The ever-expanding Federal Arbitration Act

Ever since Congress enacted the Federal Arbitration Act in 1925 the U.S. Supreme Court has repeatedly expanded the scope of the statute. After eroding state jurisdiction of local arbitration by imposing federal law preemption, the court also included employment law in addition to commercial and consumer law. Ironically, all these cases were decided by applying substantive contract principles of state law.

Not everyone in the legal world supported arbitration. Lawyers, legislators and judges engaged in a variety of attacks to subvert this new dispute resolution process, often by bemoaning the loss of the jury trial and its procedural rules. Courts in West Virginia retained legislation under the semantic guise of "public policy" as an alternative to arbitration; Florida renamed its arbitration laws as procedural rules; Louisiana elected judges to decide whether an arbitration clause was in existence and enforceable.

The U.S. Supreme Court justices, fully aware of these state diversions, slowly terminated their conduct and required state and federal courts to both use general state contract law in arbitration and no unrelated procedure. Finally, in AT&T Mobility LLC v. Concepcion, 563 U.S.333 (2011), the court applied the preemptive rule and prohibited use of any substantive or procedural state law that even disfavored arbitration inferentially. When Kentucky recently mandated only a specific signature by the plaintiff's estate victim to enforce the powers of an attorney, avoiding an arbitration instead of a jury, the Supreme Court imposed this final rule in Concepcion and reversed. A statute recently enacted by the California Legislature affecting arbitration will receive the same treatment.

Congress has not disagreed with U.S. Supreme Court FAA decisions as evidenced by not a single amendment of the statute since its enactment. The federal statute is questionable in its congressional application to states, particularly in the category of employment. One state, however, has repeatedly attempted to develop a different jurisprudence in arbitration: California. The California Legislature did adopt the alternative to litigation in 1960 and the California Supreme Court applied its statutory language roughly paralleling the FAA. Since that time jurisdictional issues have occurred with federal courts.

The California Supreme Court subsequently included its own interpretation of the state statute in an employment arbitration without citing any statutory language or precedent. The court ordered employers to: pay the cost of arbitration to the employee; select a neutral arbitrator; required a written award. Armendariz v. Foundation Health Psychare Services, 24 Cal. 4th 83 (2000). The court wrote a policy decision on the grounds a disproportionate economic relationship existed between the parties warranted this decision. In succeeding years the high court fashioned new rules to the arbitration wheel; arbitrability; unconscionable substantive and procedural clauses; adhesion contracts; liberal discovery; waiver; choice of law; severance; classwide arbitration. All litigation language in an arbitration context.

Eventually the state supreme court went too far in a consumer case. The U.S. Supreme Court in Concepcion specifically reversed a California Supreme Court decision (Discover Bank v. Superior Court) forcing the California Supreme Court to subsequently reverse its own decision in an employment dispute resolution case. The California Supreme Court invented a new law predicated on an almost unknown statute -- the Private Attorneys General Act; Iskanian v. Superior Court, 59 Cal. 4th (2014). Rarely used except in a handful of consumer arbitration cases, the decision allowed the "plaintiff" to file "capital claims," not damages, " permitting any award split between that party and the state labor department to enable its staff to enforce labor law.

The Labor Department was not named a "plaintiff" and engaged in none of the litigation against the defendant. This unusual non "litigation" matched the same pattern of the state supreme court in Armendariz, deciding a case in arbitration absent any statute or precedent. The court invoked the same rationale in this case to avoid federal restriction on class actions. This administrative order in PAGA, unique to the joining the state as an unknown partner undertook its own jurisprudence without precedent.

Unsurprisingly, Iskanian caused litigation filed against defendants to hear pre dispute motions to compel arbitration in PAGA cases. In Betancourt v. Prudential Supply, 9 Cal. App. 5th (2017), the plaintiff employee filed a PAGA motion denied by the court on the ground such motions could not be granted as the state was a plaintiff and not named in the complaint. In addition, the employer cannot enforce an employee to waive the right to arbitrate in a PAGA case on grounds this conduct would affect the public policy of the state arising out of its contractual relationship with the employer state, not the employee plaintiff, and therefore an unconscionable contract.

PAGA cases, a form of collective cause of action filed to recover losses from various employer financial abuses including lack of paying overtime, providing meal time and rest periods, compiling accurate time payments, and denying reimbursement statements are common. This conduct constitutes civil complaints as distinguished from damages. According to Iskanian, the Legislature distinguished these allegations from loss of wages, a victim-specific remedy otherwise known as damages. Moreover, PAGA is potentially a multiple victim case, and if plaintiffs are seeking victim-specific loss of wages rather than the collective loss of PAGA, the statute does not apply.

According to the California Supreme Court, the Legislature enacted PAGA to enable the plaintiff to join the state as a party without any pleading or proof to reserve a percentage of any remedy imposed by receiving a percentage of the loss. Receiving a percentage of an award to an unnamed party, of course, not only does not occur in litigation but differentiates PAGA procedure from other forms of dispute resolution. In addition, PAGA does not conflict with general law and avoids the pre-emptive consequences of the FAA. This percentage of a plaintiff's award is awarded to Labor and Workforce Development Agency to facilitate development of state projects. Esparza v. KS Industries L.P., 13 Cal. App. 5th 1228 (2017).

Procedural challenges to PAGA flourished immediately after Iskanian on pleading, Labor Code violations, class actions and discovery. The California Supreme Court reviews the PAGA appellate opinions extensively in Williams v. Superior Court, 3 Cal. 5th 531 (2017), but the character of the case is elusive. The California Supreme Court, seeking to insulate interference by the U.S. Supreme Court in arbitration reversals, drafts an opinion without statutory or precedential support and created an illusionary state of California as a party without naming it or presenting evidence.

For this non status, the state recovers three-fourths of any award and prevents arbitration.