Let's Make A Deal:
What You Need to Know About
Drafting and Enforcing Arbitration
Agreements
April 15, 2015
What Types of Disputes Are Arbitrable?
Nearly any type of claim arising out of any contractual
relationship, including:
 Consumer
 Financial Services
 Employment
 International
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What Types of Disputes Are Not Arbitrable?
 Outside the scope of the agreement
 Claims by government agencies not a party to the agreement
(e.g., EEOC)
 Statutory claims when the statute
1. prohibits arbitration (Sarbanes-Oxley and Commodity Exchange Act
whistleblower claims. Dodd-Frank added anti-arbitration provisions to both acts in
2010.); or
2. provides an exclusive remedy and exclusive forum
• Workers’ compensation claims for employee injuries in the workplace must go
the Workers’ Compensation Appeals Board
• Unemployment insurance claims must go to the Employment Development
Department
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Arbitration Has Won Out: Class Action Waivers
 Class Action Waivers: Preclude a party to an arbitration
agreement from proceeding on a class, collective, or representative
basis in court or in arbitration.
 AT&T Mobility LLC v. Concepcion, 563 U.S. 321(2011):
- Challenge to class action waiver in a consumer contract between customers and
AT&T based on state law rules imposing greater restrictions on enforceability of
arbitration agreements.
- U.S. Supreme Court holds that any state-law rule that “stands as an obstacle to the
accomplishment and execution of the full purposes and objectives of . . . [the FAA]
is preempted. . . . [Arbitration agreements may not be invalidated by] defenses
that apply only to arbitration or that derive their meaning from the fact that an
agreement to arbitrate is at issue.”
• No more arbitration agreement-specific defenses; regular contract defenses
apply (e.g., fraud in the inducement, duress).
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Class Action Waivers Are Here To Stay
 American Express Co. v. Italian Colors Restaurant, 133 S. Ct.
2304 (2013):
- Challenge to a contractual class action waiver provision in an arbitration agreement
between merchants and American Express
• Plaintiffs’ cost of individually arbitrating federal statutory claim for violations of antitrust
laws exceeded the potential recovery on an individual basis.
• Under pre-existing law, courts may not enforce arbitration agreements where they
would prevent “effective vindication” of federal statutory rights by acting as a
prospective waiver of a party’s right to pursue statutory remedies.
- However, in Italian Colors, the U.S. Supreme Court held that it does not matter if
enforcing a class action waiver would bar “effective vindication” of a federal statutory
right (e.g., antitrust rights) as a practical matter.
• So long as it is not a prospective waiver of the statutory right, the class action
waiver is enforceable.
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Is California Different When It Comes To
Class Action Waivers?
 Sonic-Calabasas A, Inc. v. Moreno, 57 Cal. 4th 1109 (2013):
- California Labor Code provides employees a right to a hearing before the
Labor Commissioner for certain violations of Labor Code (“Berman
hearing”)
- In Sonic, California Supreme Court held that the FAA preempts prior state
law rule categorically prohibiting waiver of a Berman hearing in a predispute arbitration agreement.
• Such waivers are not per se unconscionable.
• However, Supreme Court suggested that Berman waivers (among other things)
could be unconscionable if an agreement was “otherwise unreasonably onesided in favor of the employer.”
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What About California’s
Private Attorneys General Act?
 Iskanian v. CLS Transportation Los Angeles, LLC, 59 Cal. 4th
348 (2014):
- Under the Labor Code Private Attorneys General Act (“PAGA”), employees can recover
civil penalties for Labor Code violations on behalf of themselves and other aggrieved
employees
•
PAGA actions are not class actions; they are representative actions brought as enforcement
actions on behalf of the state..
- In Iskanian, the California Supreme Court held:
1.
Gentry v. Superior Court, 42 Cal.4th 443 (2007) , which prohibited class action
waivers in employment arbitration agreements, was overruled.
2.
Class action waivers do not violate the National Labor Relations Act.
3.
However, PAGA representative action waivers are unenforceable; PAGA is not
preempted by the FAA.
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The Last Somewhat Open Issue. . .
 McGill v. Citibank, N.A. (Cal. Ct. App. 2014):
- “Broughton-Cruz” Rule: California Supreme Court had ruled that
arbitration provisions are unenforceable as against policy if they
require arbitration of Unfair Competition Law, False Advertising Law,
or Consumer Legal Remedies Act claims for injunctive relief brought
in public’s benefit.
