Category: Arbitration Issues

By Gerald L. Maatman, Jr., Rebecca S. Bjork, and Eden E. Anderson

Duane Morris Takeaway: In 5-Star General Store, et al. v. American Express Co., 2024 U.S. Dist. LEXIS 217246 (D.R.I. Dec. 2, 2024), Judge Mary McElroy of the U.S. District Court for the District Court of Rhode Island held that the defendants could not move to compel arbitration on the issue of whether it was required to pay filing fees to the American Arbitration Association. This ruling presents an unusual twist to arbitration issues typically resolved by federal courts and is a cautionary warning for companies.

Background

The 5-Star General Store case is an antitrust action brought by merchants who resolved certain claims with American Express entities in arbitration relating to the acceptance of the defendants’ credit cards for purchases at their stores. After the final order was issued, the defendants refused to pay their share of the filing fees to the American Arbitration Association, which totaled more than $17 million. The AAA administratively closed the case and the plaintiffs filed a class action relative to those fees. The defendants moved to compel arbitration of the lawsuit’s claims and to strike the plaintiffs’ class allegations.

The Court’s Ruling

The court denied the defendants’ motion to compel arbitration on whether they were required to pay the AAA filing fees and denied the defendants’ motion to strike the plaintiffs’ class allegations. The plaintiffs sought to represent more than 5,000 merchants accepting the defendants’ cards. They argued that the defendants had waived their right to arbitration by failing to pay their share of the arbitration fees because they were in default of the agreement under § 3 of the FAA. First, the court ruled that it, not an arbitrator, had the authority to decide whether the defendants defaulted on the arbitration agreement. Although the court found no controlling case law authority directly on point, it decided to follow the Fifth, Ninth, Tenth and Eleventh Circuits, which have held that courts may decide whether failure to pay arbitration fees constitutes a default under § 3.

Second, the court focused on whether the defendants were in default of the agreement. Relying on Black’s Law Dictionary, which defines “default” as “the omission or failure to perform a legal or contractual duty; esp., the failure to pay a debt when due,” the court found the issue to be clear and concluded that the defendants defaulted on the arbitration agreement. Id. at *12. It also opined that a second arbitration likely would not fare any better than the first and the parties would end up before the court again.

Third, the court rejected the defendants’ claim that the plaintiffs lacked clean hands and therefore should not be allowed to pursue their claims in court. The court reasoned that the plaintiffs did not change their theory of their case sufficiently when filing the instant case to rescind the defendants’ waiver of arbitration. Therefore, the court denied the defendants’ motion to compel arbitration.

Finally, the court also denied the defendants’ motion to strike the plaintiffs’ class allegations because the class was ascertainable by objective means and the class definition was not “fail safe” because it did not contain a legal conclusion that determines eligibility for class membership. Id. at *32-33. The court further considered and rejected the defendants’ claims that the plaintiffs’ requests for injunctive and declaratory relief under Rule 23(b)(2) and 23(c)(4), including certification of issues classes, should be stricken at the pleading stage.

Implications For Companies:

This ruling should serve as a cautionary tale to companies that regularly seek to enforce mandatory arbitration agreements when those agreements require individual arbitration. The defendants’ failure to pay filing fees for thousands of individual arbitrations could lead to a complete waiver of the ability to compel arbitration of the claims in the future.

By Eden E. Anderson, Rebecca S. Bjork, and Gerald L. Maatman, Jr.

Duane Morris Takeaways:  On July 19, 2024, in Lopez v. Aircraft Service International, Inc., Case No. 23-55015 (9th Cir. July 19, 2024), the U.S. Court of Appeals for the Ninth Circuit held that the Federal Arbitration Act’s (FAA) transportation worker exemption applies to an airplane fueling technician.  Even though the technician had no hands-on contacts with goods, the Ninth Circuit held that was not required because fuel is necessary to flying the plane that holds the goods.  The decision is yet another from the Ninth Circuit broadly applying the FAA’s transportation worker exemption, in spite of multiple recent decisions from the U.S. Supreme Court directing narrow that loop hole to mandatory arbitration.  The Lopez decision presents an obstacle for employers seeking to enforce arbitration agreements and class action waivers within the Ninth Circuit, thereby opening the door to arguments that workers who do not even handle goods in the stream of commerce are exempt from arbitration if their work somehow supports the mechanism by which the goods travel.

Case Background

Danny Lopez worked as a fueling technician at Los Angeles International Airport.  He added fuel to airplanes.  After Lopez filed a wage & hour class action against his employer, the employer moved to compel arbitration.  The district court denied the motion, concluding that Lopez was an exempt transportation worker because he was directly involved in the flow of goods in interstate or foreign commerce.  It reasoned that, although Lopez did not handle goods in commerce, he was directly involved in the maintenance of the means by which the goods were transported.  The employer appealed on the grounds that the FAA’s transportation worker exemption is to be narrowly construed and that Lopez did not have any hands-on contact with goods and direct participation in their movement.

The Ninth Circuit’s Decision

The Ninth Circuit began its analysis by mentioning the U.S. Supreme Court’s 2022 decision in Southwest Airlines Co. v. Saxon, 596 U.S. 450 (2022).  In Saxon, the U.S. Supreme Court instructed that the transportation worker exemption is to be narrowly construed and does not turn on the industry within which the work is performed.  Saxon held that airline ramp agents are nonetheless transportation workers exempt from the FAA because, in loading and unloading cargo onto airplanes, ramp agents play a “direct and necessary role in the free flow of goods across borders” and are “actively engaged in the transportation of those goods across via the channels of foreign or interstate commerce.” Id. at 458.  Perceiving that the transportation worker exemption continued to be misapplied by lower courts, the U.S. Supreme Court repeated this same guidance this year in Bissonnette v. Le Page Bakeries Park St., LLC, 601 U.S. 246 (2024), and cautioned that the exemption should not be applied broadly to all workers who load and unload goods as they pass through the stream of interstate commerce.

