Class Actions: 2021 Update

• Publication year: 2021
• Author: Rachel M. Terp

CLASS ACTIONS: 2021 UPDATE

AUTHORS^*

Rachel M. Terp

Andrea (Drea) Núñez

INTRODUCTION

The last year was an active one for class, mass, and representative litigation, portending further developments in 2022. This article covers some of these recent developments, including questions addressing arbitration preemption, standing, and settlement fairness.¹

ARBITRATION: AB 51, SB 707, AND PAGA DO NOT CONFLICT WITH THE FAA.

Arbitration is a quickly evolving area of law that has critically impacted class, collective, and mass litigation since the United States Supreme Court started taking an expansive view of the preemptive scope of the Federal Arbitration Act (FAA) with respect to consumer and employment contracts.² The pandemic years have been no different.³ In 2019, the state legislature passed two laws—AB 51 and SB 707—that curtail the circumstances under which arbitration agreements may be entered into and enforced. These laws have mostly survived legal challenges that they conflict with the purposes of the FAA. The year 2021 ended with the United States Supreme Court granting certiorari to consider whether an individual's right to bring representative actions in court, including under the Labor Code Private Attorneys General Act of 2004 (PAGA), conflicts with the FAA. Expect further developments in this important area of law.

AB 51 & CHAMBER OF COMMERCE V. BONTA

In late-2019, Governor Gavin Newsom signed into law Assembly Bill 51 (AB 51),⁴ codified at Labor Code section 432.6 and Government Code section 12953. The law prohibits employers from requiring workers to sign waivers pertaining to rights under the Fair Employment and Housing Act (FEHA) or the Labor Code, including arbitration agreements, "as a condition of employment, continued employment, or the receipt of any employment-related benefit."⁵ Labor Code section 432.6 also prohibits employer retaliation for an applicant's or employee's refusal to enter into such an agreement.⁶ Any agreement requiring the employee to "opt out of a waiver or take any affirmative action" in order to reserve their FEHA or Labor Code rights is considered to place an impermissible condition on employment.⁷ To enforce their rights to employment, continued employment, or non-

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retaliation after refusing to sign a waiver, a worker may seek injunctive relief and other remedies, as well as attorneys' fees.⁸ However, once a worker signs an arbitration agreement, the arbitration provision may only be invalidated if it is otherwise unenforceable under the FAA.⁹ The law applies only to contracts for employment entered into, modified, or extended on or after January 1, 2020,¹⁰ and it does not apply to post-dispute settlement or negotiated severance agreements.¹¹

In advance of AB 51's January 1, 2020 effective date, the Chamber of Commerce and other business interests sought declaratory relief and an injunction to stop government enforcement of the law. The U.S. District Court of the Eastern District of California issued a preliminary injunction, enjoining the law to the extent that it touches on issues of arbitration. The court found a likelihood of success on the merits that the FAA preempted AB 51 because the latter bill placed arbitration on unequal footing with other laws and interfered with the purpose and objectives of the FAA.¹² The government appealed.

In Chamber of Commerce of United States v. Bonta,¹³ the Ninth Circuit reversed, in part, the lower court's preliminary injunction, thereby partially reviving AB 51. In the 2-1 decision, the majority held that the FAA does not preempt Labor Code section 432. 6 because the two statutes do not conflict.¹⁴ Section 432.6 regulates contract formation, whereas the FAA ensures the enforcement of already-executed arbitration agreements. The court reasoned that Section 432.6 does not make enforcement of the FAA impossible because it does not discriminate on its face against the enforcement of arbitration agreements and creates no contract defense allowing the invalidation or nonenforcement of an arbitration agreement.¹⁵ Further, the court reasoned that Section 432.6 does not stand as an indirect obstacle to accomplishing the FAA's purposes and objectives.¹⁶

The Ninth Circuit affirmed the district court's ruling that the FAA preempts the AB 51 provisions that permit civil and criminal sanctions on employers as applied to executed arbitration agreements.¹⁷ The appellate court reasoned that such penalties necessarily punish employers for entering into arbitration agreements, thereby creating impermissible obstacles to the purposes and objectives of the FAA.¹⁸

Judge Sandra Segal Ikuta's dissent reads like a clarion call to those who might provide future review:

The majority holds that if the employer successfully "forced" employees "into arbitration against their will," . . . the employer is safe, but if the employer's efforts fail, the employer is a criminal. . . . This tortuous ruling is analogous to holding that a statute can make it unlawful for a dealer to attempt to sell illegal drugs, but if the dealer succeeds in completing the drug transaction, the dealer cannot be prosecuted."¹⁹

In October 2021, the Chamber petitioned for reconsideration en banc by the Ninth Circuit²⁰ and may eventually petition for certiorari.