- In McGill, California Court of Appeal held that, consistent with
Concepcion, Broughton-Cruz Rule is preempted by the FAA.
• California Supreme Court granted review.
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Hurdles to Enforcement
 Although arbitration is broadly permitted, there are
significant pitfalls that must be avoided.
- Lack of agreement
- Scope is too narrow
- Unconscionability
- Additional defenses: waiver, mistake, lack of capacity, undue
influence, duress, illegality and fraud.
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Drafting An Enforceable Arbitration Agreement
 There must be an actual agreement to arbitrate.
 At a minimum, the agreement should specify:
- the disputes to be resolved,
- the parties to participate, and
- the forum and rules for the arbitration.
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Scope: The Ninth Circuit’s View
 arising under or out of an agreement
- Only requires arbitrating disputes relating to the interpretation and performance of the
contract itself, but not tort claims.
 “Any dispute arising under this Agreement shall be settled by arbitration…”
- Boat owner sued for indemnity and contribution alleging the salvage company’s gross
negligence exposed boat owner to liability for resulting environmental damage. Claims
were not arbitrable because the dispute involved a tort claim and did not turn on the
performance under the contract. Cape Flattery Ltd. v. Titan Maritime, LLC, 647 F.3d 914,
924 (9th Cir. 2011).
 …any controversy or claim arising out of this [Licensing] Agreement…
shall be settled by arbitration.
- Misappropriation of trade secrets was not arbitrable because it was based on defendants'
improper continued use of trade secrets without a license and therefore constituted a
wrong independent from any breach of the agreement. Tracer Research Corp. v. Nat'l
Envtl. Servs. Co., 42 F.3d 1292, 1295 (9th Cir. 1994).
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Scope: California’s View
 The California Court of Appeal takes a different approach than the Ninth
Circuit.
- “(a)ny dispute or other disagreement arising from or out of this Consulting Agreement…”
- All claims were arbitrable including fraudulent inducement and negligent
misrepresentation claims arising out of the formation of the agreement, as well as
derivative tort claims of breach of fiduciary duty, interference with contractual relations
and conversion. EFund Capital Partners v. Pless, 150 Cal. App. 4th 1311, 1322 (2007).
 Other circuits have similarly rejected the Ninth Circuit’s reasoning. Cape
Flattery, 647 F.3d at 923 (identifying cases from numerous circuits
disagreeing with the Ninth Circuit).
 The solution:
- Use broad language like “arising out of or relating to…” The Ninth Circuit reasoned this
language, the standard language recommended by AAA, is broader than “arising under.”
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Avoid The Unconscionability Trap
 Defeating arbitration requires both procedural and
substantive unconscionability
 Measured on a sliding scale (need to have some degree
of both to defeat enforcement)
 Unanswered questions – What constitutes
unconscionability in California?
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Procedural Unconscionability
 Procedural unconscionability concerns the manner in which the
contract was negotiated and the respective circumstances of the
parties at that time, focusing on the level of oppression and
surprise involved in the agreement. Chavarria v. Ralphs
Grocery Co., 733 F.3d 916, 922 (9th Cir. 2013).
- “…a standardized contract, drafted by the party of superior bargaining
strength, that relegates to the subscribing party only the opportunity to
adhere to the contract or reject it.”
- “…when a contract binds an individual to later-provided terms.”
- “…imposed upon employees as a condition of their continued
employment.”
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Substantive Unconscionability
 California Supreme Court is reviewing the standard for
substantive unconscionability. Sanchez v. Valencia
Holding Co., Case No. S199119 (rev. grntd. 3/21/12).
 Various formulations include:
- overly harsh,
- unduly oppressive,
- so one-sided as to shock the conscience and
- unfairly one-sided
 Mutuality is paramount – must contain a modicum of
bilaterality
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Examples of Substantive Unconscionability
 Only the weaker party's claims are subject to arbitration without reasonable
justification for that lack of symmetry
 One sided attorneys’ fees provision
 Adhesive contract authorizing dominant party to choose a biased arbitrator
 Certain cost sharing provisions
 A damages limitation clause under which the customer does not even have
the theoretical possibility he or she can be made whole
 A $50,000 threshold for an arbitration appeal in employment contract
disputes
 An arbitrator selection process that assures employer gets to select the
arbitrator
 Unreasonably shortening the limitations period, particularly for statutory
wage and hour claims
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Unconscionability After Concepcion: California
Supreme Court
 Unconscionability is a valid defense, but questions remain.
