1. The Federal Arbitration Act and Arbitrability
Arbitration clauses provide a third mechanism for influencing governing laws and dispute resolution procedures. In most cases, parties may contract to have their disputes resolved by arbitrators rather than by courts, and chosen arbitration can take multiple forms. Parties can opt for binding or nonbinding arbitration; the former type effectively precludes the parties from resorting to courts for a determination of the merits of the claim(s). Sometimes the parties enter into predispute arbitration agreements, where they contract to arbitrate as part of a larger transaction. Alternatively, agreements to arbitrate can be made after a dispute arises. The discussion that follows focuses on predispute agreements to resolve claims with binding arbitration.
Arbitration can provide a number of benefits to contracting parties. First, parties can tailor dispute resolution to their particular needs by choosing the arbitration association, location, and/or applicable rules of procedure. Relatedly, parties can opt for expedited resolution of their claims, making arbitration, at least in theory, more cost effective and less time-consuming than court litigation. Second, the parties choose the arbitrator and can provide in the arbitration clause that the arbitrator must possess particular qualifications. This tailoring enables the parties to opt for industry experts and/or arbitrators with expertise in particular fields of law, which carries the potential of improving the accuracy of decisions. Third, arbitration is less public than are most court proceedings, so parties are better able to keep commercial information confidential. Fourth, as discussed below, arbitration awards are more reliably enforced across national borders than are court awards.
Fifth, party ability to choose governing law can be enhanced through arbitration. In many arbitral contexts, arbitration associations require their arbitrators to apply the law chosen in a contract. For example, the International Center for Dispute Resolution, the international division of the American Arbitration Association, states in Article 28(1) of its arbitration rules that “[t]he tribunal shall apply the substantive law(s) or rules of law designated by the parties as applicable to the dispute.” www.internationalarbitrationlaw.com/icdr-arbitration-rules/ (last visited 7/15/14). And JAMS states in its employment arbitration rules that “[i]n determining the merits of the dispute the arbitrator shall be guided by the rules of law agreed upon by the parties.” JAMS Employment Arbitration Rules and Procedures, Rule 24(c) (2014), available at www.jamsadr.com/rules-employment-arbitration/ (last visited 7/15/14). Where these rules exist, parties may have greater assurance that their choice-of-law clause will be enforced.
Indeed, arbitration can enable parties to opt out of government-created laws altogether. Some industry arbitration forums use private law to resolve disputes, and parties opting for arbitration often can designate private law not in force in any country. Private law can come from private lawmaking bodies who propose rules that aren’t enacted, and some industries create their own trade rules for resolving disputes. For examples of the use of private law to resolve intra-industry disputes, see Bernstein, Opting Out of the Legal System: Extralegal Contractual Relations in the Diamond Industry, 21 J. Legal Stud. 115 (1992); Bernstein, Merchant Law in a Merchant Court: Rethinking the Code’s Search for Immanent Business Norms, 144 U. Pa. L. Rev. 1765 (1996); Bernstein, Private Commercial Law in the Cotton Industry: Creating Cooperation Through Rules, Norms and Institutions, 99 Mich. L. Rev. 1724 (2001). For a good discussion of the use of arbitration to get out from under law, see Ware, Default Rules from Mandatory Rules: Privatizing Law Through Arbitration, 83 Minn. L. Rev. 703 (1999). Finally, parties opting for arbitration often can alter specific rules that would otherwise apply under governing law by, for example, more effectively specifying cost allocations, or limiting recoverable remedies.
These benefits (and others) explain party preference for arbitration clauses, but sometimes the clauses can prove controversial. As with both choice-of-law and choice-of-court clauses, a party with superior bargaining power can push arbitration clauses onto unsuspecting trade partners, and interested third parties would be excluded from arbitration. Courts wishing to strike arbitration clauses are somewhat limited by federal law, however.
