United States: Arbitrate This! Ninth Circuit Issues Two Wins For California Retail Employers

Last Updated: July 14 2014
Article by Carla J. Feldman, Michael Stevens and Stanley G. Stringfellow

On June 23, a frequently employee-friendly United States Court of Appeals for the Ninth Circuit delivered two significant, pro-employer decisions pertaining to employee arbitration agreements. In Johnmohammadi v. Bloomingdale's, Inc., the court affirmed a district court's order granting Bloomingdale's motion to compel arbitration, whereas in Davis v. Nordstrom, Inc., the court reversed a district court's denial of Nordstrom's motion to compel.

Both decisions accord with and follow the United States Supreme Court's 2011 decision in AT&T Mobility LLC v. Concepcion, where the Court established the supremacy of the Federal Arbitration Act by upholding a class action waiver provision in a valid arbitration agreement notwithstanding the California state court's determination that the provision was unconscionable.

In Bloomingdale's, the question before the Ninth Circuit was whether an arbitration agreement that required employees to arbitrate claims on an individual basis violated either or both the National Labor Relations Act or the Norris-LaGuardia Act, where the employee had a 30-day period in which she could opt out of the arbitration agreement without prejudice to her employment status. The plaintiff, Fatemeh Johnmohammadi, argued that the class arbitration waiver restrained her rights to engage in concerted activity. The court, however, disagreed. Citing the 30-day opt-out period provided for in Bloomingdale's arbitration agreement that an employee could exercise without any effect on his or her job status, and there being no other evidence to the contrary, the court concluded that signing the arbitration agreement was not a condition of employment. Based on this, the court concluded that, because Johnmohammadi was given the choice between arbitrating employment claims on an individual basis or retaining the right to litigate them on a class basis, and because she knowingly chose arbitration, she could not show that her employer interfered with or restrained her "right to do anything."

Johnmohammadi attempted to show that she was unlawfully coerced into signing the arbitration agreement by arguing that the offer of arbitration to her and other employees constituted an impermissible benefit in exchange for their agreement to refrain from protected activity – conduct expressly prohibited by the National Labor Relations Act. The court again disagreed, finding that the benefits to employees of arbitration, particularly at the onset of employment, were uncertain, at best, and were not "of such a character that [they] would tend to interfere with an employee's freedom of choice." Consequently, because agreeing to arbitrate was not a condition of employment, and because Johnmohammadi was free to decline arbitration, the court concluded that Bloomingdale's did not interfere with, restrain, or otherwise violate her rights under federal law.

The Ninth Circuit considered a different, yet equally impactful question in Nordstrom. In 2011, after and in response to Concepcion, Nordstrom revised the arbitration agreement contained within its employee handbook to include a waiver of most types of class action disputes. Notably, the employee handbook contained a provision that required Nordstrom to notify employees with 30 days' written notice of any significant changes to the handbook, the purpose for which was to give employees sufficient time "to consider the changes and decide whether or not to continue in employment subject to the changes." Accordingly, Nordstrom thereafter sent employees written notice that it had revised the arbitration agreement, and included complete copies of the revised arbitration agreement with the notice. Several weeks after receiving notice of the revised handbook, plaintiff Faine Davis filed a wage-and-hour class action lawsuit, notwithstanding the arbitration provision and the recently added class waiver.

The main issue before the court was whether Nordstrom was obligated under California law to inform employees that their continued employment after receiving notice of the revision constituted "acceptance of new terms of employment" in order for the revisions to be binding on them. Although the handbook informed employees that continued employment constituted acceptance of any changes to the handbook, Nordstrom did not specifically communicate this message to employees in its notice about the changes to the arbitration agreement. The district court concluded that California law required Nordstrom to provide such specific notice, and on this basis, denied Nordstrom's motion to compel. The Ninth Circuit, however, disagreed. It reasoned that California law only required employers to give "reasonable and fair notice" of any changes to the terms of employment, but found no requirement that employers specifically advise employees that continued employment constitutes acceptance of the changes. Therefore, because Nordstrom had provided fair and reasonable notice of the changes to the arbitration agreement, the revised arbitration agreement was binding and enforceable, and the motion to compel should have been granted.

Although Davis raised an unconscionability argument, the Ninth Circuit declined to rule on it because it considered the issue unresolved under California law. The court noted the case then before the California Supreme Court, Iskanian v. CLS Transportation Los Angeles, LLC, in which the state high court was considering whether, under Concepcion, the FAA preempted a state court's refusal to enforce a class action waiver on public policy or unconscionability grounds. Remarkably, the California Supreme Court issued its opinion in that matter on the same day the Ninth Circuit issued its opinions in Bloomingdale's and Nordstrom, holding that Concepcion abrogated California law that permitted courts to deny arbitration on public policy or unconscionability grounds. (Iskanian, however, was not the unilateral victory for employers that the Ninth Circuit decisions were since the state high court refused to apply arbitration agreements to claims brought under California's Private Attorney General Act ("PAGA"). Employers, therefore, should be wary of the Iskanian decision: although class actions may decrease through the use of class waivers in arbitration agreements, California employers will likely see a corresponding increase in representative actions under PAGA – an especially sinister threat since PAGA claims have a similar effect as class actions but without the procedural rigors of the class certification process and without offering class members the chance of opting out of a class.)

June 23 was a big day for employers. The Ninth Circuit's decisions in Bloomingdale's and Nordstrom, and, to some extent, the California Supreme Court's decision in Iskanian, informed all employers that they could effectively circumvent class action lawsuits with valid arbitration agreements, regardless if the agreement violated public policy or was otherwise unconscionable. There are still important lingering questions about arbitration agreements (for instance, whether a mandatory class arbitration waiver would violate the NLRA), but as of June 23, an employer in California can sidestep future class action lawsuits by observing the following practices:

  1. Include class action waivers in valid arbitration agreements,
  1. Give employees the option of opting out of the arbitration agreement,
  1. Provide employees an adequate period of time, such as 30 days, to exercise the opt-out option, and
  1. Abstain from making acceptance of the arbitration agreement a condition of employment.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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