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California Arbitration-palooza!

by D. Gregory Valenza | |

The California courts of appeal have been busy socially distancing themselves from enforcing arbitration agreements. Mostly.  (To be fair, they enforced one too.  I just couldn’t resist the COVID joke.) It gets lonely on lockdown.  Sue me, if you can find an open court.  Wear a mask.

Let’s review the key points of the many recent arbitration decisions.  (Long post coming):

You Get What You Draft Department

The arbitration agreement in Garner v. Inter-State Oil Co. (opinion here) provided, per the opinion:

“To resolve employment disputes in an efficient and cost-effective manner, you and Inter-State Oil Co. agree that any and all claims arising out of or related to your employment that could be filed in a court of law, including but not limited to, claims of unlawful harassment or discrimination, wrongful demotion, defamation, wrongful discharge, breach of contract, invasion of privacy, or class action shall be submitted to final and binding arbitration, and not to any other forum.” The second relevant sentence appears in bold lettering just above the signature lines, and states: “This Arbitration Agreement Is A Waiver Of All Rights To A Civil Jury Trial Or Participation In A Civil Class Action Lawsuit For Claims Arising Out Of Your Employment.”

So, that first sentence says that all claims including “class action[s]” “shall be submitted to final and binding arbitration. The second sentence, though, said there’s no “Civil Jury Trial Or Participation in a Civil Class Action Lawsuit ….”  That second sentence sounds like a waiver.  But the first sentence says he has to take his class action to arbitration.  This might be an ambiguity?

But perhaps it’s not an ambiguity at all.  Because could you not waive your right to a class action lawsuit, and yet arbitrate your class claim?  Of course you could, said the court of appeal:

The waiver sentence referred to by Inter-State Oil states that the arbitration agreement waived his right to “participation in a civil class action lawsuit,” not to participation in any class action claim. (Italics added.) Inter-State Oil does not account for the word “lawsuit” in its argument. Lawsuits generally refer to court actions. (See Roberts v. Packard, Packard & Johnson (2013) 217 Cal.App.4th 822, 839 [noting the difference between an arbitration claim and a lawsuit (court action)]; see also Mission Beverage Co. v. Pabst Brewing Co., LLC (2017) 15 Cal.App.5th 686, 697 [recognizing the difference between a lawsuit and an arbitration].) There is no indication in the arbitration agreement that the word “lawsuit” was intended to apply, uncharacteristically, to both court actions and arbitration claims. Indeed, the only sentence in the arbitration agreement referring to arbitration of class claims requires arbitration. Thus, read as a whole, this is an agreement to arbitrate all claims, including class claims, with a notice at the end of the agreement that it is a waiver of all jury trials and class action lawsuits. The agreement functions as a waiver of participation in a class action lawsuit because those class claims must be submitted to arbitration.

Is that what Inter-State Oil intended?  Perhaps, but methinks, no, given Inter-State Oil was contesting this case in appellate court. But that’s what is in the text of the contract they drafted. Class action waivers that require arbitration of individual claims only are easy to draft. So, ensure your arbitration agreements are written that way if that is what you want. Because otherwise, like Inter-State Oil, you’ll get what you bargain for.

Arbitration And “Third Party” Discovery

The Court of Appeal in Aixtron, Inc. v. Veeco Instruments, Inc. (opinion here) issued a significant ruling concerning discovery in arbitration proceedings, which will require review of arbitration agreements.

In this case, Veeco was suing its former employee, Saldana, for an unfair competition violation.  To prove its case, Veeco needed records from Aixtron, Saldana’s new employer.

Veeco and Saldana had an arbitration agreement, most of which is as follows:

Except as provided under ‘Equitable Remedies’ above, any claim or controversy arising out of my employment or the cessation thereof, including any claim relating to this Agreement, shall be settled by binding arbitration, in accordance with the National Rules for Resolution of Employment Disputes of the American Arbitration Association, to be held in the county and state in which my place of employment is located, or any other location mutually agreed upon by the parties. In such arbitration, each party shall bear its own legal fees and related costs, except that the parties shall share equally the fee of the arbitrator, provided that my portion of the arbitrator’s fee shall not exceed the amount of the filing fee for commencing an action in the court of general jurisdiction in the judicial district in which my place of employment is located. The decision or award of the arbitrator shall be final and binding upon the parties. The arbitrator shall have the power to award any type of legal and/or equitable relief available in a court of competent jurisdiction, including, but not limited to, the costs of arbitration and attorney’s fees, to the extent such damages are available under law.

