Arbitration update

Tips for drafting enforceable arbitration agreements with California employees

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In 2000, the California Supreme Court set forth the standards of unconscionability applicable to invalidate mandatory arbitration agreements in the employment context in Armendariz v. Foundation Health Psychcare Services, Inc. These standards included the following elements of “essential fairness” required to vindicate the employee’s statutory rights: (1) a neutral arbitrator; (2) adequate discovery; (3) all types of relief otherwise available in court; (4) a written arbitration award that permits limited judicial review; and (5) the employer’s payment of the arbitrator’s fees and costs, except a minimal filing fee paid by the employee.

In the past years, litigation of arbitration provisions has boomed. In 2011, the United States Supreme Court decided AT&T Mobility LLC v. Concepcion, finding that the Federal Arbitration Act preempted California’s Discover Bank case rule prohibiting class action waivers in arbitration agreements. However, the enforceability of class action waivers has since been challenged on several occasions.

State of the law on the enforceability of class action waivers in CA employment arbitration agreements

Three years after Concepcion, the California Supreme Court, in Iskanian v. CLS Transportation Los Angeles, upheld the enforceability of class action waivers in employment arbitration agreements, but carved out an exception for actions brought under the Private Attorney General Act, which allows employees to bring Labor Code claims on behalf of themselves and other similarly aggrieved individuals. Iskanian, supra, (2014) 59 Cal. 4th 348. The arbitration agreement at issue in Iskanian (1) prohibited class and representative actions from being brought in arbitration, (2) provided for arbitration of only individual claims, and not claims that represented the interests of others, and (3) stated that the parties agreed not to “assert class action or representative action claims against the other in arbitration or otherwise.” Id. at 360 (emphasis added). Accordingly, the holding of Iskanian appeared to be limited to complete waivers of PAGA claims, i.e., clauses that barred an employee from bringing such claim in any forum, and not merely the agreement to arbitrate such claims. Iskanian also appeared to limit PAGA waivers as void against public policy when the waiver was made before a dispute arose, leaving open the possibility of post-dispute waivers. See id. at 383 (“waivers freely made after a dispute has arisen are not necessarily contrary to public policy….But it is contrary to public policy for an employment agreement to eliminate this choice altogether by requiring employees to waive the right to bring a PAGA action before any dispute arises.”)

Iskanian’s outcome, nevertheless, took out steam from the power of class action waivers because plaintiffs could add a PAGA claim to their other employment disputes so that even if the employee’s dispute was compelled to individual arbitration, the PAGA claim would be waiting for the employer in court, forcing the employer to fight consecutive and separate battles. The Ninth Circuit adopted Iskanian’s reasoning in Sakkab v. Luxottica Retail North America, Inc.

While Iskanian validated class action waivers in pre-dispute arbitration agreements, it left several unanswered questions: 1) can PAGA claims ever be compelled to arbitration; 2) can a representative PAGA action on behalf of the state nonetheless be brought on an individual basis; and 3) are post-dispute PAGA waivers enforceable?

Several creative arguments put forth to try to separate the representative PAGA claim and arbitrate some “individual” aspect of it, were struck down in Williams v. Superior Court (2015) 237 Cal. App. 4th 642. In Williams, the employer argued that the plaintiff in a PAGA case should be forced to arbitrate his individual Labor Code claim before being able to bring his PAGA claims in court. However, the Court held that PAGA claims could not be divided into arbitrable individual claims and non-arbitrable representative claims. Accordingly, with a class arbitration waiver, the employee could not be compelled to “submit any portion of his representative PAGA claim to arbitration.” Id. at 649. The Williams Court also rejected the argument that the representative action waiver in that case fell under an exception for voluntary post-dispute waivers identified in Iskanian on the basis that there was no evidence of any dispute between the parties over Labor Code violations prior to the filing of the action. Moreover, even if it was such a waiver, it would be limited to claims arising from Labor Code violations occurring prior to the signing of the agreement, whereas plaintiff’s claims extended “to the present.” Id. at 648-49. Williams calls into question the applicability of post-dispute arbitration agreements to wage claims, including PAGA, which seek ongoing damages.