While mentioning this recent controlling authority, the Ninth Circuit harkened back to its 2020 analysis of the transportation worker exemption in Rittman v. Amazon.com, Inc., 971 F.3d 904 (9th Cir. 2004), deeming it consistent with Saxon and Bissonnette.  In Rittman, the Ninth Circuit held that Amazon delivery drivers making local, last mile deliveries of products from Amazon warehouses to customers’ homes were exempt transportation workers engaged in interstate or foreign commerce.  Applying “the analytical approach applied in Rittman,” the Ninth Circuit  concluded that Lopez was an exempt transportation worker because his fueling of airplanes was a “vital component” of the plane’s ability to fly.  Id. at 12.

Implications Of The Decision

The Lopez decision is yet another from the Ninth Circuit broadly applying the FAA’s transportation worker exemption, in spite of multiple recent decisions from the U.S. Supreme Court directing narrow interpretation.  The Lopez decision opens the door to arguments that workers who do not even handle goods in the stream of commerce are exempt from arbitration if their work somehow supports the mechanism by which the goods travel.

 

By Gerald L. Maatman, Jr., Eden E. Anderson, Rebecca S. Bjork, and Ryan T. Garippo

Duane Morris Takeaways:  On July 1, 2024, in Wallrich, et al. v. Samsung Electronics America, Inc., No. 23-2842, 2024 WL 3249646 (7th Cir. July, 1, 2024), the U.S. Court of Appeals for the Seventh Circuit dealt a major blow to mass arbitrations.  This decision strengthens protections for companies that utilize arbitration agreements as an effective way to limit their potential classwide exposure. The Seventh Circuit’s opinion is required reading for any corporation utilizing arbitration programs.

Case Background

Samsung Electronics, Co. Ltd. and Samsung Electronics America, Inc. (collectively “Samsung”) are two affiliates that manufacture and sell consumer electronics.  “When consumers purchase or use Samsung devices, they automatically agree to Samsung’s terms and conditions.”  Id. at *1.  Like many other companies, Samsung’s terms and conditions contain an arbitration provision, which specifies that “all disputes” between Samsung and its customers shall be arbitrated before the American Arbitration Association (the “AAA”).  Id.

Pursuant to those terms and conditions, “[a] group of 35,651 Illinois consumers . . . filed arbitration demands before the AAA alleging they purchased Samsung devices and that those devices unlawfully collected and stored sensitive biometric data in violation of the Illinois Biometric Information Privacy Act.”  Id. at *2.  This tactic — commonly known as a mass arbitration demand — is often used by plaintiffs’ lawyers as an attempt to secure a quick settlement out of a defendant.  The tactic is sometimes successful because a defendant is often forced to pay expensive arbitration filing fees in order to initiate an arbitration. Often it is more cost effective for the defendant simply to settle the claims altogether rather than pay the filing fees and other expenses of litigation.  For this reason, numerous federal courts have held that while this tactic may be permissible, “mass arbitration interferes with the fundamental attributes of arbitration promoted by the [Federal Arbitration Act].”  See, e.g., Lamour v. Uber Technologies, Inc., No. 16-CV-21449, 2017 WL 878712, at *6 (S.D. Fla. Mar. 1, 2017) (quotations and citations omitted).

Against that backdrop, counsel for the claimants in Wallrich attempted to deploy mass arbitration tactics in this litigation.  After the consumers filed their arbitration demands, “the AAA requested $4,125,000 from Samsung, representing Samsung’s share of the initial administrative filing fees.”  Wallrich, 2024 WL 3249646, at *2.  The only difference between this case and others was that Samsung refused to pay the fees.  The AAA then offered the consumers the opportunity to pay the $4,125,000.  They also declined.  And, as a result, the AAA terminated the proceedings and paved the way for a federal class action lawsuit.

Rather than pursue a class action, the consumers then “filed a Petition to Compel Arbitration” in the U.S. District Court for the Northern District of Illinois.  Id.  They sought, among other things, “an order compelling Samsung to pay its AAA filing fees and to arbitrate the claims.”  Id.  In support of that petition, the consumers submitted their: (1) “arbitration demands before the AAA”; (2) “copies of Samsung’s terms and conditions”; (3) a spreadsheet containing the consumers’ names and addresses; and (4) “the AAA’s determination that the consumers had met the AAA filing requirements.”  Id.  The consumers did not submit any proof, however, that they were actually customers of Samsung.  Id. at *7.  But regardless, the district court still entered an order compelling Samsung to pay the filing fees and to arbitrate the disputes.  Samsung then appealed that decision.

The Seventh Circuit’s Opinion

On appeal, the Seventh Circuit dealt a major blow to mass arbitration tactics and reversed the order of the district court.  The Seventh Circuit held, in a unanimous opinion, that “the consumers effectively needed to present evidence that they were in fact Samsung customers” in order to arbitrate the dispute.  Id. at *6.  It also held that the consumers had not met their burden of doing so.

The Seventh Circuit explained that “arbitration demands are nothing more than allegations, much like a complaint filed in a district court.”  Id.  As such, they are not proof that the consumers were actually Samsung customers.  Similarly, copies of the terms and conditions “do nothing to show that any of the consumers purchased a Samsung device” nor did the AAA’s determination as to the filing requirements make such a showing either.  Id.  And last, the Seventh Circuit explained that the “spreadsheet of only names and addresses likewise fails to show that any of those named were Samsung customers.”  Id.  Accordingly, none of the “evidence” submitted by the consumers was sufficient to address their burden.

Further, the Seventh Circuit noted that the “consumers could have submitted almost anything to meet their burden of proving the existence of an arbitration agreement.  For example, they could have submitted receipts, order numbers, or confirmation numbers from their purchases of Samsung devices.  Or even more directly, they could have submitted declarations attesting to the allegations in their arbitration demands.  They did not.”  Id. at *7.  The major difference, however, was that all 35,651 consumers would have needed to submit such proof.  In the absence of such evidence in the record, the Seventh Circuit was left with no choice but to reverse the district court.

