Morgan v. Ramours Furniture Company, Inc.

Given the potential for additional disputes, however, part of that process should include determining whether and how to implement such agreements with existing employees. The opinion, which is rife with truisms, highlights the inclination of New Jersey courts to take notions of fairness and equity into their decision making.

Case Facts

The decision arose from the trial court’s denial of Raymours Furniture Company’s (“Raymours”) motion to compel arbitration of plaintiff’s claim alleging age discrimination and retaliation in violation of the New Jersey Law Against Discrimination (“LAD”). Raymours sought arbitration based on a provision in the company’s employee handbook. Although the defendants appealed the denial of their motion to compel arbitration on numerous grounds, the Court focused primarily on the following few facts.

Employee Makes an Internal Complaint, Then is Fired for Refusing to Sign an Arbitration Agreement

Plaintiff contended that upon complaining of age discrimination on the job, defendants gave him an ultimatum –he could either sign a stand-alone arbitration agreement, or be discharged.  When plaintiff refused to sign the agreement, Raymours followed through and terminated his employment.  Plaintiff responded by filing suit.

Raymours Moves to Compel Arbitration Under the Handbook – Despite the Handbook’s Disclaimers

The Company moved to compel arbitration of the plaintiff’s claims based on an arbitration clause and waiver of the right to sue, included in the company handbook.  The handbook, however, was prefaced with the following contract disclaimer:

Nothing in this Handbook or any other Company practice or communication or document, including benefit plan descriptions, creates a promise of continued employment, employment contract, term or obligation of any kind on the part of the Company.

Likewise, the company’s annual electronic acknowledgement of receipt of the handbook included similar contract disclaimer language that the employee,

Understand[s] that the rules, regulations, procedures and benefits contained therein are not promissory or contractual in nature and are subject to change by the company.

Court’s Analysis in Affirming the Denial of the Company’s Motion to Compel Arbitration

In rendering its decision, the Court invoked principles of equity – finding that it would be inequitable to allow an employer to take contrary positions vis-à-vis the contractual nature of the handbook according to whichever position better suited the employer at the time (i.e., claiming that the handbook is not a contract when sued by an employee for breach of contract, but then insisting that the handbook language is contractual when seeking to enforce the handbook’s arbitration provision).

The Court also relied on contractual principles in arriving at its decision, and explained that its decision was wholly consistent with the Federal Arbitration Act – citing to a recent Fourth Circuit decision refusing to enforce a handbook-based arbitration clause, based on nearly identical circumstances.[2]

Take-Away

To be enforceable, the agreement to arbitrate must be in an unambiguous contract.  The Morgan opinion suggests in dicta that “had the plaintiff executed the stand-alone arbitration agreement presented to him when a rift formed in the parties’ relationship, a different outcome would likely have followed.”   When it comes to handbooks and arbitration clauses, the Appellate Division made it clear that employers cannot have their cake and eat it too.

[1] Morgan v. Ramours Furniture Company, Inc., A-2830-14T2, 2016 N.J. Super. LEXIS 1 (App. Div. Jan. 7, 2016).

[2] Lorenzo v. Prime Commc’ns, L.P., 806 F.3d 777 (4th Cir. 2015).

Yesterday, the California Court of Appeal ruled against The Wet Seal Retail, Inc. in its appeal of the denial of its motion to compel arbitration.  The trial court determined that the arbitration agreement at issue impermissibly waived representative actions under the Private Attorney General Act (PAGA).  Because the agreement also stated that it was not to be enforced if the waiver provision was found unconscionable, the court denied the motion to compel arbitration.  On appeal, the decision was affirmed.  This case highlights the current divide between state and federal courts in California on the enforcement of representative action waivers and the need for the US Supreme Court to accept certiorari of Iskanian v. CLS Transp. Los Angeles, LLC.  (See our prior blog post on Iskanian here.)

In 2011, the US Supreme Court in AT&T Mobility v. Concepcion ruled that class actions may be waived through arbitration agreements.  Last year, the California Supreme Court followed suit in Iskanian.  However, the California Supreme Court gave with one hand and took with another, also finding that the statutory right to bring representative claims under PAGA may not be waived by an arbitration agreement.  Because PAGA claims are typically included in wage and hour litigation, employers were faced with the conundrum of crafting agreements in which PAGA claims are bifurcated or permitting PAGA representative claims to be heard in arbitration.  Although a petition for writ of certiorari with the US Supreme Court has been filed in Iskanian, until the Court accepts the petition and rules, or denies the petition and lets the California holding stand, employers will remain uncertain as to how to address PAGA claims in arbitration agreements.

In the meantime, Iskanian has created a divide between state and federal courts in California on the issue of PAGA waivers.  Montano v. The Wet Seal Retail, Inc. is among the California state court cases adopting the holding in Iskanian.  Meanwhile, five federal district courts have all found PAGA waivers enforceable: Ortiz v. Hobby Lobby Stores, Inc.; Chico v. Hilton Worldwide, Inc.; Langston v. 20/20 Companies, Inc.; Mill v. Kmart Corp.; and Fardig v. Hobby Lobby Stores, Inc.   The line in the sand has been drawn and employers should expect that the choice of forum in which their motion to compel arbitration is heard will largely decide whether a PAGA waiver will be found enforceable for the time being.

