Category: Arbitration Issues

By Eden Anderson and Rebecca Bjork

Duane Morris Takeaway: In Pace, et al. v. Hamilton Cove, Case No. A-0674-22 (N.J. Super. Ct. App. Div. May 18, 2023), the New Jersey Superior Court, Appellate Division, found a class action waiver unenforceable without an explicit arbitration clause in a lease agreement.  The ruling should be a required read for businesses trying to implement an enforceable class action waiver, as it demonstrates why it is necessary to include such a provision in a contract that includes an arbitration clause.

Case Background

Two tenants of a residential apartment complex filed a putative class action against their landlord alleging claims of common law fraud and for violation of New Jersey’s Consumer Fraud Act (CFA).  The tenants alleged that the landlord made false promises concerning the amount of security that would be provided at the complex, which was located in a high crime area. The advertisements for the complex promised that it would have “elevated, 24/7 security.” Id. at 3. Specifically, during a tour of the apartment complex, the plaintiffs were assured that there would be in person security stationed near building entrances day and night.

The plaintiffs contended that despite the promises made by the defendants, the sole security was a front desk greeter who were present only during regular business hours and was often not stationed at the desk at all.  The plaintiffs asserted that they relied upon the representations made by the defendant when selecting and moving into the apartment complex, that defendants engaged in an unconscionable business practice in violation of the CFA, and that tenants overpaid for the apartments because they did not receive the full value promised, constituting an ascertainable loss. Id. The tenants’ lease included a class action waiver, but no mandatory arbitration clause.

The defendants filed a motion to dismiss for failure to state a claim, or in the alternative, to strike the class allegations. The defendants stated that the leases were not contracts of adhesion and that the class action waivers included in the lease agreements were valid and enforceable. The plaintiffs argued the leases were contracts of adhesion, the class action waivers were unconscionable, and the case law supporting the enforceability of class action waivers was inapplicable to this case.

The trial court denied the defendants’ motion. On the defendants’ appeal, the New Jersey Appellate Division affirmed the trial court’s ruling.

The Court’s Ruling

The Appellate Division acknowledged state and federal precedent upholding the enforceability of class action waivers in arbitration agreements, including the U.S. Supreme Court’s decision in AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011).  The Appellate Division stated that an arbitration agreement necessarily involves a waiver of a party’s right to have claims litigated in court, and here, in contrast, there was no agreement to arbitrate contractual disputes. The Appellate Division held, however, that the policies favoring arbitration and encouraging enforcement of arbitration agreements, as expressed in the Federal Arbitration Act and the New Jersey Arbitration Act, are irrelevant when an arbitration agreement is not at issue.

Instead, the Appellate Division determined that New Jersey’s policy favoring class actions applied, and that “there is no societal interest in enforcing a class action waiver in a contract that does not contain a mandatory arbitration provision.” Id. at 15.  Accordingly, the Appellate Division determined that the plaintiffs were not bound to arbitration and were free to litigate their claims in court.

Implications Of The Decision

Any business trying to implement an enforceable class action waiver should include such a provision in a contract that includes an arbitration clause. Had the landlord here included an arbitration clause in its lease, the outcome of the case may have been very different and class litigation avoided.

By Eden Anderson and Rebecca Bjork

Duane Morris Takeaways: The scope of claims that can permissibly be arbitrated under the Federal Arbitration Act (“FAA”) may narrow once again.  Last year saw the enactment of the Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act, which amended the FAA to preclude a pre-dispute agreement to arbitrate claims involving allegations of sexual harassment or sexual assault.  With that amendment, plaintiffs who file claims — either individual claims or putative class action claims — that relate to a sexual harassment or sexual assault dispute may now, at their option, pursue such claims in court and cannot be compelled to submit those claims to arbitration. Now Congress may soon consider that sort on ban for claims involving race discrimination.

Proposed Legislation

Sen. Cory Booker and Rep. Hank Johnson announced plans this week to introduce a bill — the Ending Forced Arbitration of Race Discrimination Act of 2023 — to further amend the FAA to preclude arbitration of race discrimination claims.  While the parameters of the proposed bill are as yet unclear, presumptively it will seek to preclude arbitration of both individual and class action race discrimination claims, and possibly more.

The Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act was initially drafted to cover all claims alleging “sex discrimination disputes,” but was then narrowed to only apply to sexual harassment and sexual assault claims.  If Congress was not willing to ban arbitration of sex discrimination claims, it may not be willing to ban arbitration of race discrimination claims.

Implications For Employers

As states and Congress continue to take steps to limit the use of arbitration, it remains critical for businesses and employers to regularly review their arbitration agreements to ensure compliance with an often-changing landscape of laws.

