THE FUTURE OF EMPLOYMENT ARBITRATION FOR EMPLOYEES

The judicial tension between California and the U. S. Supreme Court is palpable.  The tension arises out of California court decisions that find arbitration agreements not meeting fairness and equitable criteria to be unenforceable as a “matter of public policy.”  The U.S. Supreme Court is responding in several decisions with its own idea of “public policy” under the Federal Arbitration Act [FAA]. 

Basically, the Supreme Court has stated that the FAA pre-empts California’s restrictions on parties’ agreements to arbitrate.  Ironically, the California Supreme Court has held that under state common law, which continues to govern the formation and existence of contracts generally, an arbitration agreement procured by fraud or overreaching economic power is no contract at all.  The logic is inescapable:  if there is no contract, then there is no conflict with federal law in the interpretation of the “alleged” contract.

 

This federalism tension is being played out in a wide range of commercial contracts, but within the context of an employee who signs such an agreement as a condition of being hired, or as a condition of continuing employment, the drama is found in the case of Sonic-Calabasas A, Inc. v. Moreno (2011) 51 Cal.4^th 659, which was remanded by the U. S. Supreme Court on appeal (late 2011), with directions that the California Supreme Court should reconsider its 4 to 3 decision to invalidate the employment arbitration agreement. 

Here is the stage on which the drama is played:  The California Supreme Court held that an arbitration provision that required an employee to waive his right to seek a hearing before the California Labor Commissioner was void as a “matter of public policy.” 

The California Supreme Court reasoned that the employee was at a singular disadvantage when denied the opportunity to use the resources of the Labor Commissioner to resolve his $18,000 wage dispute.  

The employee's disadvantages in being denied a Labor Commissioner hearing included the lack of a pre-hearing conference with the Commissioner to resolve the matter, the lack of an expedited hearing process, freedom from the usual rules of procedure and evidence, and the provision for an appeal bond to be posted by the unsuccessful employer on appeal.  Also, the “one way” fee rights by statute available to the employee became a “prevailing party” or “two way” fee shifting right favoring the employer in the arbitration agreement.  

Sounds plenty convincing to me!  The legal jargon used by the court, based on its prior “invalidation” decisions, included:  “procedurally and substantively unconscionable” and “contract of adhesion.” 

“Nonsense” was the U.S. Supreme Court’s response, in effect.  The U.S. Supreme Court reminded the California Court of the federal bench’s decision in AT&T Mobility LLC v Concepcion http://en.wikipedia.org/wiki/AT%26T_Mobility_v._Concepcion.  [“Concepcion”] Concepcion was a 5-4 decision decided in April 2011, and decided along ideological grounds.  The conservative majority in Concepcion held that class action consumers were required to arbitrate their individual small consumer claims against large companies, despite the impracticality and economic hardships of doing so.  The logic seems to be: the FAA is what is, fair or unfair to individual consumers.  If the law is broken, it is for Congress to fix it.  Until then, the Courts will enforce it.

Prediction:  The clash will continue.  The Supreme Court will win this particular clash of course.  The “remand” was a nice way of saying we expect a different result.  But “Concepcion” addressed an “access to justice” issue in view of the increased costs and other disadvantages of arbitration for the employee.  The employee in Sonic-Calabasas did not create an evidentiary record on appeal that those assumed disadvantages in fact had an economic impact that prevented his access to justice.  A highly paid executive, for example, might very well not be disadvantaged by a waiver of a Labor Commissioner hearing.  

All this to say:  The California Supreme Court has a “way out” by denying the employee’s appeal on grounds other than “unconscionability.”  That is, the Court could hold maintain that its standards of “unconcscionability” still apply (despite Concepcion) but that the employee had failed to make the record on appeal that the standards were triggered. Thus, the employer wins, and the further [likely adverse] review by the U. S. Supreme Court of the more fundamental legal issues is avoided.  

The overall trend however is that more California employment law cases will be arbitrated.  The issue will be, I think, what qualifiers and burdens can the California courts place on employers in view of the Concepcion decision and the Sonic-Calabasas remand.  

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New Voltage to Charge Arbitration Agreements to be Invalid.

The California Court of Appeal, Fourth Appellate Division has provided employees another basis to avoid arbitration of employment disputes. See Mayers v. Volt Management Corp (2/2/2012) No. G045036, as decided by our own Orange County based appellate panel.  


Volt provided for arbitration of employment disputes by "notice" in its Application form, its Employment Agreement, and its Acknowledgment of employee handbook.  An employee claiming he was not bound by the Arbitration Agreement had a week to consider the Agreement, and asked no questions about the Agreement.  All the versions of notice referred to "final and binding arbitration pursuant to the Federal Arbitration Act, in accordance with the applicable rules of the American Arbitration Association in the state where you are were last employed" [by Volt]. 

This case would cause a normal lay person to go into convulsions in the reading of the technical reasons for invalidating the arbitration provision.  The quick and dirty statement the reasons is as follows:


1.  There is no conflict between California and federal law on the matter of whether the contract for arbitration is enforceable.  Why?  Because the "savings clause"  [9 U.S.C. Sec. 2] of the Federal Arbitration Act states that the States may declare arbitration agreements as unenforceable by "generally applicable contract defenses, such as fraud, duress or unconscionability."  