Over the last century, arbitration in the United States has experienced substantially increased enforcement of both agreements to arbitrate and arbitral awards. Traditionally, courts were fairly uniformly hostile to predispute agreements to arbitrate. Thomas E. Carbonneau, Cases and Materials on the Law and Practice of Arbitration 47 (3d ed. 2002). Both American and English courts considered irrevocable arbitration agreements as “ousting” the courts of jurisdiction and thus refused to enforce them. Sturges & Murphy, Some Confusing Matters Relating to Arbitration Under the United States Arbitration Act, 17 Law & Contemp. Probs. 580 (1952). Congress stepped in to change this treatment in 1925 with the passage of a law now known as the Federal Arbitration Act (“FAA”), 9 U.S.C. §§1-16. As part of the FAA, arbitration agreements were deemed enforceable and courts were instructed to refer cases to arbitration, with limited exceptions:
§2. Validity, irrevocability, and enforcement of agreements to arbitrate
…[A] contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction, or the refusal to perform the whole or any part thereof, or an agreement in writing to submit to arbitration an existing controversy arising out of such a contract, transaction, or refusal, shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.
§3. Stay of proceedings where issue therein referable to arbitration
If any suit or proceeding be brought in any of the courts of the United States upon any issue referable to arbitration under an agreement in writing for such arbitration, the court in which such suit is pending, upon being satisfied that the issue involved in such suit or proceeding is referable to arbitration under such an agreement, shall on application of one of the parties stay the trial of the action until such arbitration has been had in accordance with the terms of the agreement, provided the applicant for the stay is not in default in proceeding with such arbitration.
§4. Failure to arbitrate under agreement; petition to United States court having jurisdiction for order to compel arbitration;…
A party aggrieved by the alleged failure, neglect, or refusal of another to arbitrate under a written agreement for arbitration may petition any United States district court which, save for such agreement, would have jurisdiction under Title 28, in a civil action or in admiralty of the subject matter of a suit arising out of the controversy between the parties, for an order directing that such arbitration proceed in the manner provided for in such agreement.… The court shall hear the parties, and upon being satisfied that the making of the agreement for arbitration or the failure to comply therewith is not in issue, the court shall make an order directing the parties to proceed to arbitration in accordance with the terms of the agreement.
In addition, the FAA mandates enforcement of arbitral awards. When requested, courts are with limited exception instructed to issue a court judgment confirming the arbitrator’s award, 9 U.S.C. §9, and that judgment carries the same force under the full faith and credit clause as does other judgments. Id. §13. Courts are permitted to vacate an award only when (1) “the award was procured by corruption, fraud, or undue means”; (2) “there was evident partiality or corruption in one or more of the arbitrators”; (3) “the arbitrators were guilty of misconduct” that prejudiced the rights of any party; or (4) “the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not made.” Id. §10. According to some Supreme Court precedent, courts also can set aside arbitral awards in cases where the arbitrator manifestly disregarded clearly applicable law called to the arbitrator’s attention, although more recent cases have questioned whether this is an independent ground for review. See Hall Street Assocs. v. Mattel, Inc., 552 U.S. 576, 585 (2008) (tentative statement in dicta); Stolt-Nielsen, S.A. v. AnimalFeeds Int’l Corp., 559 U.S. 662, 672 n.3 (2010) (declining to decide question). Court ability to modify or correct arbitral awards is also significantly limited. FAA §11.
Finally, parties can appeal court orders that have the effect of failing to enforce or otherwise give effect to the arbitration clause or award, but they are specifically deprived of the right to appeal from interlocutory orders that aid the enforcement of the arbitration clause. 9 U.S.C. §16.
Over time, U.S. Supreme Court decisions have reinforced the importance of arbitration as a dispute resolution tool. For example, the Court’s decisions have interpreted the scope of the FAA quite broadly. Although not mandated by the language of the FAA, it now constrains both state and federal courts. Moses H. Cone Memorial Hospital v. Mercury Construction Co., 460 U.S. 1 (1983); Southland Corp. v. Keating, 465 U.S. 1 (1984). Furthermore, agreements subject to FAA enforcement are “transactions involving commerce, which include all transactions that Congress could regulate under its Commerce Clause authority, including consumer contracts. Allied-Bruce Terminix Companies, Inc. v. Dobson, 513 U.S. 265 (1995). Despite language in the FAA that could have been interpreted to exclude employment disputes from arbitration,1 arbitration clauses in employment contracts are enforceable. Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20 (1991).
