Letter of the Law: June 2011

IN THIS ISSUE:

EMPLOYMENT LAW: A Waiver of Rights to Assert Class Action Claims in Arbitration Agreements

FAMILY LAW: Automatic Restraining Orders

CONSTRUCTION: California Civil Code Section 2782 - Schwarzenegger and the Legislation's Legacy

A Waiver of Rights to Assert Class Action Claims in Arbitration Agreements

By: Kyle D. Kring & Brendan J. Coughlin

In a potentially far-reaching decision affecting wage/hour and other class action litigation brought against employers, the United States Supreme Court has held in the case of AT&T Mobility LLC v. Concepcion et ux. (2011) 131 S.Ct. 1740, that an arbitration agreement may legally require a waiver of the right to assert class action claims in arbitration. Many important aspects of this ruling specifically abrogate or potentially alter previously controlling California employment case law. The holding is on the cutting-edge of employment dispute resolution, and employers should immediately consider adopting or having their existing employee arbitration agreements reviewed with knowledgeable counsel to take full advantage of the new law.

AT&T Mobility v. Concepcion began in February 2002, when Vincent and Liza Concepcion purchased wireless phone service from Cingular Wireless that included free phones. The cellular telephone contract between the parties provided for arbitration of all disputes, and required that claims be brought in the parties' individual capacity, and not as a plaintiff or class member in any purported class. AT&T acquired Cingular in 2005. After the Concepcions were charged sales tax on the retail value of the phones, approximately $30, they sued AT&T in California Federal District Court in March 2006. Their lawsuit was consolidated with a class action alleging that AT&T had engaged in false advertising and fraud by charging sales tax on the "free" phones.

The Federal District Court denied AT&T's motion to compel arbitration pursuant to the Concepcions' contract, relying on the California State Supreme Court's decision of Discover Bank v. Superior Court (2005) 36 Cal.4th 148. Discover Bank held that class waivers in consumer arbitration agreements are unconscionable if the agreement is in an adhesion contract, disputes between the contracting parties predictably involve small amounts of damages, and if it is alleged that the party with the superior bargaining power has carried out a scheme to deliberately defraud. The Ninth Circuit Court of Appeal in California agreed that the provision was unconscionable under California law, and held that the Federal Arbitration Act (FAA), which makes arbitration agreements "valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract," did not preempt its ruling.

In AT&T Mobility v. Concepcion, the United States Supreme Court found that nothing in the FAA suggests an intent to preserve state-law rules that stand as an obstacle to the accomplishment of the FAA's objectives, which include the encouragement of arbitration to foster dispute resolution. The Court stated that the principal purpose of the FAA is to ensure "that private arbitration agreements are enforced according to their terms."

This new case is causing controversy because practitioners of employment law have quickly seen that the holding may extend to employment contracts between businesses and their employees. AT&T Mobility v. Concepcion relates to a consumer contract, not an employment contract. But the possibility that an employee arbitration agreement that includes a class action waiver could now be enforceable in California is receiving great and instant attention.

The California Supreme Court set out the requirements for an enforceable employment arbitration clause under the state Fair Employment and Housing Act in Armendariz v. Foundation Psychcare Services, Inc. (2000) 24 Cal.4th 83. This case has subsequently been applied to hundreds of employment law claims in California of various types. The requirements of an enforceable arbitration clause sufficient to resolve an employment dispute have become numerous. For example, the agreement cannot limit the remedies available to an employee in a court action, and must provide for sufficient discovery by the Plaintiff. The employer cannot require an employee to pay for the arbitrator or any additional costs beyond those routinely faced in court litigation. Also, there should be a written decision by the arbitrator capable of review, and the employer cannot unfairly limit the kinds of claims that are subject to the arbitration. Any employer in California seeking to add an enforceable dispute arbitration clause to its employment agreements with its employees has been required to satisfy the Armendariz requirements.

Currently, it is premature to conclude that AT&T Mobility v. Concepcion is so sweeping as to overrule Armendariz in its entirety. The Federal Supreme Court specifically held that a state would be free to enact a law "requiring class-action-waiver provisions in adhesive arbitration agreements to be highlighted" or other laws requiring adequate notice of arbitration agreements, so long as the laws do not "conflict with the FAA or frustrate its purpose to ensure that private arbitration agreements are enforced according to their terms." We may not learn the full extent that the Armendariz requirements remain valid after AT&T Mobility v. Concepcion until a sample case is brought to challenge Armendariz. Established restrictions on employment arbitration agreements may still be controlling, even if California courts can no longer invalidate an arbitration agreement for the sole reason that it prohibits class action arbitrations.

