Will Trucking Case Drive New Federal Arbitration Act Case to the Supreme Court?

** Gas Company Looks for Post-Iskanian Certiorari After California Appeals Court Invalidates Arbitration and Class Waiver Provision in its Wage and Hour case with its Truck Drivers **                                                                                                                                                                                                                                                                                                                                                                             California courts are known for their distaste for arbitration provisions – and for butting heads with the Supreme Court who has (on a number of occasions now) made clear that that the Federal Arbitration Act (FAA) (9 U.S.C. § 1) preempts California judicial rulings regarding the unconscionability of class arbitration waivers.  See e.g., AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011).  The Supreme Court may get another chance to make the point, as courts in California continue with a “where there is a will – there is a way” approach to invalidating arbitration contracts.  See discussion, James v. Conceptus, Inc., 851 F. Supp. 2d 1020, 1036-37 (S.D. Tex. 2012) (concluding that, even after Concepcion, California courts continue to find arbitration forum-selection clauses unenforceable under far more stringent tests than other states).  One of the latest defendants to have their arbitration provision deemed unenforceable is Air Liquide in Garrido v. Air Liquide Indus. U.S. LP, 194 Cal. Rptr. 3d 297 (Cal. Ct. App. 2015).  However, Air Liquide has not taken it lying down – on May 3, 2016, it filed a writ of certiorari in the U.S. Supreme Court. Air Liquide Indus. U.S. LP v. Garrido, No. 15-1336, 2016 WL 2605541 (U.S.) (“Writ”).

A quick bit of history for context on the Garrido Court of Appeal decision.  Recall in Gentry v. Superior Court, 42 Cal. 4th 443 (Cal. 2007), the California Supreme Court held that a class-action waiver in an employment contract was unenforceable when the waiver would prevent employees from vindicating their rights.  The Gentry court concluded that even though individual arbitration could be a tool to enforce legal rights, in the context of the employment relationship – if each individual recovery would be modest, if an individual might be retaliated against if bringing a suit individually (rather than by merely joining a class) and if there are other real world obstacles in going it alone – then the provision would be invalid.  The practical effect of these Gentry factors made it highly unlikely that an employer arbitration provision would survive.  However, Gentry was overruled by Iskanian v. CLS Transportation Los Angeles, LLC, 327 P.3d 129 (Cal. 2014) (applying the then new rule from Concepcion).  The finding of Iskanian was that any California law that invalidated an arbitration provision was contrary to the FAA and therefore preempted.

However, in Garrido, the Court of Appeals deftly side-stepped Iskanian.  First, it determined that the FAA did not even apply to the case at hand.  194 Cal. Rptr. 3d at 302. Citing Section 1 of the FAA, which states that the FAA does not cover “contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce,” the California Court of Appeals held that “transportation workers” fell within this exception.  (Citing Circuit City Stores, Inc. v. Adams (2001) 532 U.S. 105, 109 (2001)).  More specifically, the Garrido court held that the FAA carve-out did not apply to interstate truck drivers. 194 Cal. Rptr. 3d at 303.  And second, the Court of Appeals held that because the basis of the Iskanian decision was its nexus to the FAA – with that connection severed – Gentry not Iskanian governed. 194 Cal. Rptr. 3d at 304.  Finally (and not surprisingly), after applying the factor test from Gentry, the court held that the arbitration provision failed.

Air Liquide’s certiorari writ notes that the Court of Appeal’s severing of the relevant employment contract from the FAA was improper – foremost because the contract itself says that the FAA applies.  Air Liquide’s briefing notes that “the application of the Section 1 exemption directly contradicted the parties’ clear and expressly-stated intent to apply the FAA to their dispute. The Court of Appeal’s conclusion that the parties somehow intended to apply an exemption to the FAA to vitiate the very choice of law provision that they entered into, when in fact their intention was directly opposite, defied reason.” Writ at 5 – 6.  Air Liquide also criticizes the Court of Appeals decision for applying the “transport worker” exception outside of the trucking industry to it – a gas company – that just happens to transport its material from time to time.  Writ at 18 – 19.

