California Courts Narrowly Construe Concepcion

Nine months now have passed since the U.S. Supreme Court’s landmark decision in AT&T Mobility LLC v. Concepcion (2011) 131 S.Ct. 1740, 179 L.Ed.2d 742. Concepcion held that section 2 of the Federal Arbitration Act (“FAA”) preempts California’s so-called “Discover Bank rule,” under which certain class arbitration waivers in consumer contracts were unenforceable as unconscionable. Since the decision, California courts have grappled with the scope of Concepcion’s holding. Several decisions considering trial court orders denying arbitration based on the unconscionability of a class action waiver have affirmed those decisions on other grounds, and thus avoided addressing the Concepcion issue. 

Those decisions that have squarely addressed Concepcion have interpreted it narrowly. Not a single California appellate case decided since Concepcion has involved an application of Concepcion’s holding to find that an arbitration provision containing a class action waiver was valid and enforceable. Meanwhile, more than one federal district court has now held that an arbitration agreement with a class action waiver was enforceable under Concepcion. (See Blau v. AT&T Mobility (N.D. Cal. Jan. 3, 2012) No. C 11–00541 CRB, 2012 WL 10546; Estrella v. Freedom Financial (N.D. Cal. July 5, 2011) No. C 09–03156 SI, 2011 WL 2633643.)

Several recent cases have declined to address a trial court’s finding that a class arbitration waiver was unenforceable, and thus avoided the question of the scope of Concepcion. In Sanchez v. Valencia Holding Co., LLC  (2011) --- Cal.Rptr.3d ---, 11 Cal. Daily Op. Serv. 14, the Second District instead found that the entire arbitration provision in a form automotive retail installment contract was “permeated by unconscionability and [thus] unenforceable.” Applying the analysis set forth in Armendariz v. Foundation Health Psychcare Services, Inc. (2000) 24 Cal.4th 83, the court found that four clauses in the arbitration provision were unconscionable, including clauses permitting an appeal only from an award exceeding $100,000 or that included injunctive relief, requiring the appealing party to pay appeal costs subject to an apportionment of those costs by the arbitrators, and exempting repossession from arbitration while requiring that requests for injunctive relief be arbitrated. The court found that the provisions “ha[d] the effect of placing an unduly oppressive burden on the buyer.” Thus the appellate court affirmed the trial court’s denial of the motion to compel arbitration, but on grounds that did not directly implicate the holding of Concepcion. Nonetheless, the court did not analyze whether its unconscionability findings constituted applications of “defenses that apply only to arbitration or that derive their meaning from the fact that an agreement to arbitrate is at issue,” which Concepcion states are impermissible under the FAA.

A recent Fourth District case similarly avoided the applicability of Concepcion to a trial court’s order denying a petition to compel arbitration on the ground that the class arbitration waiver was unconscionable. In Roberts v. El Cajon Motors, Inc. (2011) 200 Cal.App.4th 832, the appellate court instead affirmed the trial court’s ruling on the ground that the defendant had waived its right to arbitration by waiting five months to notify the plaintiff of its intent to arbitrate and by other actions.  

Some early commenters on the Concepcion decision wondered whether Armendariz would fully survive in its aftermath. But California courts are continuing to apply the unconscionability analysis set forth in Armendariz, which they appear to unanimously conclude has not been affected by the decision in Concepcion.  (See Buzenes v. Nuvell Financial Services, et al. (Cal.Ct.App. Jan. 25, 2012) No. B221870, 2012 WL 208051 [affirming trial court’s pre-Concepcion finding that automotive retail installment agreement’s arbitration provision was unconscionable as a whole, and rejecting argument that Concepcion altered outcome]; Moran v. Superior Court (Cal. Ct. App. Nov. 16, 2011) No. F061801, 2011 WL 5560178 [denying petition for writ of mandate after trial court granted motion to compel arbitration, and noting that Concepcion did not invalidate Armendariz]; Mission Viejo Emergency Med. Assoc. v. Beta Healthcare Group, et al. (Cal.Ct.App. Jun. 29, 2011) 197 Cal.App.4th 1146 [finding that arbitration provision in malpractice insurance contract was not unconscionable, and reversing trial court order denying motion to compel arbitration]; Macintosh v. Powered, Inc. (Cal.Ct.App. June 8, 2011) No. A129063, 2011 WL 2237938 [finding that unconscionable unilateral provision in employment arbitration agreement was severable, and reversing trial court order denying motion to compel arbitration]. 

Several decisions have issued in the employment law realm, where Concepcion’s application is arguably unclear. Most notably, last July, the Second Appellate District held that Concepcion does not apply to waivers of arbitration of another kind of representative action, those brought under California’s Private Attorney General Act under the Labor Code, or PAGA. (See Brown v. Ralph’s Grocery Company (2011) 197 Cal.App.4th 489, as modified (Jul. 20, 2011), rehearing denied (Jul. 29, 2011), review denied (Oct. 19, 2011).) While the court stated that Concepcion “does not apply” to such waivers, it based its decision not on Concepcion’s analysis but on an analysis of the public policy arguments in favor of private attorney general actions under the PAGA. The court distinguished PAGA actions from class actions on the grounds that “an employee suing under the PAGA ‘does so as the proxy or agent of the state’s labor law enforcement agencies,’” and “the relief [sought] is in large part ‘for the benefit of the general public rather than the party bringing the action.’” (Recoveries of civil penalties in PAGA actions are apportioned 75% to the Labor and Workforce Development Agency for Enforcement of Labor Laws and Education, and 25% to the aggrieved employees.) The court also noted that PAGA actions do not require certification formalities as class actions do, and found that many of the concerns about class arbitration articulated in Concepcion are thus inapplicable to PAGA actions. Nonetheless, the court did not squarely address section 2 of the FAA, which states that arbitration agreements are “valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” 

