The Court of Appeals of California, Second District, recently denied a petition for writ of mandate on the merits, concluding that California Labor Code section 229 did not exempt the plaintiff loan processor's wage claim from arbitration.
In so ruling, the Appellate Court held that neither the choice-of-law provision nor the arbitration agreement contained "unambiguous language", and instead made it "unmistakably clear", that the parties intended to have section 229 apply while agreeing to arbitrate "any dispute or controversy arising out of or relating to" the plaintiff's employment with her former employer.
The Court also concluded that the trial court properly exercised its discretion under Code of Civil Procedure 1281.2 to order arbitration of the plaintiff's individual claims.
A copy of the opinion is available at: Link to Opinion
The plaintiff "loan review analyst or operations support specialist" sued her former mortgage lender employer in a putative class action lawsuit for alleged unpaid overtime compensation and unlawful business practices. The trial court granted the former employer's motion to compel arbitration, ordered arbitration of the plaintiff's individual claims and dismissed the class claims. The plaintiff timely appealed.
The plaintiff argued on appeal that the motion to compel arbitration should have been denied pursuant to Labor Code section 229, which provides, "[a]ctions to enforce the provisions of this article for the collection of due and unpaid wages claimed by an individual may be maintained without regard to the existence of any private agreement to arbitrate." Cal Lab. Code § 229.
Alternatively, the plaintiff contended that the trial court abused its discretion under Code of Civil Procedure section 1281.2 by ordering her to arbitrate her wage-and-hour claim notwithstanding the pendency of a non-arbitrable lawsuit against the company by another former employee under the Labor Code Private Attorneys General Act of 2004 (PAGA), Cal Lab. Code, § 2698 et seq.
In light of the uncertainty of the its jurisdiction to consider the plaintiff's appeal from the order compelling arbitration and the absence of any delay or prejudice the Court's intervention at this stage would cause, the Court found that this was an appropriate case in which to exercise its discretion to treat the appeal as a petition for writ of mandate. See Olson v. Cory (1983) 35 Cal.3d 390, 401; Curtis v. Superior Court (2021) 62 Cal.App.5th 453, 465; Williams v. Impax Laboratories, Inc. (2019) 41 Cal.App.5th 1060, 1071-1072; Nelsen v. Legacy Partners Residential, Inc. (2012) 207 Cal.App.4th 1115, 1123.
The Second District noted that the party seeking to compel arbitration bears the burden of proving by a preponderance of the evidence an agreement to arbitrate exists. Pinnacle Museum Tower Assn. v. Pinnacle Market Development (US), LLC (2012) 55 Cal.4th 223, 236. The party seeking to enforce the arbitration agreement also bears the burden of establishing that the Federal Arbitration Act ("FAA"), 9 U.S.C. § 1 et seq., applies and preempts otherwise governing provisions of state law or the parties' agreement. See Lane v. Francis Capital Management LLC (2014) 224 Cal.App.4th 676, 687.
Once an agreement to arbitrate has been proved, the burden shifts to the party opposing arbitration to establish a defense to the enforcement of the agreement, including "the burden of demonstrating that the exemption [from arbitration] applies." Performance Team Freight Systems, Inc. v. Aleman (2015) 241 Cal.App.4th 1233, 1241.
Section 2 is "the primary substantive provision of the FAA." Cronus Investments, Inc. v. Concierge Services (2005) 35 Cal.4th 376, 384. It provides that "[a] written provision in any maritime transaction or a contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction . . . shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract." 9 U.S.C. § 2.
Section 2, as with all other substantive provisions of the FAA, applies when a contract involves interstate commerce. Volt Info. Sciences v. Bd. of Trustees of Leland Stanford Jr. U. (1989) 489 U.S. 468, 476; Cronus, supra, 35 Cal.4th at p. 384; Rosenthal v. Great Western Fin. Securities Corp. (1996) 14 Cal.4th 394, 405.
However, the FAA does not require the parties to arbitrate under any specific set of procedural rules. Volt, at pp. 476, 479; Cronus, at p. 385. "Just as [the parties] may limit by contract the issues which they will arbitrate [citation], so too may they specify by contract the rules under which the arbitration will be conducted." Volt, at p. 479.
Furthermore, "the procedural provisions of the CAA [the California Arbitration Act] apply in California courts by default. . . . [T]he parties may 'expressly designate that any arbitration proceeding [may] move forward under the FAA's procedural provisions rather than under state procedural law.' [Citation.] Absent such an express designation, however, the FAA's procedural provisions do not apply in state court." Valencia v. Smyth (2010) 185 Cal.App.4th 153, 174-175; see Mave Enterprises, Inc. v. Travelers Indemnity Co. (2013) 219 Cal.App.4th 1408, 1429.
Because the plaintiff's contract with her former employer involved interstate commerce, the Second District held that the parties' arbitration agreement was covered by the FAA.
