California Supreme Creates Appellate Rights for Losing Parties in Arbitration

In Cable Connections, Inc. v. DirecTV, Inc., the California Supreme Court has fundamentally altered the nature of arbitration in California. 

Previously, it had been well established that an arbitrator's decision was final and binding and could be vacated only for the most limited of reasons, such as outright corruption, refusing to hold a hearing, or exceeding his jurisdiction.  By agreeing to arbitrate, parties were deemed to have accepted the risk that an arbitrator might commit errors of fact or law -- and to have thereby waived any right to second-guess the ruling in the event that they lost.  Under this scheme, the whole point of arbitration was to allow disputes to be resolved quickly and economically with little or no involvement by the judicial system. 

Under Cable Connections, however, the arbitrator's ruling is no longer necessarily final.  Instead, if the parties' contract is interpreted to allow appellate review, the arbitrator's ruling may now be reviewed by an Appellate Court to the same extent as any findings of fact or law made by a Superior Court Judge or jury. 

Significantly, the Court was coy about what contract language may trigger this new level of appellate review.  

[T]o take themselves out of the general rule that the merits of the award are not subject to judicial review, the parties must clearly agree that legal errors are an excess of arbitral authority that is reviewable by the courts. Here, the parties expressly so agreed, depriving the arbitrators of the power to commit legal error. They also specifically provided for judicial review of such error.  We do not decide here whether one or the other of these clauses alone, or some different formulation, would be sufficient to confer an expanded scope of review. However, we emphasize that parties seeking to allow judicial review of the merits, and to avoid an additional dispute over the scope of review, would be well advised to provide for that review explicitly and unambiguously.

Very few arbitration agreements currently contain an express provision allowing for appellate review.  On the other hand, many, if not most, arbitration agreements contain some formulation to the effect that the arbitrator is required to "apply the substantive law" of California.  If this latter type of clause is deemed sufficient to subject the parties to appellate proceedings, then arbitration in California may have just become significantly more costly and time-consuming.     

Reasonable Limits On Employee's Time To File A Lawsuit Upheld By Appellate Court in Pearson Dental Supplies, Inc. v. Superior Court (Turcios)

Plaintiff Luis Turcios sued his former employer, defendant Pearson Dental Supplies, Inc., for age discrimination under the California Fair Employment and Housing Act (FEHA) (Click here to read the opinion: Pearson Dental Supplies, Inc. v Superior Court (Turcios)). Plaintiff signed an agreement with the employer that contained a mandatory arbitration clause for employment-related claims. The agreement contained a clause that plaintiff would waive any claims unless he submitted the claim to arbitration within one year from the date the dispute arose or from the date plaintiff first became aware of facts giving rise to the dispute.

While the arbitration agreement required that plaintiff submit the claim within one year, FEHA, in Government Code section 12960 requires a similar deadline, and provides, in part:

(b) Any person claiming to be aggrieved by an alleged unlawful practice may file with the department a verified complaint, in writing. . . .
(d) No complaint may be filed after the expiration of one year from the date upon which the alleged unlawful practice.

Government Code section 12965 also provides in relevant part:

(b) If an accusation [in the name of DFEH] is not issued within 150 days after the filing of a complaint, or if the department earlier determines that no accusation will issue, the department shall promptly notify, in writing, the person claiming to be aggrieved that the department shall issue, on his or her request, the right-to-sue notice. This notice shall indicate that the person claiming to be aggrieved may bring a civil action under this part against the person, employer, labor organization, or employment agency named in the verified complaint within one year from the date of that notice.

(emphasis added).  Defendant compelled arbitration of plaintiff’s claims and argued that the arbitration provision requiring that plaintiff file the claim within one year controlled and, therefore, plaintiff did not file a timely claim. The arbitrator agreed with the defendant’s argument and granted summary judgment in defendant’s favor. The trial court, however, vacated the arbitration award on the ground that the one-year limitation period impermissibly infringed on plaintiff’s unwaivable statutory rights under the FEHA. Defendant appealed the trial court’s ruling, resulting in this decision.