The Seventh Circuit concluded that a motion to compel arbitration is akin to a motion for summary judgment and, therefore, “does not allow second chances.”  Id.  “The consumers had the opportunity to present their evidence, and they failed to do so.”  Id.  Consequently, the mass arbitration tactics on display here seem to have been permanently halted.

Implications For Companies

The importance of Wallrich, et al. v. Samsung Electronics America, Inc. cannot be understated.  Companies faced with mass arbitration threats can now force each and every purported claimant to submit proof that his claim is subject to an arbitration agreement.  If a claimant does not come forward with such proof, the company may be able to refuse to pay any filing fees and avoid mass arbitration altogether.  As a result, corporate counsel can rest easy knowing that it is more difficult for their arbitration agreements to be weaponized against them.

That said, the importance of arbitration agreements also must be emphasized.  The Illinois Biometric Information Privacy Act (“BIPA”) is one of plaintiff’s counsel’s favorite litigation targets.  When utilized on a class-wide basis, claims under the BIPA are defined by its “draconian exposure” and its “job-destroying liability.”  Cothron v. White Castle System, Inc., 216 N.E. 3d 918, 940 (Ill. 2023) (Overstreet, J., dissenting).  However, if each BIPA plaintiff is required to arbitrate his claims individually, a company’s exposure becomes significantly less and, in some circumstances, even de minimis.  Accordingly, corporate counsel should also consider this factor as one of the benefits to implementing an arbitration program as an effective strategy to limit classwide relief.

By Gerald L. Maatman, Jr., Tiffany E. Alberty, Eden E. Anderson and Rebecca S. Bjork

Duane Morris Takeaways:  On June 14, 2024, in Hartsfield, et al. v. Frontier Airlines, Inc., Case No. 23-CV-2093 (D. Colo. June 14, 2024), Magistrate Judge Kathryn A. Starnella for the U.S. District Court for the District of Colorado recommended granting Frontier Airline’s motion to compel arbitration and dismiss the class claims of the Plaintiffs. This decision further illuminates the power of clear and conspicuous terms and conditions that allow for arbitration clauses and class action waivers.

Case Background

Plaintiffs and the putative class representatives (“Plaintiffs”) are individuals who sued Frontier Airlines, Inc. (“FA”) for alleged misrepresentations associated with its GoWild! Pass Program (“Pass Program”), a program that allowed participants to book unlimited number of airline flights for a specific period of time. When signing up for the Pass Program, Plaintiffs had to click “Join Now” button, thereby confirming that they agreed to the Terms & Conditions (“T&C”). When clicking “Join Now” button, the T&C was hyperlinked above, which opened another window to the actual T&C. The T&C was presented multiple times throughout the enrollment process, and even after purchase through a confirmation email, which expressly stated that the participant in the Pass Program is subject to the T&C. Id. at 2-3.

The T&C contained an arbitration clause that clearly outlined any Pass Program dispute would be subject to arbitration and governed by Colorado law. The T&C also contained a class action waiver.

For these reasons, FA moved to compel arbitration under the T&C and dismiss the class claims. Plaintiffs claimed that the arbitration clause was invalid because they never assented to the T&C, and that FA did not provide a conspicuous notice of T&C to which they agreed, thereby making it unconscionable and unenforceable.

The Court’s Opinion

Under the Federal Arbitration Act, (“FAA”), the Court noted that it “must rigorously enforce arbitration agreements according to their terms.” Id. at  4 (citing Am. Express Co. v. Italian Colors Rest., 570 U.S. 228, 230 (2013)). The Court also opined that it must  apply state contract law principles to determine validity and enforceability. Id.

Plaintiffs argued that no contract existed between the parties, because the T&C and its arbitration clause were “obscure” and failed to prove a “reasonably conspicuous notice.” Id. 5. The Court disagreed. It recognized that Plaintiffs “merely had to click on a single bold and underlined link” that would directly open the T&C which included the arbitration clause. The Court, highlighted that the link was offered multiple times to Plaintiffs during the sign up process and after purchase. Id. at 5-6.

Plaintiffs also argued that regardless if there was a valid contract, the arbitration agreement was unconscionable and thus unenforceable. The Court used a multi-factor test to determine a contractual provision’s conscionability, including: (1) a standardized agreement executed by parties of unequal bargaining strength, (2) lack of opportunity to read or become familiar with the document before signing it; (3) use of fine print in the portion of the contract containing the provision; (4) absence of evidence that the provision was commercially reasonable or should reasonably have been anticipated; (5) the terms of the contract, including substantive unfairness; (6) the relationship of the parties, including factors of assent, unfair surprise and notice; and (7) and all the circumstances surrounding the formation of the contract, including its commercial setting, purpose and effect. Davis v. M.L.G. Corp., 712 P.2d 985, 991 (Colo. 1986).

Plaintiffs claimed the unconscionability stemmed from unequal bargaining strength, convoluted presentation of the agreement, commercially unreasonable application and as it was substantively unfair. The Court was not persuaded by these arguments, as it found that circumstances here did not support that idea that the arbitration agreement was “snuck in or forced upon an unsuspecting or unsophisticated customer with no options.” Id. at 8 (citing Davis, 712 P.2d at 991). While the Court agreed that there was unequal bargaining strength, it held that FA provided Plaintiffs ample opportunities to read the T&C, which were not in fine print, thus there was no surprise or lack of notice. Finally, the Court found that the dispute fell within the scope of the arbitration agreement because the language was clear as to “any dispute in connection with Member and Frontier.” Id. at 9.

As it applies to the class action status, the T&C explicitly state that any case brought under the Pass Program can only be pursued in an individual capacity and not as a purported class-wide action. Because Plaintiff provided no arguments that the class action waiver was unconscionable, the Court held that the class action waiver bars Plaintiffs’ collective claims.

