California Enacts Laws Aimed at Choice of Law Provisions in Arbitration Agreements and the Conduct of Arbitral Proceedings

Business Tied in Red TapeGiven California’s past resistance to mandatory arbitration agreements with class action waivers, it should come as no surprise that the state has now enacted two laws primarily directed at arbitration.

On Sept. 25, Governor Jerry Brown signed a bill (Senate Bill 1241) that amended the state’s Labor Code to prohibit an employer from requiring as a condition of employment, that an employee “who primarily resides and works in California” to “adjudicate” outside of California a claim arising in that state.

And while “adjudicate” covers both litigation and arbitration, the thrust of the provision appears to be the restriction of arbitration agreements.  Moreover, the law prevents an employer from depriving an employee “of the substantive protection of California law” for a matter arising in California.  In other words, a company cannot use what are commonly referred to as choice of law provisions to make the law of other (perhaps less employer-friendly) states applicable to California workers.

The law exempts any agreement made by an employee individually represented by an attorney that designates “either the venue or forum” in which an employment claim will be resolved.

Violations of the law, which applies to contracts entered into, modified or extended after Jan. 1, 2017, will entitle the employee to injunctive relief and other remedies, including reasonable attorneys’ fees.

The other new California law, also signed on Sept. 25 (Senate Bill 1007) applies only to arbitrations and gives a party to an arbitration the right to have a certified court reporter transcribe “any deposition, proceeding or hearing” and provides that the resulting transcript will be the official record of that event. The law also establishes the time frame within which a party must request that the proceeding be transcribed, and provides that the party seeking the transcript (except for indigent consumers) must pay for it.

Finally, should the arbitrator refuse to permit the shorthand reporter to transcribe any of the covered events, the party requesting the transcription may seek a court order to compel the arbitrator to accede to the request. Charitably, the new law does not add to the grounds for vacating or correcting an award under California law.

The author of the legislation, Senator Bob Wieckowski, maintained that while some arbitral sponsors do permit the use of court reporters, the practice was not uniform. And he felt the right to have a record of the proceeding was “a critical factor.”

Regardless of motivation, these new laws clearly aim to limit arbitration agreements in California and, in the case of the provision pertaining to court reporters, to potentially add an overlay of formality to the arbitral proceeding which by its very nature is intended to be relatively informal, and cost-effective. While it is not unusual to have a court reporter at arbitral hearings and at depositions, it is not clear how broadly this statute will be construed.

It is also unclear how courts in California might apply these provisions to arbitration agreements or proceedings in interstate commerce covered by the Federal Arbitration Act (“FAA”). For example, in Rodriquez v. American Technologies Inc., 136 Cal. App. 4th 1110, 1122 (Cal. 4th Dist. 2006), the appellate court found that the parties’ selection of the FAA trumped California procedural law on staying judicial proceedings when arbitration is compelled.  At this point it is difficult to predict what challenges might be brought to these new provisions based on federal and state law or what actual impact they may have on most arbitration agreements.

BOTTOM LINE:

California has erected another potential roadblock to the development and enforcement of arbitration agreements.  Only time will tell whether court challenges will be brought under the FAA or on other grounds.

Following Precedent: Second Circuit Reaffirms Position Upholding Arbitration Agreements With Class Action Waivers

chairsAmid contrary decisions by the Seventh and Ninth Circuits, the Second Circuit followed its earlier precedent in Patterson v. Raymours Furniture Co., No. 15-2820 (Sept. 2, 2016), enforcing an Employment Arbitration Program (EAP) that requires employees to submit their employment and compensation claims to individual arbitration.

The EAP, however, permits employees to file charges and participate in investigations before the Equal Employment Opportunity Commission and state or local anti-discrimination agencies, and did not compel employees to waive any rights they had under the National Labor Relations Act (NLRA) or prevent employees from filing unfair labor practice charges with the National Labor Relations Board (NLRB).

The Case History

A Raymours Furniture Company Inc. (Raymours) employee, Connie Patterson, filed a putative collective and class action raising claims under the Fair Labor Standards Act (FLSA) and New York labor law. In response, Raymours moved to compel arbitration under the EAP. The district court granted the motion, holding that the class action waiver in the agreement was enforceable. Patterson v. Raymours Furniture Co., 96 F.Supp. 3d 71 (S.D.N.Y. 2015).

Patterson maintained that the EAP’s prohibition of class or collective actions violated the employees’ right to engage in “concerted activities” under the NLRA. See Section 7 of the NLRA, 29 U.S.C. § 157. But the lower court rejected the assertion, holding that the Federal Arbitration Act (FAA) required arbitration of Patterson’s claims because the plaintiffs had agreed to arbitrate their claims based on the EAP’s terms. Continue Reading

Reining In Individual Arbitration – Ninth Circuit Rules Class Waivers Unenforceable

Different GroupsIn a 2-1 ruling, the Ninth Circuit became the second federal court of appeals to agree with the National Labor Relations Board’s (NLRB) position that the National Labor Relations Act (NLRA) prohibits class action waivers in employees’ arbitration agreements.

