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Archive for the ‘United States Court of Appeals for the Ninth Circuit’ Category

Does the Presumption of Arbitrability Apply if a Contract Contains two Broad, Overlapping Forum Selection Clauses, one for Arbitration and one for Litigation?

June 7th, 2015 Arbitrability, Arbitration Agreements, Arbitration Practice and Procedure, Contract Interpretation, Contract Interpretation Rules, FAA Preemption of State Law, Federal Policy in Favor of Arbitration, Moses Cone Principle, Presumption of Arbitrability, Stay of Litigation, United States Court of Appeals for the Ninth Circuit Comments Off on Does the Presumption of Arbitrability Apply if a Contract Contains two Broad, Overlapping Forum Selection Clauses, one for Arbitration and one for Litigation?

Introduction

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Back in 1983 the U.S. Supreme Court, in the landmark decision Moses H. Cone Memorial Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24-25 (1983) (Brennan, J.), famously declared that “[t]he [Federal] Arbitration Act establishes that, as a matter of federal law, any doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration, whether the problem at hand is the construction of the contract language itself or an allegation of waiver, delay, or a like defense to arbitrability.” Moses Cone thus established that there was a presumption in favor of arbitrability in cases governed by the Federal Arbitration Act, a conclusion that a number of other lower courts had previously reached, and which the Court had adopted about 23 years previously as a matter of federal labor law derived from Section 301 of the Labor Management Relations Act (sometimes referred to as the “Taft-Hartley Act”). See United Steel Workers of Am. v. Warrier & Gulf Nav. Co., 363 U.S. 574, 582-83 (1960) (Douglas, J.) (“An order to arbitrate the particular grievance should not be denied unless it may be said with positive assurance that the arbitration clause is not susceptible of an interpretation that covers the asserted dispute. Doubts should be resolved in favor of coverage.”)

The presumption of arbitrability is not a talismanic solution to every arbitration-law related problem. In fact it is designed to address only questions about the scope of an arbitration agreement.

The presumption has two related components. First, when courts construe the scope provision of an arbitration agreement to determine what merits-related issues the parties agreed to arbitrate, the court resolves ambiguities in favor of arbitration.  See, e.g., Mastrobuono v. Shearson Lehman Hutton, Inc., 514 U.S. 52, 62 (1995). Second, it presumes that procedural issues arising out of arbitrable disputes, and contract-related defenses to arbitrability—that is, “allegation[s] of waiver, delay and like defenses to arbitrability[,]” are presumptively for the arbitrator. See Moses Cone, 460 U.S. at 24-25; Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79, 84 (2002).

Roughly ten days ago, in a post about U.S. Circuit Judge Richard A. Posner’s Sprint Spectrum decision, we wrote about how some judges have interpreted the presumption too expansively:

The federal policy in favor of arbitration has, at least arguably, been interpreted to apply more expansively than the U.S. Supreme Court likely intended. As a result, even though the U.S. Supreme Court has said many times that arbitration is supposed to be a “matter of contract,” or one of “consent not coercion,” an overly expansive interpretation of the policy has, at least in some cases, arguably resulted in arbitration agreements being placed on a considerably more advantaged footing than ordinary contracts. As we read it, Judge Posner’s comment in Roughneck raises the question whether this might have more to do with “limit[ing] judicial workloads” than a desire to enforce contracts as written and according to their terms.

(Read our Sprint Spectrum post here.)

With all the hoopla about the presumption of arbitrability, one would think it very difficult to find a case that didn’t apply the presumption of arbitrability in a situation where it was supposed to apply it. In general that’s probably true, but on June 2, 2015 the U.S. District Court for the Western District of Washington proved that truth is not a universal one.

In Scolari v. Elliot Rust Co., No. C15-5163 (BHS), slip op. (W.D. Wash. June 2, 2015) the court considered whether ambiguity created by apparently conflicting forum selections clauses: one arbitral and two judicial. While the Court’s reasoning indicated that it considered the issue before it one of contract interpretation—the resolution of ambiguity—it nevertheless held that the ambiguity had to be resolved against the drafter of the contract, which the district court thought Washington law required, rather than in favor of arbitration, which was what federal law required. While it apparently recognized that application of the presumption, rather than a state-law contra proferentem rule, would have required the court to stay the litigation, it nevertheless denied the requested stay of litigation, concluding that the issue before it concerned the enforceability of the arbitration agreement, rather than an interpretation of its scope.