Split between federal and california authority regarding whether PAGA claims are arbitrable, even absent a class waiver

When an arbitration agreement includes a class action and class arbitration waiver, and an arbitrator is prevented from awarding relief for nonparties or deciding collective actions, PAGA claims have been found to be inarbitrable by virtue of being collective actions. However, a split between Federal and California authority has emerged as to whether PAGA claims can be arbitrated at all, even in the absence of a class waiver.

In March 2017, the Ninth Circuit ruled, in two unpublished decisions, that Iskanian and Sakkab did not prevent an employee from bringing a representative PAGA claim in arbitration, they merely prohibited an outright waiver of such PAGA claims. Wulfe v. Valero Refining Co. California and Valdez v. Terminix International Company, et al.

California courts disagreed. While the California Court of Appeals expressly refused to opine that Iskanian prohibited arbitration of all PAGA claims, it did find, in Betancourt v. Prudential Overall Supply, that a PAGA claim was not subject to arbitration on the basis of a pre-dispute arbitration agreement. However, the Court provided no guidance on whether the PAGA claim could be subject to arbitration on the basis on a post-dispute agreement, stating, “[h]ypothetically, a PAGA plaintiff might consent to arbitration after the filing of a complaint. We provide no advice on whether such a procedure would be proper.” Tanguilig v. Bloomingdale’s, Inc. and Hernandez v. Ross Stores, Inc. were also similarly decided by the California Court of Appeals. On one hand, Iskanian expressly left open the possibility of individual PAGA claims by refusing to decide “whether or not an individual claim is permissible under the PAGA”; but on the other hand, the language of Iskanian casts doubt on the viability of individual PAGA claims because Iskanian considered such claims to be toothless and therefore, frustrating PAGA's punitive and deterrent objectives. Iskanian, supra, 59 Cal. 4th at 384.

Circuit split regarding class action waivers to be resolved by the SCOTUS

The U.S. Supreme Court has consolidated three cases to resolve the issue of whether arbitration agreements that waive class actions and class arbitrations are enforceable under the FAA, or if, instead, such waivers violate the collective-bargaining provision of the National Labor Relations Act. This decision should resolve the current split between the Fifth, Second, and Eighth and the Seventh and Ninth Circuits – the Fifth Circuit, like the California Supreme Court in Iskanian, held that such waivers are enforceable under the FAA (National Labor Relations Board v. Murphy Oil USA, Inc.), whereas the Seventh and Ninth Circuits found such waivers to impermissibly prevent employees from engaging in concerted activity as provided for by the NLRA (Ernst & Young LLP v. Morris and Epic Systems Corp. v. Lewis). As Petitioners Ersnt & Young LLP, et al.’s brief was recently filed on June 9, 2017, a decision is expected by the end of this year. Most recently, in National Labor Relations Board v. Alternative Entertainment, Inc., the Sixth Circuit joined the Seventh and Ninth Circuits in upholding the NLRB’s decision that barring an employee from pursuing class action or collective claims violates the NLRA, further solidifying the Circuit split.

Who decides the issue of arbitrability—a court or arbitrator?

In the wake of the 2016 California Supreme Court decision, Sandquist v. Lebo Automotive, Inc., it became clear that waiving class actions and class arbitrations from an arbitration agreement was going to be a tricky business. The Sandquist Court held that absent an express class arbitration waiver, who decides if a valid arbitration agreement allows class arbitration—an arbitrator or judge—depends on the agreement and is a matter of contract interpretation. This decision was in stark contrast to all recent federal appellate decisions, which require a court to decide whether an agreement allows class arbitration, unless the parties unmistakably agreed otherwise.

The consequence of not having a clear class action and arbitration waiver may mean that employers are forced to have arbitrators decide the availability of class arbitration. This presents two major downsides: 1) the increased cost, and 2) the limited right to appeal an arbitrator’s decision. Even assuming an arbitrator reaches the conclusion that class arbitration is not permitted by the agreement; the employer loses time and money having to bring a separate motion before an arbitrator, instead of having the issue decided principally and efficiently in its Petition to Compel Arbitration filed with the court. The kicker is that California law requires the employer to pay for arbitration, and because an arbitrator’s fees can rack up quickly, obtaining this ruling can itself be a costly endeavor.

