Category: Arbitration Issues

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.

By Gerald L. Maatman, Jr., Derek S. Franklin, and George J. Schaller

Duane Morris Takeaways: In Coatney, et al. v. Ancestry.com DNA, LLC, No. 22-2813, 2024 U.S. App. LEXIS 3584 (7th Cir. Feb. 15, 2024), the Seventh Circuit affirmed the district court’s denial of Ancestry’s motion to compel arbitration on the grounds that minors were not parties to arbitration agreements entered by their guardians and the Defendant.  Circuit Judge Michael B. Brennan wrote the opinion of the Seventh Circuit panel.

For companies facing class actions under the Illinois Genetic Information Privacy Act (“GIPA”) involving alleged disclosure of confidential genetic information, this ruling is instructive on dispute resolution provisions and how drafting those provisions can dictate who is bound to arbitrate claims.

Case Background

Defendant, Ancestry.com DNA, LLC (“Ancestry”) is a genealogy and consumer genomics company that allows users to create accounts to purchase DNA test kits, which Ancestry collects consumer saliva samples.  Id. at 2.  Ancestry takes these samples, analyzes the genetic information, and then returns genealogical and health information to the purchaser through its website.  Id.  In 2020, Blackstone, Inc. acquired Ancestry.

Only adults may purchase or activate a DNA test kit, and purchasers must agree to Ancestry’s terms and conditions before purchasing and activating a test kit.  Id.  However, minors thirteen to eighteen years old may still use Ancestry’s DNA service as long as a parent or legal guardian purchases and activates the test kit, and sends in the minor’s saliva sample using an account managed by the child’s parent or guardian.  Id.

Between 2016 and 2019, guardians purchased and activated test kits on behalf of the Plaintiffs, who were all minors at the time.  Id. at 2-3.  Each guardian agreed to consent terms (“Terms”) concerning the use of each minor’s DNA test kit.  Id. at 3.  The terms contained a dispute resolution provision binding the parties to arbitration and waiving any class actions.  Id.  However, the Terms did not require Plaintiffs to read them.  Plaintiffs alleged that they did not, and that they also did not create the Ancestry accounts.  Id. at 4.

Plaintiffs, on behalf of themselves and a putative class of similar members, filed suit against Ancestry in Illinois federal court alleging violations of the Illinois GIPA.  Id.  Plaintiffs alleged that, as part of Blackstone’s 2020 acquisition of Ancestry, Ancestry disclosed genetic test results and personal identifying information to Blackstone without obtaining written authorization.  Id. 

Ancestry responded by moving to compel arbitration under the Terms dispute resolution provisions.  Id. at 5.  The district court denied Ancestry’s motion.  First, the district court found that Plaintiffs did not assent to Ancestry’s Terms through their guardians’ accounts or their guardians’ execution of consent forms on Plaintiffs’ behalf.  Id.  Second, the district court determined equitable principles such as the theory of direct benefits estoppel did not bind Plaintiffs, as there were no allegations that Plaintiffs accessed their guardians’ Ancestry accounts or their DNA test results.  Id. 

As a result, Ancestry filed an interlocutory appeal with the Seventh Circuit for review of the district court’s decision.  Id.

The Seventh Circuit’s Decision

The Seventh Circuit affirmed the district court’s decision.  On appeal, Ancestry urged the Seventh Circuit to reverse the district court’s denial of its motion to compel on three grounds, including: (1) Plaintiffs’ guardians assented to the Terms on their behalf; (2) Plaintiffs were “closely related” parties to their guardians (or even third-party beneficiaries), foreseeably bound by the Terms; or (3) as direct beneficiaries of the Terms, Plaintiffs were estopped from avoiding them.  Id. at 6.

At the outset, the Seventh Circuit reasoned that it is a “bedrock principle” that “an arbitration agreement generally cannot bind a non-signatory.”  Id. at 6-7.  The Seventh Circuit also explained that “whether an arbitration agreement is enforceable against a non-party is a question governed by ‘traditional principles of state law.’”  Id. at 7.

First, on Ancestry’s argument that Plaintiffs’ guardians assented to the Terms on Plaintiffs’ behalf, the Seventh Circuit determined that the Terms’ plain and ordinary meaning was unambiguous and found that the only parties to the agreement are the signatory and Ancestry.  Id.  Further, the Seventh Circuit noted that Terms stated they “are personal” to the signatory, who “may not … assign or transfer any … rights and obligations,” established by them.  Id.  The Seventh Circuit also found that the Terms contained no language that the guardians “agreed to them ‘on behalf of their children.”  Id. at 9.

