CA Law Yields to FAA: Class Waiver in Arbitration Agreement Not Barred by CLRA

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[authors: Christine A. Scheuneman, Brian D. Martin, Amy L. Pierce, Nathaniel R. Smith]

Despite the U.S. Supreme Court’s 2011 decision in AT&T Mobility LLC v. Concepcion regarding the enforceability of arbitration agreements under the Federal Arbitration Act, plaintiffs in California have creatively argued that the FAA does not preempt certain state laws that expressly permit class actions. That position recently took another hit when a California Court of Appeal concluded that “the FAA preempts the CLRA’s anti-waiver provision because the provision acts as an obstacle to the FAA’s intention of enforcing arbitration agreements according to their terms.” Instead of proceeding with her class action claims in court, the plaintiff may be required to arbitrate her claims on an individual basis as provided in the contract she signed.

The Fourth District Court of Appeal in Caron v. Mercedes-Benz Financial Services USA LLC, __ Cal. App. 4th ___ (July 30, 2012), held that the Federal Arbitration Act (“FAA”) preempts the anti-waiver provision in the California Consumers Legal Remedies Act (“CLRA”). Caron noted that “no meaningful difference exists” between the CLRA’s anti-waiver provision and the “Discover Bank rule” that the U.S. Supreme Court held was preempted by the FAA in AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011). As representative plaintiffs attempt to avoid arbitration provisions in consumer contracts by advancing narrow interpretations of the FAA’s preemptive effect, Caron joins a line of cases recognizing that the U.S. Supreme Court “has spoken on the issue.”

The defendants in Caron unsuccessfully sought to compel the plaintiff Lee Anne Caron to arbitrate her claims on an individual basis, as provided in the Retail Installment Sales Contract she signed when she purchased a pre-owned vehicle. The trial court found the arbitration agreement was unenforceable because it waived the plaintiff’s right to bring a class action under the CLRA. The CLRA expressly permits class actions and declares that any waiver of its provisions “is contrary to public policy and shall be unenforceable and void.” The trial court determined that it was obligated to follow the decision in Fisher v. DCH Temecula Imports LLC, 187 Cal. App. 4th 601 (2010) and to hold that the arbitration agreement was unenforceable because of the class waiver. It declined to consider the plaintiff’s unconscionability challenges.

By the time of defendants’ appeal, the U.S. Supreme Court had issued its opinion in Concepcion. Concepcion held that the Federal Arbitration Act (“FAA”) preempts state law rules that act as obstacles to enforcing arbitration agreements according to their terms. Concepcion explicitly invalidated the so-called “Discover Bank rule” upon which Fisher, and thus the Caron trial court, relied in holding that a class waiver was contrary to public policy. After Concepcion, states cannot condition the enforcement of arbitration agreements on the availability of class procedures.

Caron Gives Concepcion a Fair Reading

The Fourth District Court of Appeal in Caron applied Concepcion and concluded that the CLRA’s “anti-waiver” provision, like the Discover Bank rule, is a state law rule that “prevented the parties from enforcing their arbitration agreement according to its terms.” The FAA therefore preempted the CLRA’s anti-waiver provision. To the casual observer, this may appear to be unremarkable, but to anyone tracking post-Concepcion decisions in California, Caron fits within a larger context. Caron, for example, recognizes that “no meaningful difference exists” between the CLRA’s anti-waiver provision and the Discover Bank rule invalidated in Concepcion. Similarly, the Ninth Circuit Court of Appeals in Kilgore v. KeyBank Nat’l Assn., 673 F.3d 947 (9th Cir. 2012), held, based on Concepcion, that the FAA preempted a judicial rule that invalidated class waivers for certain injunctive relief claims. In contrast, the Court of Appeal in Brown v. Ralphs Grocery Co., 197 Cal. App. 4th 489 (2011), concluded that Concepcion did not apply to representative actions brought under the Private Attorney General Act (“PAGA”), and that a waiver of PAGA representative actions is unenforceable. (In October 2011, the California Supreme Court denied review of Brown, and on April 16, 2012, the U.S. Supreme Court did as well.) Iskanian v. CLS Transportation Los Angeles LLC, 206 Cal. App. 4th 949 (2012), thereafter addressed the FAA’s preemptive effect on a PAGA claim and concluded that the U.S. Supreme Court “has spoken on the issue,” requiring it to follow the “binding authority” of Concepcion. Iskanian created a split in authority on whether representative PAGA actions remain nonarbitrable post-Concepcion. Caron falls in line with Kilgore and Iskanian.

Caron Leaves it to the Trial Court to Decide Unconscionability in the First Instance

As confirmed in Concepcion, the FAA does not preempt generally applicable state law contract defenses such as duress and unconscionability. In Caron, the panel declined to decide plaintiff’s unconscionability challenges because this issue had not been reached in the first instance by the trial court. In contrast, in Sanchez v. Valencia Holding Co., LLC, 201 Cal. App. 4th 74 (2011), the panel avoided the FAA preemption, deciding unconscionability in the first instance. Sanchez currently is on review before the California Supreme Court. It remains to be seen how future cases – including the California Supreme Court’s review of Sanchez – will further shape the post-Concepcion landscape in California and elsewhere.

Published In: Alternative Dispute Resolution (ADR) Updates, Civil Procedure Updates, General Business Updates, Conflict of Laws Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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