The net effect of the ruling was for the district court to implicitly have found that a judicial forum selection clause trumped an arbitral one, simply because they overlapped in scope, and that accordingly the arbitral forum selection clause was not enforceable. There was no legal basis for such a finding and the district court cited none.

The seriousness of the error was compounded by the district court’s acknowledgement that the arbitration proponent had advanced a reasonable interpretation of the arbitration agreement and judicial forum selection clauses, which harmonized them, and would have allowed arbitration to proceed, with the district court staying its hand in the interim. Instead of adopting that interpretation, it said that the arbitration challenger’s interpretation was likewise “reasonable,” but the court did not say what the challenger’s interpretation was, and given the disposition of the case, we assume that the “interpretation” was that the parties must not have intended to include a concededly existing and valid arbitration agreement in their agreement. But that interpretation not only ignored the presumption of arbitrability, but the general rule of contract interpretation that one contract provision not be construed to negate another.

We do not know whether the arbitration proponent preserved the argument for appeal, but there was another ground for a stay of litigation in this case that would have bypassed the issue of the presumption of arbitrability. The arbitration agreement contained a delegation clause, which clearly and unmistakably required the parties to submit to arbitration all disputes about arbitrability. Because there was no dispute about the existence or validity of the delegation clause, the Court should have held that the resolution of the apparent conflict between arbitral and judicial forum selection clauses was a question for the arbitrators.

If the arbitration proponent decides to appeal the decision, we hope that the U.S. Court of Appeals for the Ninth Circuit will correct these errors without delay, so that the parties can arbitrate their disputes, which is, after all, what they agreed to do.

Background

yay-12775922-digitalScolari v. Elliot Rust Co., No. C15-5163 (BHS), slip op. (W.D. Wash. June 2, 2015), arose out of the purchase, sale, termination and buyback of an interest in a limited liability company. Effective January 1, 2013 the plaintiff (the “Buyer”) purchased a ten-percent ownership interest in  Elliot Rust Companies, LLC (the “LLC”), the purchase and sale of which was governed by a “Grant Agreement” executed by the parties “according to the terms of [an] Amended and Restated LLC Agreement of Elliot Rust Companies, LLC dated January 1, 2013.” Both agreements were apparently part of the same transaction and were entered into at or about the same time.

The Buyer and LLC were the only parties to the Grant Agreement, which provided that the Buyer would acquire its 10% interest “according to the terms of the terms of the Amended and Restated LLC Agreement of Elliot Rust Companies, LLC dated January 1, 2013

The Grant Agreement provided, among other things, that:

[Scolari] understands, acknowledges and agrees that, upon execution of this Grant Agreement and the joinder to the LLC Agreement, [Scolari] shall, without further action or deed, thereupon be bound by the LLC Agreement, as it may thereafter be restated or amended, as though a direct signatory thereto.

It contained a “jurisdiction” clause that stipulated Washington law as governing and the U.S. District Court for the Western District of Washington as the exclusive judicial forum:

Governing Law: Jurisdiction. This Grant Agreement and the transaction contemplated hereby shall be governed by and construed according to the laws of the state of Washington. With respect to any dispute arising out of or related to this Grant Agreement or the LLC Agreement, the parties hereby consent to the exclusive jurisdiction of the United States District Court for the Western District of Washington. . . .

yay-1916763-digitalThe LLC Agreement, unlike the Grant Agreement, contained a broad arbitration agreement, which said:

Arbitration. All disputes, claims or controversies relating to this Agreement that are not resolved by mediation shall be submitted to final and binding arbitration. . . . Questions or arbitrability or the scope of the parties’ agreement to arbitrate shall be determined by the arbitrator.

But like the Grant Agreement, the LLC Agreement also contained a jurisdiction and venue clause:

Jurisdiction and Venue. Any suit involving any dispute or matter arising under this Agreement may only be brought in the United States District Court for the Western District of Washington or the Superior Court of Pierce County. All Members hereby consent to the exercise of personal jurisdiction by any such court with respect to any such proceeding.