For now, the Ninth Circuit's decision is the law of the land. While the Ninth Circuit vacated the lower court's injunction,²¹ the appellate court's mandate has not yet issued due to the Chamber's request for en banc review, so for now, the district court's injunction against government enforcement remains in place.²²

Any California employer that still utilizes arbitration agreements should carefully evaluate whether its practice for entering into such agreements complies with Labor Code section 432.6.

The language of the district court's injunction was addressed to government officials.²³ While reasonable minds can disagree, bold private litigants may interpret the injunction as inapplicable to nongovernment actors, and seek to enforce their rights under the law without waiting for a mandate to issue.

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SB 707 & TEQUILLA TOLBERT V. SISYPHIAN, LLC

In 2019, Governor Newsom signed Senate Bill 707, a law that makes it harder for employers and sellers to delay arbitration by not paying their required arbitration fees. The law, which amends sections 1280 and 1281.96 of the Code of Civil Procedure and adds sections 1281.97, 1281.98, and 1281.99, provides individuals with procedural options and remedies when a company fails to pay arbitration fees on time The framework for SB 707 was based on case law holding that companies that delay or refuse to submit payment in arbitration are in default and can no longer compel the claimant back to arbitration.²⁴ Similarly, under SB 707, if the drafting party (i.e. the party that wrote the agreement) does not pay the costs required to initiate or proceed with arbitration within 30 days after the due date, it has breached the arbitration agreement and thereby waives its right to compel arbitration.²⁵ Employee and consumer plaintiffs can then withdraw the claim from arbitration and proceed in a court of appropriate jurisdiction or compel arbitration, and the drafting party must pay reasonable attorneys' fees and costs related to the abandoned arbitration.²⁶ Additionally, the court or the arbitrator is empowered to impose sanctions on the drafting party, including monetary, evidentiary, and terminating sanctions.²⁷

SB 707 was a response to concerns about companies delaying arbitration. Before the law went into effect on January 1, 2020, companies sometimes compelled employees and consumers into arbitration and then strategically withheld arbitration fees, putting the proceedings on hold.²⁸ This was a tactic used by some companies—including Chipotle,²⁹ Lyft,³⁰ Uber,³¹ and Postmates³²—in response to mass arbitration campaigns in which many individuals filed arbitration claims against employers at the same time.³³ Avoidance tactics often worked. For example, after delaying payment in response to a mass of individual arbitrations filed against Postmates, the company eventually convinced the AAA to permit just fifty randomly selected arbitrations to move forward.³⁴

After the passage of SB 707, Postmates sought to block 10,356 separate arbitrations filed by couriers against the company.³⁵ Postmates filed an application for a temporary restraining order. The court denied the request.³⁶ Postmates then sought, among other things, declaratory judgments that Postmates cannot be compelled to arbitrate on a "de facto class basis" and that SB 707 is preempted and unconstitutional under the contracts clauses of the United States and California Constitutions.³⁷ The court denied the motions, finding that: SB 707 is not preempted by the FAA because the former does not invalidate arbitration agreements; SB 707 is not unconstitutional because it fosters rather than impairs contract compliance; and couriers without factual disputes regarding the existence of arbitration agreements were able to commence arbitration.³⁸

Currently before the Ninth Circuit is another case challenging SB 707 on preemption grounds. In Tequilla Tolbert v. Sisyphian, LLC, appellants argue that the FAA preempts SB 707 because the California law penalizes companies for refusing to pay arbitration fees.³⁹ Appellees contend there is no conflict between SB 707 and the FAA, instead arguing that SB 707 promotes arbitration by "penalizing bad actors and incentivizing timely payment of required arbitration fees."⁴⁰ They cite Ninth Circuit precedent that a party's "failure to pay required costs of arbitration" qualifies as a "default" under the FAA.⁴¹

Effective January 1, 2022, another statute now bolsters Senate Bill 707. Senate Bill 762 amends sections 1281.97 and 1281.98 of the Code of Civil Procedure to require arbitration providers to distribute invoices for the fees and costs to commence litigation to all parties to the arbitration on the same day and by...