As the FAA approaches its 100-year anniversary, its impact will be less profound if Congress continues to enact claim-specific carve outs.

By Gerald L. Maatman, Jr. and Jennifer A. Riley

Duane Morris Takeaway: Of all defenses, a defendant’s ability to enforce an arbitration agreement containing a class or collective action waiver may have had the single greatest impact in terms of shifting the pendulum of class action litigation. With its decision in Epic Systems Corp. v. Lewis, et al., 138 S. Ct. 1612 (2018), the U.S. Supreme Court cleared the last hurdle to widespread adoption of such agreements. In response, more companies of all types and sizes updated their onboarding materials, terms of use, and other types of agreements to require that any disputes be resolved in arbitration on an individual basis. To date, companies have enjoyed a high rate of success enforcing those agreements and using them to thwart class actions out of the gate.

Statistically, corporate defendants fared well in asserting the defense. Across various areas of class action litigation, the defense won approximately 68% of motions to compel arbitration (roughly 69 motions granted in 102 cases).

By almost any measure, the arbitration defense had a tumultuous year in 2022. In the courts, chinks in the armor of the defense began to grow. While the U.S. Supreme Court shut down state efforts to evade arbitration of wage and hour claims, as discussed above, it limited application of the FAA to workers who participate in interstate transportation. Perhaps more significantly, on the legislative front, Congress significantly limited the availability of arbitration for cases alleging sexual harassment or sexual assault when it passed the Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act. President Biden signed the Act into law on March 3, 2022.

The Act amends the FAA and provides a plaintiff the discretion to enforce pre-dispute arbitration provisions and class and collective action waivers in cases where he or she alleges “conduct constituting a sexual harassment dispute or a sexual assault dispute” or is “the named representative of a class or in a collective action alleging such conduct.” In other words, whereas the Act does not render such agreements invalid, it allows the party bringing sexual assault or sexual harassment claims to elect to enforce them or avoid them. The Act does not impact agreements entered into after a dispute arises.

The plaintiffs’ bar often alleges other claims along with claims for sexual assault or sexual harassment. Whereas the Act refers to a “case,” it remains to be seen whether courts will attempt to limit a plaintiff’s option to avoid pre-dispute arbitration to sexual assault or sexual harassment claims or will extend such option to all claims at issue in a case. The Act provides that “no pre-dispute arbitration agreement or pre-dispute joint-action waiver shall be valid or enforceable with respect to a case which is filed under Federal, Tribal, or State law and relates to the sexual assault dispute or the sexual harassment dispute.” To date, courts have not issued significant decisions interpreting such language.

Given the impact of the arbitration defense, in 2023, companies may face additional hurdles, on the judicial or the legislative front, as the plaintiffs’ bar continues to look for workarounds. In particular, we expect to see litigation over whether the Act’s use of the word “case” renders the statute applicable to all claims in the case, including claims other than sexual harassment and sexual assault and whether the statute, therefore, will allow for a broader shield to the arbitration defense.

By: Gerald L. Maatman, Jr., Jennifer A. Riley, and Tyler Z. Zmick

Duane Morris Takeaways: In Trio v. Turing Video, Inc., No. 21-CV-4409, 2022 WL 4466050 (N.D. Ill. Sept. 26, 2022), the Court issued yet another plaintiff-friendly decision under the Illinois Biometric Information Privacy Act (“BIPA”), putting businesses on notice that the statute can apply to technology used to screen individuals for purposes of preventing the spread of COVID-19.  The Court denied the three arguments raised in the Defendant’s motion to dismiss, and held that: (1) personal jurisdiction existed because the Defendant sent “biometric” devices to multiple Illinois-based customers; (2) the Plaintiff’s claims were not preempted by the Labor Management Relations Act; and (3) Plaintiff adequately alleged claims under BIPA. The ruling in Trio ought to be required reading for corporate counsel dealing with privacy class action litigation.

Background

Plaintiff alleged that Defendant Turing Video, Inc. sold “products integrated with artificial intelligence,” including the Turing Shield, a “kiosk that allows Turing’s customers to screen their employees for COVID-19.”  See Mem. Op. & Order at 2.  According to Plaintiff, the Turing Shield works by screening a user’s temperature through the device’s camera, thereby using its “artificial intelligence algorithm” to recognize the user based on his or her facial geometry, and detecting whether the user is wearing a protective mask.  Plaintiff also alleged that data collected through the Turing Shield was transmitted to third parties who host that data.