The appellate court overruled the trial court’s ruling, stating that the arbitration agreement did not infringe upon plaintiff’s unwaivable rights under FEHA. The appellate court stated:

In arguing that the arbitrator’s award violated public policy, plaintiff relies (as did the trial court) on his cause of action alleging age discrimination in violation of the FEHA. Under the FEHA, the plaintiff must file an administrative complaint within one year from the date of the discriminatory act. Then, a civil action must be filed within one year from the date the administrative agency issues a “right to sue” letter. (Gov. Code, §§ 12960, subd. (d), 12965, subd. (b).) Plaintiff urged, and the trial court found, that the arbitrator’s application of the one-year limitations period in the DRA contravened public policy because it shortened the FEHA limitations period. We disagree.

(footnote omitted). The appellate court held that the arbitrator’s enforcement of the one-year arbitral limitation period did not unfairly burden plaintiff’s opportunity to vindicate his FEHA claim. The court noted that “despite adequate opportunity to investigate, prepare, and litigate, plaintiff chose to ignore the arbitration requirement and the arbitral limitation period, and never argued that the limitation period was unconscionable when opposing the petition to compel arbitration.” The court did caution, however, that this case did have unique facts that compelled it to rule in this way. Nevertheless, this opinion confirms that employers may enter into arbitration agreements that reasonably require their employees to submit their claims in a timely manner, or else their claims will be waived.

Podcast On Brinker v. Hohnbaum: What Are Employers' Obligations To Provide Meal and Rest Breaks?

"Silent" Arbitration Agreements are Consistently Found to Authorize Class Wide Arbitration

Conventional wisdom among defense counsel has long been that arbitration is the preferable forum for resolving individual employment disputes such as wrongful termination, discrimination and sexual harassment.  As a result, the number of employers with mandatory ADR programs skyrocketed in the 1990's and early 2000's.

By contrast, many defense counsel have come to believe that arbitration is a decidedly less favorable forum for employers when it comes to class-wide claims.  The main reason is that the lack of a jury or meaningful appellate review, combined with the more flexible procedural rules of arbitration are likely to result in class certification.   

Some employers have sought to have the "best of both worlds" by constructing arbitration programs which require arbitration of individual claims but exclude class actions from arbitration.  But as we have previously blogged, under Gentry v. Superior Court, California trial courts will generally refuse to enforce any sort of arbitration provision that attempts to bar class wide arbitration remedies

The majority of arbitration agreements are simply silent on the whole question of class arbitration.  As to these agreements, arbitrators consistently determine that they should be interpreted as allowing a class wide arbitration to take place (assuming, of course, that the arbitrator also finds that the case to be appropriate for class certification).  For example, in a very informative post from The Metropolitan Corporate Counsel, authors P. Christine Deruelle and Robert Clayton Roesch surveyed the actual decisions on this issue by neutrals with the American Arbitration Association ("AAA").  They concluded that "At bottom, AAA arbitrators have - almost without exception - construed otherwise silent arbitration agreements to permit class proceedings."  As the basis for their conclusion, the authors explained:

As of June 15, 2007, AAA arbitrators have rendered 51 Clause Construction Awards concerning otherwise silent arbitration agreements, and in all but two of those decisions, the arbitrators have allowed classwide proceedings. Three recurring rationales for interpreting an otherwise silent agreement to permit class arbitration appear in these AAA Clause Construction Awards: (i) if the parties intended to prohibit class arbitration, they could have included an express prohibition in their arbitration agreement to this effect; (ii) a misapprehension of Bazzle as specifically authorizing class arbitration where the applicable agreement is silent; and (iii) that silence regarding the propriety of class proceedings renders the agreement ambiguous, which requires that it be construed against the drafter, consistently resulting in a construction favoring class arbitration. In contrast to the 49 AAA Clause Construction Awards construing silence to permit class arbitration, only two such awards have reached the opposite conclusion.

