Labor and Employment Arbitration Update

I. INTRODUCTION

In this column, I highlight the most significant labor and employment arbitration decisions over the last few months of interest to practitioners who use alternative dispute resolution (ADR).

II. FEDERAL ARBITRATION ACT PREEMPTION

Chamber of Commerce v. Bonta, 62 F.4th 473 (9th Cir. 2023)

In what is perhaps the most significant Fair Employment and Housing Act (FEHA) case decided during this period, the Ninth Circuit held that the Federal Arbitration Act (FAA) preempts California’s A.B. 51, California’s end to “forced arbitration.” A.B. 51, in part, adds Cal. Lab. Code § 433, which makes it a misdemeanor for an employer to require an applicant or existing employee to sign an arbitration agreement as a condition of employment. Seeking to circumvent preemption by the FAA, the California Legislature included a provision that if the parties entered into such an arbitration agreement, it would nevertheless be enforceable. See Cal. Lab. Code § 432.6(f).

In Chamber of Commerce, the Ninth Circuit determined that this penalty-based scheme to prevent the formation of arbitration agreements violates the equal-treatment principle inherent in the FAA, and evinces a hostility toward arbitration that is contrary to FAA’s intent to encourage arbitration. Thus A.B. 51 is preempted. The Ninth Circuit determined that because all of the provisions of A.B. 51 work together “to burden the formation of arbitration agreements,” it could not sever section 433 under the severability clause in section 432.6(i), finding that the severability clause related only to the provisions of section 432.6. Further, the Ninth Circuit would not presume that the California Legislature wished to invalidate a generally applicable provision such as section 433.

III. WAIVER

Armstrong v. Michaels Stores, Inc., 59 F.4th 1011 (9th Cir. 2023)

Two U.S. Supreme Court decisions on arbitration informed the opinion in this case. In Epic Systems Corp. v. Lewis, 138 S. Ct. 1612 (2018), the court held that arbitration agreements requiring individual arbitration, not class or collective arbitration, are enforceable, and in Morgan v. Sundance, Inc., 142 S. Ct. 1708 (2022), the court concluded that the FAA restricts courts from creating arbitration-favoring procedural rules.

In Armstrong, the Ninth Circuit affirmed the district court’s order compelling arbitration on the following grounds: Michael’s Stores repeatedly reserved its right to arbitration; did not ask the district court to weigh in on the merits; and did not engage in meaningful discovery. Thus, although Michael’s Stores did not immediately move to compel arbitration, its actions did not amount to a relinquishment of the right to arbitrate. The Ninth Circuit relied heavily on Morgan.

Hill v. Xerox Business Services, LLC, 59 F.4th 457 (9th Cir. 2023)

In Hill, another Ninth Circuit case regarding waiver, the court found that Xerox did not express an intent to arbitrate, served extensive discovery, moved for partial summary judgment, and waited until class certification to assert its right to arbitration. Xerox relied on a futility argument, that it could not file a motion to compel arbitration without knowing what the arbitrable claims would be. The Ninth Circuit disagreed, citing to Morgan. Thus, Xerox’s actions were deemed inconsistent with an intention to arbitrate.

IV. ISSUE PRECLUSION OF PAGA CLAIMS

Rocha v. U-Haul Co. of California, 88 Cal. App. 5th 65 (2023)

In the published portion of this opinion, the California Second District Court of Appeal, Division 1, rendered an important decision that creates a split of authority with that of the Fourth District Court of Appeal, Division 2, in Gavriloglou v. Prime Healthcare, 83 Cal. App. 5th 595 (2002).

The Rocha Court explained that principles of issue preclusion determine whether plaintiff employees have standing to bring their proposed Private Attorneys’ General Act (PAGA) claims following arbitration of their individual Cal. Lab. Code claims. Unlike a settlement of individual claims, which is not an adjudication on the merits, an arbitrator’s finding determining that the employees did not meet their burden of establishing the elements of the Cal. Lab. Code violation being adjudicated in arbitration precludes the employees from then establishing standing in court using the same Labor Code violation alleged in their individual claims if the threshold requirements of issue preclusion are met.

First, the issue must be identical. Second, the issue must actually have been litigated in the prior proceeding. Third, the issue must have been decided in the former proceeding. Fourth, the decision in the former proceeding must be final and on the merits. Fifth, the party against whom preclusion is sought must be the same as or in privity with the party to the former proceeding.

