When Can A California Court Refuse To Compel Arbitration?

Unlike the Federal Arbitration Act (“FAA”), the California Arbitration Act (“CAA”) expressly permits courts to deny a petition to compel arbitration where related litigation or other proceedings create a risk of conflicting rulings. Cal. C.C.P. § 1281.2(c). “Where, as here, the parties have agreed to abide by state rules of arbitration, enforcing those rules according to the terms of the agreement is fully consistent with the goals of the FAA, even if the result is that arbitration is stayed where the Act would otherwise permit it to go forward.” Volt Info. Sciences v. Leland Stanford Jr. U., 489 U.S. 468, 470 (1989).

Under the CAA, a party seeking to compel arbitration has the burden of proving the existence of a valid agreement to arbitrate. Cal. C.C.P. § 1281.2.

Procedural and substantive unconscionability must both be present in order for a court to exercise its discretion to refuse to enforce a contract or clause under the doctrine of unconscionability. Armendariz v. Foundation Health Psychcare Services, Inc. 24 Cal.4th 83, 114 (2000). If procedural and substantive unconscionability are both present, however, the Court has the authority to refuse to compel arbitration and instead order the parties to litigate. Cal. C.C.P. §1281.2(c).

The court can also refuse to compel arbitration in order to avoid inconsistent results, and order all parties joined in a single action. Mercury Ins. Group v. Superior Court, 19 Cal.4th 332, 339-340 (1998). A California choice of law provision authorizes refusal to compel arbitration based on risk of conflicting rulings. Mastick v. T.D. Ameritrade, 209 Cal.App.4th 1258, 1264-1265 (2012). One of the plaintiffs in Mastick was not a party to the arbitration agreement signed between Mastick and Oakwood. In order to avoid inconsistent rulings, the court refused to compel Mastick to arbitration. Ibid. Similarly, where three of the ten parties to the court action were parties to arbitration agreements but the other seven parties to the court action were not parties to any arbitration agreement, the California Supreme Court affirmed the decision of the lower court, staying the arbitration pending outcome of the related litigation. Cronus Investments, Inc. v. Concierge Services, 35 Cal.4th 376, 387 (2005). 

In the Ninth Circuit, a District Court cannot compel arbitration of PAGA claims. Sakkab v. Luxotica Retail N. Am., Inc., 803 F.3d 425, 431 (9th Cir. 2015); Whitworth v. Solarcity Corp., 2016 WL 6778662 * 2 (N.D.Cal. Case No 16-cv-01540-JSC, November 16, 2016); Smith v. H.F.D. No. 55, 2016 WL 881134 * 8 (E.D.Cal Case No. 2:15-cv-01293-KJM-KJN, March 8, 2016).

An employment agreement that compels the waiver of an employee’s right to bring a representative PAGA action is contrary to public policy and is unenforceable. Iskanian v. CLS Transp. Los Angeles, LLC, 59 Cal.4th.348, 384 (2014). This is because a PAGA case “is not a dispute between an employer and an employee arising out of their contractual relationship. It is a dispute between an employer and the state . . .” Id. at 386. Quite simply “the State is the real party in interest.” Id. at 387. As such, an employee’s PAGA claims cannot be compelled to arbitration.

General principles of contract law determine whether the parties have entered into a binding agreement to arbitrate. Chan v. Drexel Burnham Lambert, Inc., 178 Cal.App.3d 632, 640–641 (1986). This means that a party’s acceptance of an agreement to arbitrate may be express or implied-in-fact where the employee’s continued employment constitutes their acceptance of an agreement proposed by their employer. Craig v. Brown & Root, Inc., 84 Cal.App.4th 416, 420 (2000).

In a 2007 case, Mitri v. Arnel Management Co., the court denied the motion to compel arbitration where the handbook provision reinforced an intent to have employees sign a separate arbitration agreement to effectuate the company’s policy of arbitrating employment claims and the employer produced no evidence of the existence of such an arbitration agreement signed by either employee. Mitri v. Arnel Management Co., 157 Cal.App.4th 1164 (2007).

When an employee is required to consent to arbitration as a condition of employment with no opportunity to negotiate, the agreement is procedurally unconscionable. In finding the arbitration agreements signed by employees as a condition of their employment procedurally unconscionable, the California Supreme Court stated: “[I]n the case of preemployment arbitration contracts, the economic pressure exerted by the employer on all but the most sought after employees may be particularly acute, for the arbitration agreement stands between the employee and necessary employment, and few employees are in a position to refuse a job because of an arbitration requirement.” Armendariz, supra, 24 Cal.4th at 114-15.

When an employee is required to acknowledge consent to the terms of an employee handbook which contains an arbitration clause, the arbitration clause is procedurally unconscionable. Kinney v. United Healthcare Services, Inc., 70 Cal.App.4th 1322, 1329 (1999).