Writing for the majority in Morris v. Ernst & Young, Chief Judge Sidney Thomas held that Ernst & Young’s arbitration agreement violated Sections 7 and 8 of the NLRA by requiring its employees to arbitrate work-related claims in “separate proceedings.”

Plaintiffs Stephen Morris and Kelly McDaniel formerly worked at Ernst & Young. As a condition of employment, they signed arbitration agreements that included a “concerted action waiver.” The waiver required employees to pursue claims exclusively through arbitration and only as individuals in “separate proceedings.” Despite signing the agreement, Morris and McDaniel subsequently brought a class and collective action in federal court, alleging that the company misclassified its employees in violation of the Fair Labor Standards Act. Pursuant to the arbitration agreement, Ernst & Young moved to compel individual arbitration. The federal district court agreed and dismissed the case. The plaintiffs appealed to the Ninth Circuit.

Citing the NLRB’s position regarding the unenforceability of class action waivers and the Seventh Circuit’s recent decision in Lewis v. Epic Systems Corp. striking down a class waiver (discussed previously here), the Ninth Circuit concluded that Ernst & Young’s concerted action waiver violated the NLRA and could not be enforced. Continue Reading

Subway Adopts Novel Approach to Stem Wage and Hour Claims

Subway is one of the largest franchisors in the world, with over 26,000 restaurants in the United States alone. It is also in one of the industries most prone to wage and hour claims, a fact reflected in both Department of Labor (DOL) investigations and litigation involving individual outlets. And, predictably, some claimants pursuing wage and hour litigation against a franchisee have also tried to bring the corporate franchisor in as well. The potential threat against the company has increased with aggressive efforts by the National Labor Relations Board and other enforcement agencies to broaden concepts such as joint employer relationships.

While wage and hour claims are technically not a class action issue, Subway had taken the novel approach of entering into an agreement with the DOL to step up joint efforts to encourage FLSA compliance by Subway franchisees. These include:

  • Development by the Wage and Hour Division of the DOL of “easy to use” compliance materials for use in the restaurant franchise industry
  • Assistance by Subway and its franchisees in the development and dissemination of those materials
  • Provision of compliance support to franchises
  • Ongoing meetings with the DOL to improve franchise compliance
  • Compliance training by Subway

Continue Reading

Ninth Circuit Grants 23(f) Review of Denial of Class Certification for Inadequate Representation

We’re all familiar with the basic requirements of Rule 23(a), with the focus most frequently on the issues of commonality and typicality under Rules 23(a)(2) and (3). Numerosity under Rule 23(a)(1) can on occasion be an issue with smaller groups of claimants, but adequacy of representation under Rule 23(a)(4) is not often litigated.

In Kaur v. Things Remembered, Inc., D.C. Case No. 3:14-cv-o5544-VC (N.D. Cal.), 9th Cir. Case. No. 16-80060 (July 20, 2016), the plaintiffs brought claims for California wage and hour violations against a retail chain. They apparently waited until the last day of the discovery cutoff to file a motion for class certification and had not, by that time, taken a single deposition. To make matters worse, even after the court extended discovery, they lost track of a key plaintiff witness and failed to communicate their difficulties adequately with defense counsel. The district court concluded that the plaintiff’s lawyers “should not be trusted to represent a class of unnamed plaintiffs,” had delayed seeking certification, had failed to timely prosecute the case and had engaged in “unprofessional conduct during discovery.” The court denied certification on the basis of inadequacy of counsel, stating flatly:

“[Plaintiff’s] motion for class certification is denied, because the lawyers for the plaintiff cannot be trusted to “prosecute the action vigorously” on the unnamed plaintiffs’ behalf, Hanlon v. Chrysler Corp., 150 F.3d 1011, 1020 (9th Cir. 1998), and therefore can’t be trusted to adequately represent the interests of the proposed class.” Continue Reading

Seventh Circuit Clarifies Rules for Compensating Tipped Employees Performing Non-tipped Work

The Fair Labor Standards Act (FLSA) and most states permit restaurants to pay tipped employees a tip-credit rate, an amount less than the minimum wage with the expectation that tips will make up the difference. It goes without saying, however, that the system raises questions, such as how to pay a tipped employee when he or she performs non-tipped functions at work. Earlier this month, the United States Court of Appeals for the Seventh Circuit provided some clarity.

The case, Schaefer v. Walker Bros. Enterprises, — F.3d —, 2016 WL 3874171 (7th Cir. July 15, 2016), was brought by two classes of Original Pancake House servers. The first class claimed that the restaurants were required to pay them the minimum wage rate for the time they spent performing non-tipped duties. The second class argued that the disclosures provided by the restaurants regarding compensation of tipped employees failed to meet federal requirements.