The LLC terminated the plaintiff on November 6, 2014, and on December 15, 2014 offered to buy plaintiff’s 10% interest out for $158,882.60. The plaintiff refused the offer one week later, claiming that he did not believe it to be accurately valued.

yay-13760132Unable to agree a resolution the plaintiff filed suit in March 2015, requesting a judgment declaring he has a 20% interest in the profits of the LLC, and equitable relief.

The LLC moved on April 3, 2015 to dismiss for improper venue or to stay the action pending arbitration under Section 3 of the Federal Arbitration Act pending arbitration. The Court denied the motion.

The District Court’s Analysis and Conclusions

The Court began its analysis by acknowledging that its “role” was confined “‘to determining (1) whether a valid agreement to arbitrate exists and, if it does, (2) whether the agreement encompasses the dispute at issue.’” Slip op. at 4 (quoting Chiron Corp. v. Ortho Diagnostic Sys., Inc., 207 F.3d 1126, 1130 (9th Cir. 2000)). If the arbitration proponent establishes that the answers to both questions are “yes,” then, said the Court, the Court must “‘enforce the arbitration in accordance with its terms.’” Slip op. at 4 (quoting 207 F.3d at 1130). And in discussing the standard applicable to question (2), the Court, playing homage to the strong presumption in favor of arbitration, said “‘any doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration. . . .’” Slip op. at 4 (quoting 207 F.3d at 1131).

So far, so good. But having accurately stated the governing rules, the Court inexplicably failed to heed them. Continue Reading »

SCOTUS Decides AT&T Mobility LLC v. Concepcion!

April 27th, 2011 Arbitrability, Arbitration Agreements, Arbitration Practice and Procedure, Class Action Arbitration, Class Action Waivers, Practice and Procedure, Unconscionability, United States Court of Appeals for the Ninth Circuit, United States Supreme Court Comments Off on SCOTUS Decides AT&T Mobility LLC v. Concepcion!

This morning the United States Supreme Court handed down its long-awaited decision in AT&T Mobility LLC v. Concepcion, No. 09-893, slip op. (April 27, 2011).  The Court held that the Federal Arbitration Act preempts California’s Discover Bank rule, which deems unconscionable class waivers in adhesive contracts under certain circumstances, because it “‘stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress.  .  .  .'”  Slip op. at 18 (quoting Hines v. Davidowitz, 312 U.S. 52, 67 (1941)).  (The majority, concurring and dissenting opinions are here.)    

Associate Justice Antonin Scalia wrote the majority opinion, joined by Chief Justice John G. Roberts and Associate Justices Anthony M. Kennedy, Clarence Thomas and Samuel A. Alito, Jr.  Justice Thomas wrote a concurring opinion and Associate Justice Stephen G. Breyer dissented, joined by Associate Justices Ruth Bader Ginsburg, Sonia Sotomayor and Elena Kagan.  

Stay tuned for more….

AT&T Mobility, LLC v. Concepcion: What Would Cousin Vinny Have to Say About The Ninth Circuit’s Interpretation of the Equal Footing Principle?

December 10th, 2010 Arbitration Agreements, Arbitration Practice and Procedure, California State Courts, Class Action Arbitration, Class Action Waivers, Practice and Procedure, United States Court of Appeals for the Ninth Circuit, United States Supreme Court Comments Off on AT&T Mobility, LLC v. Concepcion: What Would Cousin Vinny Have to Say About The Ninth Circuit’s Interpretation of the Equal Footing Principle?

