Legal Authority for a Motion to Compel Arbitration

July 12, 2012

The FAA provides, that a “written provision in any…contract evidencing a transaction involving commerce to settle by arbitration a controversy…shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of the contract.” 9 U.S.C. § 2.  In order to opt out of the FAA, a controlling state arbitration law must be specified in the agreement. See, e.g. Wolsey, Ltd. v. Foodmaker, Inc., 144 F.3d 1205, 1209 (9th Cir. 1998) (“In other words, parties are free to contract around the FAA by incorporating state arbitration rules into their agreements.”).

The National Labor Relations Board (“NLRB”) recently held that a class action waiver was unenforceable under the National Labor Relations Act (“NLRA”). D.R. Horton and Michael Cuda, 357 NLRB No. 184 (Jan. 3, 2012).  At issue was D.R. Horton’s requirement that employees sign both an arbitration agreement and class action waiver as a condition of employment. Id. at 1.  The NLRB held that an agreement preventing class and representative actions violates § 7 of the NLRA, which grants employees “the right ‘to engage in…concerted activities for the purpose of collective bargaining or other mutual aid or protection…’ “. Id. at 2 (quoting 29 U.S.C. § 157).  This decision vests employees with a substantive right to engage in concerted activities, including collective pursuit of a workplace grievance in arbitration. Id. at 2.  

The NLRB distinguished the arbitration clause at issue in D.R. Horton from the clause at issue in the U.S Supreme Court case AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011).  While Concepcion involved consumer contracts which might cover thousands of potential claimants, D.R. Horton only involved “agreements between employers and their own employees.” D.R. Horton, Inc., 357 NLRB No. 184, at 11.  The NLRB went on to explain, “A class-wide arbitration is thus far less cumbersome and more akin to an individual arbitration proceeding along each of the dimensions considered by the Court in [Concepcion] – speed, cost, informality, and risk – when the class is so limited in size.” Id. at 12.  The NLRB held that so long as an employer leaves open at least one forum for class and collective claims, arbitral or judicial, there is no conflict between the NLRA right to collective action and the FAA. Id.

Two recent Northern District of California cases have held that the question of class arbitration is for the arbitrator to decide.  Beginning with Vazquez v. Servicemaster Global Holding Inc., 2011 WL 2565574 (N.D.Cal.) in June 2011, Judge Illston held that it was for the arbitrator to decide whether employees’ claims may be arbitrated as a class. In the arbitration agreement at issue, the individual employee had agreed “to submit to arbitration “[a]ny dispute arising out of [his] employment with Employer, including termination of employment and all statutory claims.” ” Vazquez, at *1.  The arbitration agreement included no specific language addressing the ability of employees to arbitrate their disputes as a class, nor precluding them from doing so.  Pursuant to the FAA, the Court noted that where the agreement to arbitrate is not in issue, a court must instruct the parties to proceed to arbitrate in accordance with the agreement. Id.  And where there is not a question as to the enforceability of an arbitration agreement, the question of class arbitration is for the arbitrator to decide. Id. at 3.

The Court also addressed the implications of the U.S. Supreme Court’s ruling in Stolt-Nielsen in regards to the issue at hand: “The Supreme Court has never held that a class arbitration clause must explicitly mention that the parties agree to class arbitration in order for a decisionmaker to conclude that the parties consented to class arbitration…[T]he failure to mention class arbitration in the arbitration clause itself does not necessarily equate with the “silence” discussed in Stolt-Nielsen.” Vazquez, at *3, n. 1 (some internal citations omitted) (discussing Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp., 130 S.Ct. 1758 (2010)).  Further, interpretation of an arbitration agreement is a matter of state law and state law “permits a decisionmaker to look beyond the four corners of a contract where appropriate.” Id.  Finally, “[i]n Stolt-Nielsen itself, the Supreme Court indicated that it would be appropriate for the decisionmaker to consider the “sophisticat[ion]” of the parties, and even the “tradition of class arbitration” in the field, when determining whether a contract was truly “silent” as to class arbitration. 130 S.Ct. at 1775.” Id.

Judge Koh then ruled accordingly in Yahoo! Inc. v. Iversen, 2011 WL 4802840 (N.D.Cal.), in October 2011.  Again taking into account an arbitration agreement that did not include language addressing class arbitration, the Court found that the question of class arbitration was for the arbitrator to decide. Yahoo, at *4.  Yahoo attempted to argue that under Stolt-Nielsen and Concepcion class arbitration was prohibited unless the arbitration agreement expressly allowed for it, but the Court sharply disagreed: “…Stolt-Nielsen did not disturb the longstanding principle that interpretation of an arbitration agreement is generally a matter of state law, and that state law generally permits a decisionmaker to “look beyond the four corners of the contract where appropriate.” ” Id. at *5.  Courts and arbitrators are ultimately responsible for giving effect to the rights and expectations of the parties. Id. at *6.

Further addressing Stolt-Nielsen, the Court in Yahoo noted that, “Although Yahoo believes the agreement’s lack of reference to class arbitration is dispositive under Stolt-Nielsen, the Supreme Court explained that it used the term ” ‘silent’ in the sense that [the parties] had not reached any agreement on the issue of class arbitration,” Stolt-Nielsen, at 1768, “not simply…that the clause made no express reference to class arbitration,” id. at 1766.” Yahoo, at *3.  Because the parties in Stolt-Nielsen stipulated that they had reached no agreement on the issue of class-arbitration, the Supreme Court had no reason to decide what contractual basis might support a finding that the parties had in fact agreed to class arbitration. Id. at *2.  Conversely, in Yahoo, the parties did not stipulate to agreement on this issue. Id. at *3.  The Court found that there was a genuine dispute “between the parties as to whether their contract authorize[d] class-wide arbitration” of employees claims, and ultimately held that this was a question for the arbitrator to decide. Id. at *3, *4.

In seeking to compel arbitration, the moving party need only prove, by a preponderance of the evidence, that an agreement to arbitrate the claims exists and that the respondent has breached the agreement. In re Mercury Constr. Corp., 656 F.2d 933, 939 (4th Cir. 1981).  This raises two distinct issues: (1) whether an enforceable arbitration agreement exists between the two parties, and (2) whether the claims at issue are covered by the arbitration agreement. See Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79, 83-84 (2002).

Pursuant to California law, arbitration agreements are valid and enforceable unless grounds for revocation exist. Cal. Civ. Proc. Code § 1281.2.  Under general contract principles, arbitration agreements can be invalidated on the basis of fraud, duress or unconscionability. McManus v. CIBC World Markets Corp., 109 Cal. App. 4th 76, 86 (2003).  Further, in accordance with Armendariz, both a procedural and substantive element must be met in order to find unconscionability. Armendariz v. Found. Health Psychcare Servs., 24 Cal. 4th 83, 114 (2000).

Pursuant to Cal. Civ. Proc. Code § 1281.6, the parties may decide on a method of appointing an arbitrator, or petition the court to appoint one.


Author: Richard Hoyer
Category: Arbitration, Legal Procedure
Tags: # # # # # #