Thus, the proliferation of employment class actions in recent years presents employers with a bit of a conundrum -- do the perceived benefits of arbitrating single plaintiff claims outweigh the perceived detriments of arbitrating employee class actions?

Labor Code Class Actions Consistently Outnumber All Other Categories Combined

The Class Action Defense Blog published by Michael J. Hassen has made a regular weekly feature of tracking the new filings of class actions in state and federal courts in California.  The weekly results confirm what most  class action practioners have long-recognized -- the deluge of labor law class actions far outnumbers any other category.  In fact, employment law class actions (the vast majority of which are based on wage and hour violations), consistently outnumber all other categories of class action lawsuits combined.  

For example, over the past week labor law class actions represented nearly two thirds of the total class actions filed.  As Mr. Hassen summarizes: 

This report covers August 8 - 14, 2008, during which time 37 new class action lawsuits were filed. Labor law class action lawsuits generally top the list of new class action filings in California state and federal courts, often by a wide margin, and this again proved to be the case. Twenty-four (24) new labor law class action lawsuits were filed during the past week, representing 65% of the total number of new class action lawsuits filed during the time period. The only other category that satisfied the 10% threshold involved class action lawsuits alleging unfair business practice claims, which include false advertising claims, with 5 new filings (14%). 

Alch v. Superior Court (Time Warner) -- Court Reaffirms Discoverability of Private Employee Data in Class Actions

The California Supreme Court's decision last year in Pioneer Electronics v. Superior Court, 40 Cal.4th 360 (2007), held that the privacy rights of current and former employees will not normally prevent a class action plaintiff from discovering their names, addresses, phone numbers and other data in litigation.  Pioneer explained that any privacy concerns could be dispelled by providing the targets of the discovery with a written notice and an opportunity to object.    

The Facts of Alch: 47,000 Privacy Notices and 7,700 Objections.

In the aftermath of Pioneer, a steady stream of appellate decisions have reinforced and expanded plaintiffs' rights to pre-certification discovery regarding potential class members.  Alch v. Superior Court, 2008 WL 3522099 (2008), is the latest and most expansive of these decisions. 

Alch involved a discovery dispute arising as part of a complex litigation alleging that studios and talent agencies have systematically discriminated against older television writers.  The plaintiffs subpoenaed documents showing the ages and work histories of thousands of Writers Guild members in the hope that the data would demonstrate a statistically significant pattern of discrimination. 

Following the procedure approved in Pioneer, 47,000 members of the Writers Guild received privacy notices.  Of these, 4,700 filed objections to the disclosure of their information.  The plaintiffs then asked the court to overrule these privacy objections and allow the discovery anyway.  The trial court barred further discovery as to the 7,700 objectors.  The appellate court granted writ review  and reversed the trial court's decision.

The Holding: Privacy Interests Insufficient to Avoid Discovery.

In reaching this result, Alch is interesting for two main reasons. 

First, it makes clear that a third party's objection in response to a privacy notice is not at all dispositve.  Rather, notwithstanding an individual's objection, the public interest in “facilitat[ing] the ascertainment of truth and the just resolution of legal claims," may still override his or her privacy interest.  

In fact, this aspect of Alch tends to beg the question of why the parties should have been required to send 47,000 privacy notices in the first place if the requested information was to be produced regardless of whether anyone objected.  (In fairness to the trial court, however, the plaintiffs had trimmed the scope of their discovery requests somewhat by the time the case reached the appellate court).  In the future, Courts will inevitably cite the reasoning of Alch as a rationale for dispensing with the cumbersome and expensive privacy notification altogther and merely ordering disclosure in the first instance.    