One of my favorite scenes from the movie My Cousin Vinny (1992) is Vincent Laguardia Gambini’s (a/k/a “Vinny’s”) opening statement in the criminal trial of his cousin and cousin’s friend, both of whom were arrested and mistakenly charged for murder and robbery while driving through Alabama.  Vinny (played by Joe Pesci) — a native New Yorker who is as out of place in a rural Alabama courtroom as I suppose anyone could be — dozes off during the prosecution’s opening statement only to be jarred awake by his cousin — who is facing the death penalty — so that he can deliver an opening statement.  He saunters over to the jury, and says, gesturing at the prosecutor, “Everything that guy just said is bull$#!+.  Thank you.”  Then he returns to the defense table.  (Watch the scene here, which begins approximately three minutes and 33 seconds into the clip.)     Continue Reading »

Some Initial Thoughts on the SCOTUS AT&T Mobility, LLC v. Concepcion Oral Argument

November 16th, 2010 Arbitration Agreements, Arbitration Practice and Procedure, California State Courts, Class Action Arbitration, Class Action Waivers, Practice and Procedure, United States Court of Appeals for the Ninth Circuit, United States Supreme Court Comments Off on Some Initial Thoughts on the SCOTUS AT&T Mobility, LLC v. Concepcion Oral Argument

As many readers know, on Tuesday, November 9, 2010 the United States Supreme Court heard oral argument in AT&T Mobility, LLC v. Concepcion, No. 09-893 (blogged here, here, here and here).  You can find the transcript of the argument, here, and the audio, here

After reviewing the oral argument transcript a number of times, and listening to the audio, we still believe it more likely than not that AT&T Mobility will prevail.  We’ll develop that thought further in upcoming installments of our Disputing guest post, “AT&T Mobility LLC v. Concepcion:  Can Discover Bank Withstand Stolt-Nielsen Scrutiny?” (Part I, here).

There have been a number of differing opinions post argument on how the Court will likely rule.  Some believe the argument foreshadows victory for the Concepcions.  Others are not so certain, and still others believe that AT&T Mobility may emerge the victor.  Like all such opinions, they are are really nothing more than educated guesswork, and should be taken with a grain of salt. 

We don’t suggest our take on things is anything more, but we share it for what it is worth.  We think the oral argument was basically a toss-up, and that it mainly confirmed what we already knew or surmised:  That this is a very difficult case, and that the eight Justices who asked questions appear to be split along ideological lines.  We expected no less in light of the 5-3 and 5-4 split decisions in Stolt-Nielsen, S.A. v. AnimalFeeds Int’l Corp., 559  U.S. ___, 130 S. Ct. 1758 (2010); and  Rent-A-Center West v. Jackson, 561 U.S. ___, 130 S. Ct. 2772 (2010). 

The key point on which the argument shed no meaningful light is what Associate Justice Clarence Thomas makes of this case.  Justice Thomas joined the Stolt-Nielsen and Rent-A-Center majority opinions, but those cases, unlike this one, did not concern the preemptive scope of the Federal Arbitration Act

Preemption is controversial, and its importance extends far beyond the AT&T Mobility case.    Particularly controversial — and very supportive of AT&T Mobility’s position — is the doctrine of “implied preemption,” also known as “conflict” or “obstacle” preemption. In Federal Arbitration Act cases this doctrine tells us that  state laws or policies that undermine “the goals and policies of the FAA” are preempted by the Act.  Volt Info. Sciences, Inc. v. Board of Trustees of Leland Stanford Univ., 489 U.S. 468, 477-78 (1990).

But Justice Thomas believes that the implied preemption doctrine is unconstitutional.  See Wyeth v. Levine, 555 U.S. ___, 129 S. Ct. 1187, 1205 (2009) (Thomas, J. concurring) (“implied pre-emption doctrines that wander far from the statutory text are inconsistent with the Constitution.  .  .  .”).  He also believes that Congress intended the Federal Arbitration Act to be a procedural statute that applies only in federal court.  See, e.g., Allied-Bruce Terminix Cos. v. Dobson, 513 U.S. 265 (1995) (Thomas, J., dissenting); Buckeye Check Cashing, Inc. v. Cardegna, 546 US 440 (2006) (Thomas, J., dissenting) (“[I]n state-court proceedings, the FAA cannot be the basis for displacing a state law that prohibits enforcement of an arbitration clause contained in a contract that is unenforceable under state law.”). 

He thus believes that state courts can apply state arbitration law as they see fit, irrespective of whether the result would be different had the case been brought in federal court.  While AT&T Mobility — like Stolt-Nielsen and Rent-A-Center — was brought in federal court, and everybody concedes that the Federal Arbitration Act applies, Justice Thomas remains a strong proponent of federalism.  