V. RETROACTIVITY AND UNCONSCIONABILITY: ENDING FORCED ARBITRATION OF SEXUAL ASSAULT AND SEXUAL HARASSMENT ACT OF 2021

Murrey v. Superior Court, 87 Cal. App. 5th 1223 (2023)

This case holds that the Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act of 2021, 9 U.S.C. §§ 401, 402, applies to contracts signed before or after the act, in which the case is filed after the act. However, the act is not retroactive as to cases such as Murrey’s that were pending at the time the act went into effect. The Court of Appeal did grant the writ and return the case to the trial court but did so on grounds of unconscionability.

VI. UNCONSCIONABILITY

Iyere v. Wise Auto Group, 87 Cal. App. 5th 747 (2023)

In this case, the employees opposed the motion to compel arbitration on both formation and unconscionability grounds. The trial court denied the employer’s motion to compel on both grounds.

To deny a motion to compel arbitration based on unconscionability, there must be both procedural unconscionability and substantive unconscionability. The appellate court found that the agreement, while giving the employer the option of choosing between two named arbitration providers, was not substantively unconscionable, where the two named providers were well-recognized and the choice would not give the employer an advantage. Additionally, the agreement at issue did not specify the minimum factors ensuring fairness set forth in Armendariz v. Foundation Health Psychcare Services, Inc., 24 Cal. 4th 83 (2000). However, the appellate court reiterated the principle that if an arbitration agreement covers FEHA claims and is silent as to the elements required by the Armendariz factors, courts will infer those terms.

VII. DEADLINES TO VACATE OR CORRECT AN AWARD

Darby v. Sisyphian, LLC, 87 Cal. App. 5th 1100 (2023)

The deadline for a petition to confirm an award is four years from the date the petitioner is served with the award. The deadline for a petition to vacate or correct the award is less straightforward because the California Arbitration Act prescribes two ways to do so, each with its own deadline. This decision holds that if the petition to confirm is filed fewer than 90 days after the award is served, the competing petition to vacate or correct, no matter whether styled as a response or a standalone motion, must be filed and served within 10 days of the petition to confirm. The 100-day deadline is jurisdictional and therefore inflexible. The 10-day deadline can be extended in only one of two situations: (1) a written stipulation to extend; or (2) a finding of good cause to extend and where such extension would not unduly prejudice the other party. See Cal Code Civ. Proc. § 1290.6. The detailed explanation provided by this appellate opinion provides a helpful roadmap in navigating deadlines.

VIII. COMPELLING ARBITRATION OF NON-SIGNATORIES

Hernandez v. Meridian Management Services, LLC, 87 Cal. App. 5th 1214 (2023)

The Hernandez court set forth a helpful primer on the principles of equitable estoppel, agency and third-party beneficiaries, because those principles relate to the argument of the non-signatories seeking to compel arbitration.

Equitable estoppel typically applies where a signatory has sued both another signatory and a non-signatory for identical claims, the misconduct or misconduct is identified and a signatory can show that it would be unfair to allow the non-signatory to exploit the mistake or misconduct. In a case of first impression, the Court of Appeal found that where one party to the contract was never a party to the case, the lynchpin of the estoppel doctrine, fairness, must be applied.

First, the appellate court explained that it is not unfair for the plaintiff to make the decision to exclude other companies and thereby tailor her complaint so as to avoid arbitration. Second, agency is a fact-intensive inquiry. A court cannot assume a joint employer relationship simply because companies share officers and have offices in the same building. Agency is a consensual relationship. Third, other firms should present evidence to show that they would benefit from the contract, that the motivating purpose of the contract was to provide benefit to the third party, and whether permitting a third party to bring its own breach of contract action would be consistent with the objectives of the contract and the reasonable expectations of the contracting parties.

Hon. Michelle R. Rosenblatt (Ret.) is a mediator and arbitrator with ADR Services, Inc. In 2016, she retired from the Los Angeles Superior Court after 23 years of judicial service. Judge Rosenblatt taught judicial education throughout her career on the bench and is a frequent participant in continuing education programs. She served for five years as Editor of the California Judges Association magazine, The Bench. She is a member of California Lawyers Association’s Litigation and Labor and Employment Law sections.