Implications For Employers

The holding in Hartsfield, et al. v. Frontier Airlines, Inc. highlights the enforceability of an arbitration through clear and conspicuous T&C.

T&C can completely change the landscape where a dispute can be raised, the choice of law, and the existence of any class claims. Giving individuals ample opportunities to review the T&C they are agreeing to is equally important. As such, corporate counsel, therefore, should take note any T&C, where modifications can or should be made to ensure enforceability of specific clauses like an arbitration agreement and class action waiver.

By Eden E. Anderson, Rebecca S. Bjork, and Gerald L. Maatman, Jr.

Duane Morris Takeaways:  On June 10, 2024, the Ninth Circuit issued its en banc opinion in Olson, et al. v. State of California, et al., Case No. 21-55757, 2024 WL 2887392 (9th Cir. June 10, 2024).  The en banc panel affirmed the dismissal of the Plaintiffs’ lawsuit challenging the constitutionality of A.B. 5, which mandates application of the “ABC test” for independent contractor classification to workers in certain industries.  The Ninth Circuit found no equal protection violation in applying the “ABC test” to certain gig workers, yet applying the easier-to-satisfy “Borello” test to other gig workers. 

California employers in industries subject to A.B. 5 and its more rigorous “ABC test” for independent contractor classification should take heed of the Olson ruling. 

Case Background

Postmates, an application-based goods delivery platform, Uber, and two individual workers for those companies sued the State of California and Attorney General of California seeking declaratory and injunctive relief based on the allegation that A.B. 5 violates the Equal Protection Clauses, the Due Process Clauses, and the Contract Clauses of the United States and California Constitutions.  They sought a preliminary injunction to prevent enforcement of A.B. 5.

Enacted in 2018, A.B. 5 codified and expanded upon the California Supreme Court’s holding in Dynamex Operations W., Inc. v. Superior Court, 416 P.3d 1 (Cal. 2018), which held that the “ABC test” applies in determining the proper classification of workers as independent contractors or employees under California wage orders.  Under A.B. 5, subject to specified exemptions, the “ABC test” applies beyond the wage orders to other labor and employment legislation, including workers’ compensation, unemployment insurance, sick and family leave, and disability insurance.

The “ABC test” is, as its name suggests, is comprised of three parts, with the burden being on the hiring entity to show, A: the worker is free from the control and direction of the hirer, B: the worker performs work outside the usual course of the hiring entity’s business, and C: the worker is customarily engaged in an independently established trade, occupation or business of the same nature as the work performed for the hiring entity.  This test is more challenging to meet that the traditional “Borello” test that was applied prior to A.B. 5’s enactment, which considers a larger number of factors, with the focus being the hiring entity’s right to control the manner and means of the work.

One statutory exemption from A.B. 5’s coverage applies to “referral agencies,” i.e., businesses that provide clients with referrals to service providers.  However, A.B. 2257, enacted in 2019, modified this exemption to carve-out referral agencies, like Uber and Postmates, that provide delivery, courier, or transportation services.  Consequently, categories of referral agencies are treated differently under the law, with referral agencies like Postmates and Uber subject to the “ABC test,” and referral agencies that provide other services, for example, Wag!, a dogwalking service, and TaskRabbit, which provides on-demand help with daily tasks, subject to the easier-to-meet “Borello” test.  It was that differential treatment that Plaintiffs alleged was unconstitutional.

The district court denied Plaintiffs’ motion for preliminary injunctive relief, concluding that A.B. 5 was rationally related to a legitimate state interest.  While Plaintiff’s’ appeal of that ruling was pending, California voters approved Proposition 22, a ballot initiative that classifies rideshare and deliver drivers as independent contractors, notwithstanding A.B. 5.  Thereafter, the district court dismissed the lawsuit, and Plaintiffs’ appealed that ruling too.

A three-judge panel of the Ninth Circuit reversed, in part, concluding that the district court erred by dismissing the Equal Protection claims.  However, the Ninth Circuit then granted rehearing en banc.

The Ninth Circuit’s En Banc Opinion

The Ninth Circuit first noted, as some readers may be wondering, that Proposition 22 did not moot the appeal because Postmates and Uber were still facing a number of claims for alleged violations of A.B. 5 that predated Proposition 22’s passage.

The Ninth Circuit then addressed the Equal Protection claim.  It explained that, even if it were true that the application-based business models of Postmates, Uber, Wag!, and TaskRabbit were similar, there were rational reasons for applying a different worker classification test to workers that provide delivery, courier, or transportation services.  Such disparate treatment was rational because Postmates and Uber were seemingly perceived by the legislature as “substantial contributors” to the ills that A.B. 5 sought to remedy, including worker misclassification and “erosion of the middle class,” and were pioneers in the on-demand-app-based industry whose business models others might try to replicate.  Id. at p. 21-22.  The Ninth Circuit further emphasized that, for a “referral agency” like Wag! or TaskRabbit to be exempt from A.B. 5, it needs to satisfy multiple requirements, so the availability of the referral agency exemption remains “limited.”  Id. at 23.

The Ninth Circuit further opined that, even though A.B. 5 contains many exemptions, it is entirely rational for the ABC test to apply in some contexts, and for the Borello test to apply in others, because the legislature supposedly wanted the ABC test to apply in industries where worker misclassification was historically problematic (and not because certain industries successfully pushed through legislative exemption).

Implications Of The Decision

We anticipate U.S. Supreme Court review will be sought.

The Olson opinion deals a blow to efforts to challenge A.B. 5’s enforcement.  California employers in industries subject to A.B. 5 must satisfy the more rigorous ABC test to establish they have properly classified workers as independent contractors, whereas employers in industries not subject to A.B. 5 bear a lesser burden under the Borello test.  That differential treatment is, in the Ninth Circuit’s view, constitutionally sound.

