One would have thought in the wake of Concepcion that Gentry was doomed: Concepcion expressly killed off Discover Bank; Gentry was expressly described by the Court itself as a gloss on Discover Bank; therefore, Concepcion must overturn Gentry.
In the wake of the Concepcion defeat, the plaintiffs’ bar made a strategic retreat, insisting that Gentry was based on an entirely different theory, entirely unrelated to Discover Bank and therefore not affected by Concepcion: the “effective vindication of statutory rights” theory. That theory goes like this: if the practical effect of an arbitration clause is to make it impossible for a plaintiff to “effectively vindicate” (whatever that means) his or her non-waivable statutory rights, then out it goes.
And then American Express Company v. Italian Colors Restaurant came along.
The plaintiffs in Italian Colors were merchants who entered into agreements with the defendant to accept the defendant’s charge and credit cards. The agreement included a clause both requiring arbitration and barring all class proceedings. The plaintiffs brought a putative class action under the federal antitrust laws, alleging that the defendant had used its monopoly power in the market for charge cards to both force merchants to accept its credit cards (an allegedly illegal tie) and to charge merchants rates 30% higher than its competitors.
The defendants moved to compel arbitration. Opposing the motion, the plaintiffs offered a declaration from an economist opining that an expert study and analysis sufficient to prove the claim would cost anywhere from several hundred thousand to a million dollars. Which was a bit of a problem, since the maximum per-plaintiff recovery would be just short of $40,000. Nevertheless, the district court granted the motion to compel arbitration. The Second Circuit reversed. The Supreme Court reversed and remanded for reconsideration in light of Stolt-Nielsen S.A. v. Animal Feeds Int’l Corp., but the Second Circuit reversed again after considering both Stolt-Nielsen and Concepcion.
The plaintiffs’ pitch before the United States Supreme Court was very simple: enforcing the class action waiver as written means no antitrust suit – nobody spends several hundred thousand dollars to recover $40K. Thus, as briefed and argued, Italian Colors provided about as square a test of the “effective vindication” theory as can be imagined.
One problem, the Supreme Court held: “the antitrust laws do not guarantee an affordable procedural path to the vindication of every claim.” The majority seemed to doubt whether there is any such thing as the “effective vindication” theory in the first place, describing its genesis as “dictum in Mitsubishi Motors.” But even assuming such an exception exists, it was far more limited than the plaintiffs believed. Certainly it would cover an arbitration clause saying “nobody brings an antitrust claim.” Prohibitive filing fees, sure: a clause requiring a ten million dollar per-claim filing fee would fall. But merely making it not worth the expense to prove a statutory remedy wasn’t the same thing as “the elimination of the right to pursue that remedy,” the majority wrote. In a footnote on the final page of their opinion, the majority wrote what one would have expected to be the epitaph of the “effective vindication” theory: “the FAA does . . . favor the absence of litigation when that is the consequence of a class-action waiver.”
Only a few months after Italian Colors, the California Supreme Court got its first major chance to address the new landscape in Sonic-Calabasas A, Inc. v. Moreno.
The plaintiff in Sonic-Calabasas is a former employee of an automobile dealership. As part of his employment, he signed an agreement providing that all disputes arising out of the employment would be settled by binding arbitration pursuant to the FAA and the California Arbitration Act. After leaving his employment, the plaintiff filed an administrative wage claim with the Labor Commissioner, seeking vacation pay. The filing of such a claim is the first step in California towards what’s known as a Berman hearing – a highly informal administrative proceeding designed for more-or-less speedy employee wage claims. The employer moved to compel arbitration of all disputes, arguing that the arbitration clause waived the Berman hearing. The Superior Court denied the petition to compel arbitration, but the Court of Appeal reversed, holding that a Berman waiver was enforceable.
The California Supreme Court granted review and reversed, holding that Berman waivers are per se unconscionable and unenforceable in California. The United States Supreme Court vacated and shipped the case back to California for reconsideration in light of Concepcion.
On remand, the state Supreme Court retreated slightly from its earlier holding in an opinion written by Justice Liu and joined by Justices Kennard, Werdegar and Corrigan, and Chief Justice Cantil-Sakauye. A Berman waiver did not by definition doom an arbitration clause, but the trial courts were still free to refuse to enforce an arbitration clause if “it is otherwise unreasonably one-sided in favor of the employer.” Although the Court’s majority swept away the per se rule, the Court suggested that a Berman waiver might still cast a long shadow over the unconscionability hearing: “waiver of these protections in the context of an agreement that does not provide an employee with an accessible and affordable arbitral forum for resolving wage disputes may support a finding of unconscionability.” Although unconscionability has usually been stated in terms of contracts that “shock the judicial conscience,” the court majority seemed to suggest a more malleable standard: “Unconscionability doctrine is instead concerned with whether the agreement is unreasonably favorable to one party, considering in context ‘its commercial setting, purpose, and effect.'” The unconscionability inquiry it was mandating was “not preempted by the FAA,” the majority held, expressing confidence that trial courts could make the necessary determinations fast enough not to rob arbitration of its primary virtue: speedy resolution.