2.  The employment contract in Mayers was unconscionable because obtained by "duress," that is, on a "take it or leave it" basis; AND because 


3.  The employment contract was procedurally unconscionable because it referred to "rules of the American Arbitration Association" without providing Mayers a copy of those rules, or informing him how to obtain them, for review before signing the Agreement; AND because


4.  The employment contract was "substantively" unconscionable because it provided authority for the Arbitrator to award the employer attorney fees if the employer prevailed in defending the discrimination suit, an outcome not ordinarily granted to the employer under prevailing interpretations of the Fair Employment and Housing Act.


Now, I find the ruling to be one of those head scratchers.  If a contract is actually obtained under duress, that is, "take it or leave it" in an unequal balance of power, what difference does it make that the party signing does not have the full contract terms for review (in this case the AAA rules)? Logically, the employee would have signed anyway, still under "duress."  Practically, I cannot imagine any employee actually taking the time to read the catalogue of rules and procedures for Arbitration, even if provided.
  
I am convinced of one of two theories here:  1) Lawyers, and the judges they become, really are in an alternate Universe, or 2) this whole intellectual exercise is built upon a fiction intended to have a good civic purpose:  to avoid employers gaining forums more favorable to themselves, and less fair to employees.  

As my daughter a few years back would say:  "Whatever!"  I am happy for my clients that they are given the "Section 2 Savings Clause" by which to get their cases before a jury.  

Prayer to St. Agnes, Patron Saint of Arbitrations

St. Agnes,  intervene for me before the Court of Appeal to cause, by your four factors, a decision that compels arbitration.  Amen. 

A physician sued for malpractice by his patient would ordinarily want to arbitrate under his own arbitration agreement with the patient. The patient had sought liposuction surgery with the doctor. Apparently, matters did not turn out well. This patient filed and litigated in court, but near the eve of trial, sought a court order to have the matter arbitrated. Probably to her surprise, the defendant physician refused. In holding for the physician, the court wrote: “Audiences matter . . .” [Burton v. Cruise, 2010 DJDAR 18393.] In this case, the audience was a jury.

In this December 2010 decision, the Court of Appeal provided a glimpse into the minds of counsel who may delay a petition to compel arbitration until well into the usual court litigation process. The Plaintiff Burton brought an ex parte motion to shorten time for a petition to compel arbitration. Defendant Cruise had already selected and exchanged experts. Burton had requested a jury trial at the case management conference. Inconsistently, in the motion to compel arbitration, Burton stated she wasn’t sure she would add other parties not subject to the arbitration agreement, and so did not request arbitration. Also, Burton’s counsel did not demand arbitration or even an inquiry about arbitration just before bringing her petition to compel arbitration.

The Court of Appeal cited the four “St. Agnes” factors to decide if arbitration has been “waived’: 1) actions inconsistent with seeking arbitration, including failure to request it; 2) are the parties “well into preparation” of the lawsuit; 3) is there an imminent trial date; and 4) has the delay caused harm to the other party? St. Agnes Medical Center v. PacifiCare of California (2003) 31 Ca.4th 1187, 1196. Applying these factors, the court affirmed the trial court’s denial of the petition to compel arbitration. Burton v. Cruise, 2010 DJDAR 13893 at 18396.

The Burton court reasoned that the purpose of arbitration: to expedite a hearing at less expense, is turned upside down by tactics that delay arbitration until the near-end of a civil litigation process. The Court adopted the reasoning of Guess?, Inc. v. Superior Court (2000) 79 Cal.App.4th 553, 558 that “the courtroom may not be used as a convenient vestibule to the arbitration hall so as to allow a part to create his own unique structure combining litigation and arbitration.” The Court also accepted the defendant’s argument that it selected and exchanged experts with a jury trial in mind, making tactical decisions differently than if the matter was destined for arbitration.

The value of the Burton case to the party opposing a petition to compel arbitration is that it exposes improper tactics of subverting an arbitration agreement to increase delay and costs. Those costs can include the extra expense of choosing different experts than one might otherwise. This case will have particular value as precedent to deny a petition to compel where the case management conference has been held with no reference to arbitration, where the other party has not referenced the arbitration agreement by additional demand for arbitration, and where experts or other witnesses have been tactically selected and prepared for jury trial.

Now, there is text and there is subtext. The latter is subject to speculation of course, but educated speculation. My view of the subtext is that the doctors’ attorneys were struck with a case of hubris. They really thought they could so bedazzle a jury with their experts that they did not want to forego the opportunity. The truth of course is that experts do not often bedazzle juries, who often disregard most of what they say, assuming the expert makes it understandable to them. Secondly, one wonders why the Plaintiff would not want her great case before twelve of her peers. The plaintiff almost always prefers a jury. Why this change of direction on the eve of trial? I suspect the answer also pertains to experts. Possibly the Plaintiff hoped the arbitrator would allow a late designation of experts. Or perhaps the Plaintiff was worried that the medical evidence was weak for her case, and hoped an arbitrator would do what arbitrators do, but never admit: produce a “compromise” outcome that might salvage the case, and at least provide for a possible recovery of attorney’s fees under the arbitration agreement. Or maybe the Plaintiff just wanted to delay the hearing because a witness was not available or she hoped to re-open discovery. These speculations matter little, except to point out that the real story is not often told in the formal appellate decision.


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