Tuesday, January 20, 2015

FYI: Cal App Ct Enforces Arbitration Clause, Confirms that FAA Preempts State Laws that Limit Arbitration

The Court of Appeal of the State of California, Fourth Appellate District, recently reversed a trial court’s refusal to compel arbitration of a borrower’s injunctive claims under the unfair competition law, the false advertising law, and the consumer legal remedies act. 

The Fourth District confirmed that state laws limiting the enforcement of arbitration clauses are preempted by the Federal Arbitration Act (the “FAA”) following the U.S. Supreme Court’s ruling in AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011). 

A copy of this opinion is available at: http://www.courts.ca.gov/opinions/documents/G049838.PDF

As you may recall, Congress passed the FAA “to overrule the judiciary’s longstanding refusal to enforce agreements to arbitrate,” and place such agreements “upon the same footing as other contracts.”  Volt Info. Sciences v. Leland Stanford Jr. U., 489 U.S. 468, 474 (1989) (internal citations omitted).  Toward that end, the FAA declares that a written agreement to arbitrate in any contract involving interstate commerce or a maritime transaction “shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” 9 U.S.C. § 2.

The borrower opened a credit card account with the creditor and purchased the creditor’s credit protector plan.  Under its credit protector plan, the creditor defers or credits certain amounts on the borrower’s credit card account when one or more qualifying events occur, such as long-term disability, unemployment, divorce, military service, and hospitalization. 

The operative credit card agreement when the borrower opened her account did not include an arbitration provision. The creditor, however, later sent the borrower a “Notice of Change in Terms Regarding Binding Arbitration” that amended the agreement to add an arbitration provision.

In 2011, the borrower filed a putative class action based on the creditor’s marketing of the credit protector plan and the manner in which the creditor administered the borrower’s claim under the plan when she lost her job.  The operative complaint alleges claims against the creditor for (1) violation of the unfair competition law (the “UCL”); (2) violation of the false advertising law (the “FAL”); (3) violation of the consumer legal remedies act (the “CLRA”); and (4) improper sale of insurance (Ins. Code, § 1758.9).  The borrower demanded restitution, monetary and punitive damages, attorney fees and costs, and injunctive relief enjoining the creditor from continuing to engage in its allegedly illegal and deceptive practices.

The creditor filed a petition to compel the borrower to arbitrate her claims on an individual basis as required by the credit protector plan’s arbitration provision.  The trial court granted the petition in part and denied it in part.  Specifically, the trial court severed and stayed the claims for injunctive relief under the UCL, FAL, and CLRA, and ordered the borrower to arbitrate all her other claims, including claims for restitution and damages under the UCL, FAL, CLRA, and Insurance Code.  Despite finding the credit protector plan’s arbitration provision applied to all of the borrower’s claims, the trial court refused to compel arbitration of the injunctive relief claims based on the California Supreme Court’s Broughton-Cruz rule.

As you may be aware, the Broughton-Cruz rule categorically prohibits arbitration of all injunctive relief claims under the UCL, FAL, and CLRA that are brought for the public’s benefit.

In Broughton, the California Supreme Court determined that CLRA claims for injunctive relief were not arbitrable because the California Legislature never intended to allow arbitration of such claims.  The California Supreme Court based its conclusion on an “inherent conflict” between arbitration and the underlying purpose of the CLRA’s injunctive relief remedy.  Broughton v. Cigna Healthplans, 21 Cal. 4th 1066, 1082 (1999). 

The California Supreme Court found this inherent conflict arose from two factors.  First, injunctive relief under the CLRA was for the benefit of the general public rather than the individual plaintiff who brought the action.  And, “[s]econd, the judicial forum has significant institutional advantages over arbitration in administering a public injunctive remedy, which as a consequence will likely lead to the diminution or frustration of the public benefit if the remedy is entrusted to arbitrators.”  Id.

In reaching its decision, the California Supreme Court relied on earlier United States Supreme Court cases holding that statutory claims are subject to arbitration unless arbitration would prevent the effective vindication of the statutory rights at issue.  Those cases explained that a statutory claim is not arbitrable when the text of the statute creating the claim, the statute’s legislative history, or an inherent conflict between arbitration and the statute’s purpose demonstrate Congress did not intend the claim to be arbitrated. Id., 1075.