Second, the Seventh Circuit rejected Ancestry’s argument that Plaintiffs may be contractually bound to the Terms “either as closely related parties or third-party beneficiaries.”  Id. at 11.  The Seventh Circuit opined that “[t]he company mounts these arguments from shaky legal ground, as Illinois ‘recognize[s] a strong presumption against conferring contractual benefits on non-contracting third parties.’”  Id.  With respect to Ancestry’s argument that Plaintiffs were bound by the Terms as “closely related” parties to their guardians who signed them, the Seventh Circuit determined that a special relationship in fact and in law between the Plaintiffs and their guardians as that relationship “does not join their identities, as can be the case with parent and subsidiary corporations.”  Id. at 12-14.  The Seventh Circuit similarly concluded that the Terms did not cover Plaintiffs as third-party beneficiaries since the express provisions of Ancestry’s Terms excluded third-party beneficiaries.  Id. at 12.  While the Seventh Circuit found that the Terms that contemplated consent to Ancestry’s processing and analysis of a child’s DNA, no aspect of that consent established that the Terms were for “plaintiffs direct benefit.”  Id. at 16.  In addition, the Terms’ arbitration provision did “not contain language capturing the plaintiffs.”  Id. at 17.  Instead, the provisions’ language indicated that the “signatories intended to bind themselves, but not others to arbitration.”  Id.

Finally, the Seventh Circuit rejected Ancestry’s argument that “[a]s direct beneficiaries of their guardians’ agreement to the Terms, Plaintiffs are estopped from avoid its arbitration provision.”  Id. at 18.  Noting the absence of legal authority supporting Ancestry’s argument, the Seventh Circuit concluded “that Illinois would not embrace direct benefits estoppel to bind plaintiffs here.”  Id. at 19.  The Seventh Circuit also based its conclusion on the absence of any record allegation that “plaintiffs have accessed or used the analyses completed by Ancestry as contemplated by the Terms” coupled with Illinois’ law “disfavoring the binding of non-signatories to arbitration.”  Id. at 25.

Implications For Companies

Companies that are confronted with GIPA class action litigation involving dispute resolution provisions should note the Seventh Circuit’s emphasis in Coatney on the lack of allegations that Plaintiffs read the contractual terms at issue, along with the absence of contractual language capturing or identifying Plaintiffs.

Further, from a practical standpoint, companies should carefully evaluate the language expressed in terms and conditions agreements, including those drafted in dispute resolution provisions, as courts are not inclined to assume non-signatories are bound to agreements when not expressly included.

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

Duane Morris Takeaways: On February 15, 2024, the Judge Harry Leinenweber of the U.S. District Court for the Northern District of Illinois granted a motion to compel arbitration in Hoeg et al. v. Samsung Electronics of America, Inc., Case No. 23-CV-1951 (N.D. Ill. Feb. 15, 2024),  and sent 806 individual privacy claims to arbitration and ordered Samsung to pay $311,000 to cover its share of arbitration filing fees in those matters.  The decision highlights the potential downsides of class action waivers in arbitration agreements, as well as the importance of coupling a class action waiver with a well-crafted mass arbitration provision designed to streamline arbitration proceedings and, hopefully, limit exposure and litigation costs. 

Case Background

Samsung required customers to execute agreements to binding arbitration and those agreements waive the right to pursue class claims.  The arbitration agreements provided that electronic acceptance, opening product packaging, product usage, or product retention amounted to acceptance of the arbitration agreement.

In 2022, 806 customers, all of whom alleged they had purchased and used Samsung products, filed individual arbitration actions against Samsung alleging violations of the Illinois Biometric Privacy Act (“BIPA”).  After Samsung failed to pay $311,000 in arbitration filing fees due in the matters, AAA administratively closed the cases in January 2023.  The plaintiffs then moved to compel arbitration.

The Court’s Decision

The Court granted the motion to compel arbitration and, in doing so, was highly critical of Samsung’s tactics in seeking to stall the prosecution of the claims.  The Court found that the plaintiffs alleged they purchased and used Samsung products, and thereby assented to arbitration.  While Samsung argued those allegations were conclusory and did not show the existence of agreements to arbitrate, the Court noted that Samsung’s approach “flips the evidentiary burden on its head” because, as the party opposing arbitration, it was Samsung’s burden to dispute the existence of an agreement to arbitrate. Id. at 9.