Enforceability of electronically-signed arbitration agreements

Another important consideration for employers is the use of electronic document management systems, allowing an efficient manner and process through which to disseminate their policies and retain employee records. Yet even this seemingly beneficial tool can present problems in the realm of employee arbitration, if challenged by the employee as inauthentic by asserting that he or she never executed the arbitration agreement, in order to avoid arbitration.

The California Court of Appeal set out standards and best practices related to authenticating electronic signatures of employees in two recent cases, Ruiz v. Moss Brothers Auto Group and Espejo v. Southern California Permanente Medical Group. To authenticate the employee’s signature, when that issue is disputed, the employer must be able to unequivocally prove that the employee, and only the employee, could be the individual who signed the agreement. To do so, the Company’s declarant must be able to show, via policies and practices, including adequate electronic signature consent forms, familiarity with the back-end processes of log-in creation and security, and effective methods of recording the IP address, date, time and user name and password, that the employee was the only one who had access to the electronic arbitration agreement.

What’s on the horizon for employment-related arbitration?

Recently, Congressional Democrats introduced a proposed law, the Arbitration Fairness Act of 2017, which, if enacted, would amend the FAA by adding a new chapter invalidating pre-dispute arbitration agreements of employment claims. While the bill is unlikely to become law, it illustrates the continued attack on pre-dispute arbitration agreements.

What to watch out for when drafting arbitration agreements—is there any way to be safe?

  • Per Iskanian, employers can continue to include class action and class arbitration waivers in pre-dispute arbitration agreements with employees. However, under Sandquist, if the agreement is unclear or does not expressly waive class arbitrations, then the question of the availability of class arbitration may rest in the hands of an arbitrator as well, negating the cost-effectiveness of including such language in the first place.
  • While this issue has not yet been conclusively decided, one way to overcome the attack on pre-dispute PAGA waivers is to draft an arbitration agreement expressly waiving PAGA claims, but allowing employees seven (7) days from the day that a dispute arises (i.e., the date a complaint is made) to rescind the PAGA waiver by written notice; failure to do so would be treated as a post-dispute agreement to waive PAGA claims.
  • Employers should familiarize themselves with the back-end processes and security protocols of their document management system before proceeding with the use of electronically-signed arbitration agreements. Best practices include: 1) creating a unique user name and password for each employee, tied to the employee’s email address, to which a confirmation email is sent when an account is created; 2) having employees sign a voluntary electronic signature consent agreement; 3) advising the employee in writing not to sign or click “I agree” to anything they do not understand or have not read, and to instead contact a supervisor for questions; 4) having the employee acknowledge by signed writing that s/he will not share their account information with others and will keep it secure; 5) recording on the back-end and printing on the arbitration agreement, the date, time, and IP address of the devise used to access and sign the agreement; and 6) working with your document management system provider to ensure that there is a method by which to track if and when the aforementioned practices are being followed. Employers should also “practice” setting up and completing an arbitration agreement as if they were an employee or applicant, in order to ensure the process is clear and compliant. This information can then be provided to counsel to create a sample or template declaration to be used in litigation, in the event the e-signature is challenged as inauthentic. This step should be completed before implementing the electronic signature, so that counsel can advise about the adequacy of the process.

Final thoughts

The recent circuit split, and split between state and Federal authority, has also left the arbitrability of PAGA claims in flux, making it difficult to predict how such claims will be decided and leaving employers at the mercy of the jurisdiction they fall under. Another important question remains, do employers want to arbitrate PAGA claims anyway? Even if PAGA claims can be arbitrated, and even if they can only be arbitrated based on a post-dispute agreement, the practical challenge remains: how would courts address the rights of “similarly aggrieved” employees who did not agree to arbitration? There appears to be no simple solution to the PAGA problem and employers are encouraged to discuss their individual needs and concerns with qualified counsel to draft arbitration provisions best suited to their needs and the current law.