Wednesday, May 28, 2014

When the Refs Pick the Refs....

Tiri v. Lucky Chances, Inc., No. A136675 (D1d4 May 15, 2014)

The court of appeal holds that an arbitration agreement effectively delegated the issue of arbitrability to the arbitrator and that because the plaintiff could not establish that the delegation itself was unconscionable, the delegation should be enforced.

This is an appeal of the denial of a motion to compel arbitration in an employment case. The agreement in this case is different from most: In addition to agreeing to arbitrate disputes, it specifically delegated the authority to decide the scope or enforceability of the arbitration agreement to the arbitrator. Following a U.S. Supreme Court case interpreting the Federal Arbitration Act, see Rent-A-Ctr., W., Inc. v. Jackson, 561 U.S. 63 (2010), the court holds that a party resisting arbitration under an agreement with this kind of delegation must attack the enforceability of the delegation clause itself. 

That entails a two-part test. First, the delegation clause must be clear and unmistakable. As the delegation issue is “rather arcane” and counterintuitive, it’s not entitled to the same pro-arbitration presumption that applies to regular arbitration agreements. But if it is clear, arbitration will be compelled so long as the delegation clause itself is not subject to a defense to enforcement, such as fraud or unconscionability. Said differently, even if the court thinks the arbitration agreement as a whole is not enforceable, the court must nonetheless delegate that determination to the arbitrator unless the narrower agreement to delegate is not enforceable. 

Applying this test, the court finds the clause to be clear and specific. And although the court finds the delegation agreement to be procedurally unconscionable, it does not find it to be substantively so. The substantive unconscionability arguments plaintiff raises aren
t specific to the delegation clause, so they must thus be left to the arbitrator to decide. 

The court notes that two prior court of appeal cases—Ontiveros v. DHL Express (USA), Inc., 164 Cal. App. 4th 494 (2008) and Murphy v. Check ’N Go of California, Inc., 156 Cal. App. 4th 138 (2007)—found delegation arguments to be both procedurally and substantively unconscionable. They found substantive unconscionably because: (1) there was a lack of mutuality because only the employee would ever be in a position to argue that the delegation clause—drafted by the employer—is unconscionable; and (2) when it came to delegation clauses in employment arbitrations, there was a “repeat player” bias in favor of employers. But these features are present in every employment case with a delegation clause. Consequently, the court holds that Ontiveros and Murphy run sideways with Rent-A-Center, which held a delegation clause enforceable, and AT&T Mobility LLC v. Concepcion, 563 U.S. ___, 131 S. Ct. 1740 (2011), which held that state common law rules that effectively exist only as obstacles to arbitration are preempted under § 9 of the FAA.


There is something in this case I don’t get. If we take Rent-a-Center at its word, the reason that the court must focus only on the delegation clause is that the the enforceability of the clause is severable from the question of the enforceability of the arbitration agreement as a whole. Which is, under Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395 (1967), further severable from the enforceability of the contract of the whole. If that’s the case, what the parties have done in this case is agree to present an entirely separate and severable question regarding the arbitrability of the claims to the same arbitrator who will get paid hundreds of dollars an hour to decide the merits, assuming he or she decides the case is arbitrable.

I just don’t see how it is not substantively unconscionable to agree to submit an issue to an arbitrator who has that kind of direct financial stake in the issue. This isn’t the kind of systemic “repeat player” bias raised in Ontiveros and Murphy. Viz., an arguably speculative bias grounded in a subtle incentive to please the party in order to get hired for some future case. While that is, at base, an empirical question that merits testing, there’s nothing speculative about the deal here: If the arbitrator decides the case is arbitrable, she will earn thousands of dollars over the duration of the case. If not, she can bill the three hours of work and go home.

This isn’t to impugn the ethics of arbitrators. But we would never tolerate that kind of direct financial interest like that from a judge, no matter how honest. Long ago, the Supreme Court found it would violate constitutional due process for an adjudicator to receive even a miniscule amount of additional compensation based on the results of his decision. Tumey v. State of Ohio, 273 U.S. 510, 532 (1927) (twelve dollars per case). And the Court has more recently understood due process to address financial interests that provide even more tenuous “compensation,” based only on an appearance of bias. Caperton v. A.T. Massey Coal Co., Inc., 556 U.S. 868, 887 (2009) (significant campaign contributions).

The thousands of dollars of potential compensation at issue here would certainly merit recusal by a state judge in California.  See Cal. Code Civ. Proc. § 170.1(3)(A) (requiring disqualification when a “judge has a financial interest in the subject matter in a proceeding or in a party to the proceeding”). And, perhaps key, the Code provision dealing with arbitrator disqualification would specifically require disqualification of the arbitrator under the same circumstances. See Cal. Code Civ. Proc. § 1281.91(d) (“If any ground specified in Section 170.1 exists, a neutral arbitrator shall disqualify himself or herself . . . .”). So how exactly is it conscionable to require arbitration of an issue before an arbitrator who should be rightly subject to disqualification?

Had this issue been raised—it wasn’t—I don’t see how it would present the kind of collision course with Rent-A-Center and Concepcion that’s raised in the opinion.  If the parties were to agree to have a truly neutral, financially unbiased arbitrator decide the arbitrability issues, these concerns would be a non-issue. For instance, the arbitrability decision could be delegated to a different arbitrator with no stake in the outcome. So, unlike the ban on class action waivers addressed by Concepcion, this is not a case where a per se rule of state contractual law arguably discriminates against arbitration.

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