Plaintiff previously worked in Illinois for New Albertson’s, Inc. d/b/a Jewel-Osco, where she used the Turing Shield at the start of each workday as part of the store’s COVID-19 screening process.  Based on her use of the device, Plaintiff claimed that Turing violated the BIPA by: (i) failing to inform her that the Turing Shield would collect her biometric data, and (ii) disseminating her biometric data to third parties without her consent.

Turing moved to dismiss on three grounds, including: (1) that the Court lacked personal jurisdiction; (2) Plaintiff’s claims were preempted by the Labor Management Relations Act; and (3) Plaintiff failed to state a claim upon which relief could be granted.

The Court’s Decision

The Court denied Turing’s motion to dismiss on all three grounds.

Personal Jurisdiction

Turing argued that the Court lacked specific personal jurisdiction because Turing was a non-forum (i.e., California) resident that sold the devices used by Plaintiff to a non-party, Jewel-Osco (also a non-forum resident), and Jewel-Osco brought the devices into Illinois without Turing’s involvement.

The Court held that the evidence – which showed Turing had over 30 Illinois-based customers and had shipped Turing Shields into Illinois – established that Turing had the requisite minimum contacts with Illinois to establish personal jurisdiction.

Labor Management Relations Act Preemption

The Court next addressed Turing’s argument that Plaintiff’s claims were preempted by Section 301 of the Labor Management Relations Act (the “LMRA”), which establishes federal jurisdiction over “suits for violations of contracts between an employer and a labor organization representing employees in an industry affecting commerce.”  Courts typically interpret Section 301 as preempting state law claims that are “substantially dependent on analysis of a collective-bargaining agreement.”  Id. at 18.

Here, Plaintiff was represented by a union and subject to a collective bargaining agreement (“CBA”) while employed at Jewel-Osco.  Based on those facts, Turing claimed that resolving Plaintiff’s BIPA claims for alleged privacy invasions sustained through her work required the Court to interpret the CBA.  The Court disagreed. It held that Plaintiff’s claims were not preempted because the Court could resolve the claims without interpreting the CBA.

The Court recognized that the Seventh Circuit has held that federal law preempts BIPA claims brought by certain union-represented employees against their employers.  See Miller v. Southwest Airlines Co., 926 F.3d 898, 903 (7th Cir. 2019); Fernandez v. Kerry, Inc., 14 F.4th 644, 646-47 (7th Cir. 2021).  The Court distinguished those cases because Turing was not a party to the CBA, and “Turing’s obligations under BIPA stand wholly independent of whether Plaintiff’s union may have consented to Jewel-Osco . . . collecting and disseminating her biometric data.  In other words, resolution of the state law BIPA claims would not require this Court to interpret any [CBA], and instead depend upon the entirely unrelated question of whether Turing provided Plaintiff with the necessary disclosures and obtained from her the required written release before it collected and disseminated her biometric information.”  Mem. Op. & Order at 20-21.

Extraterritoriality & PREP Act Immunity

Finally, the Court rejected Turing’s arguments that: (i) Plaintiff failed to allege that Turing’s relevant conduct occurred in Illinois, and (ii) the Public Readiness and Emergency Preparedness Act (the “PREP Act”) immunized Turing from BIPA liability.  Regarding extraterritoriality, the Court held that Plaintiff sufficiently alleged that Turing’s conduct occurred “primarily and substantially” in Illinois, thereby satisfying the “extraterritoriality doctrine.”  Id. at 25. Regarding PREP Act immunity, the Court noted that the PREP Act provides immunity from liability relating to the “use of a covered countermeasure” upon the declaration of a public health emergency by the Secretary of the Department of Health and Human Services.  The Court held that PREP Act immunity did not apply because the Food and Drug Administration had not approved the Turing Shield, meaning the device did not satisfy the definition of a “covered countermeasure.” Id. at 28.

Conclusion

Trio can be added to the list of recent plaintiff-friendly BIPA decisions, as it reinforces the growing consensus that multiple private entities can be subject to liability under the statute for what may seem like a single “violation.”

The case also raises a potential hurdle to asserting jurisdictional defenses to BIPA claims based on its holding that personal jurisdiction can exist even where the defendant does not send into Illinois the specific device used to collect a plaintiff’s “biometric” data.  Other courts, however, appear more willing to dismiss BIPA claims on personal jurisdiction grounds.  See, e.g., Gutierrez v. Wemagine.AI LLP, Case No. 21-CV-5702, ECF No. 32, Mem. Op. & Order at 1 (N.D. Ill. Oct. 7, 2022) (available here) (dismissing BIPA case for lack of personal jurisdiction despite plaintiffs’ allegation that defendant’s app “derives substantial revenue from nearly 5,000 Illinois-based users”).