As to its failure to pay the arbitration filing fees, the Court expressed great displeasure with Samsung, noting that its “repeated failure to pay after multiple deadlines, without any showing of hardship, is a classic refusal to pay scheme in violation of Section 4” of the Federal Arbitration Act.  Id. at 15. The Court also highlighted that Samsung’s tactics had delayed plaintiffs’ prosecution of their claims for two years.  The Court further denied Samsung’s request that the matters be stayed so that it could pursue an appeal and ordered Samsung to pay the outstanding arbitration fees.

Implications Of The Decision

The Hoeg decision highlights the potential downsides of class action waivers, which have spurred the plaintiffs’ bar to pursue hundreds or even thousands of individual arbitrations all at once.  The decision also underscores the importance of adding a mass arbitration provision to an arbitration agreement.  Such a provision, if well-crafted, may serve to streamline those proceedings, facilitate resolution, and limit exposure.  Some jurisdictions have enacted laws aimed at punishing a retailer’s or employer’s failure to pay arbitration fees.  For example, in California, if arbitration fees are not timely paid, it results in a material breach of the arbitration agreement and could lead to the imposition of sanctions including “the reasonable expenses, including attorney’s fees and costs, incurred by the employee or consumer as a result of the material breach.”  (Cal. Civil Code § 1281.99.)

By Eden E. Anderson, Gerald L. Maatman, Jr., and Jennifer A. Riley

 

Duane Morris Takeaways: On February 12, 2024, the Ninth Circuit issued its opinion in Johnson v. Lowe’s Home Centers, LLC, No. 22-16486 (9th Cir. Feb. 12, 2024).  It held that federal courts must follow the statutory standing analysis of the California Supreme Court in Adolph v. Uber Technologies, Inc., and not the U.S. Supreme Court’s different interpretation in Viking River Cruises, Inc. v. Moriana.  Additionally, in his concurrence, Judge Kenneth Lee opined that issues decided in individual arbitration of a PAGA claim should not have preclusive effect on the bigger non-individual PAGA claim. 

Case Background

The plaintiff in Johnson alleged PAGA claims against her former employer based on the employer’s alleged violations of the California Labor Code.  Applying all aspects of the U.S. Supreme Court’s decision in Viking River Cruises, Inc. v. Moriana, the district court compelled Johnson’s individual PAGA claims to arbitration and dismissed her non-individual PAGA claims for lack of statutory standing.  While the case was on appeal, the California Supreme Court issued its decision in Adolph v. Uber Technologies, Inc., which held that a PAGA plaintiff retains standing to maintain non-individual PAGA claims even after their individual PAGA claims are compelled to arbitration.

At issue on appeal in Johnson v. Lowe’s Home Centers, LLC was whether the non-individual PAGA claims should have been dismissed.

The Ninth Circuit’s Decision

The Ninth Circuit held that federal courts must follow the statutory standing analysis of the California Supreme Court in Adolph, and not the U.S. Supreme Court’s different interpretation in Viking River.  It thus vacated the ruling dismissing the non-individual PAGA claims and remanded the case to the district court to apply Adolph.

The Johnson decision is of further interest because of the concurring opinion of Judge Kenneth Lee.  His concurrence addressed the next big question in PAGA cases, i.e., the extent to which issues decided by the arbitrator in resolving individual PAGA claims will be binding in court in the litigation of the non-individual PAGA claims.  Judge Lee noted that individual arbitration is often “low-stakes” for companies, who sometimes even send non-lawyers, such as paralegals, to arbitration proceedings because the amount at issue is not worth a lawyer’s higher hourly rates.  However, as Judge Lee noted, if legal conclusions or factual findings in individual arbitration are binding, then companies would have little choice but to bring in the “legal cavalry” and devote substantial resources in individual arbitration, which would undermineg the efficiency of those proceedings, which is the whole “point” of enforcing arbitration agreements according to their terms.  Judge Lee reasoned that there is thus a “lurking tension” between the FAA and the suggestion in Adolph that issue preclusion can apply to the outcome of arbitration of an individual PAGA action.  Judge Lee expressed his view that application of issue preclusion in this context would contravene the FAA.

Implications For Employers

Whether in state or federal court in a PAGA action, the Ninth Circuit made clear that Adolph must be applied.  The concurring opinion in Johnson provides employers facing adverse rulings in individual arbitration with good arguments against the application of issue preclusion in the non-individual PAGA claim proceedings.

