Friday, October 15, 2021

FYI: Cal App Ct (2d Dist) Holds Court Should Decide Whether Parties Agreed to Arbitrate

The California Court of Appeal, Second Appellate District (Second District), recently granted a lender's petition for a writ of mandate compelling the trial court to vacate its order granting the borrower's petition to compel arbitration.

 

In so ruling, the Second District agreed with the lender that the trial court erred in relying on the Supreme Court of the United States' recent ruling in Henry Schein, Inc. v. Archer and White Sales, Inc. (2019) ___ U.S. ___ [139 S.Ct. 524, 529].

 

The Second District explained that the SCOTUS in Schein considered who should decide whether the parties' dispute arising from a specific contract with an arbitration clause was arbitrable. In this case, however, the question on the borrower's petition to compel arbitration was whether the parties agreed to arbitrate their dispute over the loan documents, which did not have arbitration clauses, a question the court must decide in the first instance.

 

A copy of the opinion is available at:  Link to Opinion

 

After the borrower defaulted on a loan to purchase a commercial aircraft, the lender filed suit alleging that the borrower breached the terms of the loan documents in various respects. The lender also alleged it had a right to sell the aircraft in the possession of a charter company as collateral for the loan and to recover money owed by the charter company to the borrower based on a subordination agreement. Furthermore, the lender asserted claims for breach of the aircraft usage agreement and conversion, but later dismissed these aircraft usage agreement claims, leaving only claims based on breach of the loan documents.

 

The trial court granted the borrower and the charter company's petition to compel arbitration, finding that the American Arbitration Association ("AAA") rules provided for delegation of the determination of whether the parties' dispute arose out of an arbitration clause and thus the arbitrator should decide whether the lender's claims were arbitrable.

 

The lender then sought a writ of mandate compelling the trial court to vacate its order granting the petition to compel arbitration. The lender asserted that the trial court erred in relying on the US Supreme Court's decision in Henry Schein, Inc. v. Archer and White Sales, Inc. (2019) ___ U.S. ___ [139 S. Ct. 524, 529].

 

Section 1281.2 of the California Code of Civil Procedure requires the trial court to order arbitration of a controversy "[o]n petition of a party to an arbitration agreement alleging the existence of a written agreement to arbitrate a controversy and that a party to the agreement refuses to arbitrate such controversy . . . if it determines that an agreement to arbitrate the controversy exists." Whether there is a written agreement to arbitrate "is a matter of contract, and courts must enforce arbitration contracts according to their terms." (Schein, supra, 139 S. Ct. at p. 529; accord, Rent-A- Center, West, Inc. v. Jackson (2010) 561 U.S. 63, 67.

 

Furthermore, the SCOTUS held in Schein that the arbitrator should resolve the threshold question of whether an arbitration agreement applies to a particular dispute where the arbitration agreement delegates to the arbitrator the question of arbitrability, regardless of whether the argument for arbitration is "'wholly groundless.'" 139 S. Ct. at p. 528.

 

However, the Second District distinguished the facts here from those in Schein. It reasoned that, unlike in Schein, where the SCOTUS considered who should decide whether the parties' dispute fell within the scope of a specific contract, here the trial court was tasked with deciding in the first instance whether there was an agreement to arbitrate at all.

 

The Second District agreed with the holdings found in Moritz v. Universal City Studios LLC (2020), 54 Cal.App.5th 238 and Bautista v. Fantasy Activewear, Inc. (2020) 52 Cal.App.5th 650 that where a party seeks to arbitrate a dispute that arises from a contract without an arbitration clause, the court is not required under Schein to defer to the arbitrator on the threshold determination of arbitrability. See Bautista, supra, 52 Cal.App.5th at p. 656; Moritz, supra, 54 Cal.App.5th at p. 248.

 

Here, the Second District determined that the only agreement that contained an arbitration clause was the aircraft usage agreement entered into almost two months after the execution of the loan documents. However, after the lender voluntarily dismissed two of its causes of action, the only remaining causes of action at the time of the petition to compel arbitration related to the seven loan documents, none of which contained an arbitration clause.

 

Furthermore, the Second District found that the promissory note, loan agreement, security agreement, and assignment agreement also provided for a jury waiver, and the loan agreement provided that any disputes would be heard by a referee. Given the parties' clear expression of which courts (or referee) would hear any lawsuit arising from the loan documents, the Court concluded that the parties' failure to specify in the loan documents that the disputes would be decided by an arbitrator showed the parties' contrary intent.

 

The borrower argued that because the seven loan documents and the aircraft usage agreement were "interrelated," this supported arbitration. However, the Second District rejected this argument because, even if the loan documents had some relationship to the aircraft usage agreement, the question for the trial court was whether the parties' dispute related to the aircraft usage agreement.