The Broughton court acknowledged this exception to the general rule of arbitrability only had been applied to federal statutory rights—not state statutory rights—but nonetheless applied it to the CLRA’s injunctive relief provision because “it would be perverse to extend the [federal] policy [of enforcing arbitration agreements] so far as to preclude states from passing legislation the purposes of which make it  incompatible with arbitration, or to compel states to permit the vitiation through arbitration of the substantive rights afforded by such legislation.” Id., 1083.

In Cruz, the California Supreme Court subsequently extended Broughton rule to injunctive relief claims under the UCL and FAL.  Cruz v. PacifiCare Health Systems, Inc., 30 Cal.4th  303, 307 (2003).

In determining the Broughton-Cruz rule’s continuing vitality, the Fourth District noted that the U.S. Supreme Court’s decision in AT&T Mobility had dramatically broadened the FAA’s preemptive scope.  In AT&T Mobility, the U.S. Supreme Court explained, “When state law prohibits outright the arbitration of a particular type of claim, the analysis is straightforward: The conflicting rule is displaced by the FAA.”  AT&T Mobility, supra, 131 S.Ct. at 1747.

Following the U.S. Supreme Court’s decision in AT&T Mobility, the Ninth Circuit Court of Appeals found that the Broughton-Cruz rule was preempted by the FAA.  The Ninth Circuit overturned the two lower court decisions reaching the opposition conclusion. Ferguson v. Corinthian Colleges, Inc. 733 F.3d 928, 934-937 (9th Cir. 2013); Lombardi v. DirecTV, Inc. 546 Fed.Appx. 715, 716 (9th Cir. 2013).  In Ferguson, the Ninth Circuit explained the effective vindication exception is “reserved for claims brought under federal statutes.”  Ferguson, supra, 733 F.3d at 936.

The Fourth District agreed with the Ninth Circuit and determined that the Broughton-Cruz rule is no longer valid in light of the U.S. Supreme Court’s decision in AT&T Mobility.  The Fourth District reversed the trial court and held that the FAA required that all of the borrower’s claims be arbitrated.

In so ruling, the Fourth District distinguished the California Supreme Court’s recent decision in Iskanian v. CLS Transportation Los Angeles, LLC, 59 Cal.4th 348 (2014).  In Iskanian, the California Supreme Court held that claims under Labor Code Private Attorneys General Act (the “PAGA”) were not arbitrable notwithstanding the FAA.

In Iskanian, the California Supreme Court distinguished an employee’s class action to recover unpaid wages from an employee’s representative action to recover civil penalties under the PAGA.  The California Supreme Court noted that the PAGA was enacted “to allow aggrieved employees, acting as private attorneys general, to recover civil penalties for Labor Code violations, with the understanding that labor law enforcement agencies were to retain primacy over private enforcement efforts.”  Id., 379.

Before an aggrieved employee may file a representative PAGA action, he or she must give written notice of the alleged Labor Code violations to both the employer and the Labor and Workforce Development Agency.  The employee may not file the action unless the agency declines to investigate, declines to issue a citation after investigating, or fails to initiate and complete its investigation within the time periods the Labor Code specifies.  (Lab. Code, § 2699.3; Iskanian, supra, 59 Cal.4th at p. 380.)  The employee brings the action as a “‘proxy or agent of the state’s labor enforcement agencies,’” and those agencies are “always the real part[ies] in interest in the suit.”  (Id., 380, 382.)

The California Supreme Court found that “[b]ecause an aggrieved employee’s action under the [PAGA] functions as a substitute for an action brought by the government itself, a judgment in that action binds all those, including nonparty aggrieved employees, who would be bound by a judgment in an action brought by the government.”  Id., 381.

Therefore, the California Supreme Court concluded that “a PAGA claim lies outside the FAA’s coverage because it is not a dispute between an employer and an employee arising out of their contractual relationship.  It is a dispute between an employer and the state.”  Id., 386-87.

The Fourth District concluded that “[a]lthough a plaintiff in both a PAGA representative action an action seeking injunctive relief under the UCL, FAL, and CLRA generally acts as a private attorney general, the PAGA representative action is fundamentally different than the injunctive relief action under the other statutes.

Accordingly, the Appellate Court reversed the trial court’s order denying the creditor’s motion to compel arbitration, and remanded for the trial court to order all claims to arbitration.

Eric Tsai
McGinnis Wutscher Beiramee LLP
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