This latter point raises an important issue that will apply to all companies who move their own products around the country – are their employees “transport workers”?  The more interesting and broader question, however, arises if Air Liquide fails on that question:  Can parties force the FAA to apply where it otherwise has no force?  Does an agreement that says the FAA “governs” carry with it those circumstances where it otherwise wouldn’t (because the FAA exempts it)? Interesting questions . . . and again – as we have blogged in the past – one that will be a test of the legacy of the arbitration jurisprudence of which the late Justice Scalia was the chief architect.

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Here’s Something You Don’t See Every Day: Poliitcal Support for the Primacy of State Law


** Federal Agencies and Legislators Attempt an Assault on the Enforceability of Class Action Waivers and Mandatory Arbitration Contract Provisions **                                                                                                                                                                                                                                                                                                                                                                                                                                                         

x93vP26g_400x400We’ve recently posted regarding the pushback state high courts have been giving the Supreme Court’s recent decisions regarding the primacy of the Federal Arbitration Act over state laws that restrict private arbitration agreements.  These state court cases arise in circumstances (such as in consumer cases) where the high cost/low recovery dynamic makes the class action attractive versus the consumer pursuing an individual claim in arbitration.  The concern over the increased use of mandatory arbitration agreements – particularly those providing class waivers – extends beyond state courts and to the federal government itself.  But unlike the states, who must accept federal pre-emption of state law, the feds can work around it – and they are (trying, at least).  For example, the Department of Education has just released a proposal to amend the federal regulations governing colleges’ participation in the Direct Loan Program.  The proposed amendments would prevent colleges participating in the lucrative program from requiring students to arbitrate unless they consent after the claim arises; and from prohibiting students from asserting their claims “in cases filed in a court on behalf of a class.”  Department of Education, Issue Paper 5 Session 3: March 16-18, 2016.  These proposed regulations stem in part from a citizen petition filed by a consumer group, Public Citizen, Inc and comes in the wake of some high profile for-profit college failings, especially the infamous 2014 bankruptcy of Corinthian Colleges, one of the largest for-profit, post-secondary school operators in the country (housing Bryman College, National Institute of Technology, etc.)  The Department of Education is justifiably concerned that taxpayers are on the hook for Direct Loans made to students who attended Corinthian Colleges’ campuses from 2010-2015 (to the tune of $3.5 billion according to Public Citizen).

The Department of Education’s proposal comes on the heels of the Consumer Fraud Protection Bureau’s announcement in October that it is considering proposed rules to eliminate mandatory arbitration provisions in consumer finance agreements.   Dodd-Frank tasked the CFPB with conducting a study of arbitration agreements in consumer finance contracts, which was completed in March 2015.  Among the study’s insights was that, based on a sampling of consumer finance agreements,  53% of those involving credit cards, 44% of debit cards, 92% of prepaid cards, and 99% of payday loans and wireless contracts contained mandatory arbitration clauses.  The study also disclosed that, while “a relatively small number of individual cases against their financial service providers [were filed] either in arbitration or in court” in the aftermath of Concepcion, prior to that Supreme Court decision, “at least 32 million class members per year were eligible for relief pursuant to class settlements approved by federal courts between 2008 and 2012” resulting in settlements of “$540 million per year in cash, in-kind relief and attorneys’ fees and expenses . . . .”  The CFPB concluded that the dramatic decline in consumer finance disputes was the direct result of the rise of mandatory arbitration agreements – the individual harm is too small for a consumers to bring a claim, lawyers won’t take on such small cases, and “in some cases consumers may not know that they have suffered harm” (presumably because a lawyer hasn’t informed them).