The Court held that the dispute at issue did not relate to the aircraft usage agreement because nothing in the record showed that the breach of the loan documents was in any way related to the aircraft usage agreement, which simply provided the terms for the lender to obtain a discounted price for flight time on the borrower's aircraft.

 

Thus, the Second District concluded that the borrower did not meet its burden to show the parties had "clearly and unmistakably" agreed to arbitrate their dispute over the loan documents based on the arbitration clause in the aircraft usage agreement. See AT&T Technologies, Inc. v. Communications Workers of America, supra, 475 U.S. at p. 649.  Absent an agreement to arbitrate, the Court held that the trial court erred in granting the borrower's petition to compel arbitration on the issue of arbitrability.

 

Accordingly, the Appellate Court granted the lender's petition for writ of mandate and ordered that a peremptory writ of mandate should issue directing the trial court to vacate its order granting the borrower's petition to compel arbitration and motion to stay the action and to enter a new order denying the petition and motion.

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 6th Floor
Chicago, Illinois 60602
Direct:  (312) 551-9320
Fax: (312) 284-4751

Mobile:  (312) 493-0874
Email: rwutscher@MauriceWutscher.com

 

Admitted to practice law in Illinois

 

 

 

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Tuesday, October 12, 2021

FYI: 3rd Cir Clarifies Procedure for "Hybrid Wage-and-Hour" Aggregate Litigation

In a "hybrid wage-and-hour" action brought by mortgage loan officers (MLOs), the U.S. Court of Appeals for the Third Circuit recently:

 

1.  Reiterated its prior holding that "an FLSA opt-in collective action is not, by its nature, incompatible with a parallel state law Rule 23 opt-out class action", and

 

2.  Held that the trial court should not have required a trial in the FLSA opt-in collective action before deciding Rule 23 class certification on the parallel state-law claims.

 

A copy of the opinion is available at:  Link to Opinion

 

This lawsuit involved claims by current and former MLOs against their mortgage lender employer, simultaneously alleging violations of the federal Fair Labor Standard Act (FLSA) as an opt-in collective action, and violations of parallel state laws as a Fed. R. Civ. Pro. 23(b)(3) opt-out class action.

 

Previously in the litigation, the trial court conditionally certified the FLSA collective action, and 351 of over 1,000 MLOs opted in and consented.  The trial court then scheduled the trial. The plaintiffs then filed an amended complaint asserting various state labor and employment law claims, and a motion for class certification as to the state-law claims under Rule 23.

 

The employer responded by opposing Rule 23 class certification and seeking decertification of the FLSA collective action. A special master was appointed who recommended certifying the Rule 23 class, denying the motion for decertification of the FLSA collective action, and granting final FLSA certification. The trial court adopted these recommendations.

 

The employer then filed a Rule 23(f) petition seeking permission to appeal the class certification. The petition was granted by the Third Circuit.

 

In the Rule 23(f) appeal, the Third Circuit noted numerous flaws in the trial court's consideration of the Rule 23 class certification issues. As a result, the Third Circuit reversed the trial court's class certification ruling, and remanded with instruction that the trial court must "conduct a 'rigorous' examination of the factual and legal allegations underpinning [the] claims before deciding…class certification."

 

The Third Circuit, however, declined to consider the FLSA collective action certification, reasoning that "Rule 23 class certification and FLSA certification are different creatures."

 

On remand from the Rule 23(f) appeal, and notwithstanding the Third Circuit's instruction, the trial court chose not to return to the question of class certification and instead to proceed with the scheduled trial. The employer again objected, moving to stay the trial until after the reconsideration of the Rule 23 class certification had been made as required by the Third Circuit.

 

The trial court declined to stay the trial, and the employer filed a writ of mandamus before the Third Circuit.

 

The employer requested the Appellate Court to direct the trial court not to proceed with the trial until after ruling on Rule 23 class certification and if certification was granted, to delay the trial until after the class members were given an opportunity to opt out. The employer also requested the case be reassigned to a new judge. Finally, the employer sought a stay while awaiting the Appellate Court's ruling.

 

The Third Circuit noted that "the present mandamus petition brings into sharp relief some of the potential challenges of trying a case that simultaneously includes both forms of aggregate litigation."

 

Upon review, the Third Circuit used the standard framework for a request to stay lower court proceedings pending appeal. 

 

This framework considers the following factors: (1) the likelihood of obtaining mandamus relief; (2) whether irreparable injury would be suffered by the employer absent a stay; (3) whether the plaintiffs would be substantially injured by a stay; and (4) the public interest.