Businesses of all sizes therefore should consider revising their employment agreements to include arbitration provisions that bar class action claims in arbitration. The ability to successfully compel arbitration of employment disputes, and to prevent claimants from pursuing class action remedies in arbitration, are potential benefits to businesses, reducing exposure to the costs of traditional litigation, as well as significant class action damages. But such employment agreements must be properly drafted in light of the latest law. The experienced employment attorneys at Kring & Chung are well-versed in these issues, and are available to help your business draft employment agreements that minimize your liabilities, and maximize your rights under the law.

Automatic Restraining Orders

In a family law matter, the Family Law Summons contains automatic restraining orders on its second page. These automatic restraining orders, referred to as ATROS and pronounced "at-röse," take effect immediately against the petitioner upon issuance of the summons, and take effect immediately against the respondent upon service of the petition on the respondent. These ATROS should be taken every bit as seriously as any other court-issued restraining order as the court enforces ATROS equally. In Goold v. Superior Court (2006) 145 Cal.App.4th 1, the Court sanctioned and incarcerated a husband for repeated violations of the ATROS. In Marriage of McTiernan & Dubrow (2005) 133 Cal.App.4th 1090, a Court awarded the wife one-half of the lost profits from the husband's sale of community securities that were sold by the husband without written consent or Court Order.

The ATROS restrain either party from taking several enumerated actions, which are explained in further detail below.

1) The parties are restrained from removing minor children from the state of California without the prior written consent of the other party or an order of the court. I have seen other parties and even other attorneys attempt to argue that "remove" means a relocation rather than an out-of-state visit. Due to the lack of case law interpreting this specific ATRO, I err on the side of caution in my practice and instruct my clients not to take the children out of the state of California, for any purpose, without first obtaining written consent of the other parent or a court order.

2) The parties are restrained from:

(a) Transferring. Example - gifting, selling, bequeathing, etc. Having a "garage sale" during a divorce and selling anything without the other party's written consent is a very typical "no-no" (yes, that is legal jargon);

(b) Encumbering. Example - borrowing against, putting at-risk, or using as collateral. Using a pre-established HELOC during a divorce without the other party's written consent is "no-no";

(c) Hypothecating. Does anyone really know what this means? Actually, it means to pledge something as collateral in order to secure a debt. An example would be taking a wedding ring to a pawn shop;

(d) Concealing. Example - moving to a storage facility without notice and access to other party. Opening up a safety deposit box to protect certain things during a divorce without notifying the other spouse is a "no-no";

(e) Or in any way disposing of any property, which is liberally interpreted, whether

(1) real; or

(2) personal; whether

(i) community;

(ii) quasi-community (Property outside of California); or

(iii) separate (Yes - even your own separate property!)

without the written consent of the other party or an order of the court...except...

(A) In the usual course of business. The party had better be able to prove to the court how their action falls within this category; or

(B) For the necessities of life. Example - party can sell an asset for fair market value in order to feed your children before a support order is in place if your spouse is not voluntarily supporting party and kids - the key is that it must be sold at "fair market value"; and

(C) Requiring each party to notify the other party of any proposed extraordinary expenditures at least five business days before incurring those expenditures and to account to the court for all extraordinary expenditures made after service of the summons on that party.

However, the ATROS do not prevent the following types of actions.

1) A party may use community funds and that party's separate funds to pay for reasonable attorney's fees and costs in a dissolution or legal separation proceeding, but an accounting must be made for such;

2) Creation, modification or revocation of a will. I always stress to my clients that they create a "divorce will" while the divorce is pending and then amend their divorce will after the divorce if necessary. A divorce will can provide some, but not all, protection in the event that the party dies during a dissolution in that at least they can designate someone other than their spouse to inherit their share of community assets;

3) Revocation of a nonprobate transfer, including a revocable trust, pursuant to the instrument, provided that notice of the change is filed and served on the other party before the change takes effect. A nonprobate transfer means an instrument, other than a will, that makes a transfer of property on death, including a revocable trust, pay on death account in a financial institution, Totten trust, transfer on death registration of personal property, or other instrument of a type described in Section 5000 of the Probate Code. A nonprobate transfer does not include a provision for the transfer of property on death in an insurance policy or other coverage held for the benefit of the parties and their child or children for whom support may be ordered, to the extent that the provision is subject to paragraph (3) of subdivision;

4) Elimination of a right of survivorship to property, provided that notice of the change is filed and served on the other party before the change takes effect; and

5) Creation of an unfunded revocable or irrevocable trust.

