FAA Impacts California Supreme Court Arbitration Cases

Recent rulings of the Supreme Court of the United States have called into question key California arbitration decisions.  US Supreme Court decisions such as Preston v. Ferrer (2008), Stolt-Nielsen v. AnimalFeeds International Corp. (2010), AT&T Mobility LLC v. Concepcion (2011), and American Express v. Italian Colors Rest. (2013) have made clear federal law under the Federal Arbitration Act (FAA) trumps state laws and courts that are hostile to arbitration.

This is a welcome development for those who represent employers in California.  California courts since the California Supreme Court’s Armendariz v. Foundation Health Psychcare Services, Inc. (2000) decision have otherwise grown increasingly hostile to arbitration.  Arbitration of employment and wage related claims are particularly scrutinized.  And California courts routinely strike arbitration agreements they consider to be “unconscionable” or in violation of “public policy.”

In AT&T Mobility the US Supreme Court expressly overruled one key California Supreme Court case, Discover Bank v. Superior Court (2005), relating to class action waivers in consumer arbitration agreements.  Here is a list of key California Supreme Court cases that are in the cross hairs of the United States Supreme Court:

1. Sonic-Calabasas A, Inc. v. Moreno (2011).  In Sonic-Calabasas the California Supreme Court ruled the California Labor Commissioner’s wage claim and administrative hearing process known as a “Berman Hearing” could not be waived via arbitration agreement.   The California Supreme Court essentially found the arbitration agreement was against “public policy” and “unconscionable“ because the employee would forfeit advantageous procedural benefits created by California law to protect the employee if arbitration was compelled over a Berman Hearing.  The California Supreme Court is reconsidering its original decision in light of AT&T Mobility on orders from the US Supreme Court.  The author believes upon reconsideration, the California Supreme Court will have no choice but to conclude that AT&T Mobility controls and that it must compel arbitration over the Berman Hearing process.  A state mandated procedure that interferes with arbitration must bow to the FAA.  If so, this would significantly tip the balance back in favor of arbitration agreements and employers.  Employers could then compel arbitration over a Berman Hearing before the California Labor Commissioner.  (Update 10/19/2013: The California Supreme Court issued it’s Sonic-Calabasa II decision on 10/18/2013.  See post here.)
2. Gentry v. Superior Court (2007).  Gentry, decided in 2007, relied heavily on Discover Bank to rule class action waivers for employee claims is against “public policy” and “unconscionable.”  As noted above, Discover Bank was the California Supreme Court case overruled by the US Supreme Court in AT&T Mobility.  Gentry did not involve an arbitration agreement made under the FAA.  It involved arbitration under the California Arbitration Act only.  The author suspects an arbitration agreement with a class action waiver for employment claims made under the FAA will be enforceable in light of AT&T Mobility.  If so, this would be a big win for employers both large and small.  Employees who sign such an arbitration agreement should be compelled to arbitrate on an individualized basis only, and not on a class arbitration basis.  This would allow the streamlined resolution of the claim which is the point of arbitration.
3. Finally we come to Armendariz.  Armendariz set forth the requirements of an enforceable agreement to arbitrate otherwise unwaivable statutory rights of employees.  These are: 1) employee claimant must have the same substantive rights and remedies as they would in court; 2) sufficient discovery must be permitted; 3) the arbitrator must be neutral; 4) employer must pay for 100% of all arbitration costs (including the arbitrator’s fees); and 5)  arbitrator must issue a written decision setting forth the facts and law to allow meaningful review.   In light of AT&T Mobility and other post-2000 US Supreme Court rulings, the author believes Armendariz is subject to attack on several fronts:
   • A major premise of Armendariz is that “adhesion contracts” are bad.  AT&T Mobility scoffed at the notion that there were anything but “adhesion” contracts in modern consumer (and therefore employee) contracts.
   • Armendariz is a decision based on “public policy” though issued under the guise of an “unconscionability” defense.  Arbitration agreements are subject to contract defenses like any contract.  Since a defense to a contract is that it is “unconscionable,” the arbitration contract can be voided on this basis goes the argument.  But the US Supreme Court appears to be saying an arbitration agreement cannot be “unconscionable” based on “public policy” grounds.  Only time will tell, but the author suspects that “public policy” dressed up as “unconscionability” is not going to fly under the recent rulings of the US Supreme Court.
   • Under Armendariz the employer must pay for all costs of the arbitration, including the arbitrator’s fees.  This has resulted in the death of arbitration for the small/medium business.  If you’re a small/medium business and arbitration may cost you $30,000 (or much more) are you going to do it?  No, especially if you know the court system is free except for a $435 filing fee (and perhaps some other miscellaneous filing fees).  And many small/medium businesses can no more afford to pay for the arbitration than the employee suing them.  Therefore why impose 100% of the costs on the employer only?  This Armendariz factor is subject to challenge under AT&T Mobility in the author’s view.
   • Armendariz also requires “adequate discovery.”   But arbitration is supposed to be a streamlined process where the parties can agree upon the rules, including no or limited discovery.  And the US Supreme Court in AT&T Mobility has already hinted strongly states cannot impose procedural requirements (such as discovery) on parties who have not agreed to them.

Stay tuned because the shake down will continue.  The US Supreme Court and the FAA are turning the tide in favor of employers and against the judicial hostility towards arbitration.