California Courts Rule for and against Arbitration

by Ballard Spahr LLP
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Two recent Ninth Circuit opinions and a California Supreme Court ruling demonstrate that the debate over the enforceability of consumer arbitration provisions is far from over. With the U.S. Supreme Court weighing whether to dive back into the debate this term, companies should take an opportunity to review their consumer arbitration provisions and seek assistance with navigating the newly emerging case law.

In Ferguson v. Corinthian Colleges, Inc., decided October 28, 2013, the Ninth Circuit held that California case law exempting claims for “public injunctive relief” from arbitration was preempted by the Federal Arbitration Act (FAA). Under the so-called Broughton-Cruz rule, California courts permitted consumers to act as private attorneys general under state consumer protection statutes, despite the existence of otherwise binding arbitration agreements, and seek injunctive relief in court designed to benefit the general public. The courts held that claims for public injunctive relief were not suitable for arbitration because courts were better equipped to administer such a remedy than arbitrators.

The Ninth Circuit, however, held that the Broughton-Cruz rule was “clearly incompatible” with subsequent U.S. Supreme Court decisions such as AT&T Mobility LLC v. Concepcion, Marmet Health Care Center, Inc. v. Brown, and Nitro-Lift Technologies, LLC v. Howard. Those decisions, the Ninth Circuit concluded, hold that the FAA preempts state law that “prohibits outright arbitration of a particular type of claim” and requires courts to “rigorously enforce arbitration agreements according to their terms.”

In addition, the Ninth Circuit found that the Broughton-Cruz rule was flawed because it ran afoul of the principles set forth in American Express Co. v. Italian Colors Restaurant. In that case, the Supreme Court rejected the argument that arbitration agreements should not be enforced if the plaintiffs cannot effectively vindicate their rights in arbitration.

Nevertheless, on the same date it decided Ferguson, the Ninth Circuit affirmed a district court’s denial of a motion to compel arbitration of class action claims asserting violations of California labor law. In Chavarria v. Ralphs Grocery Co., the Ninth Circuit agreed with the district court that the arbitration provision was both procedurally and substantively unconscionable.

The Ninth Circuit emphasized that the arbitration terms were not provided to the employee-plaintiff until three weeks after she had agreed to be bound by them. Moreover, the arbitration clause prohibited the use of institutional administrators such as the American Arbitration Association and JAMS and imposed prohibitive administrative and filing costs on the plaintiff. The Ninth Circuit determined that its ruling was not preempted by the FAA because in American Express, the Supreme Court noted that an arbitration agreement might be unenforceable if it required a plaintiff to pay administrative and filing fees that are “so high as to make access to the forum impracticable.”

Earlier in October, the California Supreme Court held that even after Concepcion, “state courts may continue to enforce unconscionability rules that do not interfere with fundamental attributes of arbitration.” The issue in Sonic-Calabasas A, Inc. v. Moreno was whether employees who had agreed to arbitrate wage disputes could be required to waive their statutory right to a state administrative hearing that would assist them in recovering wages owed.

The court concluded that although Concepcion preempts a state law rule categorically prohibiting the waiver of such hearings in an arbitration agreement, “such an agreement may be unconscionable if it is otherwise unreasonably one-sided in favor of the employee.” The case was remanded to the trial court to determine whether the arbitration agreement was unconscionable.

The interplay between FAA preemption principles and state law unconscionability doctrines may be addressed again by the U.S. Supreme Court if it grants the petition for certiorari filed on July 24, 2013, in Geneva-Roth Ventures v. Kelker. The petition presents the question of whether the FAA preempts Montana’s rule subjecting arbitration provisions in standard-form contracts to a heightened standard of consent that does not apply to other terms in form contracts. The Court should rule on the petition within the next few months.

In the meantime, companies should make sure that their consumer arbitration provisions are as consumer-friendly as possible to avoid the results in Chavarria and Sonic-Calabasas. We routinely draft and revise consumer arbitration agreements for clients taking into account new court decisions and emerging legal theories.

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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