By Eden E. Anderson, Rebecca S. Bjork, and Gerald L. Maatman, Jr.,

Duane Morris Takeaways:  On May 22, 2024, the California Court of Appeal held in Hernandez v. Sohnen Enterprises, Inc., 2024 WL 2313710 (Cal. App. May 22, 2024), that the Federal Arbitration Act (“FAA”) preempts the California Arbitration Act’s provisions that impose forfeiture of the right to arbitration for late payment of arbitration fees.  Although employers should continue to closely monitor and fully adhere to arbitration fee payment deadlines, the Hernandez decision recognizes that mistakes can occur and should not result in the overly harsh penalty of forfeiture of the arbitral forum.  The decision creates a split of authority within the California Courts of Appeal that may ultimately need to be resolved by the California Supreme Court.

Case Background

After Hernandez initially filed various claims against her employer in court, the parties stipulated to move the claims into arbitration and to stay the court case.  The applicable arbitration agreement provided that it was governed by the FAA and that the Federal Rules of Civil Procedure (“FRCP”) would apply in arbitration.  After Hernandez’s demand was filed in arbitration, JAMS requested payment from the employer of its share of the filing fees.  The employer paid those fees one week past the 30-day statutory deadline of Section 1281.97 of the California Code of Civil Procedure (“Section 1281.97”).  Hernandez then filed a motion to withdraw from arbitration and to lift the stay of the court case.

The trial court granted the motion. It concluded that the employer’s late payment of arbitration fees was a material breach of the arbitration agreement.  The court also imposed monetary sanctions against the employer.  The employer appealed on the basis that the arbitration agreement was governed by the FAA and that the FAA preempted Section 1281.97.

The Court Of Appeal’s Decision

The Court of Appeal reversed.  It held that, because the parties agreed that the FAA and FRCP would apply to the arbitration agreement and in arbitration, the procedures of the California Arbitration Act, including Section 1281.97’s 30-day arbitration fee payment deadline, did not apply.  Additionally, the Court of Appeal held that, even if Section 1281.97 applied, it was preempted by the FAA.

Under the FAA and its “equal treatment” principle, arbitration agreements must be treated the same as any other contract and can only be invalidated based on generally applicable contract defenses.  The Court of Appeal held that Section 1281.97 violated this equal treatment principle because it mandates a finding of material breach (and resulting waiver of the right to arbitration for late payment of arbitration fees) that would not apply generally to all contracts.  The Court of Appeal noted that, ordinarily, a party to a contract can argue substantial compliance, but Section 1281.97 precludes such an argument because it mandates strict adherence to fee payment deadlines.  Additionally, the Court of Appeal found that Section 1281.97 frustrates the FAA’s objective of cheaper, more efficient resolution of disputes by increasing the overall cost of litigation and wasting resources already invested in arbitration.

Implications Of The Decision

The Hernandez decision marks the first time the California Court of Appeal has held that Section 1281.97 is preempted by the FAA.  The decision creates a split in authority amongst the California Courts of Appeal.  Other appellate courts in California have concluded that Section 1281.97 promotes the goals of the FAA because, in requiring prompt payment of arbitration fees, arbitrations can proceed without delay.  Employers must continue to closely monitor arbitration fee payment deadlines to ensure timely payment.  However, if a mistake happens, the Hernandez case may, if followed by trial courts, provide relief so long as the applicable arbitration agreement makes clear that the FAA and federal law, and not the California Arbitration Act or California law, govern.

By Eden E. Anderson, Rebecca S. Bjork, and Gerald L. Maatman, Jr.

Duane Morris Takeaways:  On May 23, 2024, the U.S. Supreme Court issued its decision in Coinbase, Inc. v. Suski, Case No. 23-3 (2024).  The Supreme Court held that, where parties have agreed to two contracts — one sending arbitrability disputes to arbitration, and the other sending arbitrability disputes to the courts — a judge (and not an arbitrator) must decide which contract governs.  Thus, if a company rolls out successive contracts containing inconsistent terms regarding the forum for dispute resolution, a court will decide which of the two contracts applies.  Companies with arbitration programs should take heed of the decision, and make sure that the wording of later issued contracts do not impair previously existing contractual rights to compel disputes to arbitration.  

Case Background

Coinbase operates a cryptocurrency exchange platform where users can buy and sell cryptocurrency.  Coinbase offered a sweepstakes that users could enter for a chance to win cryptocurrency.  In connection with the sweepstakes, users filed a class action complaint alleging that the sweepstakes violated various California consumer protection statues.

Citing an arbitration clause in the User Agreement, Coinbase moved to compel arbitration and to dismiss the class claims based on a class action waiver contained therein.  The arbitration clause in the User Agreement included a delegation clause and, per that provision, an arbitrator was to decide whether a given dispute was arbitrable.  The users argued that the court, and not an arbitrator, should decide the arbitrability issue.

In support, the users cited a second contract — the Official Rules — they had agreed to in connection with the sweepstakes.  In contrast to the earlier executed User Agreement, the Official Rules contained a forum selection clause providing that all disputes related to the sweepstakes had to be decided in California courts.  The users also argued that the Official Rules superseded the User Agreement and its arbitration and class action waiver provision.  Coinbase responded that the delegation clause in the User Agreement was meant to govern all agreements moving forward and that the issue of arbitrability should be left in the hands of an arbitrator, and not the court.

The district court denied Coinbase’s motion to compel arbitration and the Ninth Circuit affirmed.  Both reasoned that deciding which contract governed was a question for the court, and not an arbitrator, to answer; that the User Agreement’s arbitration provision conflicted with the forum selection clause in the Official Rules; and that the Official Rules superseded the User Agreement.

The U.S. Supreme Court then granted review to answer the question of who — a judge or an arbitrator — should decide whether a subsequent contract supersedes an earlier arbitration agreement that contains a delegation clause.

