The debate continues: California courts rule for and against arbitration

May 30, 2014

CourtroomThree recent 9th U.S. Circuit Court of Appeals opinions and a California Supreme Court ruling demonstrate that the debate over the enforceability of consumer arbitration agreements is far from over.

Two of these rulings favored arbitration, while the other two did not.

Alan Kaplinsky and Mark Levin of Ballard Spahr LLC in Philadelphia offer an in-depth appraisal of the cases and their implications for the pro- and anti-arbitration camps.

(Westlaw users: Click here for Kaplinsky-Levin article, and see links below for opinions.)

In Ferguson v. Corinthian Colleges Inc., No. 11-56965, 2014 WL 5779514 (9th Cir. Oct. 28, 2013), the 9th U.S. Circuit Court of Appeals said the California Supreme Court’s Broughton-Cruz rule prohibited outright arbitration of a particular type of claim, and thus was preempted by the Federal Arbitration Act.  This ruling was in line with that of the U.S. Supreme Court in American Express Co. v. Italian Colors Restaurant, 133 S. Ct. 2304 (2013).

In Mortensen v. Bresnan Communications LLC, 722 F.3d 1151 (9th Cir. 2013), the 9th Circuit held that even though Montana’s reasonable expectations rule constituted generally applicable Montana law, it was preempted by the FAA because the court found “Concepcion’s holding to be broader than a restriction on the use of unconscionability to end-run FAA preemption.” (AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011).

In Chavarria v. Ralphs Grocery Co., No. 11-56673, 2014 WL 5779332 (9th Cir. Oct. 28, 2013), the appeals court agreed with the lower court that the arbitration provision was both procedurally and substantively unconscionable under California contract law.

Kaplinsky and Levin observe, “The appellate court determined that its ruling was not preempted by the FAA because in Italian Colors, the U.S. 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.’”

California high court weighs in

In Sonic-Calabasas v. Moreno, No. S174475 (Cal. Oct. 17, 2013), 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.

In this case, the issue 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 before the commencement of arbitration.

The state high court concluded that although Concepcion preempts a state law rule categorically prohibiting the waiver of such hearings prior to arbitration, such an agreement may be unconscionable if it is otherwise unreasonably one-sided in favor of the employer.

In light of these decisions, the Ballard Spahr attorneys say, consumer lawyers who are opposed to arbitration “have not given up the fight.”

Kaplinsky and Levin urge companies to maintain and update their arbitration agreements to reflect recent court and legislative developments.

“In particular, they should make sure that their consumer arbitration provisions are as consumer-friendly as possible in order to ward off charges that their arbitration agreements are unconscionable under state law,” the authors recommend.  “Otherwise, they may be easy targets for consumer lawyers still smarting from the sting of Concepcion and Italian Colors.”

The authors can be reached at ballardspahr.com.