California’s Armendariz opinion violates federal law

In the 1950s and 60s, opponents of civil rights laws sought to block judicial enforcement by resort to various "states' rights" defenses. Similarly, opponents of private arbitration contracts now assert state law grounds of "unconscionability" and "unwaivable public rights" in court challenges to enforcement of these agreements. California is at the forefront of this anti-arbitration campaign, and the U.S. Supreme Court is once again the ultimate forum for enforcing federal law -- this time the Federal Arbitration Act (FAA, 9 U.S.C. Sections 1 and 2) -- against state law barriers to arbitration.

Plaintiffs' attorneys are the leading foes of arbitration contracts, as evidenced from a perusal of civil appeals in California courts, where challenges to employment arbitration agreements abound. They decry arbitration primarily because it is not sufficiently like court litigation, but instead is an alternative for resolving disputes without typical litigation trappings -- juries, protracted discovery, formal rules of evidence, an array of damage categories, and lengthy appeals, to name a few. These differences between arbitration and court litigation, however, are precisely why employers and employees prefer arbitration over litigation.

Central to the outcome of this fray is the FAA, as limned by AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011), and its progeny, and enforced by the Constitution's supremacy clause (U.S. Const., art. VI). These authorities provide broad preemptive protection against state laws that discriminate against arbitration or "disfavor[] contracts that (oh so coincidentally) have the defining features of arbitration agreements." Kindred Nursing Centers Ltd. Partnership v. Clark, 137 S. Ct. 1421, 1427 (2017) (per curiam).

Defining features of contractual arbitration include informality, efficiency, reduced costs and speed (American Exp. Co. v. Italian Colors Restaurant, 570 U.S. 228, 238 (2013)), all of which can be attained by stipulations limiting issues subject to arbitration, agreeing to arbitrate according to specific rules, and defining the scope of relief and cost allocations between arbitral parties. Shearing these stipulations from arbitration agreements because they conflict with state law effectively consigns parties to "the litigation [the FAA] was meant to displace." Epic Systems Corp. v. Lewis, 138 S. Ct. 1612, 1623 (2018).

California appellate courts, led by the state's Supreme Court, originally supported contractual agreements to arbitrate (see generally Moncharsh v. Heily & Blase, 3 Cal. 4th 1 (1992), and Nedlloyd Lines B.V. v. Superior Court, 3 Cal. 4th 459 (1992)), but since Armendariz v. Foundation Health Psychcare Services, 24 Cal. 4th 83 (2000), have often wielded the state sword of "unconscionability" and "unwaivable public rights" to strike down employment arbitration agreements that run afoul of any of four elements it requires: (1) no limits on statutorily available remedies; (2) adequate discovery; (3) a written award with judicial review; and (4) no unreasonable costs and fees to be paid by the employee.

Since Armendariz was decided, 375 appellate opinions have relied on it to determine if arbitration agreements pass muster. Ten of these opinions, counting Armendariz itself, were by the California Supreme Court. That leaves 365 opinions by intermediate appellate courts. Most of these (264) are "not reported" -- precluding their citation as authority -- which suggests the future of employment arbitration may be death by a thousand sui generis cuts. Since Concepcion's advent nine years ago (10 years after Armendariz), 161 appellate opinions deciding the validity of arbitration agreements have been issued, with only 48 reported. Many of these opinions struck down agreements on the basis of Armendariz while paying lip service to Concepcion, confirming that "California's courts [are still] more likely to hold contracts to arbitrate unconscionable than other contracts." Concepcion, 563 U.S. at 342.

But there is hope on the horizon to end this seemingly endless struggle and bring greater certainty and clarity about what can and cannot be in such agreements. A recent opinion, Ramos v. Superior Court, 28 Cal. App. 5th 1042 (2018), voided an arbitration clause in a law firm partnership agreement. Ramos found Winston & Strawn LLP's arbitration clause unconscionable because it violated Armendariz's "statutory vindication" rule and its ensuing "minimal fairness" factors in four ways: It (1) impermissibly waived plaintiff's assertion of statutory employment rights and remedies under the state's Fair Employment and Housing Act; (2) required each party to pay its own attorney fees while the FEHA entitles the prevailing party to an award of attorney fees; (3) required the parties to share arbitral costs equally while Armendariz requires the employer to pay all costs unique to arbitration; and (4) potentially impaired through its confidentiality provision the plaintiff's ability to engage in informal discovery in pursuit of her litigation claims.

Winston & Strawn, along with supporting amici, asked the California Supreme Court to grant review, which was denied. Petitioner then sought writ review by U.S. Supreme Court with support from seven organizations filing amici briefs.Winston & Strawn v. Ramos, 18-1437. These briefs make various arguments in favor of review by the Supreme Court while advancing a common contention: Armendariz conflicts with and is preempted by the FAA because of its insistence that employment arbitration agreements cannot waive an employee's state statutory rights.

In short, a principal fallacy of Armendariz is that it applies the "effective vindication" doctrine for federal laws to state laws. In Amex the majority opinion described the effective vindication doctrine as "dictum" limited to federal statutory rights; and Justice Elena Kagan further explained in her dissent that, "[o]ur effective-vindication rule comes into play only when the FAA is alleged to conflict with another federal law." 570 U.S. at 252 (first italics added). "We have no earthly interest (quite the contrary) in vindicating [a state] law" that is inconsistent with the FAA, so the state law must "automatically bow" to federal law; any effective-vindication exception that might possibly exist would "come[] into play only when the FAA is alleged to conflict with another federal law." Id.

California's FEHA is the only law at play in Ramos, the same one Armendariz used to derive its "minimum fairness" factors as emanations from this purportedly unwaivable state statute. As one scholar concluded about this situation, "Amex undermines the foundation of Armendariz." Szalai, "More than Class Action Killers: The Impact of Concepcion and American Express on Employment Arbitration," 35 BERKELEY J. EMP. & LAB. L. 31, 47 (2014). The Ramos certiorari petition presents an opportunity to learn if Armendariz must, at long last, "automatically bow" to the protective ambit of the FAA.

Fred J. Hiestand represents the Civil Justice Association of California in a friend-of-the-court brief filed before SCOTUS in Winston & Strawn, LLP v. Ramos.

Benjamin G. Shatz is counsel for amicus curiae the Association of Southern California Defense Counsel in Winston & Strawn, LLP v. Ramos.