Justice Thomas’ deference to state law is problematic for AT&T Mobility.  Perhaps AT&T Mobility’s best argument is that the Federal Arbitration Act impliedly preempts the Discover Bank rule for the reasons set forth in Stolt-Nielsen.   Apparently concluding that the Justices in the Stolt-Nielsen majority — including Justice Thomas —  are the ones most likely to support AT&T Mobility’s position, AT&T Mobility deliberately downplayed the implied preemption issue, although it made clear that it believes the Federal Arbitration Act both expressly and impliedly preempts the Discover Bank rule. 

That was a wise strategy given Justice Thomas’ rejection of implied preemption.  Its wisdom was borne out by what transpired at the argument:  of the eight Justices that asked questions, the four more liberal ones (Associate Justices Ruth Bader Ginsburg, Stephen G. Breyer, Sonia M. Sotomayor and Elena Kagan) appear to be leaning in favor of finding that the Federal Arbitration Act does not preempt the Discover Bank rule, while the four more conservative ones (Chief Justice John G. Roberts, and Associate Justices Antonin G. Scalia, Anthony M. Kennedy, and Samuel J. Alito, Jr.) appear to be leaning in favor of finding that the Federal Arbitration Act preempts Discover Bank.      

That means Justice Thomas is likely to hold the deciding vote, but where he’ll ultimately cast it, nobody knows (at least outside the Supreme Court).  We believe there are equally plausible reasons why he might vote  for or against preemption.  

We’ll explore all of this and more in our Disputing guest post.  In the meantime, keep an eye out for our next Forum article on AT&T Mobility, which will focus on the highlights of the oral argument and tie them into the express and implied preemption issues that this critically important case presents.    

U.S. Law Week Quotes Philip J. Loree Jr. Comments on SCOTUS AT&T Mobility LLC v. Concepcion Class Waiver Case

October 23rd, 2010 Arbitration Agreements, Arbitration Practice and Procedure, Class Action Arbitration, Class Action Waivers, United States Court of Appeals for the Ninth Circuit, United States Supreme Court Comments Off on U.S. Law Week Quotes Philip J. Loree Jr. Comments on SCOTUS AT&T Mobility LLC v. Concepcion Class Waiver Case

On October 14, 2010 I was interviewed by Tom P. Taylor, a reporter for The United States Law Week, about the AT&T Mobility LLC v. Concepcion case (blogged here, here, here and here), which will be argued before the United States Supreme Court on November 9, 2010.  On October 19, 2010 Tom’s excellent article on AT&T Mobility was published in 79 U.S.L.W., No. 14 (October 19, 2010) (BNA), and he extensively quoted my comments in it.   

U.S. Law Week is a subscription only publication, but I received permission from the Bureau of National Affairs (“BNA”) to post a copy of the article on my LinkedIn profile.  So, if you are a member of Linkedin, you can access a copy of the article here (it does not appear in my “public” LinkedIn profile).

We would like to thank Tom for conducting a very professional interview and following up with a well-written, comprehensive and informative article about this critically important case.

We are following AT&T Mobility closely, and will be commenting further on it in the near future.  I am also working on a guest-post about the case for another ADR-oriented blog.  Stay tuned for details….

AT&T Mobility LLC v. Concepcion: What is the Scope of Federal Preemption in Class Waiver Cases?

September 30th, 2010 Arbitrability, Arbitration Agreements, Arbitration Practice and Procedure, Class Action Arbitration, Class Action Waivers, Practice and Procedure, Unconscionability, United States Court of Appeals for the Ninth Circuit, United States Court of Appeals for the Second Circuit, United States Supreme Court Comments Off on AT&T Mobility LLC v. Concepcion: What is the Scope of Federal Preemption in Class Waiver Cases?

Part II

Introduction

Part I of this two-part post (here) briefly discussed the background of  AT&T Mobility LLC v. Concepcion, No. 09-893, a case pending before the United States Supreme Court that will be argued on November 9, 2010.  We now delve into the details of the preemption questions before the Court and take a guess at the outcome. 