But the biggest challenge to mandatory pre-dispute arbitration agreements in consumer contracts comes from Congress, itself.  In what some readers might view as an ironic title for federal legislation — “The Restoring Statutory Rights and Interests of the States Act of 2016” was introduced by Senators Leahy (D. VT) and Franken (D. MN) on February 4th.  This bill would effectively “overrule” Concepcion (specifically referenced in the text) and its progeny by decreeing that FAA preemption does not apply to claims brought by an individual or “small business concern” – including class actions – arising from a Federal or state statute . . . or a constitution of a State.”  Not satisfied with merely protecting state statutory claims (e.g., California’s Consumer Legal Remedies Act) from pre-dispute arbitration agreements, the proposed legislation goes further by providing that state statutory or common law on unconscionability, contract formation, and public policy trumps the FAA as well.  Senator Leahy and Franken’s 2016 legislation appears aimed at garnering Republican support by specifically referencing state rights.  In 2015, Senator Franken along with Representative Hank Johnson reintroduced their prior bill, “The Arbitration Fairness Act” that was a full federal frontal assault on arbitration agreements, eliminating them in employment, consumer, civil rights and antitrust cases.  The Arbitration Fairness Act was referred to the House and Senate Judiciary Committees from whence it is unlikely to emerge.  The Restoring Statutory Rights and Interests of the States Act is unlikely to fare much better, but it is an election year and worth a watch.

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Latest Salvo in the Arbitration Wars

** U.S. Supreme Court Grants Certiorari and Vacates Supreme Court of Hawaii’s Decision Voiding Pre-Dispute Arbitration Contract Provision ** 

The Supreme Court’s series of close decisions upholding agreements to arbitrate (including waivers of class arbitration) in private contracts in the face of unconscionability-type assertions —  AT&T Mobility v. Concepcion, 563 U.S. 333 (2011); American Express Co., et al. v. Italian Colors Restaurant, 133 S.Ct. 2304 (2013) and DIRECTV, Inc. v. Imburgia, 577 U.S. ___ (2015) — has understandably quickened the pace of consumer companies deploying such provisions in their customer contracts and their on-line terms of use.  As those who have followed these cases would know, the rationale of this line of authority is that the Federal Arbitration Act (which provides for the enforceability of arbitration agreements) preempts state law to the contrary, i.e. that would prohibit contracts providing for mandatory arbitration (and class waivers).  But these important Supreme Court decisions are controversial and have been met with resistance by state courts around the country.  Perhaps the most “in your face” response to the Supreme Court’s arbitration decisions is the 2011 Genesis Healthcare case: where the West Virginia Supreme Court accused the Supreme Court of manufacturing “from whole cloth” its reasoning.  Brown ex. rel. Brown v. Genesis Healthcare Corp., 724 S.E.2d 250 (2011).  The Supreme Court was quick to “correct” the West Virginia Supreme Court. Marmet Health Care Center, Inc. v. Brown, 565 U.S. __ (2012).  Will this back-and-forth play out again in Hawaii? The Hawaii Supreme Court has entered the fray in Narayan, et al. v. The Ritz-Carlton Dev. Co., 350 P.3d 995 (2015).  The case involves an (undoubtedly tony) condominium complex at Kapalua Bay that went tragically south.  The purchase agreement included a jury trial waiver and other terms that suggested a right to a civil trial, but the agreement also referenced other documents including a condominium declaration recorded with the state that included a mandatory arbitration provision.  The Hawaii Supreme Court found the plethora of documents inconsistent and confusing and decided that no agreement to arbitrate existed.  It also determined that — even if an agreement to arbitrate existed — it was unconscionable because the fact that the purchasers were stuck with arbitration due to the recording of the declaration created an adhesion contract.  Further objectionable provisions (according to the court) were that the agreement precluded discovery, eliminated punitive and consequential damages, required secrecy, and imposed a one year statute of limitations.  On January 11, 2016, the U.S. Supreme Court granted writ of certiorari, vacated Hawaii’s decision, and remanded the matters “for further consideration in light of DIRECTTV, Inc. v. Imburgia,” (136 S. Ct. 800) signaling that it had made its decisions on this type of challenge to mandatory arbitration agreements (and perhaps signaling that it is done with the issue).  But with the recent passing of Justice Scalia – the author of Italian Colors and the primary architect of the Supreme Court’s arbitration jurisprudence – all eyes will be focused on 1 First Street NE to see if the minority’s strong dissents began to find their way into majority opinions.


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