The Court majority summarized its holding in language reminiscent of the “effective vindication” theory:
[W]here, as here, a particular class has been legislatively afforded specific protections in order to mitigate the risks and costs of pursuing certain types of claims, and to the extent those protections do not interfere with fundamental attributes of arbitration, an arbitration agreement requiring a party to forgo those protections may properly be understood not only to substitute one dispute resolution forum for another, but also to compel the loss of a benefit.
Justice Chin, joined by Justice Baxter, vigorously dissented from the majority’s opinion:
[W]e should reject Moreno’s unconscionability claim . . . I also disagree with the majority’s advisory opinion regarding the unconscionability principles the trial court should apply on remand. In my view, those principles are both contrary to state law and invalid under – and thus preempted by – the FAA.
Which finally brings us to Iskanian. The plaintiff was employed for a little over a year as a driver for the defendant. He signed an agreement providing that “any and all claims” arising out of his employment would be submitted to binding arbitration. The arbitration clause provided for reasonable discovery, a written award and judicial review. Costs unique to arbitration were paid by the employer. Class procedures – either class actions in court or class arbitration – was barred.
After leaving his employment, the plaintiff filed a putative class complaint, alleging that the defendant had failed to pay overtime, provide meal and rest breaks, reimburse business expenses, provide accurate and complete wage statements, and pay final wages in a timely manner. The trial court initially granted the employer’s motion to compel arbitration, but then Gentry came down, and the Second District issued a writ of mandate directing the trial court to reconsider in light of the new decision. Apparently concluding that the result post-Gentry was a foregone conclusion, the employer withdrew its motion to compel arbitration. Not long after, the plaintiff filed a consolidated first amended complaint, purporting to state claims under the Labor Code, for unfair competition, and claims in a representative capacity under the Labor Code Private Attorneys General Act (“PAGA”) of 2004.
After discovery, the plaintiff moved to certify a class. The employer opposed, but the motion was granted in the fall of 2009. In April 2011, with trial imminent, the United States Supreme Court handed down Concepcion. The employer promptly renewed its motion to compel arbitration and dismiss the class claims. The trial court granted the motion in both respects.
The Second District affirmed, holding that Concepcion had necessarily overruled not only Discover Bank, but Gentry to boot. This was so for three reasons: if Gentry was applied, as the plaintiff wanted, the case would be decided under class arbitration, even though the employer had never agreed to it. Such a situation was clearly barred by Concepcion. Second, the Gentry rule was irreconcilable with the fundamental lesson of the FAA — that arbitration agreements must be enforced according to their terms. Third, the premise that the plaintiff brought the class action to “vindicate statutory rights” was necessarily irrelevant after Concepcion.
Next, the Court turned to D.R. Horton, a decision of the National Labor Relations Board handed down while briefing in Iskanian was under way. There, the NLRB held that class waivers were a per se violation of the National Labor Relations Act, which protects employees’ right to engage in concerted actions. Although courts usually defer to the NLRB’s interpretation of its governing statute, the Iskanian court noted that D.R. Horton was also an interpretation of the FAA itself. The Court of Appeal concluded that Concepcion trumped D.R. Horton, and refused to follow the NLRB.
The Court of Appeal next addressed the plaintiff’s argument that his PAGA claims were a non-waivable statutory right to proceed in a judicial class action. Division Five of the Second District had held that Concepcion was inapplicable to PAGA actions under California state law in Brown v. Ralphs Grocery Co. in 2011, but the Iskanian court refused to follow suit: “the United States Supreme Court has spoken on the issue, and we are required to follow its binding authority.” Only an express finding by Congress that a Federal claim had to proceed in court was sufficient to override the FAA, the Court held.
The Court concluded by briefly addressing the plaintiff’s claim that by withdrawing its motion to compel arbitration post-Gentry, and not raising the issue again until Concepcion, the defendant had waived any right to arbitration. The Court of Appeal disagreed, holding that since any motion to compel arbitration would have, according to all parties, been doomed to failure in the years between Gentry and Concepcion, the defendant’s conduct had not been inconsistent with an intent to arbitrate.
Next time in Waiting for Iskanian, Part 3, we’ll consider the amicus briefs filed at the Supreme Court for the plaintiff’s side.