AT&T Mobility LLC v. Concepcion

Copyright: Poofy / 123RF Stock Photo
Copyright: Poofy / 123RF Stock Photo

The California Supreme Court has once again deviated from what many view as clear precedent of the U.S. Supreme Court concerning the enforcement of arbitration agreements. Last week, the California court decided McGill v. Citibank, N.A., holding that state “public policy” precludes the enforcement of arbitration agreements where a class sues for “public injunctive relief” under Business and Professions Code § 17200, California’s much abused “unfair competition” statute. This decision comes on the heels of Iskanian v. CLS, in which the California court held that a class waiver in an arbitration agreement was unenforceable to prevent a representative action under the Private Attorneys General Act, again citing “public policy.” The McGill and Iskanian decisions are at odds with recent SCOTUS opinions such as ATT Mobility v. Concepcion, and American Express Co. v. Italian Colors. In the Italian Colors case, the high court specifically rejected state “public policy” as any kind of exception to the sweeping preemption of the Federal Arbitration Act (“FAA”).

California has been in a running dog fight with the FAA since 1987. In that year, SCOTUS decided Perry v. Thomas, in which Justice Thurgood Marshal upheld the FAA under the Commerce and Supremacy clauses, and slapped down California’s attempt to undermine arbitration agreements. Thirty years later, California courts remain determined to block arbitration under PAGA and Section 17200 in the face of otherwise enforceable arbitration agreements.

Also, with today’s swearing in of Neil Gorsuch, SCOTUS returned to its full complement of nine justices. Look for the high court to grant review of California and Ninth Circuit cases that follow McGill and Iskanian in the next couple of years with an eye toward overturning those decisions. In the meantime, companies should continue to include waivers of class and representative actions in their arbitration agreements with consumers and employees, noting that the waivers are enforceable to the extent permitted by applicable law.

We asked nearly 4 years ago if Armendariz (the key California Supreme Court case from 2004 on employment arbitration) was on a collision course with Concepcion (the US Supreme Court case from 2011). Concepcion said that the Federal Arbitration Act preempts state laws that “stand[] as an obstacle to the accomplishment and execution of the full purpose and objectives of [the FAA].” Armendariz, however, created numerous requirements that seem to violate that prohibition. (Can you say “modicum of bilaterality”?)

Given the number of issues facing the U.S. Supreme Court, it’s striking how often it finds it necessary to correct California’s interpretation of the FAA. It ended the last term doing so in DIRECTV Inc. v. Imburgia and appeared intent on doing the same near the start of this next term in MHN Government Services Inc. v. Zaborowski.

Copyright: luna123 / 123RF Stock Photo
Copyright: luna123 / 123RF Stock Photo

At the request of the Daily Journal (subscription required), I wrote an opinion piece about Zaborowski. In that case, the petitioners complain that California law since Armendariz applies a different standard to arbitration agreements in deciding whether to strike unlawful provisions and enforce the rest of the agreement or whether, instead, to strike the entire agreement. Oral argument in the case was set for February.

So, are Armendariz and Concepcion on a collision course? It sure looked that way. But the collision has been postponed. As of January 7th, the argument has been removed from the court’s calendar. It looks like the parties may have settled. (While that collision is no longer imminent, I like this image too much to change it.)

Last week, the state legislature passed AB 465 — a bill that prohibits employers from asking employees to agree to arbitrate employment claims unless the employees have their own attorneys negotiate the terms. Passing the bill looks like a futile exercise. The Federal Arbitration Act preempts state law in this area. In 2011, when the U.S. Supreme Court decided AT&T Mobility v. Concepcion, it said:

When state law prohibits outright the arbitration of a particular type of claim, the analysis is straightforward: The conflicting rule is displaced by the FAA.

Let’s break that down. “When state law [like AB 465] prohibits outright arbitration of a particular type of claim [like employment claims], the analysis is straightfoward: The conflicting rule is displaced by the FAA.” Seems pretty clear. So what’s the point?

The introductory language to AB 465 expresses concern about contracts that are coerced or involuntary. But coercion and lack of consent have always been grounds to invalidate contracts. Also, California law on employment arbitration agreements already requires the employer to foot the bill, prohibits any limitations on employees’ remedies, and imposes numerous other requirements to ensure fairness. So why go to the trouble of passing a law that relatively recent Supreme Court precedent says is invalid?

Some, like Maryann Maloney of California Citizens Against Lawsuit Abuse, say its so that “trial lawyers” (a shorthand term that overlooks the fact that we defense lawyers try cases too) know that they can make more money trying cases before juries than before arbitrators. (She’s saying it. Not me. I have to work with these people.)

Copyright: klotz / 123RF Stock Photo
Copyright: klotz / 123RF Stock Photo

Whatever the reason, if Governor Brown signs the law, it will create a great deal of unnecessary litigation as employers go through the time-consuming and expensive steps of getting it declared invalid. It will also give businesses that have a choice of where to locate yet another reason to avoid California 

Even with this added uncertainty, for reasons I’ve described before, I still believe arbitration makes sense for most employers with California operations.

 

In 2000, the California Supreme Court used its decision in Armendariz v. Foundation Health Psychcare Services to articulate minimum requirements for employment arbitration agreements. Last year, in AT&T Mobility LLC v. Concepcion, the U.S. Supreme Court reiterated that the Federal Arbitration Act preempts state laws that “stand[] as an obstacle to the accomplishment and execution of the full purpose and objectives of [the FAA].”