Secondly, Alch is significant for its categorical rejection of what might be termed the "cart-before-the-horse" defense argument to discovery -- i.e., that class-wide discovery should not be allowed until the plaintiffs have first demonstrated that the requested information will prove their claims.  As the Court explained:

Real parties' argument is, in effect, a claim that, because privacy interests are involved, the writers must prove that the data they seek will prove their case before they may have access to the data. But there is no support in law, or in logic, for this claim. . . . [s]uch a rule would be wholly impractical and unreasonable in the context of class action litigation requiring complex statistical analysis. . . Some information in the databases doubtless will be, in the end, irrelevant or unusable for any number of reasons, including the subject's lack of interest or availability for television writing. But that does not mean that the overall body of information subpoenaed-demographic and work history information of Writers Guild members-is not directly relevant and essential to the writers' case.   

In short, there is now a fairly unassailable wall of authority in place allowing plaintiffs to discover the contact information and vital statistics of potential class members.  Many employers may be better served if their defense counsel were to simply acknowledge this new reality rather than engaging in expensive, but ultimately futile attempts to block the discovery.       

Plaintiffs Stand To Gain More From Settling? New Study Suggests So

A recent New York Times article provides a prelude to a study being unveiled later that examines the psychological issues that clients and lawyers face when deciding whether to take a case to trial.

One of the main findings of the study is that plaintiffs, statistically speaking, stand to gain more in taking a settlement offer than litigating the case.

“The lesson for plaintiffs is, in the vast majority of cases, they are perceiving the defendant’s offer to be half a loaf when in fact it is an entire loaf or more,” said Randall L. Kiser, a co-author of the study and principal analyst at DecisionSet, a consulting firm that advises clients on litigation decisions.

The article also found that defendants made the wrong decision of going to trial (i.e., they plaintiff was willing to take less in a settlement than what the jury eventually found for the plaintiff) less often than plaintiffs. Defendants made the incorrect decision only in 24 percent of cases, according to the study, where plaintiffs were wrong 61 percent of the time. The article states that “[i]n just 15 percent of cases, both sides were right to go to trial — meaning that the defendant paid less than the plaintiff had wanted but the plaintiff got more than the defendant had offered.”

However, the study also concluded that a wrong decision by defendants cost them much more (costing $1.1 million), as opposed to if plaintiffs got it wrong (costing $43,000).

The article also discusses the psychological theory of loss aversion, which could definitely explain litigants’ choices.  The article explains:

The findings are consistent with research on human behavior and responses to risk, said Martin A. Asher, an economist at the University of Pennsylvania and a co-author. For example, psychologists have found that people are more averse to taking a risk when they are expecting to gain something, and more willing to take a risk when they have something to lose.
“If you approach a class of students and say, I’ll either write you a check for $200, or we can flip a coin and I will pay you nothing or $500,” most students will take the $200 rather than risk getting nothing, Mr. Asher said.
But reverse the situation, so that students have to write the check, and they will choose to flip the coin, risking a bigger loss because they hope to pay nothing at all, he continued. “They’ll take the gamble.”

Definitely some food for thought for litigators that have to assit clients in the difficult decision about whether to settle or try a case. 

CA Supreme Court Holds Non-Competes Are Generally Unenforceable and Release of "Any And All" Claims Not Unlawful

In Edwards v. Arthur Andersen LLP, the California Supreme Court ruled on the following issues: (1) To what extent does Business and Professions Code section 16600 prohibit employee noncompetition agreements; and (2) is a contract provision requiring an employee to release “any and all” claims unlawful because it encompasses nonwaivable statutory protections, such as the employee indemnity protection of Labor Code section 2802?

Noncompetition Agreements
Noncompetition agreements are governed by Business & Professions Code section 16600, which states: “Except as provided in this chapter, every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.” The statute permits noncompetition agreements in the context of sale or dissolution of corporations (§ 16601), partnerships (§ 16602), and limited liability corporations (§ 16602.5).

Under the common law, as still recognized by many states today, contractual restraints on the practice of a profession, business, or trade, were considered valid, as long as they were reasonably imposed.  Andersen argued that California courts have held that section 16600 embrace the rule of reasonableness in evaluating competitive restraints.