Federal Arbitration Act Preemption

The Federal Arbitration Act does not preempt all state law applicable to arbitration agreements, but it expressly preempts state law that conflicts with Section 2, and impliedly preempts all state law that “stands as an obstacle to the accomplishment and execution of the full purposes of Congress”  embodied in the Federal Arbitration Act.  See Shroyer v. New Cingular Wireless Serv., Inc., 498 F.3d 976, 988 (9th Cir. 2007) (citations and quotation omitted). 

Does Section 2 of the Federal Arbitration Act Expressly Preempt the Discover Bank Rule?

Section 2 of the Federal Arbitration Act declares that arbitration agreements within its scope “shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.”  9 U.S.C. § 2.  Section 2 establishes substantive federal law that expressly preempts all conflicting state law, except for state law that permits “the revocation of any contract” or governs the formation, interpretation, or construction of contracts generally. 

The exception to federal preemption is exceedingly narrow, for it saves from preemption only state laws that apply equally across the board to all contracts.  The United States Supreme Court summarized it well when it said:

States may regulate contracts, including arbitration clauses, under general contract law principles and they may invalidate an arbitration clause ‘upon such grounds as exist at law or in equity for the revocation of any contract.  What States may not do is decide that a contract is fair enough to enforce all its basic terms (price, service, credit), but not fair enough to enforce its arbitration clause.  The Act makes any such state policy unlawful, for that kind of policy would place arbitration clauses on an unequal footing, directly contrary to the Act’s language and Congress’s intent.

Allied-Bruce Terminix Cos. v. Dobson, 513 U.S. 265, 281 (1995) (citations and quotations omitted; emphasis in original).   Continue Reading »

AT&T Mobility LLC v. Concepcion: What is the Scope of Federal Preemption in Class Waiver Cases?

September 30th, 2010 Arbitrability, Arbitration Agreements, Arbitration Practice and Procedure, Class Action Arbitration, Class Action Waivers, Practice and Procedure, United States Court of Appeals for the Ninth Circuit, United States Supreme Court Comments Off on AT&T Mobility LLC v. Concepcion: What is the Scope of Federal Preemption in Class Waiver Cases?

Part I

Introduction

In our recent feature “What to Make of the Second Circuit Voiding a Class Action Waiver Under California’s Discover Bank Rule,” we briefly discussed AT&T Mobility LLC v. Concepcion, No. 09-893, a case which asks the United States Supreme Court to determine whether the Federal Arbitration Act preempts California’s Discover Bank rule.  The Discover Bank rule deems unconscionable class action and class arbitration waivers in adhesive contracts in circumstances where a consumer alleges that a party with superior bargaining power has committed widespread but small-dollar fraud.  Petitioner AT&T Mobility LLC (“AT&T Mobility”) has filed its brief (here); various organizations, including the Chamber of Commerce of the United States of America, have filed an impressive stack of amicus curiae briefs supporting AT&T Mobility (here); Vincent and Liza Concepcion (the “Concepcions”) have filed their brief, which was posted online earlier today (here); and AT&T will presumably submit a reply brief.  The Court has scheduled argument for November 9, 2010. 

AT&T Mobility is an extremely important case because it will decide whether the Federal Arbitration Act preempts certain state law unconscionability and public-policy-based rules that are principally directed at class arbitration and class action waivers.  This issue has spawned a number of conflicting decisions in the state and federal courts, including Feeney v. Dell, Inc. 454 Mass. 192 (2009), a case we blogged back in 2009 (posts here and here). 

This two-part feature takes a closer look at AT&T Mobility, considers the principal issues before the Court, and ventures a guess on what the outcome will be.   This Part I discusses the background of the case, and Part II (here) outlines Federal Arbitration Act preemption rules, analyzes and explains why we believe the Federal Arbitration Act expressly and impliedly preempts the Discover Bank rule, and provides our best guess as to what the Supreme Court will conclude.     Continue Reading »

What to Make of the Second Circuit Voiding a Class Action Waiver Under California’s Discover Bank Rule?

