Delegation and Arb Rules

Nelson v. Dual Diagnosis Treatment Center, Inc., No. G059565 (D4d3 Apr. 19, 2022)

This is an appeal of the denial of a motion to compel arbitration. The trial court found the agreement to be unconscionable and the Court of Appeal agrees. By all indications, the signatory was a schizophrenic off his meds being admitted to an unlicensed drug detox facility, in which we would later hang himself. And the provisions of the arb agreement seem pretty unfair as a matter of substance. Not much to see here.

But the interesting thing is a bit on whether the unconscionability analysis should get delegated to the arbitrator. The agreement designates the AAA rules, which provide that an arbitrator can decide his or her own jurisdiction. Cases have found that selecting the AAA rules is the kind of “clear and unmistakable” expression of intent that is adequate to delegate arbitrarily. The Court here is skeptical if that rule should apply when one of the parties is unsophisticated. But that is not the ultimate basis of the decision. The Court finds that other indicia in the agreement regarding decisions being made by courts render any expressed intent to delegate, at best, ambiguous. And an ambiguous statement of intent is not clear and unmistakable. 

Affirmed.

The LWDA Doesn't Delegate Squat

Bautista v. Fantasy Activewear, Inc., No. B297070 (D2d1 Jul. 24, 2020)

Another case involving PAGA and arbitration. The clause has a PAGA representative action waiver and a delegation of arbitrability to the arbitrators. Defendant says the validity of the waiver has to be decided by the arbitrators. But that misses the point, which is the same point why PAGA claims aren’t arbitrable in the first place. The true party in a PAGA claim is the government—the Labor and Workforce Development Agency. Although plaintiffs bring PAGA claims on behalf of the LWDA, they can’t sign pre-dispute arbitration agreements on behalf of it—they don’t have the authority. Thus, since the LWDA is not a party to the agreement, it also could not have agreed to any delegation. The validity of the waiver was a matter for the court to decide, which it correctly did.

Affirmed.

The Fait Accompli Exception

Smythe v. Uber Techs., Inc., No. A149891 (D1d3 Jun. 8, 2018)

This is kind of interesting. You might have noticed that ridesharing drivers often have both Lyft and Uber stickers on their cars. Plaintiff here is one of those guys. He’s suing Uber in his capacity as a Lyft driver, alleging that Uber engages in unfair business practices by encouraging people to set up fake Lyft accounts and send its drivers on wild goose chases. But Plaintiff's driver contract with Uber has an arbitration clause in it, so the question is whether his obligation to arbitrate with Uber extends to claims arsing from driving for its competitor.

You don’t need to be Farnsworth to get that the case isn’t arbitrable under the text of the agreement. The clause is broad; it requires arbitration of disputes “arising from or related to” Plaintiff’s driver agreement with Uber. But it’s not so intergalactic that it includes every possible dispute between Plaintiff and Uber, such as a dispute arising from Plaintiff's injury sustained while working for an Uber competitor.

But the arb agreement has a delegation clause. It says, contrary to the general rule, questions about arbitrability go to the arbitrator. So Uber says the court should have compelled arbitration nonetheless, and then it was up to the arbitrator to find that Plaintiff’s claims in his capacity as a Lyft driver don’t arise from or relate to his Uber driver contract and send him back to court accordingly. 

Of course, it seems rather wasteful to pay an arbitrator a couple of grand to entertain motion practice over what is evident from the face of the contract. That said, Uber probably thought it worth a shot, because an arbitrator addressing his or her future employment as an arbitrator has a pretty big financial incentive to find some potential ambiguity to be interpreted in favor of arbitration. Which is why I’ve always believed that delegating the arbitrability question to the same arbitrator who is going to get paid to hear the merits is problematic. (I’ve lost that argument, for now.)

In any event, there’s apparently an exception to the delegation rule, at least in some federal cases, as well as dicta in a 2004 Court of Appeal case and a 1957 decision of the California Supreme Court. Under these cases, even if arb clause clearly and unmistakably delegates arbitrability questions to the arbitrator, courts can still decline to do so when a party’s assertion of arbitrability is “wholly groundless.” And since that was the case here, the superior court didn’t err in denying Uber’s motion to compel arbitration, even if just for the threshold question.

Affirmed.

Through the McCarran-Ferguson Looking Glass

Citizens of Humanity, Inc. v. Applied Underwriters, Inc., No, B276601 (D2d2 Nov. 22, 2017)

When we talk about preemption and arbitration, we’re usually talking about federal law preempting a state law rule that says something isn’t arbitrable. But when it comes to insurance, that gets stood on its head. 

The McCarran-Ferguson Act, 15 U.S.C. §§ 1011–1015, says that federal law doesn’t regulate state insurance law unless the federal law is specifically addressed to the topic of insurance. It’s kind of a reverse preemption where state insurance law displaces federal laws of general applicability when it comes to insurance. 

One area where state insurance law does so is the Federal Arbitration Act. Under McCarran-Ferguson, state insurance laws that say insurance claims aren’t arbitrable trump the FAA’s generally applicable rule that federal law will make you arbitrate whatever the parties agree to arbitrate, subject to defenses that apply to any contract. Here, the parties selected Nebraska law, which includes a statute that says that insurance policy disputes aren’t arbitrable. So the superior court rightfully denied the motion to compel in this case.

There’s also a threshold issue of whether the McCarran-Ferguson issue should have been decided by the court or the arbitrator. The clause in this instance specifically delegated arbitrability questions to the arbitrator. Under the FAA, that usually means the arbitrator decides arbitrability. But Nebraska law says none of this can go to the arbitrator, so the attack on the arbitration provision was also an attack on the delegation clause. Under those circumstances, the court needs to decide the gateway choice of law question.

Affirmed.

Someone Else's Decision

Aanderud v. Superior Court, No. F073277 (D5 Jul. 27, 2017).

Trial court here granted a motion to compel arbitration where the agreement contained a class action waiver. In the process of doing so, the court found that that agreement was not unconscionable, the class action waiver valid, and the claims arbitrable. 

Problem is, the agreement contained a clause that specifically and expressly delegated all questions of validity or arbitrability to the arbitrator. Those are generally enforceable. So the trial court shouldn’t have predetermined those issues is granting the motion to compel. And while a granted motion to compel arbitration isn’t generally an appealable order, the court exercises its discretion to treat the appeal as a writ petition and issues a writ directing the trial court to vacate its order.

Writ granted.