If you are contemplating divorce, or have additional questions about what actions you may take while a divorce or legal separation is pending, you can reach our team by calling 949-345-1621 or by completing a short online contact form. Flexible appointments are available by request.

California Civil Code Section 2782 - Schwarzenegger and the Legislation's Legacy

By: David P. Ramirez

In general, under the recent amendment to Civil Code § 2782, the subcontractor is now only obligated to provide indemnification for construction defect claims to the extent that such claims arise or result from the subcontractor's scope of work. Subcontractors cannot be required to indemnify a builder or general contractor for liability or defense costs for construction defect claims which arise out of the builder's, general contractor's or other subcontractor's negligence.

Regardless of what you think about Governor Arnold Schwarzenegger and the legacy he has left the State of California, during his tenure the California legislature made various revisions to California Civil Code § 2782 within the last four years which have significantly changed the impact of the section on indemnity provisions in residential construction contracts. Rather than go through the various changes made from 2005 to 2007, we will restrict our review today to those more recent revisions made back in 2008 when Governor Schwarzenegger signed into law California State Assembly Bill 2738. These revisions addressed indemnity and defense obligations in non-wrap situations. The revisions and additions to the Civil Code became effective on January 1, 2009 and only applied to those contracts and contract amendments entered into after January 1, 2009. This date is important because it rescinds prior revisions to § 2782 which would have restricted the use of Type I and Type II indemnity provisions in residential construction contracts beginning on January 1, 2006.

That's the good news. As we all know, Governor Schwarzenegger and the State legislature were well known for providing us with a mixed bag of goods. The bad news is that the subcontractor now has defense obligations related to construction defect claims to the builder and/or general contractor pursuant to subsection (d) and (e) of Civil Code § 2782. Subsection 2782(d) requires the builder or general contractor in a residential construction setting to tender the claim to the subcontractor before any defense obligation arises. The builder or general contractor must also provide information that directly implicates the subcontractor's scope of work. Details of the claim are set forth in Civil Code § 910 (a).

Upon receipt of the tender, the subcontractor has the option to either provide a complete defense of the builder at its cost or pay its reasonable portion of defense so long as an itemized invoice of defense fees and costs has been sent to the subcontractor (Civil Code § 2782(d)(1) and (2)). However, if the subcontractor elects to defend the builder at its own cost, then the subcontractor will be liable for any vicarious liability imposed upon the builder. (Civil Code § 2782(d)(1)). Should the subcontractor elect to pay an allocated portion, that allocation must be reasonable and is subject to reallocation upon final resolution of the claim (Civil Code § 2782(d)(2)). Subsection (f) of 2782 also provides builders, general contractors, subcontractors the right to seek equitable indemnity for any claim governed by this section.

Please note that if the subcontractor breaches its duty by failing to timely accept the tender, to adequately conduct the defense, or by failing to pay allocated attorney fees and costs, the subcontractor will be liable to the builder or general contractor for damages, potentially including attorney fees and costs.

In short, with the myriad of overlapping laws regarding Civil Code § 2782 and its application to residential construction contracts entered into after January 1, 2009, as a subcontractor you will need to be mindful of the duties and obligations required under this section. Additionally, builders and general contractors also have obligations and duties that they have to comply with in order to fully take advantage of this amended provision. Counsel who is quick to respond on your behalf and provide you guidance in regard to these rights and obligations may be needed until further clarification is received from the courts regarding the indemnification duties under this amended provision.

Attorney Advertising. This client newsletter is a periodical publication of Kring & Chung, LLP and should not be construed as legal advice or a legal opinion on any specific facts or circumstances. The contents are intended for general information purposes only, and you are urged to consult a lawyer concerning your own situation and any specific legal questions you may have. Any tax information or written tax advice contained herein (including any attachments) is not intended to be and cannot be used by any taxpayer for the purpose of avoiding tax penalties that may be imposed on the taxpayer.

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