The Supreme Court’s Decision

The Supreme Court held that, where parties have agreed to two contracts — one sending arbitrability disputes to arbitration, and the other sending arbitrability disputes to the courts — a court must decide which contract governs.  By contrast, in cases where only one contract is at issue, and that contract contains an arbitration clause with a delegation provision, courts must send all arbitrability disputes to arbitration, absent a successful challenge to the delegation clause.

Thus, the Supreme Court determined that it was correct for the district court (and the Ninth Circuit) to have determined which contract governed the claims concerning the sweepstakes.  Although Coinbase sought to challenge the Ninth Circuit’s ruling that the Official Rules superseded the User Agreement, the Supreme Court declined to consider that issue.

Implications Of The Decision

The Suski decision serves as a cautionary reminder to companies that roll-out successive contracts that bear on the forum for dispute resolution.  A court’s task is to determine what the parties’ agreement was or if a contract was not formed.  If an earlier contract contains an arbitration clause with a delegation provision, but a later contract does not and refers disputes to the courts, it will be up to a judge to decide which contract governs.

Anytime a company issues successive contracts addressing topics such as the forum for disputes, it is important to ensure there is consistency in the forum selected or else the right to arbitration and dismissal of class claims (based on a class action waiver) may be lost.

 

By Eden E. Anderson, Rebecca Bjork, and Gerald L. Maatman, Jr.

Duane Morris Takeaways: On May 16, 2024, the U.S. Supreme Court issued a unanimous decision holding that when a district court determines that the claims in a lawsuit are arbitrable and a party has requested a stay of litigation, the district court does not have discretion to dismiss the lawsuit.  The decision resolves a split amongst the federal circuit courts over whether Section 3 of the Federal Arbitration Act (“FAA”) mandates a stay in such circumstances by use of the word “shall” in that provision.  The Supreme Court reasoned from established canons of statutory interpretation as well as the structure and purpose of the FAA compelled the result in the case. The decision will likely result in a situation where disputes between parties in an arbitral proceeding will more often be brought to the attention of the district court to resolve. 

Case Background

The case arrived at the Supreme Court via the Ninth Circuit which considered in Forrest v. Spizzirri, 62 F.4th 1201 (9th Cir. 2023), whether, under the FAA, a lawsuit should be dismissed or stayed after all the plaintiff’s claims are compelled to arbitration.

The plaintiffs were delivery drivers who sought to maintain wage-and-hour claims against their former employer for allegedly misclassifying them as independent contractors.  Although the plaintiffs agreed their claims were subject to arbitration, they disagreed that their lawsuit should be dismissed and asked the district court to instead stay the case pending arbitration.  According to the plaintiffs, the FAA mandates a stay to protect rights in the existing lawsuit and preserve judicial supervision while an arbitration is ongoing.  The district court disagreed. It dismissed the lawsuit without prejudice, and the Ninth Circuit affirmed.  Although Section 3 of FAA states that the court “shall” stay the trial of an action pending arbitration, the Ninth Circuit held that district courts have discretion to instead dismiss a lawsuit after all claims have been ordered to arbitration.

The U.S. Supreme Court’s Decision

The Supreme Court unanimously reversed the Ninth Circuit and embraced the position the plaintiff delivery drivers took in the district court – that their lawsuit should be stayed and not dismissed pending arbitration.  Justice Sotomayor wrote the opinion for the Supreme Court.

The Opinion is concise, tightly reasoned, and less than six pages long.  The Supreme Court begins its analysis – after describing the parties and how the case arrived on their docket – with a straightforward statement of the conclusion that “[i]n this statutory interpretation case, text, structure, and propose all point to the same conclusion,” which is that “a district court does not have discretion to dismiss a suit on the basis that all the claims are subject to arbitration.”  (Slip Op. at 3.)  Then, the Opinion explores each of those sources of interpretation and explains why they lead to the outcome reached.

The text of the FAA on this issue appears in Section 3, and it states that when any issue in a lawsuit is subject to arbitration, the district court “shall on application of one of the parties stay the trial of the action until such arbitration has been had in accordance with the terms of the agreement, providing the applicant for the stay is not in default in proceeding with such arbitration.”  (Slip Op. at 4.)  The Supreme Court concluded that “shall” is “plain statutory text [that] requires a court to stay the proceeding.”  (Id.)  The Supreme Court noted that the word “shall” also appears “in neighboring sections of the FAA” and it previously found those sections “created a mandatory obligation that left no place for the exercise of discretion by a district court.” (Id.)  The Supreme Court concluded that “The same is true here.”  (Id.)

Moreover, “just as ‘shall’ means ‘shall,’ ‘stay’ means ‘stay,” according to the Court.  (Id.)  Therefore, it rejected the argument of the employer that stopping the parallel in-court proceedings during the arbitration is what matters, and it is equally achieved by an order of dismissal without prejudice.  The Supreme Court noted that in 1910, when Congress passed the FAA, Black’s Law Dictionary defined a “stay” as a temporary suspension of legal proceedings, which is at odds with an outright dismissal.  (Id. at 4-5.)

As for the structure and purpose of the FAA, the Supreme Court found that they also supported interpreting Section 3 as mandating stays in this situation.  The fact that Congress chose to provide an automatic interlocutory appeal of a denial of a motion to compel arbitration in Section 16, but did not do so for grants of motions to compel arbitration supports the conclusion that Congress intended to move arbitrable disputes out of courts and into arbitration as quickly and easily as possible.  (Id. at 5-6.)  But a dismissal triggers the right to an immediate appeal, which Congress clearly sought to avoid in drafting Section 16 of the FAA.

Finally, the Supreme Court explained that stays are preferable to dismissal orders in arbitration cases because they will allow federal courts to maintain jurisdiction to resolve disputes between the parties that may arise more smoothly. (Id.)

