Iskanian: Arbitration's got a brand new bag

Last week's decision from the state Supreme Court in Iskanian v. CLS Transportation Los Angeles LLC, 2014 DJDAR 8037 (June 23, 2014), is like the little boy who pointed that the emperor was naked. And like the Hans Christian Anderson parable, it begs the question: Why did he walk around like that for so long?

California courts have been traditionally hostile to the Federal Arbitration Act, especially the FAA's requirement that "private agreements to arbitrate are enforced according to their terms," and barring any state rule that "stands as an obstacle to the accomplishment and execution of the full purposes and objectives" of the FAA. AT&T Mobility LLC v. Concepcion, 131 S.Ct. 1740, 1753, 1773 (2011). Time and time again the state's courts have carved out exceptions to the FAA's enforcement mandate where they perceived it as hostile to important state policies, even though the FAA requires enforcement of the terms of an arbitration agreement and preempts any state rules that stand in the way.

Gentry v. Superior Court, 42 Cal. 4th 443 (2007), cert. denied sub nom Circuit City Stores Inc. v. Gentry, 552 U.S. 1296 (2008), was one of the biggest California carve-outs. In Gentry, the court established a four-factor test to determine when a waiver of class arbitration in an employment agreement is unenforceable that considered: (1) whether the "potential individual recovery" is "modest"; (2) whether there is a "potential for retaliation against members of the class"; (3) whether "absent members of the class may be ill informed of their rights"; and (4) whether there exist other "real world obstacles to the vindication of class members' rights ... through individual arbitration."

But in the seven years that have passed since the court handed down Gentry, a series of U.S. Supreme Court decisions - including American Express Co. v. Italian Colors Restaurant, 133 S.Ct. 2304 (2103), Concepcion and Stolt-Nielsen S.A. v. AnimalFeeds Int'l Corp., 559 U.S. 662 (2010) - repeatedly held that state courts cannot create such exceptions to the FAA, even if they do not provide for class action procedures in arbitration.

In Iskanian, the court recognized the handwriting on the wall: A 6-to-1 majority declared that Gentry was preempted by the FAA, definitively ending the state's experiment with judicial civil disobedience.

The outcome in Iskanian is not surprising. It was clearly foreshadowed in Sonic-Calabasas A Inc. v. Moreno. There the court initially held that an employee's statutory right to file an administrative claim before the labor commissioner (the so-called "Berman Hearing" process) was too important to be arbitrated in the first instance, and any arbitration agreement to the contrary was unconscionable. The U.S. Supreme Court reversed without even bothering to ask for briefing or oral argument. It summarily took the case and issued a short opinion reversing the court, ordering it reconsider the matter in light of Concepcion. See Sonic-Calabasas A, Inc. v. Moreno, 51 Cal. 4th 659, vacated and remanded, 132 S.Ct. 496 (2011). After hearing further oral argument in April, the state high court reversed itself, declaring that any state-law rule that "categorically" denies enforcement of an arbitration agreement in deference to the Berman hearing process was preempted by the FAA. Reasoning that Concepcion "make[s] clear" that state-law unconscionability principles "must not disfavor arbitration as applied by imposing procedural requirements that 'interfere[] with fundamental attributes of arbitration,'" and that "a Berman hearing causes arbitration to be substantially delayed," the court concludes that the rule established in its first opinion "interferes with a fundamental attribute of arbitration - namely its objective 'to achieve 'streamlined proceedings and expeditious results.'" "According to Concepcion," the court pointedly concluded, "class wide arbitration interferes with fundamental attributes in several ways," namely: It makes arbitration "slower, more costly, and more likely to generate procedural morass"; it "'requires procedural formality' because of due process concerns"; and it "'increases risks to defendants' and 'is poorly suited to the higher stakes of class litigation' because of the lack of judicial review." This observation all but sealed Gentry's fate: Gentry clearly "disfavor[s] arbitration as applied by imposing procedural requirements that 'interfere[] with fundamental attributes of arbitration.'" It, no less than the rule announced in the first Sonic decision, must fall before the FAA under Concepcion.

Sadly, Iskanian was not really the result of new developments in U.S. Supreme Court jurisprudence (even though it took a great deal of prompting from the nation's high court to make California fall in line). To the contrary, the same preemption rationale embraced by the court in Iskanian was urged on the court in Gentry, and was the subject of an extensive dissent in Gentry by the three most conservative justices on the court. Gentry summarily rejected any suggestion that such a rule runs afoul of the FAA.

At the end of the day, it took a combination of two things to make the court admit that it was wrong: The U.S. Supreme Court had to emphasize that it meant what it always said about FAA preemption, and the court had to undergo a personnel change that brought in more justices who were willing to listen. The six-justice supermajority in Iskanian was comprised of the three Gentry dissenters, both of Gov. Jerry Brown's nominees, and one justice (Justice Joyce Kennard) who switched from the Gentry majority to the Iskanian majority. Only one of the two justices from Gentry's majority who remain on the court (Justice Kathryn Werdegar) remained true to Gentry and provided the lone dissent in Iskanian.

One question left unresolved is: What does this mean for the fate of Armendariz v. Foundation Health Psychcare Svcs. Inc., 24 Cal. 4th 83 (2000)? The nonunanimous portion of Sonic attempts to carve some room out for Armendariz, which conditions enforcement of employment-related arbitration agreement on existence of certain procedural features of the arbitration process. Whether Sonic will succeed in doing so remains to be seen. That portion of the majority opinion is subject to a vigorous dissent by Justice Ming Chin (joined by Justice Marvin Baxter). That dissent raises in large part the same concerns about FAA preemption that first attracted the high court's attention to the case. Certiorari in Sonic is not certain, but it is a very real possibility.