Is Code of Civil Procedure § 1281.98 Prempted by the FAA?

Hohenshelt v. Superior Court, No. B327524 (D2d8 Feb. 27, 2024)

This is another case where an employer in an arbitration was late in paying the arbitrator’s fee so the employee moved to go back to litigating her case in court under Code of Civil Procedure § 1281.98. The employer here was clearly late under the relevant standard, and a bunch of recent cases are good authority that the upshot of that is that the employee does not need to arbitrate any more.

Employer argues, after a prompting for supplemental briefing, that the FAA preempts § 1281.98. The Court rejects that argument, based on the idea that § 1281.98 is an arbitration procedure statute that furthers, not dissuades against, arbitration by incentivizing parties to pay up and participate in full. So the Court of Appeal grants a writ ordering the litigation to proceed.

Justice Wiley dissents. He notes that California state courts don’t have the greatest record predicting how the US Supreme Court will rule on the preemption of anti-arbitration state laws under the FAA. Following a federal case district court case, Belyea v. GreenSky, Inc., 637 F. Supp. 3d 745, 759 (N. D. Cal. 2022), he notes that § 1281.98 can’t really encourage arbitration when its chosen enforcement method is to effectively invalidate an agreement to arbitrate. 

Setting aside whether SCOTUS’s manic desire to force arbitration on every employee and consumer is the right take on the law, Justice Wiley is clearly onto the the trend. Would not be surprised to see a cert grant on this in the next year or two.

Writ granted.

Stickin' It to the Man

Adolph v. Uber Techs., No. S274671 (Cal. Jul. 7, 2023)

I told you so.

Pay Up, Or Back To Court

Gallo v. Wood Ranch, No. B311067 (D2d2 Jul. 25, 2022)

The Legislature recently passed a series of statutes—Code of Civil Procedure §§ 1281.97, 1281.98, and 1281.99—that require a business in a consumer or employment arbitration to pay the arbitrator fees within 30 days’ of their being due. A failure to do so is a material breach of the arbitration agreement, which then gives the consumer or employee the option to go back to court.

Defendant in this case is a Restaurant that didn’t pay some AAA fees on time. The trial court vacated a prior order compelling an arbitration. Restaurant appeals, arguing that the new statutes are preempted by the FAA, 9 U.S.C. § 2. The U.S. Supreme Court has read § 2 to preempt: (1) state law rules that single out arbitration for disfavored treatment; (2) arbitration-specific rules that discourage arbitration and (3) generally applicable state rules that adversely affect arbitration. But the FAA doesn’t occupy the field of arbitration. State-specific laws addressed to arbitration are fine, so long as they are not hostile to arbitration as a dispute resolution mechanism. Hence the entire CAA.

Here, the Court finds that the new statutes facilitate arbitration by encouraging the prompt payment of the arbitrator’s fees. Indeed, in passing them, the Legislature was addressing a particular problem. Cases would get sent to arbitration and then just sit when the defendant failed to pay. So the new statutes just incentivize defendants in employment and consumer cases (the party that is invariably the one seeking arbitration) to pay the fee and get moving with the arbitration.

Affirmed.

Tis Good to Be a Trucker....

Nieto v. Fresno Beverage Co., No. F074704 (D5 Mar. 22, 2019)

Plaintiff is a truck driver bringing wage and hour claims. His employment contract has an arb clause. But since he’s a transportation worker, a carve out in the FAA’s preemption clause means that state laws regarding the enforceability of arbitration contracts apply. It applies even though the routes Plaintiff drives are all within the State of California because his employer is clearly involved in an interstate business. Which means that Labor Code § 229—an oft-preempted statute that exempts wage and hour cases from arbitration—applies in full force. So the trial court correctly ruled that Plaintiff’s claims aren’t arbitrable.

Affirmed.