The FAA also prevents state lawmakers from singling out arbitration agreements for special rules that do not apply to other types of contract provisions. See Perry v. Thomas, 482 U.S. 483 (1987) (FAA preempts California Labor Law provision stating that employees could bring wage collection actions to court notwithstanding having entered into private agreements to arbitrate); Southland Corp., supra (to extent that California Franchise Investment Law prohibits the use of arbitration to resolve claims brought under it, the statute is preempted by the FAA); Doctor’s Associates, Inc. v. Casarotto, 517 U.S. 681 (1996) (Montana law prohibiting the enforcement of arbitration clauses unless the first page of the contract provided conspicuous notice preempted by the FAA).
What types of claims are subject to resolution in arbitration rather than in the courts? Under section 3 of the FAA, a court is required to enforce an arbitration clause only to the extent that the parties’ dispute involves an “issue referable to arbitration.” At first courts took the position that although private law claims were referable to arbitration, statutory claims creating a private right of action that invoked the public interest were not so referable. Over time, however, the Supreme Court seems to have eroded this defense. First, as noted above, the FAA preempts states from holding particular state claims off bounds from arbitration. Federal claims can be nonarbitrable if a Congressional intent to withhold them from arbitration is somehow indicated in a federal statute. Although at one time courts thought many public claims were nonarbitrable, the Court has not held a federal claim off bounds from arbitration for several decades. In the meantime, the Court has held that federal RICO, antitrust, employment discrimination, securities law, and Credit Repair Organization Act claims are all subject to arbitration. Indeed, the Court has recently suggested that federal claims are subject to arbitration unless Congress expressly states otherwise. CompuCredit Corp. v. Greenwood, 132 S. Ct. 665 (2012).
Prior to this shift in treatment, arbitration of public law claims was viewed with suspicion because arbitrators need not be expert in federal (or any) legal principles and plaintiffs might have difficulty proving their claims with the limited discovery sometimes afforded in arbitration. See, e.g., Wilko v. Swan, 346 U.S. 427 (1953). A Congressional intent to prevent the arbitration of public law claims was sometimes found in the nonwaiver language of federal statutes; where present, these provisions state that contractual efforts to modify or abridge rights or protections afforded under the statute are void. In Wilko, for example, the Court concluded that similar nonwaiver language in federal securities statutes extended to plaintiffs’ right to file suit in state or federal court. Id. at 432-37.
By the 1970s, however, international trade pressures and the need for allowing parties to cross-border contracts to provide for resolution of their disputes in a neutral forum caused a shift in the Court’s reasoning. In Scherk v. Alberto-Culver Co, 417 U.S. 506 (1974), for example, the Court exempted international securities disputes from the restrictions of Wilko, and relied heavily on its reasoning in The Bremen for allowing international parties to choose to arbitrate their disputes:
An agreement to arbitrate before a specified tribunal is, in effect, a specialized kind of forum-selection clause that posits not only the situs of suit but also the procedure to be used in resolving the dispute. The invalidation of such an agreement in the case before us would not only allow the respondent to repudiate its solemn promise but would, as well, reflect a “parochial concept that all disputes must be resolved under our laws and in our courts.… We cannot have trade and commerce in world markets and international waters exclusively on our terms, governed by our laws, and resolved in our courts.
Id. at 519. Similar statements were used by the Court in Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614 (1985), to support its conclusion that antitrust claims arising under international commercial agreements could be arbitrated.