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

Duane Morris Takeaways: Last year, the Ninth Circuit held in Chamber of Commerce of the United States v. Bonta, 62 F.4th 473 (9th Cir. 2023), that California Assembly Bill (AB) 51 — a statute that attempted to criminalize employers’ use of mandatory arbitration agreements — was preempted by the Federal Arbitration Act.  In Bonta, the Ninth Circuit affirmed a preliminary injunction prohibiting the State of California from enforcing AB 51.  On January 1, 2024, following remand in the case, the district court entered a permanent injunction that enjoins the State from enforcing the Labor and Government Code sections enacted as part of AB 51, and awarding the plaintiffs, as prevailing parties, $822,496.  The district court’s order brings finality, judgment, and ultimate success to a strong coalition of employer interests who banded together to challenge California’s attempt to criminalize the use of mandatory arbitration agreements. 

Case Background

AB 51, effective January 1, 2020, added Section 432.6 to the California Labor Code and Section 12953 to the California Government Code.  Labor Code Section 432.6 makes it a misdemeanor for employers to require employees or applicants to waive “any right, forum, or procedure for violation of any provision of the California Fair Employment and Housing Act” or the California Labor Code.  Government Code Section 12953 makes it an unlawful employment practice to violate Labor Code Section 432.6.

In December 2019, the U.S. Chamber of Commerce, California Chamber of Commerce, National Retail Federation, California Retailers Association, National Association of Security Companies, Home Care Association of America, and the California Association for Health Services at Home (“Plaintiffs”) filed a complaint against the State of California challenging AB 51 as preempted by the Federal Arbitration Act (FAA).

The district court granted the Plaintiffs’ motion for a preliminary injunction, finding that Plaintiffs were likely to succeed on the merits.  California appealed, and challenged only the district court’s holding that AB 51 was likely to be preempted by the FAA.  A divided panel of the Ninth Circuit initially reversed the district court in a September 2021 opinion but, after a rehearing petition was filed, the Ninth Circuit withdrew its opinion and issued a new opinion, which affirmed the district court’s preliminary injunction order and held that the FAA preempts AB 51.

The District Court’s Issuance Of A Permanent Injunction

After the decision, the case was remanded to the district court and, on January 1, 2024, the district court issued an order permanently enjoining the State of California from enforcing Labor Code Section 432.6 and Government Code Section 12953.  Additionally, the district court awarded the Plaintiffs, as prevailing parties, $822,496 in attorneys’ fees.  The order was obtained via stipulation of the parties whereby they agreed that the Ninth Circuit’s decision in Bonta was dispositive of the legal issues in the case and further agreed to the amount of attorneys’ fees to be paid by the State.

Implications For Employers

The district court’s order brings finality, judgment, and ultimate success to a strong coalition of employer interests who banded together to challenge AB 51.  Employers in California may permissibly use mandatory arbitration agreements.  However, the use of mandatory arbitration agreements potentially can be problematic when it comes to enforcing the agreement.  When an applicant or employee must sign an arbitration agreement as a condition of employment, the agreement is a contract of adhesion that will likely be found to be procedurally unconscionable.  Thus, a court may refuse to enforce a mandatory arbitration agreement if there are also terms in the agreement that are substantively unconscionable and non-severable.

By Gerald L. Maatman, Jr. and Tyler Zmick

Duane Morris Takeaways:  In Ipina v. TCC Wireless, 2023 IL App (1st) 220547-U (Nov. 9, 2023), the First District of the Illinois Appellate Court held that T-Mobile retailer TCC Wireless was barred from enforcing an arbitration clause in the plaintiff’s employment agreement based on TCC’s actions in an earlier-filed privacy class action it settled.  The Court determined that TCC was collaterally estopped from compelling the plaintiff’s claims to arbitration because TCC had unsuccessfully moved to send nearly identical claims to arbitration in the earlier-filed case.  In doing so, the Illinois Appellate Court embraced a broad view of the circumstances in which “offensive” collateral estoppel is warranted in the class action context – that is, when a party may be prohibited from making an argument that was already raised and rejected in an earlier case.

Background

Plaintiff Stephanie Ipina alleged that while employed by Defendant TCC Wireless, she used a fingerprint-based timekeeping device to clock in and out of work.  According to Plaintiff, her use of the timekeeping device resulted in TCC collecting her biometric data.  Plaintiff claimed that TCC did not give her prior notice that it would be collecting her biometric data or obtain her prior written consent, and that TCC disclosed her data to TCC’s “payroll provider” without Plaintiff’s consent.  Based on these allegations, Plaintiff asserted that TCC violated §§ 15(b) and 15(d) of the Illinois Biometric Information Privacy Act (the “BIPA”).