 

By: Gerald L. Maatman, Jr., Jennifer A. Riley, and Rebecca S. Bjork 

Duane Morris Takeaways: On October 3, 2022, the Supreme Court of the United States granted certiorari, reversed, and remanded a case seeking review of a motion to compel arbitration in a California Private Attorney General Act (“PAGA”) labor law case entitled Dolgen California, LLC v. Galarsa, No. 21-1444 (U.S. Order List, Oct. 3, 2022).  Granting Dollar General’s specific request, the Supreme Court ordered the California Court of Appeal to reconsider its decision affirming a trial court’s denial of the company’s motion to compel arbitration.  That court held that the waiver of representative actions in the plaintiff’s arbitration agreement was unenforceable under California law.  This is only one of several cases pending in California courts involving arbitration agreements that waive an employee’s right to bring a representative action under the PAGA that are being revisited in light of the U.S. Supreme Court’s ruling in Viking River Cruises, Inc. v Moriana (No. 20-1573, June 15, 2022).  As a result, employers will soon have a better understanding of how PAGA representative action waivers will be interpreted in California within the now-controlling framework of the Federal Arbitration Act.

The Holding In Viking River Cruises, Inc. v. Moriana

Earlier this year, on June 15, 2022, the U.S. Supreme Court issued its long-awaited ruling in Viking River Cruises, Inc. v. Moriana. Companies with California-based workforces watched the case closely because it represented an opportunity to clarify the extent to which a court-made rule established by the California Supreme Court back in 2014 could co-exist with the Federal Arbitration Act (“FAA”).  The FAA has long been found to favor the enforcement of arbitration agreements, including waivers of class and other representative claims.  But the California Supreme Court’s decision made it impossible for class waivers to be enforceable under state law as a result of its decision in Iskanian v. CLS Transp. Los Angeles, LLC, 59 Cal. 4th 348, 387-88 (2014) (holding that a “PAGA claim lies outside the [FAA]’s coverage because it is not a dispute between an employer and an employee arising out of their contractual relationship,” but is instead “a dispute between an employer and the state”).

In a complex and lengthy opinion, the Supreme Court held in Viking River that “the FAA preempts the rule of Iskanian insofar as it precludes division of PAGA actions into individual and non-individual claims through an agreement to arbitrate.”  (Slip Op. at 20.)  “This prohibition on contractual division of PAGA actions into constituent claims unduly circumscribes the freedom of parties to determine ‘the issues subject to arbitration’ and ‘the rules by which they will arbitrate,’ and does so in a way that violates the fundamental principle that ‘arbitration is a matter of consent[.]’”  (Id. at 18 (citations omitted).)  In short, representative PAGA claims can now be subject to waiver in an arbitration agreement because “state law cannot condition the enforceability of an arbitration agreement on the availability of a procedural mechanism that would permit a party to expand the scope of the arbitration by introducing claims that the parties did not jointly agree to arbitrate.”  (Id.)

Dollar General’s Petition For Certiorari

Dollar General filed a petition for certiorari while Viking River was pending, expressly asking the Supreme Court to hold the petition pending a decision in that case.  It requested that once Viking River was decided, the Supreme Court should at that time grant Dollar General’s petition, vacate the California Court of Appeal decision below, and remand the case to that court for reconsideration in light of Viking River (known to Supreme Court practitioners as a “GVR” order). The facts in the Dollar General case are strikingly similar to those at issue in Viking River, and the company’s petition described the question presented as “Does the FAA require enforcement of a bilateral arbitration agreement providing that an employee cannot assert representative claims, including under PAGA?”

The U.S. Supreme Court’s GVR Order

On October 3, 2022, the Supreme Court did what Dollar General expressly asked it to do.  (See Order List, Oct. 3, 2022.)

As is typical with GVR orders, there is no explanation of the reasoning behind the order, except that the California Court of Appeal is instructed to apply the reasoning of Viking River on remand.  The California Court of Appeal now will soon reconsider its affirmation of the trial court’s denial of Dollar General’s motion to compel the plaintiff’s claim to an individual, non-representative arbitration proceeding.

Implications For Employers

Employers have long known that if they have operations in California, special attention must be paid to state law provisions that impose restrictions on employment practices unlike those in any other state.  Now that the U.S. Supreme Court has ruled that the FAA preempts the court-made rule of Iskanian that precluded splitting representative PAGA claims from individual claims, it is likely that California courts will modify their enforcement of representative action waivers in arbitration agreements.  But because this is California, wary employers would be wise to stay tuned for further developments in this rapidly changing area of the law.