 

The Third Circuit granted the stay after finding the first three factors weighed in favor of relief. The fourth factor was not taken into consideration. The Court addressed each of the first three factors in turn.

 

"To prevail on the merits of a mandamus petition, the petitioner must show that the district court clearly and indisputably erred, and that no other adequate alternative remedy exists." See In re Howmedica Osteonics Corp., 867 F.3d 390, 401 (3d Cir. 2017).

 

The bar for prevailing is lower when considering a stay pending resolution of a petition for writ of mandamus. In such instance, the applicant only has to show "a reasonable chance, or probability, of winning" relief to prevail. In re Revel AC, Inc., 802 F.3d 558, 568 (3d Cir. 2015). Thus, the Appellate Court may grant a stay as long as the ultimate likelihood of winning the mandamus is "significantly better than negligible." Id. at 357.

 

The Third Circuit found that the employer had "cleared that hurtle" based on the fact that the trial court refused to engage with the employer's objection to proceeding with the trial prior to resolving whether to certify the Rule 23 class action despite having been instructed to conduct a rigorous analysis of certification on remand and despite that the trial would resolve a fact issue central to all claims.

 

The Third Circuit reasoned that even if there were not an FLSA claim at hand, a pre-certification approach to trial would be viewed with the utmost skepticism as it goes against the history and text of Rule 23 and Supreme Court and Circuit Court precedent.

 

In effect, the Third Circuit held, conducting a trial as to the main factual question in the FLSA action would trigger the same concerns as a trial-before-certification approach. As such, the Appellate Court determined that the employer had a strong probability of prevailing on the merits of the mandamus petition.

 

The Third Circuit stressed that Rule 23 was in fact amended to include a provision requiring certification "[a]s soon as practicable after the commencement of [the] action," Fed. R. Civ. P. 23 (c)(1) (amended 2003), to avoid the very outcome that would result if the trial court were to move forward with the trial in the FLSA matter prior to certifying the Rule 23 class, i.e., allowing class members to "await developments or even final judgment to determine whether participation would be favorable to their interests." See Am. Pipe & Constr. Co. v. Utah, 414 U.S. 538, 547 (1974).

 

The Appellate Court likened the trial court's attempt to move forward with the FLSA trial, to "foisting trial-before-certification on an unwilling Rule 23(b)(3) defendant," which the Third Circuit recognized was against the precedent of the Supreme Court of the United States, seven of the federal Circuit Courts of Appeals, and the Third Circuit itself.

 

The Third Circuit stressed that if the FLSA trial reached a conclusion in favor of the plaintiffs, it would effectively have identified and determined the merits of the class members' common factual question.

 

The Appellate Court further stated that allowing FLSA trials in hybrid wage-and-hour lawsuits prior to Rule 23 class certification to become the norm would mean employees would not likely ever opt in to an FLSA action. This would result in a win-win for the employees and would unfairly disadvantage the employer.

 

The Third Circuit further reasoned that given that the employer had a reasonable probability for success, mandamus was their only avenue to address the error of the trial court. An appeal was unavailable because there was no final ruling under 28 U.S.C. 1291 and the collateral order doctrine did not permit an immediate appeal.

 

For the reasons discussed above, the Third Circuit concluded the employer would be irreparably damaged by the airing of evidence relating to their liability prior to the certification of the Rule 23 class.

 

The Appellate Court further reasoned that the MLOs would not be injured because their damages would be held constant during the stay period should they ultimately recover and if their claim were unsuccessful the delay would make no difference.

 

Finally, the Third Circuit found that a stay did not weigh against the public interest, as the public now benefited from the discussion of the potential difficulties of prosecuting an FLSA opt-in collective action and Rule 23(b)(3) opt-out class action at the same time.

 

After explaining its decision in granting the stay, the Third Circuit determined the stay was no longer necessary.

 

The Third Circuit dismissed the request for reassignment of the trial judge as moot, as the trial judge filed a supplemental response joining the petition for the case to be reassigned.   The Third Circuit expressed confidence that the new trial judge who would be reassigned the case would follow the Third Circuit's prior direction to "conduct a 'rigorous' examination of the factual and legal allegations underpinning [the] claims before deciding…class certification."

 

As such, the stay was dissolved and the mandamus petition was dismissed in part as moot and denied in part as unnecessary.

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 6th Floor
Chicago, Illinois 60602
Direct:  (312) 551-9320
Fax: (312) 284-4751

Mobile:  (312) 493-0874
Email: rwutscher@MauriceWutscher.com

 

Admitted to practice law in Illinois

 

 

 

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