Arbitration, Sales Reps and Personal Injury Claims

by Dechert LLP

While it doesn’t involve a drug or device claim, James v. Conceptus, Inc., N. H-11-1183, 2012 U.S. Dist. LEXIS 32434 (S.D. Tex. Mar. 12, 2012), does involve a device company, sales rep, arbitration clause, and a determination that it isn’t unconscionable to send someone unwillingly to California.  That was enough to pique our interest.     
The plaintiff was a medical device sales rep.  Id. at *1.  He claimed that he was fired after he discovered certain information that he believed showed that a doctor and previous sales rep violated the False Claims Act.  Id. at *5-6.  He saw his firing as retaliation and filed a retaliation claim under False Claims Act §3730(h).  But this case really isn’t so much about what the sales rep claimed.  It’s more about where and how he could claim it. 
The sales rep filed his case in Texas federal court. The company wanted arbitration in California.  Id. at 1.  Why?  Because the sales rep’s employment agreement required that “any dispute” concerning his employment agreement be resolved by arbitration in “in San Mateo County of the State of California.”  
So the company moved to dismiss the case in favor of arbitration.  As you’d expect, the sales rep tried to get around the arbitration clause. 
But that isn’t so easy these days.  At least, not since the Supreme Court’ recent decision in AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011).  This decision gave teeth to section 2 of the Federal Arbitration Act (“FAA”), which says that agreements to arbitrate are “valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for revocation of any contract.”  The Concepcion court read the FAA to require courts to “place arbitration agreements on an equal footing with other contracts and enforce them according to their terms.”  Id. at 1745. Moreover, the Court recently re-emphasized this the importance of this decision by upholding pre-dispute agreements to arbitrate personal injury or wrongful death claims against nursing homes.  Marmet Health Care Ctr. v. Brown, 132 S. Ct. 1201 (2012).
Facing this strong mandate, it’s not surprising that the sales rep tried to get around the FAA by arguing that a different federal statute, the more-recent Dodd-Frank Act, rendered the arbitration clause unenforceable.  Dodd-Frank amended the whistleblower provisions of the Commodity Exchange Act and the Sarbanes-Oxley Act to make unenforceable any pre-dispute clause that required arbitration of claims under their whistleblower provisions.  2012 U.S. Dist. LEXIS, at *15.  The problem, though, is that the sales rep wasn’t suing under either of those Acts.  His retaliation claim was under the False Claims Act, which Dodd-Frank didn’t amend.  “When Congress amends one statutory provision but not another, it is presumed to have acted intentionally.”  Id. at *15-16.  The court properly rejected this argument. 
The sales rep’s fall-back position was that two provisions of the arbitration clause – that he must pay half the costs of the arbitration, and that the arbitration occur in California – were unenforceable because they were unconscionable under California law, which applied under the employment agreement.  He got, at best, a split decision. 
In considering the applicability of California’s law of unconscionability, the James court applied its general understanding of Concepcion: “if the state law singles out arbitration agreements by imposing requirements that do not apply to other contracts, §2 of the FAA preempts applying that law to ‘disfavor’ arbitration.”  Id. at *8.   The court determined that the requirement that the sales rep pay half the cost of the arbitration was unconscionable because it would have required the sales rep to do something that he could not – pay half the arbitration bill.  Id. at *33-34.  The court felt that this application of California’s law on unconscionable agreements did not single out arbitration.
More important, though, the Court upheld the requirement that the sales rep, who lived in Texas, arbitrate his claim in California.  Underlying the court’s decision was the fact that California law had two separate standards for forum selection clauses, one that applied generally (a fair and reasonable standard) and one that applied only to arbitration agreements (which are considered categorically unconscionable.)  Id. at *35-39.  Under Concepcion, this stricter standard that applied to arbitration agreements is preempted because it improperly singles out arbitration.
Applying the fair and reasonable standard instead, the Court upheld the forum selection clause.  Id. at *42-43.  While the sales rep argued that he didn’t have the assets to hire local counsel or pay travel costs, the court didn't buy this argument.  The court noted that the sales rep didn’t need local counsel in an arbitration and that his Texas counsel had shown himself capable of arguing California law.  Id. at *43.  Additionally, travel costs are insufficient to invalidate an arbitration clause – particularly where, as here, plaintiff would have to take only one trip to California .  Id. at *43-44. 

So the forum selection clause was enforced.  And, like it or not, the sales rep was going to California.


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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