In addition to performing normal server tasks like taking orders and delivering food, the servers in this case were also obligated to spend about 10 to 45 minutes each shift performing tasks they argued were completely unrelated to traditional server functions. For example, they were required to wash and cut fruits and vegetables; prepare applesauce, jellies and salsas; restock bread bins and replenish condiment dispensers; fill ice buckets; brew hot drinks; clean toasters, burners and woodwork; and dust picture frames. The servers argued that the restaurants should not be allowed to use the tip-credit rate for the time they spent performing these functions because they are unrelated to tipped tasks. The Seventh Circuit disagreed. Continue Reading

Here’s a Tip for You, Jack – Fifth Circuit Upholds Ruling on Restaurant Credit Card Offset

Life is filled with risky decisions. Should you take that new job? Should you put in an offer on that house that is just out of your price range? Should you really eat that last piece of cake when you’ve already had two? Companies make big gambles, too. For example, should Lionsgate really invest millions in a sequel to Now You See Me when nary a soul is clamoring for one?

In the wage and hour world, there are few risks more hazardous than the tip credit system. For the unfamiliar, the basic rule is that tips belong to employees, not the employer. Under the Fair Labor Standards Act (“FLSA”), employers may pay tipped employees less than the minimum wage, as long as the employees receive enough in tips to make up the difference. Easy, right? As the saying goes when cooking pasta: Step 1 – Measure the amount of pasta you need; Step 2 – Wrong.

The tip credit system is fraught with potential problems for employers. For example, if an employee does not receive sufficient tips to make up the difference between his direct wage and minimum wage, the employer must make up the difference. Or, when a tipped employee is required to contribute her tips to a tip pool that includes individuals who do not customarily receive tips, the employee is owed all the tips she submitted to the pool and the full minimum wage. Continue Reading

Court Grants Summary Judgment for Employer in California Class Action Vacation Pay Case

Underlying claim premised on PowerPoint slide invalid

Most California employers know that California treats vacation pay largely as a vested benefit that cannot ordinarily be “forfeited.” In common parlance, the state prohibits “use it or lose it” policies. To prevent employees from accruing, or claiming to have accrued, large amounts of vacation time, most California employers have a policy that states that employees cease to accrue time once they have hit a set maximum. This neatly avoids the “forfeiture” problem because the employees simply stop accruing time and forfeit nothing.

Like many national employers, IBM had such a policy that was specifically directed to California and was different from the policy that applied in other states. Despite having such a policy, the company found itself a defendant in the Northern District of California in a class action contending that it, in fact, was applying a “use it or lose it” policy in that state. Reznik v. International Business Machines, Inc., Case No. 15-cv-02419-YGR (June 7, 2016). Continue Reading

Sixth Circuit Rejects Class Action Settlement With Key Documents Under Seal

All’s not fair in secretive class-action settlements.

If class actions are the exception (see Wal-Mart Stores, Inc. v. Dukes), then class-action settlements are a reflection of that exception. Specifically, the secrecy that might otherwise accompany dispute resolution is usually not permitted in class-action settlement, whether pursuant to Rule 23 or under the Fair Labor Standards Act (FLSA).

With that policy in mind, the Sixth Circuit sent back for a do-over a $30 million class-action settlement on Tuesday, June 7, 2016, chastising the district court for allowing several key documents to be filed under seal, unavailable for class members to review. Those sealed documents in Shane Group, Inc., et al. v. Blue Cross Blue Shield of Michigan, Nos. 15-1544/1551/1552, included class certification briefing and the named plaintiffs’ expert report that purported to detail the scope of antitrust damage suffered by three million to seven million putative class members. The price-fixing case alleged that private individuals and corporations were damaged by a rate-setting scheme orchestrated by Blue Cross’ efforts to expand its footprint in Michigan’s health-insurance market. After the complaint alleged some $13.7 billion in damages, and the expert report determined approximately $118 million in damages, the parties reached a class-wide settlement of $30 million. But because the unnamed class members couldn’t review any of the most relevant documents, the unanimous panel vacated the order approving the settlement and remanded it “for an open and vigorous examination of the settlement’s fairness to the class.” Continue Reading

Eighth Circuit Stays the Course in the Cellular Sales of Missouri Opinion, Rejecting the NLRB’s Arguments Against Class Waivers

Following in the wake of an earlier opinion, the Eighth Circuit rebutted the National Labor Relations Board’s (“Board”) arguments that by requiring employees to enter into arbitration agreements with a class and collective action waiver, it violated the National Labor Relations Act (“NLRA”). This comes only a week after the Seventh Circuit ruled in favor of the Board’s position on essentially the same issue. See Lewis v. Epic Systems Corp., which we recently discussed here.

In Cellular Sales of Missouri, LLC v. National Labor Relations Board, No. 15-1620 (June 2, 2016), the Eighth Circuit drew upon Owen v. Bristol Care, Inc., 702 F.3d 1050 (8th Cir. 2013), to reject a Board decision premised on the conclusion that the company violated Section 8(a)(1) of the NLRA by requiring its employees to enter into an arbitration agreement that waived class or collective actions arising from employment disputes. Continue Reading

LexBlog