Moreover, as the Scherk Court noted in a footnote, 417 U.S. at 520 n.15, in 1970 the U.S. acceded to the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards, also known as the New York Convention, which obligates member nations to enforce international arbitration agreements. The Court’s conclusion was not dictated by the Convention, because the Convention allows member nations to decide what claims are arbitrable. For example, Article II(1) of the Convention states that a court is obligated to enforce a written agreement to arbitrate if the dispute is one “concerning a subject matter capable of settlement by arbitration.” And Article V(2) permits a court to refuse to enforce an arbitral award if it determines either that “(a) The subject matter of the difference is not capable of settlement by arbitration under the law of that country; or (b) The recognition or enforcement of the award would be contrary to the public policy of that country.” Nevertheless, the Convention does reflect a worldwide movement toward enabling international commercial parties the freedom to choose private dispute resolution mechanisms. Today the Convention boasts approximately 150 member nations, and the member list includes virtually all of the developed and much of the developing world. See www.uncitral.org/uncitral/en/uncitral_texts/arbitration/NYConvention_status.html (last visited 7/15/14).
Eventually the Court abandoned its distinction between domestic and international commerce, and it overturned Wilko, enabling all securities claims to be arbitrated. Rodriguez de Quijas v. Shearson/American Express, Inc., 490 U.S. 477 (1989). Part of the problem with the domestic/international distinction is that nothing in the FAA or the public law statutes justified it. Moreover, private parties committed to arbitration often can turn a domestic into an international transaction without difficulty, thus depriving the distinction of force. In addition, once the benefit of arbitration is conferred on international companies, it makes little sense to continue to hinder domestic competitors. This reasoning is developed more fully in O’Hara & Ribstein, The Law Market (2009).
In Rodriguez de Quijas, the Court acknowledged that its reading of Congress’ antiwaiver provision was clouded by an unwarranted hostility to arbitration:
The shift in the Court’s views on arbitration away from those adopted in Wilko is shown by the flat statement in Mitsubishi: “By agreeing to arbitrate a statutory claim, a party does not forgo the substantive rights afforded by the statute; it only submits to their resolution in an arbitral, rather than a judicial, forum.” To the extent that Wilko rested on suspicion of arbitration as a method of weakening the protections afforded in the substantive law to would-be complainants, it has fallen far out of step with our current strong endorsement of the federal statutes favoring this method of resolving disputes.
Id. at 481. Today, a majority of Justices consistently conclude that there is no a priori reason to believe that substantive rights will be treated any differently in arbitration than in litigation. As a result, the arbitration clause is merely a choice of forum which is entitled to enforcement under the FAA.
This reasoning is somewhat suspect, however. For one, if choice-of-law clauses are more readily enforced in arbitration than in court, then it is altogether possible that arbitration will alter the substantive rights of the parties. The possibility arose in Mitsubishi, when the United States government filed an amicus brief expressing concern that the arbitrators, located outside of the United States, would ignore federal antitrust laws and instead apply the law of the Swiss Confederation, as designated in the parties’ sales contract. In a footnote, the Court declined to speculate on what law the arbitrators might apply, in part because the parties stipulated that the dispute had been referred to arbitration under U.S. antitrust law. However, the Court did state that failure to apply U.S. laws might justify judicial interference: “[I]n the event the choice-of-forum and choice-of-law clauses operated in tandem as a prospective waiver of a party’s right to pursue statutory remedies for antitrust violations, we would have little hesitation in condemning the agreement as against public policy.” 473 U.S. at 637 n.19. In Mitsubishi itself, the Court indicated that the question should be reserved for the award enforcement stage. In practice, arbitral awards are rarely challenged on grounds that the arbitrator failed to apply U.S. laws. For a general discussion, see Drahozal, Is Arbitration Lawless? 40 Loy. L.A. L. Rev. 187 (2006).
Arbitration can also alter substantive rights in the context of adhesion contracts. In consumer and employment contracts, for example, the company chooses the arbitration forum and rules, and, for most claims, the company is the defendant. In these circumstances, companies might have incentives to choose unfair dispute resolution in order to defeat potential claims against it. In Wilko, the fact that investors do not enter into arm’s length transactions contributed to the Court’s conclusion that securities claims should be resolved in courts. Since overturning Wilko, however, the Court has been reluctant to distinguish between contract settings when deciding questions of arbitrability.
