Implied-in-fact arbitration agreements: when no doesn’t mean no

THE NEUTRAL CORNER

In my last column, I defended the use of mandatory arbitration clauses in employment agreements while acknowledging the validity of some of the criticisms leveled by strong opponents of these clauses. Two recent cases, Diaz v. Sohnen Enterprises and Floyd v. Precision Cast Parts Corp., reach opposite conclusions in very similar situations. These decisions remind us that there rarely is such a thing as "the law." Outcomes are dependent on the facts, the lawyering , and the judge.

Diaz v. Sohnen Enterprises (2019 DJDAR 3032, April 10, 2019)

On Dec. 2, 2016, Sohnen Enterprises notified its employees -- at a meeting plaintiff Diaz attended -- that the company was adopting a new dispute resolution policy requiring the arbitration of all employment claims. The employees were notified that continued employment would, itself, constitute acceptance of the dispute resolution agreement. Two weeks later, Diaz notified her employer that she refused to sign the agreement or accept its mandatory arbitration terms. Five days after that, Diaz met with more representatives of the company and reiterated her refusal to accept the mandatory arbitration agreement. Diaz was advised, once again, that by continuing her employment with Sohnen, her acceptance of the agreement was implied.

Diaz hired an attorney and together they drafted a letter to the company, dated Dec. 20, 2016. The letter explained that Diaz would continue her employment with Sohnen but formally rejected the mandatory arbitration provision. Diaz and her lawyer delivered the letter on Dec. 23, 2016 at which time Diaz also served a civil complaint.

On Jan. 17, 2017, Sohnen sent a demand for arbitration to Diaz's attorney. Diaz did not reply and Sohnen filed a motion to compel arbitration. Diaz filed an opposition. The trial court heard arguments and denied Sohnen's motion, claiming that there was no "meeting of the minds" regarding the arbitration clause.

Sohnen then appealed the denial of its petition to compel arbitration. The 2nd District Court of Appeal reviewed the case de novo and reversed the trial court's decision, determining that, by continuing to work, Diaz had accepted the terms of the arbitration clause and was, therefore, required to arbitrate her dispute. The Court of Appeal made quick work of this case asserting: "California law in this area is settled: when an employee continues his or her employment after notification that an agreement to arbitration is a condition of continued employment, that employee has impliedly consented to the arbitration agreement."

So the law is well settled? Not so fast.

Floyd v. Precision Castparts Corp. (E069678, May 14, 2019, unpublished)

Floyd began working for Precision in January 2014 as a customer service manager. She also served as the company's assistant compliance manager responsible for insuring the company's financial reports complied with the federal Sarbanes-Oxley Act. In February 2016, Floyd allegedly discovered that a production manager was changing information on the compliance reports. Floyd reported the conduct to the company's controller after which she alleged she suffered a hostile work environment and was wrongfully terminated.

In March 2017, Floyd filed her civil complaint. The company answered and then moved to compel arbitration. The trial court denied the petition to compel arbitration and the company appealed. The 4th District Court of Appeal affirmed the denial holding that the company had failed to demonstrate that an agreement to arbitrate existed.

In support of its motion to compel arbitration, the company argued, as in Diaz, that the parties had an implied-in-fact agreement to arbitrate. That agreement, according to the company, was based on: (1) Floyd having signed the Feb. 24, 2016 attendance sheet at a company meeting at which the company announced it was implementing a new arbitration policy, and (2) Floyd not having provided an opt-out form to the company within 30 days after receiving notice of the policy.

Like the 2nd District, the 4th District noted: "The lack of a perfected written arbitration agreement does not necessarily establish the absence of an agreement to arbitration." Continued employment may constitute the basis for finding an implied-in-fact agreement according to the court. The Court continued: "Whether a party's conduct constitutes consent is fact specific." The Court then enumerated the reasons the company failed to meet its burden of showing that an implied-in-fact contract to arbitrate existed.

Court Should Reexamine The Implied-In-Fact Agreement to Arbitrate.

These two cases are, at once, both easy and difficult to reconcile. Sure, the facts are different. In Floyd, the court noted that the employee did not sign any acknowledgment that she had received the dispute resolution policy; she simply signed in at the meeting where the policy was one of the topics discussed. The declaration of the human resources person submitted to the court in Floyd states that the company provided notice of the policy to the employees but does not state that she witnessed the employee actually being given a copy of the policy. In contrast, the employee in Diaz clearly received the new policy because she expressly refused to consent to it.

So, we have a situation where a court found an implied-in-fact contract in the face of Diaz's express refusal to consent to the new arbitration policy juxtaposed against a case where another court refused to find the same implied-in-fact contract in a virtually identical scenario. In both cases, the companies held an employee meeting where they distributed a new policy to employees and announced that the policy was taking effect immediately. In Diaz, there is no mention of an opt-out provision. In Floyd, the company even provided an opt-out opportunity, but the employee claims she knew nothing about the policy. Did she really have no idea? Even Floyd's lawyer thought his client had received the policy before stating otherwise during oral argument to avoid the consequences of what might have been an admission that could have turned the court the other way. Thus, it is apparent that subtle differences in the way these company meetings were conducted and documented, and the way the facts were presented to the different courts made all the difference in the outcome.

Although I generally favor the use of arbitration clauses, the result in Diaz is hard to justify. None of the cases cited by either of these courts has ever confronted a situation where an employee expressly refused to consent to an arbitration clause. Courts have long held that "an implied contract is consensual in nature. In general an implied contract, in no less degree than an express contract, must be founded upon an ascertained agreement of the parties to perform it." Pasadena v. County of Los Angeles, 118 Cal. App. 2d 497, 500 (1953).

Contrast the courts' willingness to find an implied-in-fact agreement to arbitrate in the first place with the U. S. Supreme Court's recent holding in Lamps Plus Inc. v. Varela. In that case decided just last month, the Supreme Court ruled that a state-law contract interpretation rule to resolve ambiguous provisions against the drafter "cannot be applied to impose class arbitration in the absence of the parties' consent." There is an entire body of law distinguishing between contract formation and contract interpretation that is beyond the scope of this column. Nevertheless, even a proponent of arbitration clauses like me cannot help but point out the irony of the Supreme Court requiring an employer's express consent to class arbitration -- when the agreement is silent or even ambiguous -- while state courts are concluding that an employee who expressly refuses to consent to arbitration is, nevertheless, held to have implicitly done so by refusing to give up her job.

Although I certainly do not favor banning compulsory arbitration clauses in employment contracts, it does seem to me that courts should require express consent at the formation stage especially if such consent is required when interpreting the terms of an arbitration clause. Left for another day is the question of whether a court should be able to find that an implied contract exists in a circumstance where the employee's implied consent is obtained with the proverbial gun to the head -- in this case, loss of a job an employee may have held for years.