Plaintiff’s complaint also described a prior BIPA class action entitled Garcia v. TCC Wireless, which had been brought against TCC based on the same timekeeping device used by the Plaintiff in Ipina.  In Garcia, TCC responded to the complaint by moving to compel arbitration pursuant to the plaintiff’s employment agreement, which stated that “[a]ny dispute arising out of or relating in any [way] to Employee’s employment with [TCC] . . . shall be resolved by binding arbitration . . . . except for (i) the institution of a civil action seeking equitable relief, or (ii) the institution of a civil action of a summary nature where the relief sought is predicated on there being no dispute with respect to any fact.”  Id. ¶ 7.

The trial court in Garcia denied TCC’s motion to compel because TCC did not dispute that it collected employees’ biometric data without consent, and therefore the plaintiff’s claims were subject to the arbitration clause’s “carve-out” for claims “of a summary nature where no facts are in dispute.”  Id. ¶ 23.  The parties in Garcia later reached a class-wide settlement, after which TCC produced a list of 899 employees to include in the settlement class.  Due to TCC “compil[ing] the class incorrectly,” however, Plaintiff Stephanie Ipina and other TCC employees were omitted from the list of class members eligible to receive payments in connection with the Garcia settlement.

In response to the complaint filed in the Ipina case (on behalf of Plaintiff and other individuals who should not have been omitted from the settlement class in Garcia), TCC moved to compel Plaintiff’s BIPA claims to arbitration based on the same employment agreement provision at issue in Garcia.  In opposing the motion, Plaintiff argued that TCC was collaterally estopped from compelling arbitration based on TCC’s motion to compel arbitration having been denied in the Garcia action.  The trial court granted TCC’s motion, however, reasoning that collateral estoppel did not apply because unlike in Garcia, in the present case TCC denied the factual allegations set forth in the complaint.

The Illinois Appellate Court’s Decision

On appeal, the Illinois Appellate Court reversed the trial court and held that TCC was collaterally estopped from enforcing the arbitration provision in Plaintiff’s employment agreement.

The Court noted that collateral estoppel is an equitable doctrine that “promotes fairness and judicial economy by preventing the relitigation of issues that have already been resolved in earlier actions.”  Id. ¶ 21 (internal quotation marks and citation omitted).  A party seeking to collaterally estop its opponent from raising a particular argument must show that (i)  the current issue is identical to one that was resolved in a prior action; (ii) the court in the previous matter entered a final judgment on the merits; and (iii) the party against whom estoppel is being asserted was a party, or in privity with a party, to the prior litigation.

The Appellate Court summarized TCC’s litigation conduct in Garcia by noting that in that case, TCC did not dispute that it collected employees’ biometric data without consent; in light of that fact, the court in Garcia denied TCC’s motion to compel arbitration because of the arbitration provision’s exception for claims of a summary nature where no facts are in dispute; the court also denied TCC’s motion to reconsider the order denying TCC’s motion to compel arbitration, which denial TCC did not appeal; and the parties subsequently settled the case on a class-wide basis.

Based on these facts, and contrary to the trial court’s order, the Appellate Court ruled that Plaintiff had shown that the collateral estoppel elements were established, and that the trial court erred in not applying the doctrine.

First, the Appellate Court rejected TCC’s attempt to distinguish the present case from Garcia on the basis that unlike Garcia, in this case TCC had denied the allegations in Plaintiff’s complaint.  According to the Appellate Court, this argument was contradicted by the position TCC had taken throughout the litigation, which is that Plaintiff should have been included in the Garcia settlement because TCC collected her biometric data before she signed a consent form.  Because “TCC is bound by these admissions,” the Appellate Court ruled that the issue in the present case was identical to the issue resolved in Garcia because TCC had effectively conceded the plaintiffs’ factual allegations in both cases. Id. ¶ 25.

Second, the Appellate Court found that the trial court in Garcia entered a “final judgment on the merits” when it issued an order granting final settlement approval and dismissing the case with prejudice.  Acknowledging the split in authority as to whether a settlement agreement qualifies as a “final order on the merits,” the Appellate Court sided with those decisions reflecting the proposition that “policy reasons counsel in favor of applying the doctrine of collateral estoppel to interlocutory judgments after settlement and dismissal with prejudice.”  Id. ¶ 28 (citation omitted).  As stated by the Appellate Court, “[c]ollateral estoppel exists to prevent litigants from doing exactly what TCC attempts.  The doctrine’s purpose is to prevent a party from losing an issue on the merits, but then relitigating it before a different judge to procure the desired result.”  Id. ¶ 29.  Thus, the Appellate Court found that Plaintiff satisfied the second element.