At least three factors can justify this reluctance. First, Congress can always enact laws preventing contracting parties from having to arbitrate their claims. For example, in the Dodd-Frank Wall Street Reform and Consumer Protection Act (2010), Congress declared that arbitration clauses in mortgage agreements were not enforceable. Under the Military Lending Act (2007), mandatory arbitration clauses are unenforceable in loan contracts entered into by active-duty military service personnel. Broader legislation which would deem unenforceable arbitration clauses in all consumer and employment contracts has been introduced but not enacted for several years. Should these questions be left to Congress?
Second, statutory offenses can be separately enforced by government agencies, so the voluntary submission of the private dispute to arbitration does not necessarily leave companies unregulated by laws expressing public interests. In Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20 (1991), for example, the Court noted that although the employee must have his ADEA claim resolved in arbitration, the EEOC has independent authority to investigate violations of the Act. Convincing? Recall a similar discussion in Section A above with regard to enforcement of choice-of-law clauses.
Third, the fairness of chosen arbitration procedures can be scrutinized in individual cases, making a blanket nonarbitrability determination unnecessary. Recall that section 2 of the FAA, supra page 749, provides that agreements to arbitrate “shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” Stated differently, courts are entitled to subject arbitration clauses to the same scrutiny that is given to other contracts under contract law. A court could refuse to enforce an arbitration agreement that was procured by fraud, for example. One common argument raised by consumers and employees to avoid enforcement of the arbitration clause is that it, or some portion of it, is unconscionable. If the forum or the procedures chosen are unlikely to lead to a fair resolution of the parties’ dispute, a court can decline to refer the parties to arbitration. This topic is explored in the following section.
2. Policing the Clauses
States are permitted to decline to enforce arbitration agreements using general common law contract principles—agreement, consideration, fraud, duress, mistake, etc. The most common doctrine used by courts to ensure the fairness of arbitration clauses is unconscionability. The specific contours of the unconscionability doctrine vary across the states, but in general the defense requires a showing of both procedural and substantive unconscionability. Procedural unconscionability exhibits an absence of meaningful choice, with a focus on the relative bargaining power of the parties and the circumstances surrounding the formation of the contract. A list of factors that courts commonly consider include:
(1) whether each party had a reasonable opportunity to understand the terms and conditions of the agreement; (2) whether there was a lack of opportunity for meaningful negotiation; (3) whether the agreement was printed on a duplicate or boilerplate form drafted solely by the party in the strongest bargaining position; (4) whether the terms of the agreement were explained to the weaker party; (5) whether the aggrieved party had a meaningful choice or instead felt compelled to accept the terms of the agreement; and (6) whether the stronger party employed deceptive practices to obscure key contractual provisions.
Spann v. American Express Travel Related Services Co., 224 S.W.3d 698, 715 (Tenn. Ct. App. 2006). Substantive unconscionability is present when a contract is infected by terms that are fundamentally unfair or unreasonably favorable to the weaker party.
Because states vary in how easily procedural and substantive unconscionability can be demonstrated, a court’s conclusion on unconscionability can turn on the applicable substantive law. For example, in some states an adhesion contract is per se procedurally unconscionable, whereas in other states more than just take-it-or-leave-it terms is necessary. In some states the weaker party has a fair opportunity to read and understand the terms of a contract so long as the terms are not affirmatively hidden, whereas in other states the stronger party might have a positive duty to explain terms, use simple language and conspicuous presentation, etc. And, of course, the degree of unfairness necessary before a court will strike a contract or term can also vary. Farnsworth, Contracts §4.28 (4th ed. 2004), provides a general description of the unconscionability doctrine as developed in U.S. courts.