Implications Of The Decision

This decision by the U.S. Supreme Court precluding district courts from dismissing suits without prejudice after granting motions to compel arbitration will have the benefit of providing a uniform national standard in this ever important area of the law.  It also may well have the effect the Court seems to desire, e.g., ensuring that arbitrations are able to proceed quickly and smoothly by ensuring the district judge remains in the background to resolve disputes as they arise.  But that same virtue could amount to a vice, in that it may create an incentive for participants in arbitration to attempt to avoid the arbitrator by going to the court.  The following months should provide a hint of whether the Court’s predictions come true.

By Eden E. Anderson, Rebecca S. Bjork, and Gerald L. Maatman, Jr.

Duane Morris Takeaways:  On April 12, 2024, the U.S. Supreme Court issued its decision in Bissonnette v. LePage Bakeries Park St., LLC, Case No. 23-51 (U.S. Apr. 12, 2024), holding that application of the transportation worker exemption in the Federal Arbitration Act (“FAA”) turns upon the work performed by the plaintiff and not the employer’s industry.  The Supreme Court made clear, however, that this work-focused test should not bring within the exemption large swaths of workers who in some manner engage with products in the flow of commerce.  The Supreme Court opined that the worker at issue must play a “direct” and “necessary” role in the free flow of goods across borders.  Id. at 9. For employers with workplace arbitration agreements, the Supreme Court’s ruling is a required read.

Case Background

The defendant in Bissonnette produced and marketed baked goods, with its products made in 19 states and distributed across the country.  The plaintiffs were franchisees who contracted with the defendant to distribute the products in local markets.  The plaintiffs also advertised the products, identified retail buyers, and performed services for those retailers, including stocking and inventory.  When the plaintiffs filed a putative wage and hour class action, the defendant sought to compel arbitration and to dismiss the class claims, citing a contractual arbitration provision with a class action waiver.

The district court granted the motion and the Second Circuit affirmed.  The Second Circuit reasoned that, because the plaintiffs’ work was performed in the baking industry and not the transportation industry, the FAA’s transportation worker exemption did not apply.  The transportation worker exemption provides that the FAA “shall not apply to contracts of employment of seamen, railroad employees, or any other class of worker engaged in interstate commerce.”  9 U.S.C. § 1.

Immediately after that decision, the U.S. Supreme Court issued its decision in Southwest Airlines Co. v. Saxon, 596 U.S. 450 (2022), wherein it held that the test to be employed in assessing application of the transportation worker exemption is based on the work performed by the plaintiff and not the employer’s industry.  Nonetheless, on panel re-hearing, the Second Circuit adhered to its prior decision on the grounds that the transportation worker exemption still did not apply because the defendant’s business was to distribute baked goods into commerce and not transportation services.

The U.S. Supreme Court then granted review.

The Supreme Court’s Decision

As it did in Saxon, the Supreme Court emphasized in Bissonnette that the test for application of the transportation worker exemption focuses on the work performed by the plaintiff and not the employer’s industry.  Addressing the employer’s argument that such a test would make virtually all workers who load or unload goods, such as pet shop employees and grocery store clerks, exempt transportation workers, the Supreme Court disagreed. It determined that the exemption has never been interpreted to apply in such a limitless basis.  The Supreme Court emphasized that, for the exemption to apply, the worker “must at least play a direct and necessary role in the free flow of goods across borders.”  Bissonnette, at 9.  The Supreme Court thus vacated the order compelling arbitration and remanded for further proceedings.

Implications Of The Decision

Seemingly feeling its decision in Saxon was being misapplied, the Supreme Court’s ruling in Bissonnette confirms that the FAA’s transportation worker exemption turns upon the work the plaintiff performs and not on the employer’s industry.  Thus, an employer cannot seek to compel arbitration and avoid application of the transportation worker exemption by arguing that it is not in the transportation industry.  Rather, an employer’s arguments against application of the exemption must focus on the work the plaintiff performs.

By Gerald L. Maatman, Jr., Maria Caceres-Boneau, and Gregory S. Slotnick

Duane Morris Takeaways: On March 6, 2024, Judge Joanna Seybert of the U.S. District Court for the Eastern District of New York in Hernandez v. RNC Industries, LLC, et al., Case No. 2:21-CV-04518 (E.D.N.Y. March 6, 2024), issued an order granting a motion to compel arbitration and held that a plaintiff’s putative class action claims for unpaid overtime wages and other wage-related violations were subject to an enforceable arbitration agreement compelling arbitration of such claims on an individual basis.  The decision comprehensively summarizes the current state of the law concerning motions to compel arbitration in the Second Circuit.  It also provides a timely example of the importance for employers to maintain well-drafted arbitration provisions and related language in employee handbooks and other company policy acknowledgment forms (in both English and workers’ native languages) to effectively limit filed putative class actions down to individual claims. 

Case Background

As summarized in Judge Seybert’s opinion, the Plaintiff brought a putative class action in federal court in New York against his former employer, seeking allegedly unpaid overtime wages under the Fair Labor Standards Act (“FLSA”) and the New York Labor Law (“NYLL”), as well as related NYLL claims for failure to provide required wage notices and wage statements.  Id. at 1-2.  On February 4, 2022, Defendants moved to compel arbitration and stay or dismiss the complaint.  Id. at 2.

As to the relevant background facts, the Court stated that the parties dispute when Plaintiff began working for Defendant – Plaintiff claims the time period was approximately March 2018 through September 2020, while Defendants contend that Plaintiff began working for them in May 2019 based on Plaintiff’s signature on I-9 and pay rate notice forms on May 22, 2019.  Id. at 2.  Plaintiff also executed a “Receipt of Employee Handbook Form” on May 22, 2019, which stated (in both English and Spanish), in relevant part: “I also understand that this handbook contains a mandatory arbitration provision with a class action waiver and that by accepting and/or continuing my at-will employment I agree to the binding arbitration provisions set forth in this handbook.”  Id. at 2-3.  Plaintiff signed and dated his assent to the contract’s terms.  Id. at 3.