July 23rd, 2010 Arbitration Practice and Procedure, California State Courts, Class Action Arbitration, Class Action Waivers, Practice and Procedure, United States Court of Appeals for the Ninth Circuit, United States Court of Appeals for the Second Circuit, United States Supreme Court Comments Off on What to Make of the Second Circuit Voiding a Class Action Waiver Under California’s Discover Bank Rule?

After deciding Stolt-Nielsen, S.A. v. AnimalFeeds, Inc. and Rent-A-Center West v. Jackson, the United States Supreme Court left federal arbitration law at a crossroads.  In both cases the Court adhered quite faithfully to its prior Federal Arbitration Act jurisprudence, under which it enforces arbitration agreements according to their terms, without regard to other considerations.  In Rent-A-Center the Court implicitly reaffirmed that these pro-enforcement rules apply equally to contracts of adhesion. 

We will find out whether the Court intends to continue down the same path when it decides AT&T Mobility v. Concepcion next term, a case that raises the question whether California’s Discover Bank  unconscionability rule is pre-empted by the Federal Arbitration Act.  That rule deems unconscionable under California law class-action or class-arbitration waivers where:  (a) “the waiver is found in a consumer contract of adhesion in a setting in which the disputes between the contracting parties predictably involve small amounts of damages”; and (b) “it is alleged that the party with the superior bargaining power has carried out a scheme to deliberately cheat large numbers of consumers out of individually small sums of money.  .  .  .”  Discover Bank v. Superior Court, 36 Cal. 4th 148, 162-63 (2005) (citing Cal. Civ. Code § 1668). 

The Discover Bank rule is grounded in a California-law principle – embodied in Cal. Civ. Code § 1668 – that “contracts which have for their object, directly or indirectly, to exempt anyone from responsibility for his own fraud.  .  .  are against the policy of the law.”   See Cal. Civ. Code § 1668.  If a company is allegedly engaging in fraudulent acts designed to cheat numerous consumers out of small amounts of money, a class action or class arbitration waiver may, if enforced, effectively act as an exculpatory provision that insulates the company from the consequences of its small scale, but widespread fraud, because the individual, allegedly defrauded consumers have little incentive to pursue separate actions or arbitrations to recoup trivial amounts of damages.  See Discover Bank, 36 Cal. 4th at 162-63.  Any contract that had that effect – whether it is a class action waiver in an arbitration clause, an exculpatory agreement or a contract that simply forbids class actions  — would be unconscionable under the rule.  

In Fensterstock v. Education Finance Partners, No. 09-1562-cv, slip op. (2d Cir. July 12, 2010), the United States Court of Appeals for the Second Circuit suggested one path that the United States Supreme Court might take on Discover Bank preemption.  In an interesting opinion, Senior Circuit Judge Amalya Lyle Kearse, joined by Circuit Judges José A. Cabranes and Chester J. Straub, held that the Discover Bank rule was not preempted by the Federal Arbitration Act.  According to the Second Circuit, California’s  Discover Bank rule “’places arbitration agreements on the exact same footing as contracts that bar class action litigation outside the context of arbitration,’” and for that reason the rule is not preempted by the Act.  Slip op. at 16-17 (quoting Shroyer v. New Cingular Wireless Serv., Inc., 498 F.3d 976, 990 (9th Cir. 2007) (emphasis in original)). 

On first blush the Second Circuit’s decision seems reasonable.  But there are some important issues lurking beneath the surface that the Supreme Court will need to address when it decides AT&T MobilityContinue Reading »

The United States Supreme Court Adopts Severability Analysis in Rent-A-Center v. Jackson

June 21st, 2010 Arbitrability, Arbitration Practice and Procedure, Authority of Arbitrators, Class Action Arbitration, Class Action Waivers, Practice and Procedure, Unconscionability, United States Court of Appeals for the Ninth Circuit, United States Supreme Court Comments Off on The United States Supreme Court Adopts Severability Analysis in Rent-A-Center v. Jackson

Yesterday the United States Supreme Court decided Rent-A-Center West v. Jackson, ___ U.S. ___, slip op. (June 21, 2010).  Rent-A-Center raised the question whether “a district court may decide a claim that an arbitration agreement is unconscionable, where the agreement explicitly assigns that decision to the arbitrator.”  The United States Court of Appeals for the Ninth Circuit had said “yes,” but the Supreme Court said “no.”