Third, the Appellate Court held that the last collateral estoppel element was satisfied because TCC was the defendant in Garcia and was the same party against whom estoppel was being asserted in the present case.  See id. ¶ 30 (“TCC was a party in Garcia, where it had the same incentive to fully litigate the enforcement of the arbitration clause (and in fact did so).”).  However, the Appellate Court also noted that while both parties argued on appeal the issue of Plaintiff’s privity, that was is “irrelevant” because “the privity requirement only applies to the party against whom estoppel is asserted.”  Id.

Implications For Corporations

Ipina is an important reminder that a litigation decision made in one case can have potentially significant consequences for that party in an entirely separate action.  As illustrated in the Ipina case, a party’s position in one matter (e.g., a defendant conceding the truth of certain factual allegations in a complaint) can be used to limit (or entirely foreclose) that party’s ability to raise a defense in another matter – regardless of how strong the defense might be on the merits.

Thus, corporate defendants should always think about the “big picture” when deciding on a course of action to take in defending a lawsuit.  They should consider not only how a defense position may impact that particular litigation, but also how the position could affect separate and seemingly unrelated actions involving the same (or a related) party, whether in cases that are currently pending or that may be filed in the future.

By Gerald L. Maatman, Jr., Rebecca S. Bjork and Derek Franklin

Duane Morris Takeaways: Mass arbitration continues to be a formidable tool for plaintiffs’ attorneys seeking to deal with class action waivers in arbitration agreements. This trend is aptly demonstrated by a new ruling in Wallrich, et al. v. Samsung, Case No. 22-CV-5506 (N.D. Ill. Sept. 12, 2023), where Judge Harry D. Leinenweber of the U.S. District Court for the Northern District of Illinois ordered the defendants – who had been served with just shy of 50,000 arbitration demands – to pay the arbitration fees and submit to arbitrating consumers’ claims that the defendants had committed violations of the Illinois privacy laws.  Those fees had been waived by the arbitration authority, as allowed by a provision in its’ supplemental rules, but the Court sided with the plaintiffs, who had moved to compel arbitration after the fees were waived, and seeking also to require the defendants to pay them.

Case Background

The Named Plaintiffs filed 49,986 arbitration claims with the American Arbitration Association (“AAA”) on September 7, 2022 on behalf of consumers who are users of Samsung mobile devices. Id. at 2, 5.  They alleged that the defendants had unlawfully collected their biometric information in violation of the Illinois Biometric Information Privacy Act.  The user agreement required all disputes be resolved in final, binding arbitration and it prohibited class actions.  Id. at 3.

The agreement also required use of the services of the AAA and explicitly invoked the AAA’s rules, including its supplemental rules relating to arbitration fees.  Id.  On September 27, 2022, Samsung refused to pay its portion of the initial arbitration fees to the AAA because it believed the claimants included deceased individuals and others who did not reside in Illinois.  Id. at 6.  Plaintiffs responded by moving to compel arbitration on October 7, 2022.  Id. at 7.

The Court’s Decision

Judge Leinenweber compelled arbitration of the claims of living, Illinois resident petitioners and ordered the respondents to pay the AAA arbitration fees. He first concluded that the arbitration agreements are valid between Samsung and those who actually are its consumers.  Id. at 21-22.  Second, he noted that as to the petitioners that respondents suspected were either deceased or not Illinois residents, he explained that petitioners’ counsel used Samsung’s own customer list to remove ineligible petitioners.  Id.  Third, he determined that the arbitration agreement left questions of arbitrability to the arbitrator, thereby declining to rule on respondents’ argument that the collective action waiver in the agreement applies to mass arbitrations, which would bar petitioners’ claims with the AAA.  Id. at 25.  Finally he ruled that he had the authority to construe and enforce the AAA’s rules about arbitration fees, and determined that respondents are required to pay approximately $4.13 million in fees.  Id. at 30, 33-34.

Implications For Employers

As corporations who employ large numbers of individuals in their workforces know, agreements to arbitrate claims related to employment-related disputes are common.  They serve the important strategic function of minimizing class action litigation risks.  But corporate counsel also are aware that increasingly, plaintiffs’ attorneys have come to understand that arbitration agreements can be used to create leverage points for their clients.  Mass arbitrations seek to put pressure on respondents to settle claims on behalf of large numbers of people, even though not via the procedural vehicle of filing a class or collective action lawsuit.   As a result, corporate counsel should carefully review arbitration agreement language with an eye towards mitigating the risks of mass arbitrations as well as class actions.