The U.S. Supreme Court may well view the Brown court’s finding that California public policy provides sufficient grounds to invalidate a provision in a valid arbitration agreement as outside of the authority granted by the FAA, and at odds with Concepcion. Certainly, this idea conflicts with Justice Thomas’s reading of section 2 as stated in his concurrence: “[Section 2] require[s] enforcement of an agreement to arbitrate unless a party successfully asserts a defense concerning the formation of the agreement to arbitrate, such as fraud, duress, or mutual mistake. [Citation] Contract defenses unrelated to the making of the agreement—such as public policy—could not be the basis for declining to enforce an arbitration clause.”  Some indication of the high court’s view of the scope of Concepcion may be found in its recent order granting certiorari in Sonic-Calabasas A, Inc. v. Moreno and remanding the case to the California Supreme Court for further consideration in light of Concepcion. In Sonic-Calabasas, the California Supreme Court held unconscionable an arbitration provision in an employment contract that waived the right to a Berman hearing. This at least implies, if not clearly indicates, that the high court considers its decision in Concepcion to extend beyond the context of class action waivers in consumer contracts. A petition for certiorari was filed in Brown on January 13, 2012.

At least three federal district courts have pointedly disagreed with Brown’s limited interpretation of Concepcion and holding with respect to PAGA, and declined to apply it. (Quevado v. Macy’s, Inc. (C.D. Cal. Oct. 31, 2011) No. CV 09-01522 GAF (MANx), 2011 WL 6961598 at pp. *3-*4; Nelson v. AT & T Mobility, LLC (N.D.Cal. Aug. 18, 2011) No. C10—4802, 2011 WL 3651153 at p. *4; Grabowski v. Robinson (S.D.Cal. Sept. 19, 2011) No. 10cv1658, 2011 WL 4353998 at pp. *18-*20.) However, one federal district court has agreed with its reasoning and applied it to deny a motion to compel arbitration of PAGA claims. (Plows v. Rockwell Collins, Inc. (C.D. Cal. 2011) --- F.Supp.2d ---, 2011 WL 2011 WL 3501872.)

A recent First District case relying, in part, on Brown, in turn explicitly rejected the reasoning of the three federal district court cases, and thus implicitly rejected the proposition that a Concepcion analysis is applicable to a PAGA claims analysis in the arbitration context.   In Reyes v. Macy’s Inc. (Dec. 21, 2011) --- Cal.Rptr.3d ----, 2011 WL 6416432, the First District found that Macy’s could not appeal from the trial court’s order granting its motion to compel arbitration of the plaintiff’s individual claims but denying its motion to dismiss the plaintiff’s class allegations. The trial court had not compelled arbitration of the plaintiff’s PAGA claims, and had instead ordered them stayed along with the class claims. The First District rejected Macy’s argument that that they were appealing from the trial court’s denial of the part of their motion seeking to compel arbitration of the PAGA claims. Citing Brown and Arias v. Superior Court, 46 Cal.4th 969 (2009), the court reasoned that PAGA claims cannot be and are not brought as individual claims, and thus Reyes’s PAGA claim was not within the scope of the “individual claims” of which Macy’s sought to compel arbitration in its trial court motion.

Thedecision in Brown was also notable in that it confronted the trial court’s decision that the class action waiver was unconscionable and unenforceable under Gentry v. Superior Court (2007) 42 Cal.4th 443, 64 Cal.Rptr.3d 773, 165 P.3d 556 (Gentry ), which addresses class arbitration waivers in employment actions. Because the court found that the plaintiff had not submitted sufficient evidence to meet her evidentiary burden under Gentry, it did not reach the issue of whether the Gentry rule was preempted by the FAA under Concepcion.  

Three unpublished decisions from the Second District, which decided Brown, similarly have avoided confronting the Gentry issue. In Collins v. Contemporary Services Corp. (Cal.Ct. App. Aug. 18, 2011) No. B227951, 2011 WL 3630516, the court did state, however, that on remand either the trial court or the arbitrator would be required to determine the continuing viability of Gentry in light of Concepcion, which the appellate court made clear had addressed a consumer contract rather than an employment contract.

And in both Lewis v. 24 Hour Fitness USA, Inc. and Lawler v. 24 Hour Fitness USA, Inc., the Second District found that the respective plaintiffs had not presented sufficient evidence of substantive unconscionability to support the trial court’s rulings that the class arbitration waivers were unenforceable under Gentry. Both decisions resulted in the reversal of the trial courts’ orders denying 24 Hour Fitness’s motions to compel arbitration. While both decisions mention Concepcion, neither acknowledges any potential conflict between that decision and Gentry.

While the federal district courts in California have embraced Concepcion, California state courts appear to desire to avoid the application of Concepcion to arbitration provisions in both consumer and employment contracts. Some initial commenters on the Concepcion decision noted that it appeared to abrogate the Armendariz analysis at least to some extent, but state courts are still applying Armendariz, and may in some cases do so very broadly in order to invalidate arbitration clauses without implicating Concepcion. The state courts seem to be carving employment law cases out of the reach of Concepcion altogether, and it would not be surprising if some courts begin to apply Brown’s PAGA arguments in other contexts where possible. The fate of Gentry remains to be seen, although one federal district court decision has concluded that it remains the law in California. (See Plows v. Rockwell Collins, Inc. supra.) It will be interesting to see whether the U.S. Supreme Court decides to clarify any of these issues by granting certiorari in Brown or a future case.

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