Where an agreement is silent on whether or not class claims may be submitted to arbitration, courts have held that the class claims cannot be submitted to arbitration. Stolt-Nielsen S.A. v. Animal Feeds International Corp., 130 S.Ct. 1758 (2010); Kinecta Alternative Financial Solutions v. Superior Court, 205 Cal.App.4th 506, 518 (2012) (overruled on other grounds); Nelsen v. Legacy Partners, 207 Cal.App.4th 1115 (2012).

In Stolt-Nielsen the Supreme Court held that an arbitration agreement between owners of parcel tankers and charterers that was silent on class arbitration, where there was no dispute that the parties did not reach any agreement on the issue of class arbitration, could not be interpreted to include class arbitrations, and therefore the charterers could not be compelled to arbitrate their antitrust class action claims. Stolt-Nielsen, supra, 130 S. Ct. at 1775-76.

The Court of Appeal in Kinecta was faced with a nearly identical question in a putative wage and hour class action brought by a credit union employee against her former employer. The employee arbitration agreement in that case covered:

‘any claim, dispute, and/or controversy that either I may have against the Credit Union . . . or the Credit Union may have against me, arising from, related to, or having any relationship or connection whatsoever with my seeking employment with, employment by, or other association with the Credit Union….’

Kinecta, supra, 205 Cal.App.506, 511, fn. 1.

The trial court ordered the parties to class arbitration. Id. at 509. The Court of Appeal granted the employer’s petition for writ of mandate overturning the trial court’s order, holding the language of the arbitration agreement was inconsistent with an intent to allow class arbitration in that the arbitration provision identifies only two parties to the agreement, the plaintiff and the defendant. It makes no reference to employee groups or to other employees of Kinecta. Id. at 577. The court found there was no contractual basis for finding the agreement authorized class arbitration. Id. at 517. Similarly, if an Arbitration Agreement is silent as to collective actions, no implicit agreement to arbitrate class disputes should be inferred.

In a 2016 case, Morris v. Ernst & Young, Ernst & Young moved to compel arbitration in response to plaintiffs’ putative class and collective action under the Fair Labor Standards Act and California labor law. Morris v. Ernst & Young, 834 F.3d 975 (9th. Cir. 2016) at 979. In reversing the district court, the Ninth Circuit held that “Section 7 [of the National Labor Relations Act (“NLRA”)] protects a range of concerted employee activity, including the right to seek to improve working conditions through resort to administrative and judicial forums.” Id. at 981 (internal citation and quotation marks omitted). A lawsuit filed in good faith by a group of employees to achieve more favorable terms or conditions of employment is ‘concerted activity’ under § 7 of the National Labor Relations Act.” Id. at 981–82. The NLRA thus “establish[es] the right of employees to pursue work-related legal claims, and to do so together.” Id. at 982. The court concluded that Ernst & Young’s requirement that employees pursue work related claims individually was the “very antithesis of § 7’s substantive right to pursue concerted work-related legal claims.” Id. at 983 (internal citation and quotation marks omitted). The concerted action waiver was therefore unenforceable under the NLRA. Id. at 983-84.

A court cannot compel arbitration of class claims where the parties did not contract to submit to class-wide arbitration. Stolt-Nielsen, supra, 559 U.S. at 684; Echevarria v. Aerotek, Inc., 2017 WL 24877 (N.D.Cal. Case No. 16-cv-04041-BLF, January 10, 2017); Whitworth, supra, 2016 WL 6778662 * 4.

The California Supreme Court held that the California rule, enumerated in Gentry v. Superior Court, 42 Cal.4th 443 (2007), against employment class waivers was preempted by the FAA. Iskanian, supra, 59 Cal.4th at 364. However, Gentry‘s holding has not been overturned under California law in situations where the FAA does not apply. Garrido v. Air Liquide Industrial U.S. LP, 241 Cal.App.4th 833, 837-8 (2015). Where the CAA, rather than the FAA applies, Gentry remains good law. Id. at 845.

Gentry applies “whether an arbitration agreement bars class arbitration expressly or only impliedly.” Nelsen, supra, 207 Cal.App.4th at 1127. Thus, an employee might render unenforceable any alleged waiver of the right to a class action by demonstrating the existence of the following factors: (1) the modest size of the potential individual recovery; (2) the potential for retaliation against members of the class; (3) the fact that absent class members may be ill informed about their rights; and (4) other real world obstacles to the vindication of class members’ rights. Gentry, supra, 42 Cal.4th at 453, 463; Truly Nolen v. Superior Court, 208 Cal.App.4th 487, 502 (2012).

Indeed, in Gentry, the court observed that wage and hour cases will generally satisfy the “modest” recovery factor because they “usually involve[ ] workers at the lower end of the pay scale.” Id. at 457–458. As the Gentry court recognized, “retaining one’s employment while bringing formal legal action against one’s employer is not ‘a viable option for many employees.” Id. at 459.