Although the agreement says “American Arbitration Association” rules, it turns out the parties agreed to the JAMS rules.

After much wrangling, Veeco had the arbitrator issue a subpoena to Aixtron, to see whether Saldana had transferred any of Veeco’s proprietary information / trade secrets to Aixtron, which was a primary competitor of Veeco.  Saldana objected, as did Aixtron.  Saldana argued that the arbitrator had no authority to issue  subpoenas to non-parties to the arbitration before the hearing (discovery subpoenas).  The arbitrator issued the subpoena with modifications.

Aixtron lodged objections to the subpoena, also claiming it was not obligated by an arbitration subpoena. Veeco then filed a motion to compel compliance with the arbitrator. Aixtron argued that the parties did not incorporate into their arbitration agreement section 1283.05 of the California Arbitration Act governing discovery (in addition to claiming the requests themselves were improper). But the trial court also agreed with Veeco and ordered Aixtron to provide the documents.  Aixtron then went to the Court of Appeal.

Guess what, arbitration fans?  Aixtron won.  The Court of Appeal held that neither the Federal Arbitration Act or California Arbitration Act (with exceptions) authorize arbitrators to issue discovery subpoenas to third parties. The Federal Arbitration Act is more limited.  However, under the California Arbitration Act, arbitrators may order discovery (1) by statute in “wrongful death” or “personal injury” cases or (2) Subdivision (b) of section 1283.1 provides that in “all other arbitrations, the arbitrator may grant discovery ‘[o]nly if the parties by their agreement so provide . . . .”  The Federal Arbitration Act, too, permits the parties to agree on discovery.

So, as with most of the other cases discussed in this long post today, drafting matters.  Did Veeco and Saldana agree that the arbitrator could issue discovery subpoenas to third parties like Aixtron?  Well, they agreed that the  AAA arbitration rules applied.  But the Court said that the parties did not specifically mention discovery, the California Civil Discovery Act, or Code of Civil Procedure section 1283.05, which would have authorized the arbitrator all of the powers in the Civil Discovery Act.  JAMS Rules do not specifically mention discovery subpoenas to third parties, either.   Even the AAA rules are vague as to third party discovery subpoenas:

The arbitrator shall have the authority to order such discovery, by way of deposition, interrogatory, document production, or otherwise, as the arbitrator considers necessary to a full and fair exploration of the issues in dispute, consistent with the expedited nature of arbitration.

Here’s the thing for employers. An arbitration agreement has to permit “adequate discovery” to be enforceable in discrimination / wrongful termination / statutory cases.  If your arbitration clause doesn’t permit third party discovery (and merely incorporating the AAA or JAMS rules apparently is not enough), will that render the arbitration clause unenforceable?  Better get to fixing those agreements….  chop chop, even.

PAGA Claims Are Still Not Arbitrable

The plaintiffs in Bautista v. Fantasy Activewear, Inc. (opinion here) were parties to a class action settlement.  Their settlement agreement contained an arbitration clause.  Years later, they brought a new class action.  The Company sought to enforce the arbitration agreement. The plaintiffs dismissed their class claims, but left in place a PAGA claim. Fantasy tried to enforce the arbitration clause in the settlement agreement against the PAGA claim.  But, no sale. PAGA claims are really the DLSE’s or Labor Workforce Development Agency’s claims. The employee is merely the “agent” of those agencies. The agencies don’t sign up for arbitration. That’s the theory, and the courts are sticking to it.

The question here is not whether a PAGA representative action may ever be arbitrable or who is empowered in any particular circumstance to determine arbitrability, but rather whether an arbitration agreement binds a real party in interest that never agreed to arbitrate. We acknowledge that “there are six theories by which a nonsignatory may be bound to arbitrate” (Suh v. Superior Court (2010) 181 Cal.App.4th 1504, 1513), but none of those six theories applies here.6 Bautista and Garcia entered into their arbitration agreements with Fantasy in 2014. Bautista and Garcia did not become agents of the LWDA for purposes of their PAGA representative actions until 2018.

Because Bautista and Garcia were not acting as agents of the state when they entered into the arbitration agreements at issue here, Fantasy has identified no arbitration agreement that would bind the real party in interest here—the state—to arbitration, even of the question of arbitrability.