The Wet Seal case serves as a cautionary tale to retailers whose arbitration agreements call for the court to nullify the agreement if the class/collective action waiver is found to be unenforceable.  Had the agreement permitted the court to enforce the remainder of the agreement, Wet Seal may have been able to compel the individual claims into arbitration and bifurcate the PAGA representative claims, as the court suggested in Iskanian.  Thus, employers who wish to proceed with individual claims in arbitration should consider including either a PAGA waiver with instructions to enforce the remainder of the agreement even if the PAGA waiver is found unenforceable or language that carves out representative claims that may not be waived as a matter of law. Because the law remains in flux, this is a particularly good time to assess risks under currently operative arbitration agreements and adjust agreements accordingly.

One of the main battlegrounds between employers and employees relates to the ability of employers to preclude class actions by way of arbitration agreements containing class action waivers.  In California, the seminal case of Gentry v. Superior Court (“Gentry”) has had the practical effect of invalidating class action waivers in employment arbitration agreements since 2007.  Gentry held that an employment class action waiver was unenforceable as a matter of California public policy if the class action waiver would “undermine the vindication of the employees’ unwaivable statutory rights” under the Labor Code.  Thus, California retailers and national retailers with a business presence in California have found it extremely difficult, if not impossible, to enforce class action waivers in their employment arbitration agreements over the past seven years and have seen scores of California wage and hour cases proceed in court under the harsh hand of Gentry.

The landscape changed drastically in 2010 when the United States Supreme Court issued its decision in AT&T Mobility, LLC v. Concepcion (“Concepcion”).   There, the Supreme Court held that the Federal Arbitration Act (“FAA”) preempts state laws or policies that deem arbitration agreements unconscionable and unenforceable on the basis that they preclude class actions.  While the Concepcion case related to a consumer arbitration agreement, many have questioned whether its impact extended to employment arbitration agreements, such as the ones invalidated on public policy grounds under Gentry. 

Iskanian v. CLS Transportation Los Angeles, LLC is the first case to test this issue before the California Supreme Court.  The decision takes one step forward and one step back.  First, the Court held that Gentry has been abrogated by Concepcion.  As such, courts may not refuse to enforce an employment arbitration agreement simply because it contains a class action waiver.  The Court further rejected the argument that a class action waiver is unlawful under the National Labor Relations Act. 

However, the Court also found that an employee’s right to bring a representative action under Private Attorney General Act (“PAGA”) is nonwaivable. Under PAGA, an employee may bring a civil action personally and on behalf of other current or former employees to recover civil penalties for Labor Code violations.  Of the civil penalties recovered, 75 percent goes to the State of California and the remaining 25 percent go to the “aggrieved employees.”  The Court held that “an arbitration agreement requiring an employee as a condition of employment to give up the right to bring representative PAGA actions in any forum is contrary to public policy.”  The Court also found that “the FAA’s goal of promoting arbitration as a means of private dispute resolution does not preclude [California’s] Legislature from deputizing employees to prosecute Labor Code violations on the state’s behalf.”  The Court explained that PAGA waivers do not frustrate the FAA’s objectives because the FAA aims to ensure an efficient forum for the resolution of private disputes, whereas a PAGA action is a dispute between an employer and the State, which is being brought in a representative capacity by the employee.  Because the State derives the majority of the benefit of the claim and any judgment is binding on the government, it is the “real party in interest,” making a PAGA claim more akin to a law enforcement action than a private dispute.  Because of this, it is within California’s police powers to enact PAGA and prevent the waiver of representative PAGA claims.

The practical effect is that even if a class action waiver is enforceable, any purported waiver of a representative PAGA action will be unenforceable.  As a result, a complaint filed in court that includes a PAGA cause of action will arguably remain with the court unless the claims are bifurcated.  As for Iskanian and his former employer, the Court left these questions to the parties to resolve.  While it is possible that Iskanian will be appealed to the United States Supreme Court for guidance, at least for the foreseeable future employers should expect plaintiffs’ counsel to include PAGA causes of action in order to frustrate employer efforts to move wage and hour claims to arbitration.

Going forward, retail employers may want to consider adopting agreements with their California employees that expressly permit representative PAGA claims to be brought in arbitration while waiving all other class claims to the extent allowed by law.  Alternatively, employers may revise their agreements to allow for bifurcation of claims or expressly exclude PAGA claims from the scope of the agreement.  In either case, employers should use this opportunity to review the terms of their arbitration agreements and put new agreements in place with California employees, if necessary.    

Last month, the California Court of Appeal ruled that a former employee of Forever 21 must try her claims against the retailer in arbitration, enforcing the company’s employment arbitration policy and reversing a lower court decision finding the agreement unconscionable under California law.  The plaintiff, Maribel Baltazar, alleged that she had been discriminated against by the retailer due to her race and sexually harassed by a supervisor and coworker.  She filed a complaint against Forever 21 and several of its employees in the Los Angeles Superior Court and the retailer moved to compel Baltazar to arbitration.

Reversing the lower court, the Court of Appeal found that Baltazar had been given the opportunity to review the arbitration agreement, which was contained in her employment contract, and that the contract’s provision allowing the parties to seek injunctive relief in court did not unduly favor Forever 21.  The panel noted that six of the claims asserted in Baltazar’s suit were brought under the Fair Employment and Housing Act (“FEHA”), which authorizes injunctive relief, and that there was nothing to suggest that the employer would be more likely than the employee to seek provisional remedies.

Injunctive relief provisions have sounded the death knell for many employment arbitration agreements in California of late, with multiple appellate decisions citing an injunctive remedy as unduly favoring the employer.  Ostensibly, these courts are inclined to believe that an employer is more likely than an employee to seek injunctive relief.  The Baltazar court felt otherwise. Until this issue is considered by the California Supreme Court, it remains likely that the luck of the draw will ultimately decide whether an arbitration agreement is enforceable if it contains a provisional remedies provision that allows parties to seek an injunction in court.