From my admittedly biased perspective, a number of the Armendariz requirements run afoul of Concepcion. Where, for example, did the requirement of “a modicum of bilaterality” come from? And if federal law preempts limitations on arbitration, how can a state court dictate what level of discovery is required and how much detail must be included in a written decision?

More recently, one California appellate case struck down an arbitration agreement for not providing the employee with a copy of the American Arbitration Association rules. The defendant in that case – Mayers v. Volt Management – has petitioned for review. Last week, the California Supreme Court granted review in Wisdom v. AccentCare, which found an arbitration agreement substantively unconscionable because the acknowledgment said "I agree . . . " instead of "we agree . . . " and that evidenced a lack of mutuality.  

There is no doubt that there are judges at all levels of our state court system who are hostile to the idea of mandatory workplace arbitration. The frequency with which they announce new requirements makes it impossible for employers to keep up. If the California Supreme Court doesn’t rein them in, expect the U.S. Supreme Court to intervene. Until then, add this to the areas of California employment law that are rife with uncertainty.

 

Senator Al Franken, among others, has reintroduced legislation to eliminate mandatory arbitration in employment, civil rights, and consumer cases.  The so-called Arbitration Fairness Act of 2011 (S. 987 (pdf), H.R. 1873) bears a striking resemblance to the Arbitration Fairness Act of 2009, which went nowhere.  This latest attempt seems to be a response to the Supreme Court’s recent decision in AT&T Mobility v. Concepcion.

The legislation is premised on several questionable assumptions, including assumptions that:

  • The broadly worded Federal Arbitration Act was never intended to apply to employment disputes and the Supreme Court has misinterpreted it in that respect,
  • An employee can’t knowingly agree to arbitration until after a dispute has arisen.

The Federal Arbitration Act and decades of court cases explain that the goal is to put arbitration agreements on the same footing as other contracts.  Saying that this bill is intended to give effect to the original legislative intent is clearly inaccurate.  To quote Al Franken’s SNL character Stuart Smalley, “That’s just stinkin’ thinkin’!”

Today, the Supreme Court decided AT&T Mobility v. Concepcion (pdf), a case we first reported on last June.  The plaintiffs in the underlying case filed a class action complaining about being charged sales tax on phones that AT&T advertised as "free" once you bought the service plan.   AT&T sought to enforce an arbitration provision in the sales contract and the plaintiffs countered that the provision was unconscionable because it required them to waive their right to proceed as a class action.  The 9th Circuit court of appeals held that the class action waiver was unconscionable under California law and that the Federal Arbitration Act did not preempt California law regarding unconscionability.

In an opinion issued today, the Supreme Court reversed in a 5 to 4 ruling that broke down along familiar ideological lines (Scalia, Roberts, Thomas, Alito, and Kennedy in the majority; Breyer, Ginsburg, Sotomayor, and Kagan dissenting). The majority argued that California’s rule disfavoring class action waivers in arbitration agreements (as articulated in Discover Bank v. Superior Court) was preempted by federal law encouraging arbitration. The dissent countered that this effectively left plaintiffs without a remedy since, as Justice Breyer phrased it, “What rational lawyer would have signed on to represent the [plaintiffs] in litigation for the possibility of fees stemming from a $30.22 claim?”

Most of the attacks on arbitration agreements in California involve the doctrine of unconscionability. The doctrine, which arises more from judicial decisions than legislative enactments, finds certain agreements unenforceable if they don’t meet specified requirements. Some of these, such as the requirement articulated in Armendariz v. Foundation Health Psychare Services that the agreements contain a "modicum of bilaterality," seem to reflect judicial suspicion (if not outright hostility) towards arbitration of employment claims.  This latest decision shows that the Supreme Court will not allow California unconscionability analysis to run amok. To that extent, it’s an encouraging development for employers.  And if class action waivers are now permissible in employment arbitration agreements, this provides a huge incentive for employers to have arbitration agreements with their employees.

Sometimes cases from other areas of law can have a strong impact on employment law in California.  For example, Laster v. AT&T Mobility LLC involved class action waivers in consumer contracts.  Laster filed a class action complaining about being charged sales tax on phones that AT&T advertised as "free" once you bought the service plan.   AT&T sought to enforce an arbitration provision in the sales contract and Laster countered that the provision was unconscionable because it required him to waive his right to proceed as a class action.   The 9th Circuit court of appeals held that the class action waiver was unconscionable under California law and that the Federal Arbitration Act (FAA) did not preempt California law regarding unconscionability.

AT&T Mobility asked the Supreme Court to weigh in on the issue.  In doing so, it argued that class-wide arbitration is not necessary to protect the consumers’ rights.  It further argued (pdf) that 

Class-wide arbitration affords none of the benefits of traditional, individual arbitration–it is at least as burdensome, expensive, and time-consuming as litigation–while multiplying the risks enormously because judicial review is so limited.

Finally, AT&T Mobility argued that the FAA preempts state law on this issue (including California law regarding unconscionability) as applied to arbitration agreements. 

Last week, the Supreme Court agreed to hear the matter (under the title AT&T Mobility v. Concepcion).  The decision, which is still many months away (oral argument has yet to be scheduled), could have a significant impact on California unconscionability analysis in the arbitration context.