The new issue here was Fantasy’s argument that the arbitrator should decide whether the arbitration agreement was arbitrable between the plaintiffs and Fantasy on the PAGA claims. The company argued that under recent U.S. Supreme Court authority, Henry Schein, Inc. v. Archer and White Sales, Inc. (2019) ___ U.S. ____, when the arbitration agreement delegates questions of arbitrability to the arbitrator, the courts have to defer, even if the arbitrability question is “wholly groundless.” (Which it would be here).  But the Court of Appeal said that the issue wasn’t whether there was an arbitrable claim. The issue was whether there was an agreement to arbitrate a PAGA claim (between Fantasy and the DLSE) at all.

The question here is not whether claims are arbitrable under an agreement among the parties, but rather whether there exists an agreement among the parties to arbitrate. “Under ‘both federal and state law, the threshold question presented by a petition to compel arbitration is whether there is an agreement to arbitrate.’ ”

Be Careful What You Draft For II AND PAGA II

The Court in Kec v. Superior Court (opinion here) also considered a PAGA claim under an arbitration agreement, but with a twist.

Nicole Kec was an employee of RJ Reynolds.  Her arbitration agreement contained a waiver:

The Parties waive the right to bring, join, participate in, or opt into, a class action, collective action, or other representative action whether in court or in arbitration.

So, this agreement contained a proper class action waiver that the Garner v. Inter-State Oil case (discussed above) did not.  But the agreement here went on:

This Section (Section 5) may not be modified or severed from this Agreement for any reason.”   


Section 16 of the arbitration agreement contains both a general severability provision and an exception for section 5, to which a purported blow-up provision attaches instead. “Except for Section 5, if any provision of this Agreement is held by a court of competent jurisdiction or an arbitrator to be invalid, void, or unenforceable, the remaining provisions shall, nevertheless, continue in full force without being impaired or invalidated in any way. If Section 5 is found by a court of competent jurisdiction to be, in any way, unlawful, invalid, void or otherwise unenforceable, the Agreement becomes null and void as to employee(s) who are parties to that particular dispute, for purposes of that dispute in the jurisdiction of the court delivering the ruling. If Section 5 is found by a court of competent jurisdiction to be, in any way, unlawful, invalid, void or otherwise unenforceable, any class claims, collective claims, or any other representative claims may only be brought in a court of competent jurisdiction.” 

So, the class waiver could not be severed per “section 5.”  And under section 16, illegal provisions could be severed.  Except if the illegal provision was in section 5, the entire agreement would be invalidated.

Welp, section 5 not only contains a class action waiver, but also a waiver of “representative claims.”  A claim under PAGA is a representative claim, not a class claim.  So, the employer tried to include a PAGA waiver.  No big whoop, courts sever those out all the time.

But here, the court could not sever out the representative claim waiver. Why?  Because the agreement forbade it.  As a result, the Court held that the arbitration agreement was invalid as to the plaintiff’s otherwise arbitrable claims:

defendants may not selectively enforce the arbitration agreement in a manner that defeats its goals. Had the parties intended to permit defendants to proceed with arbitration notwithstanding an invalid waiver of representative claims, they would have simply made that provision severable, like every other term in the agreement. But that is not what they did. Instead, by specifically making section 5 not severable, the agreement evinces an intent not to allow defendants to selectively enforce the arbitration agreement. 

Given Kec was entitled to pursue the PAGA claim in court, and the PAGA claim was not severable from the rest of the claims, all the claims were entitled to be brought in court.

So, again, drafting is key.

And One for the Employer 

The Court of Appeal in Torrecillas v. Fitness International LLC (opinion here) enforced LA Fitness’ arbitration agreement with former executive Torrecillas.

The plaintiff claimed the agreement was “unconscionable” and therefore unenforceable.  As you must know by now, to prove unconscionability, the plaintiff has to show that an arbitration agreement is both procedurally and substantively unconscionable.  Procedural unconscionability refers to the elements of surprise and oppression in the agreement.  Substantive unconscionability is whether the terms of the agreement are illegal, too one-sided, shock the judicial conscience, etc.

The court of appeal first decided there was little to no procedural unconscionability.  Of note, the arbitration agreement permitted (1) the plaintiff to review the agreement with counsel and (2) the parties to amend the agreement in writing. It also was plaintiff’s second arbitration agreement with the company, following a re-hire and promotion.

One of the plaintiff’s main points regarding substantive unconscionability was that the agreement limited discovery to five depositions and 30 interrogatories without permission of the arbitrator upon a showing of substantial need. The court held that such limits were not unconscionable and were consistent with case law.  The plaintiff also argued that requiring him to pay the court filing fee, requiring arbitration of injunctive relief under the Unfair Competition Law, and other issues rendered the agreement substantively unconscionable. But, as the court of appeal rightly found, these arguments were previously rejected in other cases.



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