Archives: May 2007
Mon May 21, 2007
Arbitration Clauses in Employment Contracts
Citing the FAA, in 1991 the Supreme Court enforced a clause in a contract compelling arbitration of disputes between employees and their employer; Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20 (1991). The employee alleged violation of ADEA, a federal statutory right, but the Supreme Court held the arbitration clause enforceable as long as the employee could vindicate statutory rights in a non-judicial forum. Ten years later, reversing the Ninth Circuit, the Supreme Court interpreted the FAA to include all employees-other than transportation workers-within the scope of the statute and subject to arbitration; Circuit City v. Adams, 532 U.S. 105 ( 2001). On remand, the Ninth Circuit refused to enforce the same arbitration clause on grounds the terms were unconscionable; Circuit City Stores, Inc. v. Adams, 279 F.3d 889 (9th Cir. 2002).
The Ninth Circuit subsequently decided a trio of cases refusing to enforce arbitration agreements in employment cases; Circuit City Stores, Inc. v. Mantor, 335 F.3d 1101 (9th Cir. 2003); Ingle v. Circuit City Stores, 328 F.3d 1165 (9th Cir. 2003); Ferguson v. Countrywide Credit Inds., Inc., 298 F.3d 778 (9th Cir. 2002). In a 2005 opinion, a majority of the court concluded it should consider allegations in the complaint in determining whether to enforce the arbitration clause, albeit in a franchise dispute; Nagrampa v. MailCoups, Inc., 469 F.3d 1257 (9th Cir. 2006). The Ninth Circuit’s most recent foray into an employment contract involved a dispte between a major law firm and one of its employees.
The court struck down every element of the arbitration clause executed between an employee and her law firm employer. The court, classifying the employment clause as adhesive (“take or leave it”), and a corresponding failure to allow the employee to “opt out” of the arbitration clause, qualified as procedurally unconscionable conditions. Requiring the employee to file a claim against the employer within one year improperly accelerated the California statute of limitations for statutory claims and is substantively unconscionable. The clause requiring “confidentiality” of the proceedings is also substantively unconscionable; the employer’s exemption from arbitration to protect the attorney client privilege is unconscionable because the language of the arbitration clause is “too broad.” Severance was impossible, concluded the court.
The Ninth Circuit panel occasionally cited Armendariz v. Foundation Psychcare Services, Inc., 24 Cal.4th 83 (2000), the leading California case interpreting arbitration clauses in employment contracts. But the court followed none of the California Supreme Court recommendations listed in Armendariz to enforce arbitration clauses in employment contracts and thereby avoid a finding of “unconscionability.”
Armendariz will enforce employment contracts if remedies for the parties are bilateral; the arbitrator is neutral; limited discovery is allowed; the employer pays the cost of arbitration; the arbitrator writes a reasoned opinion. By incorporating these prophylactic conditions in employment contracts, the California Supreme Court neutralizes the disproportionate bargaining strength of employers. The Ninth Circuit panel ignores these remedial measures, either omitting their presence in the arbitration clause or without acknowledging none exist.
According to well-established Supreme Court law, federal courts must interpret arbitration clauses under general state contract law; Buckeye Check Cashing, Inc.,v. Cardegna, 546 U.S. 440 (2006). The Ninth Circuit cites a handful of selected California Court of Appeal cases but essentially writes its own arbitration law.
This case, and arbitration of employment cases in federal court is discussed in Judge Waddington's electronic text at: www.ArbitrationAdr.com Ch. IV-G-2-a
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Thu May 10, 2007
Arbitration of Skilled Nursing Facility Disputes
The interplay between three statutes, CCP 1295 mandating arbitration of medical services claims, H & S 1430 (Elder Abuse and Dependent Adult Civil Protection Act), and H & S 1530 providing group medical insurance, have created a series of inconsistent decisions in the California Courts of Appeal.
The latest example, decided by the First Appellate District, is Fitzhugh v. Granada Healthcare & Rehabilitation Ctr., LLC, 2007 WL 1272221. In admitting his wife as a resident to a skilled nursing facility, Mr. Fitzhugh signed a contract containing an arbitration clause identifying himself as “Legal Representative/Agent.” The arbitration clause also bound heirs. Fitzhugh, acting in the same legal capacity, also signed a second agreement requiring arbitration of medical services.
Mrs. Fitzhugh died during her tenure at the Granada facility. Fitzhugh and two heirs filed allegations of fraud, wrongful death, elder abuse and H & S 1430, a statute referencing the Patient’s Bill of Rights (Title 22, section 72527 of Cal. Code of Regs). H & S 1430 prohibits arbitration of disputes between the facility and a patient or former patient. Only Granada, and not the physician who may have rendered medical services, is named in the complaint (& caption).
Ruling on the motion to deny arbitration, the appellate court held that the H & S 1430 cause of action and the wrongful death cause of action survive as to the husband and heirs (although no reference is made to survival in the statute or the Regs.). According to the statute, the parties do not waive their right to file a civil action. The trial court never addressed the survival issue.
Assuming wrongful death survives, the husband signed the arbitration agreement as an “agent” of his wife and the arbitration clause extends its coverage to the non-signatory heirs. According to the court, Mr. Fitzhugh did not sign in his personal capacity-apparently not having gone to law school-although an agent can also bind non-signatories under agency law. Apparently the court did not want to confront another questionable decision written by the Fourth District Court of Appeal holding the husband is not the agent of his wife; Flores v. Evergreen at San Diego, LLC, 148 Cal.App.4th 581 (2007). Husbands and wives are fiduciaries and owe a higher legal duty to each other than an agent. Apparently not in some courts.
The court rejects the obvious future course of action mandated by this case as argued by the defendant as follows: the plaintiff will just add a 1430 claim to other claims, i.e., plaintiff files an H & S 1430 non-arbitrable claim with arbitrable claims. Accordingly, the court under Fitzhugh will select litigation of otherwise arbitrable claims (fraud; negligence, wrongful death; breach of contract) on the ground of potential inconsistent results in arbitration; CCP 1281.2. To this argument, the Court of Appeal responds by writing a vigorous defense of 1430.
In order to avoid the result in Fitzhugh, the skilled nursing facility must apparently request the admitting party to execute a power of attorney in advance of a spouse even needing nursing home care; Garrison v. Sup.Ct. 132 Cal.App. 4th 253 (2007).
The court ultimately accepts the theory that dividing the case between two forums, i.e., litigation and arbitration, is a discretionary decision for the trial court; CCP 1281.2. What will happen when the plaintiffs seek to file their medical services claim? This claim, whether it survives or not, is subject to mandatory arbitration; CCP1295. Result: litigation of the wrongful death and H & S 1430 claim and arbitration of the medical services claim.
The court also ignored the argument of plaintiff in the trial court that defendant’s fraud induced the arbitration clause. California law is clear that when a party alleges fraudulent conduct induced the arbitration clause, resolution of that issue is a judicial function. The court should have addressed the issue of whether the arbitration clause was the subject of fraud.
Had interstate commerce been involved, the FAA would have preempted enforcement of the H & S 1430 anti-arbitration clause. “Commerce”, however, is usually not involved in the delivery of medical services or the operation and management of skilled nursing facilities.