatory-arbitration-on-consumers/. In holding that Concepcion does not alter the unconscionability analysis, the Samaniego court’s ruling will likely be influential as other courts, trial and appellate, state and federal, continue to confront the same issue.