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Khalatian v. Prime Time Shuttle, Inc., (2015) 237 Cal.App.4th 651

The FAA Preempts the Labor Code Where an Arbitration Clause Provides for Arbitration of Controversies or Claims Arising Out of the Underlying Contract and the Party Seeking to Enforce Shows the Contract’s Subject Matter Involves Interstate Commerce.

Khalatian v. Prime Time Shuttle, Inc., (2015) 237 Cal.App.4th 651

Plaintiff was an airport shuttle van driver who picked up and dropped off people primarily at LAX for Defendants (Prime Time). Plaintiff entered into a work agreement (Agreement) with Prime Time that specified that Plaintiff was an independent contractor and not an employee and which contained an arbitration provision. After 14 months of litigation, Prime Time moved to compel arbitration.

In supplemental briefing to their motion, Prime Time for the first time asserted preemption under the Federal Arbitration Act (FAA; 9 U.S. C. § 1, et seq.); the trial court denied the motion without reference to the FAA argument. Instead, the trial court held that Prime Time had waived their right to arbitrate by litigating and waiting too long before moving to compel, and further denied the motion on the grounds that Plaintiff’s complaint was based primarily on California Labor Code violations and therefore California law applied. At no point did Plaintiff contend that the arbitration agreement was unconscionable.

Labor Code section 229 provides in relevant part, “Actions to enforce the provisions of this article for the collection of due and unpaid wages claimed by an individual may be maintained without regard to the existence of any private agreement to arbitrate.” By contrast, Section 2 of the FAA provides in relevant part, “A written provision in…a contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction…shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or equity for the revocation of any contract.”

In this case, the Agreement contained the following language, “any controversy or claim between the parties arising out of or relating to this Agreement or any alleged breach thereof, including any issues…that this Agreement or any part hereof is invalid, illegal, or otherwise voidable or void, shall be submitted to binding arbitration.” Thus, the question was which law would control the arbitration clause.

In order to prevail on FAA preemption, Prime Time had to show that the subject matter of the agreement involved interstate commerce.[i] Plaintiff conceded that Prime Time was involved in interstate commerce (including providing shuttle service to and from major California airports and harbors, contracting with Expedia and other web vendors to advertise on the vendors’ websites, and allowing passengers to make reservations and payments online) but argued that Plaintiff himself was not engaged in interstate commerce because he only drove shuttles in California.

The court of appeal adopted the reasoning in Abel v. S. Shuttle Servs., Inc. (11th Cir. 2011) 631 F.3d 1210, 1216 (“the purely intrastate transport of passengers to and from an airport may, under certain circumstances, constitute interstate commerce…”) and held that both Plaintiff and Defendants were engaged in interstate commerce because of the above indicia.

The appellate court further held that Plaintiff’s allegation that he was misclassified as an independent contractor and that therefore the Labor Code (not the Agreement) determined his compensation still fell within the scope of the arbitration provision because Plaintiff’s claims “ar[ose] out of or relat[ed] to” the Agreement. Such broad language in arbitration clauses has been extended to extra-contractual disputes between the contracting parties,[ii] and it was appropriate to arbitrate Plaintiff’s statutory claims since Prime Time had established that the parties’ contract involved interstate commerce,[iii] given the public policy favoring arbitration.

Regarding the waiver issue, the court of appeal held that the trial court’s ruling was not supported by the record (i.e., that Prime Time had not been dilatory nor was trial imminent) and that 14 months was an insufficient amount of time to support waiver of an arbitration clause.[iv]

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[i] Lane v. Francis Capital Mgmt LLC (2014) 224 Cal.App.4th 676, 687-88; Giuliano v. Inland Empire Personnel, Inc. (2007) 149 Cal.App.4th 1276, 1286; Shepard v. Edward Mackay Enter., Inc. (2007) 148 Cal.App.4th 1092, 1101.
[ii] Coast Plaza Doctors Hosp. v. Blue Cross of Calif. (2000) 83 Cal.App.4th 677, 681, fn. 2, 686; Berman v. Dean Witter & Co., Inc. (1975) 44 Cal.App.3d 999, 1003.
[iii] Mitsubishi Motors v. Soler Chrysler-Plymouth (1985) 473 U.S. 614, 626.
[iv] Iskanian v. CLS Transp. Los Angeles LLC (2014) 59 Cal.4th 348, 376-77.