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

Duane Morris Takeaways: On July 17, 2023, the California Supreme Court issued its long-awaited decision in Adolph v. Uber Technologies, Inc., No. S274671 (July 17, 2023), addressing standing requirements under the Private Attorneys General Act of 2004 (“PAGA”).  The Supreme Court held that, once a PAGA plaintiff’s individual claims are compelled to arbitration, the plaintiff retains standing to maintain non-individual, representative PAGA claims in court so long as they are an aggrieved employee.  If the plaintiff loses in arbitration, they are not aggrieved and therefore lack standing.  However, if the plaintiff prevails or settles their individual claims in arbitration, they can then return to court to prosecute their non-individual PAGA claims.  For companies facing PAGA claims, the ruling in Adolph is required reading, as it will usher in a new period of workplace litigation in California.

Case Background

Erik Adolph, an Uber delivery driver, alleged that Uber misclassified him as an independent contractor.  Although Adolph initially sought to maintain a class action, those efforts were thwarted by a class action waiver in his workplace arbitration agreement.  Adolph then amended his complaint to allege PAGA claims.  The trial court denied Uber’s motion to compel arbitration, and the Court of Appeal affirmed on the basis of California’s prior rule, under Iskanian v. CLS Transportation, 59 Cal. 4th 348 (2014), that PAGA claims cannot be split into individual and non-individual parts and that a PAGA claim was non-arbitrable.

Uber filed a Petition for Review and, while it was pending, the U.S. Supreme Court issued its decision in Viking River Cruises, Inc. v. Moriana, 142 S.Ct. 1906 (2022), holding that PAGA claims are divisible and that the Federal Arbitration Act preempted California law insofar as it precluded arbitration of an individual PAGA claim.  The U.S. Supreme Court further opined that, once a PAGA plaintiff’s individual claims are compelled to arbitration, they lose standing to pursue non-individual PAGA claims.  Against this backdrop, the California Supreme Court granted review in Adolph.

The California Supreme Court’s Decision

In a unanimous decision, the California Supreme Court disagreed with Viking River’s interpretation of PAGA standing.  The California Supreme Court held that, so long as an employee alleges they are aggrieved by a violation, they maintain standing under the PAGA.  Thus, even after individual PAGA claims are compelled the arbitration, the plaintiff retains standing to pursue non-individual PAGA claims in court.

As to logistics, the Supreme Court clarified several things.  First, even though individual PAGA claims may be pending in arbitration and non-individual PAGA claims pending in court, the claims all remain one action, and the court action may be stayed pending completion of arbitration.  Second, if the plaintiff loses in arbitration, at that juncture, the plaintiff no longer has standing to maintain non-individual PAGA claims.  Third, if the plaintiff prevails in arbitration or settles their individual claims, they continue to possess standing to return to court to pursue non-individual PAGA claims on behalf of others.

Implications for Employers

In the wake of Adolph, the stakes for employers in individual PAGA arbitrations are high.  Employers facing PAGA claims should conduct an early assessment of the plaintiff’s individual claims and if unmeritorious aggressively defend the matter because a win in arbitration will extinguish the case in court as well.  We also anticipate that PAGA plaintiffs may begin alleging their aggrieved employee status, yet disclaiming any individual relief, in order to bypass arbitration altogether.  It remains to be seen if that pleading strategy will be condoned by California courts.

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

Duane Morris Takeaways: On June 23, 2023, the U.S. Supreme Court issued a 5-4 ruling that is welcome news to parties seeking to enforce arbitration agreements.  In Coinbase, Inc. v. Bielski, No. 22-105 (U.S. June 23, 2023), the Supreme Court decided that district courts must stay all proceedings after denying a motion to compel arbitration once the moving party appeals the denial.  Such appeals are allowed on an interlocutory basis under the Federal Arbitration Act (FAA), but the FAA is silent as to a stay pending appeal.  This ruling is significant because parties seeking to resolve claims in arbitration will no longer be required to litigate whether the district court should stay its consideration of the case until their appeal is decided.  They also will be spared proceeding with discovery and motion practice in the district court while their appeal of the denial of arbitration is pending.  As the majority explained in its opinion, this will further the purposes of arbitration (efficiency, less expense, and less intrusive discovery), save scarce judicial resources, and reduce pressure on defendants to settle.