“Applicable State Law” Does Not Include Preempted State Law

Sahei v. White Memorial Med. Cntr., No. B283217 (D2d8 Mar. 14, 2018)

Under California law, special protections are required before party can agree to arbitrate claims brought under the Ralph and Bane Civil Rights Acts. See Civil Code § 51.7, 52.1. These protections, however, are preempted by the FAA, which doesn’t permit states to enact special rules that discriminate against or are hostile to arbitration. On the other hand, preemption won’t apply if the agreement isn’t governed by the FAA or if parties nonetheless agree that their agreement to arbitrate will be governed exclusively by preempted California law.

In this case, the parties’ agreement specifically carved out from the scope of arbitration several categories of generally non-arbitrable claims, as well as “any claim that is non-arbitrable under applicable state or federal law.” So the question comes down to contract interpretation: Does “applicable state law” mean the Ralph and Bane Acts as written, or as applied, i.e., baking in the fact that their anti-arbitration provisions are preempted. Following the U.S. Supreme Court’s 2015 decision in DIRECTV v. Imbrugia, the Court takes the as-applied approach. “Applicable state law” incorporates the idea that some state laws are preempted, so the FAA trumps the Ralph and Bane Acts on the arbitrability question.

Reversed.

Outside the Clause, But Heading for Arb Nonetheless

Melendez v. S.F. Baseball Assocs. LLC, No. A149482 (D1d3 Oct. 17, 2017)

Security guards at AT&T Park bring a wage and hour case against the SF Giants. Plaintiffs, who are less than full time workers, are not consistently employed by the Giants. So their theory is that they are periodically “discharged,” and thus entitled to immediate payment of their wages under Labor Code § 701. There is a complication, however, because Plaintiffs are members of the SEIU and parties to a collective bargaining agreement. The Giants move to dismiss because the claim is preempted by the Labor Management Relations Act, or in the alternative, to compel arbitration under the terms of the CBA.

Broughton-Cruz Lives to Fight Another Day

McGill v. Citibank, N.A., No. S224086 (Cal. Apr. 6, 2107)

The Supreme Court granted review of this case to address whether claims brought under statutes like the CLRA and UCL, which permit a private plaintiff to seek injunctive relief on behalf of the public, can be subjected to mandatory arbitration wherein that relief is completely waived. The Court of Appeal said yes. The Supreme Court says no.

The main issue in the case is whether a California rule that claims seeking public injunctive relief are not arbitrable is preempted under § 2 of the Federal Arbitration Act, which makes all contracts to arbitrate enforceable except to the extent that state law would generally invalidate the contract. The California Supreme Court had previously upheld such a rule (known as the “Broughton-Cruz” rule), but there’s a question as to whether it survives the U.S. Supreme Court’s ruling in AT&T v. Concepcion, which held that class-action waivers were enforceable and any rule otherwise was preempted by § 2. Plaintiff analogizes Broughton-Cruz to Iskanian v. Superior Court, in which the California Supreme Court held that Private Attorney General Act claims, in which private plaintiffs seek relief on behalf of the state, cannot be compelled to arbitration because the state is not a party to the arbitration agreement.

But the Court sidesteps the brewing Concepcion/Iskanian debate—which will sooner or later make it to the U.S. Supreme Court—to decide the case on narrower grounds. The agreement here effectively precluded plaintiff from seeking public injunctive relief in any forum, arbitral or otherwise. But unlike Concepcion—where the class action waiver was a procedure inconsistent with arbitration— the contract here waived a substantive remedy that is un-waivable as a matter of statute. Which means that the waiver is unenforceable, Concepcion notwithstanding. 

Court of Appeal reversed.

FAA Preempts State Limits on Med-Mal Arbitration

Scott v. Yoho, No. B265641 (D2d5 Jun. 22, 2016)

The court here holds that some arbitration clauses between a plastic surgeon and his (dead) patient bore on interstate commerce such that the FAA applied. The fact that LA Superior Court was elected as the venue in which any collateral litigation would occur was not an election that the California Arbitration Act would apply instead. And because the FAA applied, it preempted Code of Civil Procedure § 1295(c)’s 30-day right to rescind arbitration agreements in medical services contracts. Because the right applies only to arbitration contracts, it is not a “grounds . . . at law or in equity for the revocation of any contract” and is thus not saved from preemption by 9 U.S.C. § 2.