The Court disagreed with Andersen, and noted:

We conclude that Andersen’s noncompetition agreement was invalid. As the Court of Appeal observed, “The first challenged clause prohibited Edwards, for an 18-month period, from performing professional services of the type he had provided while at Andersen, for any client on whose account he had worked during 18 months prior to his termination. The second challenged clause prohibited Edwards, for a year after termination, from ‘soliciting,’ defined by the agreement as providing professional services to any client of Andersen’s Los Angeles office.” The agreement restricted Edwards from performing work for Andersen’s Los Angeles clients and therefore restricted his ability to practice his accounting profession.

The Court found that this agreement was invalid because it restrained Edwards’ ability to practice his profession.

However, Andersen argued that section 16600 has a “narrow-restraint” exception and that its agreement with Edwards survives under this exception.  Andersen pointed out that a federal court in International Business Machines Corp. v. Bajorek (9th Cir. 1999) upheld an agreement mandating that an employee forfeits stock options if employed by a competitor within six months of leaving employment. Andersen also noted that another Ninth Circuit federal court in General Commercial Packaging v. TPS Package (9th Cir. 1997) held that a contractual provision barring one party from courting a specific customer was not an illegal restraint of trade prohibited by section 16600, because it did not “entirely preclude[]” the party from pursuing its trade or business.

In refusing to accept the “narrow-restraint” exception for noncompetition agreements in California, the Court stated:

Contrary to Andersen’s belief, however, California courts have not embraced the Ninth Circuit’s narrow-restraint exception. Indeed, no reported California state court decision has endorsed the Ninth Circuit’s reasoning, and we are of the view that California courts “have been clear in their expression that section 16600 represents a strong public policy of the state which should not be diluted by judicial fiat.” [citation] Section 16600 is unambiguous, and if the Legislature intended the statute to apply only to restraints that were unreasonable or overbroad, it could have included language to that effect. We reject Andersen’s contention that we should adopt a narrow-restraint exception to section 16600 and leave it to the Legislature, if it chooses, either to relax the statutory restrictions or adopt additional exceptions to the prohibition-against-restraint rule under section 16600.

The Court’s ruling basically eliminates the validity of non-competition agreements under California that are not expressly provided for in Section 16600.

Contract Provision Releasing “Any and All” Claims
The second issues in the case was whether Andersen's condition of Edwards’s obtaining employment that Edwards execute an agreement releasing Andersen from, among other things, “any and all” claims, including “claims that in any way arise from or out of, are based upon or relate to [Edwards’s] employment by, association with or compensation from” Andersen.

Edwards argued that Labor Code section 2804 voids any agreement to waive the protections of Labor Code section 2802 (which provides that employers must reimburse employees for all business related expenses that the employee incurs) as against public policy.

The Court noted that Labor Code section 2804 has been interpreted to apply to Labor Code section 2802, making all contracts that waive an employee’s right to reimbursement null and void. Therefore an employee’s right to be reimbursed for business expenses provided under Labor Code section 2802 are nonwaivable, and any contract that does purport to waive an employee’s right would be contrary to the law.  Edwards maintained, therefore, the agreement was an independent wrongful act that would support another claim he was alleged for intentional interference with prospective advantage.

The Court disagreed with Edwards, and concluded that a contract provision releasing “any and all” claims does not encompass nonwaivable statutory protections, such as the employee indemnity protection of Labor Code section 2802.  Therefore, such agreements are still valid and enforceable under the law.

East Bay Taxi Drivers Association v. Friendly Cab Co., -- Taxi Drivers Found to be Employees, Not Independent Contractors

The Ninth Circuit’s decision earlier this year in East Bay Taxi Driver’s Association v. Friendly Cab, Inc., 512 F3d 1090 (2008), illustrates how easily courts will pierce through the outward appearances of a “business” contract to find that, at bottom, it is just a glorified employer-employee relationship.

