Supremacy at the state high court

A recent article in the Boston University Law Review referred to the California's Supreme Court's 25-year-plus hostility to the Federal Arbitration Act as an "endless battleground." Will 2015 be the year that the court surrenders to the supremacy clause of the U.S. Constitution? I doubt it.

California courts traditionally have been hostile to 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, 563 U.S. 321 (2011). Time and 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 an arbitration agreement and preempts any state rules that stand in the way.

This summer, in Iskanian v. CLS Transp. Los Angeles LLC, 59 Cal. 4th 348 (2014), relying on the U.S. Supreme Court decisions in Stolt-Nielson S.A. v. AnimalFeeds International Corp., 559 U.S. 662 (2010), and Concepcion, a 6-1 California Supreme Court overturned its prior decision in Gentry v. Superior Court, 42 Cal. 4th 443 (2007), and held that California's rule prohibiting class action relief waivers in arbitration was preempted by the FAA.

The outcome in Iskanian is not surprising. It was foreshadowed in Sonic-Calabasas A Inc. v. Moreno, 57 Cal. 4th 1109 (2013), in which the court, after a summary reversal by the U.S. Supreme Court, recognized 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 "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.'"

The same can be said of the corollary to Gentry, established in Franco v. Athens Disposal Co., 171 Cal. App. 4th 1277 (2009), and Brown v. Ralphs Grocery Co., 197 Cal. App. 4th 489 (2011), which applied the same rule to representative actions under the Labor Code Private Attorneys General Act, Labor Code Sections 2699 et seq. The Franco-Brown rule is similar to the one established by the California Supreme Court in Broughton v. Cigna Health Plans of Cal., 21 Cal. 4th 1066 (1999), and Cruz v. Pacificare Health Systems Inc., 30 Cal. 4th 303 (2003), barring arbitration of claims for public injunctive relief.

In Ferguson v. Corinthian Colleges Inc., 733 F.3d 928 (9th Cir. 2013), the 9th U.S. Circuit Court of Appeals held that the FAA preempted the Broughton-Cruz rule. Although no fewer than 11 federal district courts (in every district in the state) held before Iskanian that the FAA preempted the Franco-Brown rule along with Gentry, Iskanian declined to do so. In the five months that have passed since Iskanian was decided, five more district courts - in every district in the state - have issued opinions rejecting Iskanian's analysis of the Franco-Brown rule, and holding that the FAA preempts California's rule barring arbitration of PAGA claims. Fardig v. Hobby Lobby, 2014 WL 4782618 (C.D. Cal. Aug. 11, 2014); Ortiz v. Hobby Lobby, 2014 WL 4961126 (E.D. Cal. 2014); Langston v. 20/20 Companies Inc., 2014 WL 5335734 (C.D. Cal. Oct. 17, 2014); Chico v. Hilton Worldwide Inc., 2014 WL 5088240 (C.D. Cal. Oct. 7, 2014); Lucero v. Sears Holding Mgmt. Corp., 14-1620 (S.D. Cal. Dec. 2, 2014).

The employer in Iskanian has petitioned the U.S. Supreme Court for certiorari to review that portion of the decision holding that the FAA does not preempt Franco-Brown. As of the writing of this article, the court has not acted on the petition. However, there is a distinct possibility that the court will take the same action it did in Sonic-Calabasas: issue a short per curiam opinion reversing the California Supreme Court and remanding the case for reconsideration.

Now that Iskanian conclusively establishes that class claims (and perhaps representative claims as well) must be arbitrated on an individual basis if the underlying arbitration agreement makes no provision for class arbitration, the next important question is, who decides. The court, or the arbitrator? In Green Tree Financial Corp. v. Bazzle, 539 U.S. 444, 452 (2003), a four-justice plurality of the U.S. Supreme Court concluded it was for the arbitrator to decide. But more recently, in Oxford Health Plans LLC v. Sutter, 133 S. Ct. 2064, 2058 n.2 (2013), the majority noted that the question remained an open one.

Even more recent decisions from the 3rd and 6th U.S. Circuit Courts of Appeals, Opalinksi v. Robert Half Int'l Inc., 761 F.3d 326, 335 (3rd Cir. 2014), and Huffman v. Hilltop Companies LLC, 747 F.3d 391, 398-99 (6th Cir. 2014), held that unless the arbitration agreement clearly delegated the task to the arbitrator, the court must decide whether class or representative relief is available in arbitration, not the arbitrator. A pair of recent California Court of Appeal decision have reached the same conclusion. Garden Fresh Restaurant Corp. v. Superior Court, 2014 WL 6306143 (Nov. 17, 2014); Network Capital Funding Corp. v. Papke, 2014 WL 5035099 (Oct. 9, 2014). A third decision, Sandquist v. Lebo Auto, 174 Cal. Rptr. 3d 672 (2014), review granted, reached the contrary conclusion, but it is now on review before the state Supreme Court. (A petition for review has been filed in Papke, but the court has not yet acted on it.)

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 out for Armendariz, which conditions enforcement of employment-related arbitration agreement on the existence of certain procedural features of the arbitration process. Whether Sonic will do 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 the same concerns about FAA preemption that first attracted the high court's attention to the case. At least one published and several unpublished Court of Appeal decisions have recognized that Armendariz sits on shaky FAA ground. See, e.g., Lona v. Citibank N.A., 202 Cal. App. 4th 89 (2011); Moran v. Qwest Communications International Inc., 2012 WL 3645072 (Cal. App. Aug 27, 2012); Woods v. JFK Memorial Hospital Inc., 2014 WL 5475231 *4 (Cal. App. Oct. 30, 2014).

The Southern District of Texas neatly summarizes the problem: "The general Armendariz rule is in serious doubt following Concepcion. Armendariz sets categorical, per se requirements specific to arbitration clauses. The Armendariz requirements, though couched in terms of unconscionability, cannot be described as grounds that "exist at law or in equity for the revocation of any contract," 9 U.S.C. Section 2, because they "'apply only to arbitration [and] derive their meaning from the fact that an agreement to arbitrate is at issue.' Concepcion, 131 S. Ct. at 1746." James v. Conceptus Inc., 851 F.Supp.2d 1020, 1033 (S.D. Texas 2012).

After Sonic in 2013 and Iskanian this year, there is little doubt that the California Supreme Court is losing its will to maneuver over the "endless battleground" of FAA jurisprudence with the U.S. Supreme Court. But its efforts to protect Armendariz suggest that it is not quite ready to quit the field of battle entirely.