Reversed

Sometimes, It's Good to Be a Trucker . . .

Garrido v. Air Liquide Indus. U.S. LP, No. B254490 (D2d4 Oct. 26, 2015)

Before the U.S. Supreme Court stepped in with AT&T v. Concepcion, California state law more of less said that class action waivers in employment and consumer arbitration agreements are not enforceable. (Technically, there were multifactor tests, but most of the time they came out in favor of unenforceability.) Concepcion expressly reversed that rule for consumer contacts, abrogating a case called Discover Bank. And as the Cal. Supremes recognized more recently in the Iskanian case, the logic of Concepcion applies to employment cases too, thus abrogating their prior Gentry case.

But the whole reasoning of Concepcion depends on its reading of the Federal Arbitration Act’s preemption provision in 9 U.S.C. § 2. There are cases, however, to which the FAA, and thus its preemption rule, doesn’t apply. As the court recognizes here, in those cases, the logic of Concepcion shouldn’t control. Instead, in the absence of any indication that California state arbitration law has changed to reject the earlier Discover Bank and Gentry rationales on state law grounds, those cases are still good law when an agreement isn’t not governed by the FAA.

Notably, the FAA has an express carve out for “contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce.” 9 U.S.C. § 1. Courts have read the final "any other class of workers" catchall to mean only “transportation workers.” And since plaintiff here is a truck driver with an interstate route, the FAA does not apply to his contract. In the absence of that, the California Arbitration Act applies, and without the FAA to preempt state law, the old Gentry rule controls. Which means that the class waiver in plaintiff’s employment contract can’t be enforced.

Affirmed.

Why Not Wait?

Khalatian v. Prime Time Shuttle Inc., No. B255945 (D2d8 Jun. 9, 2015)

In an appeal of the denial of a motion to compel arbitration in a wage-and-hour misclassification case, the court of appeal uncontroversially finds that plaintiff’s job as an airport shuttle driver involved interstate commerce and thus that the FAA preempted the anti-arbitration provisions in Labor Code § 299.

Gentry Falls, But PAGA Waivers Are Still Void

Iskanian v. CLS Transp., No. S204032 (Cal., as modified, June 26, 2014)

This is yet another arbitration preemption decision in the wake of AT&T v. Concepcion, 563 U.S. 321 (2011). The California Supreme Court holds that its prior opinion in Gentry v. Superior Court, 42 Cal. 4th 443 (2007)—which says class action waivers in employment agreements are generally unenforceable—is preempted under the FAA. But the court goes on to decide that the FAA does not preempt state law that prohibits waiver of representative actions under the Labor Code Private Attorney General Act.

When the Man Gives Him Lemons, Justice Liu Makes Lemonade

Sonic-Calabasas  A, Inc. v. Moreno, S174475 (SC Oct. 17, 2013)
 
On remand from the US Supreme Court, the California Supreme Court unanimously reverses its prior holding that an arbitration clause's waiver of rights to administrative remedies for the collection of unpaid wages renders the clause per se unconscionable. But in a 5-2 ruling, the court holds that waiver of those procedures remains a factor, among many others, that can be considered in deciding whether the contract is unconscionable.

Three Years Late in the Race to the Courthouse

Mave Enterprises, Inc. v. Travelers Indemnity Co., No. B241807 (D2d1, as modified, Oct. 23, 2013)

The court of appeal holds that the superior court did not err by confirming an arbitral award, even though the defendant had filed a parallel petition to vacate the award in federal court. Because the superior court had obtained jurisdiction over the subject matter of the action years before the federal case was filed, it did not abuse its discretion in refusing to stay in favor of the federal case.