The arbitration provision in the Employee Handbook explicitly stated that “[a]ll claims from potential, current or former employees of [Defendant] accruing at any time pursuant to…any claims for monies that may have been owed for back wages, vacation, overtime, prevailing wage or minimum wage claims, including claims under the Fair Labor Standards Act, the New York State Labor Law or similar law… (collectively “Covered Claims”) must be submitted to binding arbitration before the American Arbitration Association”.  Id. at 3-4.  The arbitration provision continued: “No party shall have the right to bring or participate in a class, collective or other representative proceeding concerning any Covered Claim in any forum including any court of law or arbitration.  To be clear all Covered Claims submitted to arbitration must be handled on a singular individual basis.”  Id. at 4.

Plaintiff claimed he was never provided with Defendant’s Employee Handbook and did not know it existed – instead he only recalled signing three documents in May 2019 that Defendant told him were “registration-related OSHA documents.”  Id.  Plaintiff further alleged that no one told him that by signing any of the documents, he would not be able to bring a future lawsuit against Defendant, and that he was unable to understand the documents he signed because he could not speak, read, or write in English.  Id.

The Court’s Decision

The Court began by citing to the Federal Arbitration Act’s standards and mandate that courts “direct the parties to proceed to arbitration on issues to which an arbitration agreement has been signed.”  Id. at 5 (citing Daly v. Citigroup, Inc., 939 F.3d 415, 421 (2d Cir. 2019)).  The Court noted that in order to determine whether to compel arbitration upon the filing of a motion to compel, it must determine: (i) whether the parties agreed to arbitrate; (ii) the scope of the agreement; and (iii) if federal statutory claims are asserted, whether Congress intended those claims to be non-arbitrable.  Id. at 5-6.  The Court further reasoned that as part of its determination, it must draw all inferences in favor of the non-moving party and if there is a disputed issue of material fact, such as the making of an arbitration agreement, the Court shall proceed summarily to the trial thereof.  Id. at 6 (internal citations omitted).  Where a party “categorically and specifically” denies signing an arbitration agreement, that evidence creates an issue of triable fact whether the agreement is enforceable; however, where a party merely states they cannot recall signing the agreement or makes assertions based on speculation or that are conclusory, no genuine issue of material fact exists.  Id. at 6-7 (internal citations omitted).

The Court’s analysis first concluded that the arbitration agreement at-issue in the case was valid.  In response to Plaintiff’s arguments, Defendants asserted that Plaintiff’s signed acknowledgement that he received the Employee Handbook containing a binding arbitration provision was conclusive evidence that he knew the handbook’s contents and assented to them; the arbitration agreement was explicit and contained no temporal limits; and Plaintiff’s claims he was not aware of the agreement’s contents or was misled regarding same had no merit since he received the Receipt of Employee Handbook Form in his native language (Spanish).  Id. at 7-8.

The Court found that Plaintiff did not create a question of material fact as to whether the arbitration agreement was enforceable.  Id. at 8.  In support of its conclusion, the Court cited to the fact that Plaintiff did not deny signing the Receipt of Employee Handbook, which stated (in Spanish): “I also understand that this handbook contains a mandatory arbitration provision with a class action waiver and that by accepting and/or continuing my at-will employment, I agree to the binding arbitration provisions set forth in this handbook”.  Id.  Moreover, the Court noted that none of the “registration documents” Plaintiff signed, and claims he was misled into signing, fit the description of the Receipt of Employee Handbook Form.  Id.

The opinion cited Second Circuit case law holding that where a Plaintiff merely states he cannot recall signing an agreement as opposed to denying he has done so, such declaration generally fails to create a triable issue of fact regarding the enforceability of an arbitration agreement.  Id. at 9 (internal citations omitted).  Here, Plaintiff’s statement that “to his knowledge” he did not sign documents concerning not being able to bring a future lawsuit against Defendants was not an “unequivocal denial” that such a contract was made.  Id.  Moreover, under New York contract law, Plaintiff was deemed to have accepted the arbitration policy by continuing to work after being advised it was his responsibility to read and understand all company policies, including the arbitration policy.  Id. at 10.  According to the opinion, Plaintiff agreed by signing (and not disputing his signature of) the Receipt of Employee Handbook Form that he received and read a copy of the Employee Handbook and also that it is his responsibility to keep himself appraised of any changes to the policy.  Id.  As such, the Court rejected Plaintiff’s argument that his non-receipt of the Employee Handbook somehow invalidates his agreement to arbitrate.

The Court also ruled that under New York law, a party is not excused from failure to read and understand the contents of a document signed by the party, and that the Second Circuit rejects the notion that a language barrier could prevent the enforcement of contractual obligations.  Id. at 11-12 (internal citation omitted).  Moreover, after finding that the parties agreed to arbitrate, the Court confirmed that the arbitration provision covered Plaintiff’s claims under the FLSA and NYLL, all of which are arbitrable.  Id. at 12-13.  The Court granted Defendants’ motion to compel arbitration and stayed the litigation pending the outcome of arbitration.  Id. at 15.

Implications For Businesses

Hernandez serves as timely reminder of just how important a sound arbitration agreement and related company policies and acknowledgement forms can be in the event of a filed class action litigation in court.  Here, the Court pointed to Defendants’ clear and articulable policies in granting a motion to compel arbitration of Plaintiff’s claims on an individual basis and cut down the potential class exposure in its entirety at the outset.  Not only did Defendants maintain an enforceable arbitration agreement, but also it further locked Plaintiff into the agreement by citing to the agreement to arbitrate with language in its Receipt of Employee Handbook Form.  Critically, the Receipt of Employee Handbook Form was provided to the Plaintiff in both English and his native language (Spanish), and he signed and dated it.  In light of these additional defenses, Plaintiff’s failure to recall signing the documents and other claims that no one informed him he would be barred from suing Defendants in the future by signing failed to defeat Defendants’ motion to compel.  Employers in the Second Circuit should use this decision as a roadmap for arbitration agreement and policy best practices.