A Tale of Three Cases: California's Split Over Concepcion Continues

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In state and Federal courts throughout the country, the defense and plaintiffs’ bars are debating the application of the United States Supreme Court’s landmark 2011 decision in AT&T Mobility v. Concepcion, in which the Court made it significantly easier to enforce waivers of class arbitration in most consumer contracts. My post about Parisi, a new decision from the Second Circuit, is below.

Perhaps nowhere has this battle been more active than in California, the home of the Discover Bank rule overturned by the Supreme Court in Concepcion. As my colleague Michael Walsh reported here, the California Supreme Court heard argument in a case involving an arbitration clause yesterday. Today, I address three cases which illustrate the ongoing debate in California. All three were decided in the final two weeks of March, two in the Second District and one in San Francisco’s First District. The Second District twice refused to enforce arbitration clauses while the First found the clause before it fully enforceable.

Compton v. Superior Court (American Management Services LLC) was the first of the trio, decided by Division Eight of the Second District on March 19. Compton is a putative class action for alleged Labor Code violations in connection with wages.

The plaintiff had signed an arbitration agreement with the defendant when she began work as a property manager. The agreement contained a waiver of class arbitration. After she left her job, she filed her putative class complaint, alleging violations regarding the payment of minimum and overtime wages, rest and meal breaks and reimbursement of expenses. Although the defendant litigated the matter for a time, it immediately filed a petition to compel arbitration after Concepcion was handed down, pointing out that Concepcion had directly overturned Discover Bank and implicitly overruled Gentry v. Superior Court, the two decisions which would have made any earlier petition futile.  The trial court granted the petition, finding the agreement neither procedurally nor substantively unconscionable. The court labeled the plaintiff’s arguments about the purported one-sidedness of the agreement “largely hypothetical.”

The Court of Appeal reversed. According to the two-Justice majority, the agreement was substantively unconscionable because, in several respects, it was one-sided: the agreement required arbitration of the claims the employee was most likely to bring, but not those the employer would bring; it significantly shortened the time limit for the employee to seek arbitration in comparison to the relevant statutory limitations, but imposed no similar limits on the employer; and it suggested that the arbitrator could decline to award attorneys fees in situations where statutes made such an award mandatory. The majority rejected the employer’s argument that cases providing that one-sidedness amounted to substantive unconscionability had not survived Concepcion, writing that “the judicial forum affords plaintiffs” certain advantages which cannot fairly be retained for only one side’s claims. The agreement was also procedurally unconscionable, in the majority’s view, because it failed to disclose the “disadvantages” of arbitration as provided for by the contract over litigation. Presiding Justice Tricia A. Bigelow filed a compelling dissent, arguing that California’s law of unconscionability must be viewed through the lens of Concepcion. She pointed out that the agreement was bilateral with respect to arbitration of wage-and-hour claims, and that the parties hadn’t even raised the issues of attorneys fees and time limitations which the majority had relied upon. “I am compelled to follow the law which incorporates a strong public policy in favor of arbitration,” Presiding Justice Bigelow wrote.

A week after Compton, Division One of the Second District decided Fowler v. Carmax. Fowler was another wage-and-hour case involving an employment agreement expressly waiving class arbitration. After Concepcion, the employer moved to compel arbitration. The trial court granted the petition, finding that Gentry had not survived Concepcion and that plaintiff’s claim under the Private Attorneys General Act was arbitrable on an individual basis. (This PAGA argument is central to Iskanian v. CLS Transportation Los Angeles, an arbitration case from Division Two of the Second District currently before the Supreme Court).

Division One reversed. The Court found “only some evidence” of procedural unconscionability, noting that although the contract had been presented on a take-it-or-leave-it basis, plaintiff made no claim of surprise. Nor did the employer’s reserved right to terminate or modify the agreement on thirty days notice render it substantively unconscionable, according to the Court. The problem was, according to the Court, Gentry was still good law after Concepcion. Therefore, any class action waiver in an arbitration clause of an employment agreement was per se unconscionable if it interfered with employees’ ability to vindicate “unwaivable rights and to enforce the overtime laws.” The Court accordingly remanded the case back to the trial court to determine whether the Gentry rule required that the class action waiver be thrown out.

The day after Fowler was decided, Division One of the First District decided Vasquez v. Greene Motors, and this time, the arbitration clause fared better. Vasquez involved an installment sales contract for a used car. The plaintiff sued under various state statutes, alleging that the financing terms in the contract were inaccurate. The defendant filed a petition to compel arbitration, but the trial court denied the petition, finding the clause unconscionable by reason of “adhesion, oppression and surprise.”

The Court of Appeal unanimously reversed. The mere fact that the arbitration clause was presented in a preprinted form on a take-it-or-leave-it basis made it procedurally unconscionable, the Court conceded, but the degree of unconscionability was relatively minor. Such non-negotiable forms are ubiquitous, and given how highly regulated such transactions are, they may well be the only way for merchants to ensure compliance with the law. Although the plaintiff complained about the densely printed double-sided single sheet contract, the Court pointed out that the use of a single sheet was arguably required by state law, and a multiple-sheet contract would have made it easier to bury the arbitration clause.

The Court’s discussion of substantive unconscionability makes an interesting contrast to the majority in Compton. The Court found that mere one-sidedness was not enough to make an arbitration clause substantively unconscionable. After the Supreme Court’s decision in Pinnacle Museum Tower Ass’n v. Pinnacle Market Development, the agreement must be so seriously one-sided as to shock the conscience in order to be unconscionable. Unconscionability turned not only on one-sidedness, the Court found, but on the absence of any justification for it. The Court carefully reviewed the few grounds raised by plaintiff for finding the arbitration clause one-sided, and concluded that none shocked the conscience, and all were arguably justified. Because the agreement was only minimally procedurally unconscionable, and not substantively unconscionable at all, it was necessarily enforceable.

It seems likely that only clear guidance from the California Supreme Court will bring to a close the distinctions among the Court of Appeal districts in the enforceability of arbitration clauses. With several arbitration clauses on the high court’s docket, that guidance may well come soon.

Topics:  Arbitration Agreements, AT&T Mobility v Concepcion, Class Action, Class Action Arbitration Waivers, Discover Bank Rule, Rest and Meal Break, SCOTUS, Unconscionable Contracts, Wage and Hour

Published In: Alternative Dispute Resolution (ADR) Updates, Civil Procedure Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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