Case Background

Abraham Bielski brought a class action lawsuit in the U.S. District Court for the Northern District of California against Coinbase, Inc., a company that operates an online platform where users buy and sell cryptocurrencies as well as government-issued currencies.  Slip Op. at 1.  Coinbase’s User Agreement contained a provision requiring binding arbitration of any disputes arising from use of the platform. Id. As a result, Coinbase moved to compel arbitration, but the district court denied its motion.  Id. at 1-2.  Coinbase filed an appeal to the Ninth Circuit under 9 U.S.C. § 16(a), the FAA’s provision that allows interlocutory appeals of denials of such motions.  Id. at 2.  At the same time – as is customary – Coinbase moved the district court to stay proceedings pending the Ninth Circuit’s decision on the arbitrability of the dispute between itself and Bielski.  Id.  The district court denied the motion, so Coinbase had to expend even more resources asking the Ninth Circuit to order a stay of the district court’s proceedings.  That motion, too, was denied, based on Ninth Circuit precedent holding that a denial of a motion to compel arbitration does not automatically stay proceedings.  Id. (citing Britton v. Co-op Banking Group., 916 F.2d 1045, 1412 (9th Cir. 1990).  The U.S. Supreme Court granted certiorari to resolve a split between the circuit courts on the issue, citing Bradford-Scott Data Corp. v. Physician Computer Network, Inc., 128 F.3d 504, 506 (7th Cir. 1997), among other circuit court decisions contrary to the Ninth Circuit’s rule.

The Supreme Court’s Decision

Justice Kavanaugh authored the majority opinion, which was joined by Chief Justice Roberts and Justices Alito, Gorsuch and Barrett.  The question presented was “whether the district court must stay its pre-trial and trial proceedings while the interlocutory appeal is ongoing.”  Slip Op. at 1.  In explaining its answer, which is “yes,” the majority first pointed to the section of the FAA that allows interlocutory appeals where motions to compel arbitration are denied by federal district courts, noting that it is “a rare statutory exception to the usual rule” precluding appeals before final judgment.  Id. at 1, 3.  The Congress did not include any language in § 16(a) of the FAA relating to stays during the interlocutory appeal process.  However, the majority placed the enactment of that section within “a clear background principle prescribed by this Court’s precedents” – namely, that an appeal “divests the district court of its control over those aspects of the case involved in the appeal.”  Id. (citing Griggs v. Provident Consumer Discount Co., 459 U.S. 56, 58 (1982).  Indeed, Justice Kavanaugh traced that principle all the way back to a Supreme Court decision issued in 1883 entitled Hovey v. McDonald, 109 U.S. 150, 157 (1883).

The majority bluntly stated that “[t]he Griggs principle resolves this case.”  Id. at 3.  Relying on “common practice” and common sense, they note that leading treatises on litigation in federal courts consider issuing stays pending interlocutory appeals of denials of arbitration to be “the sounder approach” and desirable.  Id. at 4-5.  The Supreme Court reasoned that it makes sense that “absent an automatic stay of district court proceedings, Congress’s decision in § 16(a) to afford a right to an interlocutory appeal would be largely nullified.”  Id. at 5.

Beyond this reasoning, the majority also noted the purposes of arbitration and explained that automatic stays will preserve those objectives of efficiency, reduced litigation cost, and reduced discovery burdens on the parties.  Id. at 6.  Defendants in class actions in particular are subject to immense pressure to settle cases where arbitration motions are denied, presenting a “potential for coercion . . . where the possibility of colossal liability can lead to what [are] called ‘blackmail settlements.’” Id. at 6.

The majority also noted that allowing a case to proceed simultaneously in district court and the court of appeals leads to a distinct possibility that scarce judicial resources will be wasted if, for example, the parties litigate a dispute in the district court, only for the court of appeals to reverse and order that very same dispute to binding arbitration.  Id.

Implications for Employers

As any employer knows who has been sued by a named plaintiff in a class action despite that plaintiff having signed an arbitration agreement with a class action waiver, the Supreme Court’s decision in Coinbase is a very welcome development.  With potentially thousands of absent class members’ claims at issue, a district court’s denial of an employer’s motion to enforce its arbitration agreement can be an earth-shattering development.  In addition, employers with nationwide operations now have a single, uniform rule that applies to this situation, bringing certainty to the law and one common rule in each and every circuit court.  The Supreme Court’s decision is, therefore, a highly significant development in the law regarding arbitration.