In a 5-4 opinion by Associate Justice Antonin Scalia, joined in by Chief Justice John G. Roberts, Jr. and Associate Justices Anthony M. Kennedy, Clarence Thomas and Samuel A. Alito, Jr , the Court held that the employee had to arbitrate its claim that certain provisions of an arbitration agreement were allegedly unconscionable because the parties clearly and unmistakably agreed to arbitrate arbitrability questions, and the employee did not specifically claim that that agreement was unconscionable.  The Court said that the parties’ clear and unmistakable agreement to arbitrate arbitrability was, as a matter of federal law, severable from the other provisions of the arbitration agreement, including the ones the employee said were unconscionable.  

Prior to the decision we had advocated in the Forum (here and here), and in our cover story published in the March 2010 issue of Alternatives to the High Cost of  Litigation (blogged here), that the Court should resolve the case in favor of Rent-A-Center using a severability analysis of sorts derived from Buckeye Check Cashing v. Cardegna, 546 U.S. ___ (2006) and Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395 (1967).   And that’s exactly what happened, even though neither side advocated or addressed the severability argument before the Court, a point made by Associate Justice Stevens’ dissenting opinion, which was  joined in by Associate Justices Ruth Bader Ginsburg, Stephen G. Breyer and Sonia Sotomayor.  See Dissenting Op. at 1.  (The district court’s analysis, however, which was reversed by the Ninth Circuit, was, according to the Court, consistent with the Buckeye Check Cashing and Prima Paint severability principle.  See Slip op. at 9.)  Continue Reading »

International Institute for Conflict Prevention and Resolution Newsletter Features Philip J. Loree Jr. Cover Story on Rent-A-Center and Granite Rock

March 16th, 2010 Arbitrability, Authority of Arbitrators, Labor Arbitration, United States Court of Appeals for the Ninth Circuit, United States Supreme Court Comments Off on International Institute for Conflict Prevention and Resolution Newsletter Features Philip J. Loree Jr. Cover Story on Rent-A-Center and Granite Rock

The March 2010 issue of Alternatives to the High Cost of Litigation, the excellent newsletter of the International Institute for Conflict Prevention and Resolution (“CPR”), featured as its cover story an article I wrote on Rent-A-Center West v. Jackson, No. 09-497, and Granite Rock Co. v. Int’l Brotherhood of Teamsters, No. 08-1214, two of the three cases pending before the United States Supreme Court this term.  The article is entitled “It’s Time for Doctrines: The Supreme Court Wrestles with ‘Severability’ and the ‘Clear and Unmistakable’ Standard.” 

These two cases involve, to some degree, the Buckeye Check Cashing/Prima Paint doctrine of severability—a/k/a “separability.”  Rent-A-Center also examines the “clear and unmistakable doctrine,” under which arbitrators can decide arbitrability questions if the parties clearly and unmistakably so agree. 

Rent-a-Center, which arises under the Federal Arbitration Act,  raises the question whether courts or arbitrators get to decide whether an arbitration agreement is unconscionable if the parties clearly and unmistakably agree to submit arbitrability questions to arbitration.  (See our prior posts here, here and here.)   Granite Rock, which arises under Section 301 of the Labor Management Relations Act, concerns whether, on the facts presented, arbitration must go forward and what it should encompass.  (See our prior post here.)

In the article I argue that both cases were wrongly decided by the Court of Appeals for the Ninth Circuit, and that, in Granite Rock, the Ninth Circuit reached the right result (an order compelling arbitration) for the wrong reasons.  I predict that the United States Supreme Court will reverse the Rent-A-Center decision and vacate the Granite Rock decision.

Alternatives to the High Cost of Litigation is a subscription-only publication.   Anyone interested in obtaining a copy of the article can request one at this page.  Subscription information is available at that page, too, as well as publisher John Wiley & Sons, here.

I would like to take this opportunity to thank CPR, and Russ Bleemer, Editor of Alternatives, for their kind assistance and support in featuring my article.  Russ is not only a keen, professional editor, but a pleasure to work with as well.