 A facially neutral state-law rule designed to protect an individual
litigant’s rights is not preempted simply because its evenhanded
application would disproportionately impact arbitration agreements.
- A state-law rule is preempted when it interferes with fundamental attributes of arbitration
such as its lower costs, greater efficiency and speed. Sonic-Calabasas, 57 Cal. 4th at
1143-1144.
 The California Supreme Court may provide clarity.
- Sanchez v. Valencia Holding Co. is set for oral argument on May 5 before the California
Supreme Court.
- According to the petition for review, “This Court needs to resolve the post-Concepcion
California substantive unconscionability standard… [and] needs to provide guidance as to
just when and how businesses can tailor arbitration provisions to their particular
circumstances. Until it does so, confusion will reign…”
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Unconscionability after Concepcion: The Ninth Circuit
 Mortensen v. Bresnan Commc'ns, LLC, 722 F.3d 1151, 1159 (9th
Cir. 2013)
- FAA preempted Montana’s reasonable expectations/fundamental rights rule.
- “We take Concepcion to mean what its plain language says: Any general statelaw contract defense, based in unconscionability or otherwise, that has a
disproportionate effect on arbitration is displaced by the FAA.”
 Chavarria v. Ralphs Grocery Co., 733 F.3d 916, 927 (9th Cir. 2013)
- Employment arbitration agreement was unconscionable under California law
because it contained an unfair procedure for selecting an arbitrator and because
employee was responsible for half of the cost of the arbitration.
- The Court distinguished Mortensen and held that the Supreme Court's holding that
the FAA preempts state laws having a “disproportionate impact” on arbitration
cannot be read to immunize all arbitration agreements from invalidation no matter
how unconscionable they may be, so long as they invoke the shield of arbitration.
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There May Be Additional Requirements For Arbitration
of Unwaivable Rights
 In addition to the generally applicable unconscionability standards, Armendariz
requires five items for arbitration of unwaivable rights including claims under FEHA
and for wrongful termination in violation of public policy.
-
(1) The agreement must provide for adequate discovery.
-
(2) It must require a written decision allowing limited judicial review.
-
(3) The agreement must permit the types of relief that would be available in court.
-
(4) It must limit the employee's forum costs.
-
(5) It must provide for a neutral arbitrator.
 Do these five requirements survive Concepcion?
-
Numerous courts continue to follow Armendariz. See Lara v. Onsite Health, Inc., 896 F. Supp.
2d 831, 845 (N.D. Cal. 2012) and Woods v. JFK Mem'l Hosp., Inc., 2014 WL 5475231, at *7.
-
Compare James v. Conceptus, Inc., 851 F. Supp. 2d 1020, 1033 (S.D. Tex. 2012) and Beard v.
Santander Consumer USA, Inc., 2012 WL 1292576, at *9 (E.D. Cal. Apr. 16, 2012).
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Is the Arbitration Agreement Void or Severable?
 Courts have discretion to sever unconscionable provisions.
- The overarching inquiry is whether the interests of justice would be
furthered by severance and whether the agreement is permeated by
unconscionability.
 Courts will not rewrite or add terms to an unconscionable
arbitration provision.
 Relevant factors include:
- The number of unlawful provisions
- Whether the problem can be cured by severing or whether it would
require adding additional terms.
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Should You Elect Arbitration?
The Traditional Balancing
Pros
Cons
No jury
Tendency for a split the baby
approach
Efficiency of proceedings (limited
time for hearing)
Summary judgment rare, although
possible
No (or limited) discovery
No appeal except in limited
circumstances
Reduced costs
Cost of compelling arbitration
Choice of arbitrator(s) with
particular expertise
Cost of the arbitrator(s)
Confidentiality
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Considerations and Best Practices in Drafting
 Select the right provider
-
Consider specifying the number of arbitrators (3 for commercial arbitrations)
-
Consider arbitrator panels available (Lawyers? Former judges?)
 Specify your preferred discovery rules
 Include class/collective/representative action waiver (Concepcion)
-
Provision regarding adjudicative body to determine whether class arbitration may proceed in
absence of class action waiver (Oxford Health)
 Expressly authorize summary judgment/adjudication
 Include a fee/cost provision
-
But. . . employers must pay costs unique to arbitration in California employment discrimination
arbitrations
 Clearly reference applicable rules and forum to avoid unconscionability arguments
 Include choice-of-law provision for court to use in evaluating the existence of an
agreement
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