The case involved taxi drivers who were seeking to form a union to bargain with the company that leased their cabs. As employees they would be covered by the National Labor Relations Act (“NLRA”) and could force the company to recognize their union and bargain collectively. This required the Court to detrmine their true status.  As the Court explained:

‘Employees' work for wages or salaries under direct supervision. ‘Independent contractors' undertake to do a job for a price, decide how the work will be done, usually hire others to do the work, and depend for their income not upon wages, but upon the difference between what they pay for goods, materials, and labor and what they receive for the end result, that is, upon profits.

The drivers leased their vehicles and kept the fares that they generated. Nevertheless, the Ninth Circuit upheld the NLRB’s determination that they were mere “employees.” The main reason for this outcome was the company’s tight control over the drivers’ operations. For example, the drivers were required to only respond to the company’s radio dispatches and could not pick up fares on their own or advertise their own services apart from the company. The company's high degree of control thus negated the drivers’ opportunity to generate any real “entrepreneurial profit” through their own initiative.  

We have blogged repeatedly about the difficulty of maintaining a proper independent contractor status.  Unfortunately, the various multifactor tests promulgated by courts and administrative agencies are remarkably unhelpful for predicting which side of the line a worker falls. As the outcome of the East Bay Taxi case illustrates, however, it is probably more useful to view the standard as a simple determination of whether the company’s control prevents the individual from making significant profit from his own business decisions.

Disputes over Unpaid Sales Commissions and Bonus Payments: When Does a Mere Expectation Become an "Earned" Wage? Part I - Performance-Based Employment Compensation as a Unilateral Contract

Most employees are paid for their time. Thus, if they work eight hours at a rate of $25 per hour, or eight weeks at a salary of $2,500 per week, there is little dispute over the amount of wages owed. But disputes begin to multiply where the payment is deferred and is calculated based on meeting certain performance targets. Typical disputes include the following:

• What must the employee do to be considered the originator of a particular sale?
• What happens if the employee closes a sale but the customer never pays for the product?
• What if the salesman closed the sale but the company ships a defective product or otherwise causes the sale to be cancelled?
• What if the commission formula is based on meeting an annual target, but the Company decides to restructure the commission formula halfway through the year?
• What if the employee quits or is terminated after making a sale but before the customer has paid for product?

The first (but by no means the last) step to resolving these questions is to examine the terms of the parties’ contract. To do so, it is important to realize that under California law an enforceable commission contract is typically formed based on the company’s written policies or other communications to the employee concerning what commissions or bonuses he can expect if specified criteria are achieved. This is true regardless of disclaimers stating that the employment itself is terminable at-will or that there is supposedly no contract “of employment.”

In other words, it is not necessary for the parties to have a signed piece of paper for a valid compensation contract to exist. Rather, California generally follows a “unilateral contract” theory of employment compensation. A unilateral contract is one in which a “unilateral” offer to pay for performance is communicated by the employer (e.g., an employer policy stating that “an employee selling $100K in product will be paid a 10% commission”). The employee simultaneously accepts the offer and performs his side of the contract by doing the specified task (i.e., selling $100K in product).

A vested right to a commission payment thus usually arises immediately when the employee performs the requested services, closes the sale, stays employed throughout the year, or achieves any another specified goal. As a result, the employer may be legally barred from thereafter attempting to change the commission structure in a way that would prevent the employee from eventually collecting this entire “earned” commission.

Many employers mistakenly believe that if an employee can be terminated “at-will” his or her commissions may also be reduced at-will. Another common belief is that commissions are only “earned” when they are actually paid out by the employer. At least as to commissions on past sales, these assumptions are usually incorrect as a matter of law.

Understanding exactly when and how a commission or bonus becomes “earned” and vested according to common contract provisions will be addressed in greater detail in future posts. In the meantime, however, it is important to at least recognize the basic legal concept of the "unilateral contract."