The Court reasoned that, without an express choice-of-law provision, such an agreement would be subject to the procedural provisions of the CAA, but section 2 of the FAA would preempt Labor Code section 229. Perry v. Thomas (1987) 482 U.S. 483, 490-91 ("clear federal policy places § 2 of the Act in unmistakable conflict with California's § 229 requirement that litigants be provided a judicial forum for resolving wage disputes. Therefore, under the Supremacy Clause, the state statute must give way"); see Hoover v. American Income Life Ins. Co. (2012) 206 Cal.App.4th 1193, 1207 ("[a]n exception" to the exemption set forth in section 229 "occurs when there is federal preemption by the FAA, as applied to contracts evidencing interstate commerce").
Notwithstanding this general principle of preemption, the Second District decided that the parties could have provided in their arbitration agreement that a dispute regarding unpaid wages — the subject of section 229 — is not arbitrable. See Volt, supra, 489 U.S. at p. 479.
Therefore, the Second District determined that the issue here was whether the general choice-of-law provision in the Employment and Confidentiality Agreement, which governed all aspects of the plaintiff's relationship with the former employer, not simply the arbitration provision, evidenced the parties' intent to exclude unpaid wage claims from their otherwise all-inclusive agreement to arbitrate "any dispute or controversy arising out of or relating to [the] Agreement or [the] employment."
At the trial court level, the plaintiff argued that the FAA did not apply to the Agreement—and Labor Code section 229 was not preempted because of the Agreement's broad choice-of-law provision, which stated that the Agreement would be "construed[,] . . . interpreted and enforced" in accordance with California law."
To harmonize the choice-of-law provision with the arbitration provision in the Agreement, the Second District adopted the Supreme Court of the United States' holding in Mastrobuono v. Shearson Lehman Hutton, 514 U.S. 52 (1995), that "the choice-of-law provision covers the rights and duties of the parties, while the arbitration clause covers arbitration; neither sentence intrudes upon the other." Id. at p. 64.
Moreover, applying the principles of Mastrobuono, a different division of the Second District already concluded that interpreting a general California choice-of-law provision in an agreement as evidencing the parties' intent to apply section 229 to an arbitration provision covering all employment claims, including those relating to wages, "departs from common sense and makes mischief." Bravo v. RADC Enterprises, Inc. (2019) 33 Cal.App.5th 920, 923.
Here, the Second District agreed with the analysis in Bravo and Mastrobuono and concluded the choice-of-law provision in the Employment and Confidentiality Agreement, which covered a wide range of matters including interpretation of the at-will employment and confidentiality provisions in the parties' Agreement, is "consistent with the parties' intent to arbitrate all disputes when [the Court reads] 'the laws of the State of California' to include substantive principles California courts would apply, but to exclude special rules limiting the authority of arbitrators." Bravo, at p. 923.
The Second District also observed that Labor Code section 229, which exempts wage claims from arbitration, unquestionably "reflects a hostility to the enforcement of arbitration agreements that the FAA was designed to overcome." Additionally, the Court found that neither the choice-of-law provision nor the arbitration agreement contained "unambiguous language" and instead made it "unmistakably clear" that the parties intended to incorporate section 229 while agreeing to arbitrate "any dispute or controversy arising out of or relating to" the plaintiff's employment. Mount Diablo Medical Center v. Health Net of California, Inc. (2002) 101 Cal.App.4th 711, 724
As such, the Second District held that the choice-of-law provision should not be construed to deny arbitration pursuant to California Labor Code section 229.
The Appellate Court also concluded that the trial court properly exercised its discretion under Code of Civil Procedure 1281.2 to order arbitration of plaintiff's individual claims.
Although the prohibition on arbitration in Labor Code section 229 was not incorporated into the parties' agreement to arbitrate, the Second District decided that Code of Civil Procedure section 1281.2 was. See Cronus, supra, 35 Cal.4th at p. 380 (the FAA does not preempt application of Code of Civil Procedure section 1281.2, subdivision (c), where "the parties agreed that their arbitration agreement would be governed by California law"); Williams v. Atria Las Posas (2018) 24 Cal.App.5th 1048, 1054).
Code of Civil Procedure section 1281.2, subdivision (c) and (d), authorizes a California trial court to deny or stay arbitration if: 1) "a party to the arbitration agreement is also a party to a pending court action or special proceeding with a third party, arising out of the same transaction or series of related transactions"; and 2) "there is a possibility of conflicting rulings on a common issue of law or fact." Cal. Civ. Proc. Code § 1281.2(c) and (d).
The Second District determined that the trial court reasonably concluded that the conditions for invoking the third-party litigation exception did not exist here because the plaintiff's lawsuit did not arise out of the same transaction as the non-arbitrable PAGA action and that there was no likelihood of conflicting rulings on a common issue of law or fact. "A PAGA claim is legally and conceptually different from an employee's own suit for damages and statutory penalties." Kim v. Reins International California, Inc. (2020) 9 Cal.5th 73, 81.
Furthermore, even when the third-party litigation exception applies, the Second District held that the trial court has discretion to "order arbitration among the parties who have agreed to arbitration." Cal. Civ. Proc. Code § 1281.2(d).
Therefore, the Second District affirmed the order dismissing the putative class claims, dismissed the order compelling arbitration, and denied the petition for writ of mandate.
Ralph T. Wutscher
Maurice Wutscher LLP
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