Using unconscionability, courts have refused to enforce arbitration clauses that (1) force the weaker party to incur prohibitive costs in order to pursue claims, Mendez v. Palm Harbor Homes, 45 P.3d 594 (Wash. Ct. App. 2002); (2) force a party to arbitrate using rules that unfairly favor the other party, Samaniego v. Empire Today, LLC, 140 Cal. Rptr. 3d 492 (Ct. App. 2012); and (3) require only one of the parties to resort to arbitration while enabling the other party to bring its claims in court, Armendariz v. Foundation Health Psychcare Services, 6 P.3d 669 (Cal. 2000).
In addition, prior to 2011, some courts refused to enforce arbitration clauses that prohibited consumers or employees from bringing claims against the company as a class. The concern with these class waivers was that companies would be able to use arbitration in order to avoid class actions and thereby defeat liability altogether. In the case that follows, however, the Supreme Court concluded that this use of the unconscionability doctrine was not permitted under the FAA.
AT&T Mobility LLC v. Concepcion
131 S. Ct. 1740 (2011)
Justice SCALIA delivered the opinion of the Court.
Section 2 of the Federal Arbitration Act (FAA) makes agreements to arbitrate “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. We consider whether the FAA prohibits States from conditioning the enforceability of certain arbitration agreements on the availability of classwide arbitration procedures.
In February 2002, Vincent and Liza Concepcion entered into an agreement for the sale and servicing of cellular telephones with AT&T Mobility LCC (AT&T). The contract provided for arbitration of all disputes between the parties, but required that claims be brought in the parties’ “individual capacity, and not as a plaintiff or class member in any purported class or representative proceeding.”…
The … agreement provides that customers may initiate dispute proceedings by completing a one-page Notice of Dispute form available on AT&T’s Web site. AT&T may then offer to settle the claim; if it does not, or if the dispute is not resolved within 30 days, the customer may invoke arbitration by filing a separate Demand for Arbitration, also available on AT&T’s Web site. In the event the parties proceed to arbitration, the agreement specifies that AT&T must pay all costs for nonfrivolous claims; that arbitration must take place in the county in which the customer is billed; that, for claims of $10,000 or less, the customer may choose whether the arbitration proceeds in person, by telephone, or based only on submissions; that either party may bring a claim in small claims court in lieu of arbitration; and that the arbitrator may award any form of individual relief, including injunctions and presumably punitive damages. The agreement, moreover, denies AT&T any ability to seek reimbursement of its attorney’s fees, and, in the event that a customer receives an arbitration award greater than AT&T’s last written settlement offer, requires AT&T to pay a $7,500 minimum recovery and twice the amount of the claimant’s attorney’s fees.3
The Concepcions purchased AT&T service, which was advertised as including the provision of free phones; they were not charged for the phones, but they were charged $30.22 in sales tax based on the phones’ retail value. In March 2006, the Concepcions filed a complaint against AT&T in the United States District Court for the Southern District of California. The complaint was later consolidated with a putative class action alleging, among other things, that AT&T had engaged in false advertising and fraud by charging sales tax on phones it advertised as free.
In March 2008, AT&T moved to compel arbitration under the terms of its contract with the Concepcions. The Concepcions opposed the motion, contending that the arbitration agreement was unconscionable and unlawfully exculpatory under California law because it disallowed classwide procedures. The District Court denied AT&T’s motion. It described AT&T’s arbitration agreement favorably, noting, for example, that the informal dispute-resolution process was “quick, easy to use” and likely to “promp[t] full or … even excess payment to the customer without the need to arbitrate or litigate”; that the $7,500 premium functioned as “a substantial inducement for the consumer to pursue the claim in arbitration” if a dispute was not resolved informally; and that consumers who were members of a class would likely be worse off. Nevertheless, relying on the California Supreme Court’s decision in Discover Bank v. Superior Court, 36 Cal. 4th 148 (2005), the court found that the arbitration provision was unconscionable because AT&T had not shown that bilateral arbitration adequately substituted for the deterrent effects of class actions.
The Ninth Circuit affirmed, also finding the provision unconscionable under California law as announced in Discover Bank. It also held that the Discover Bank rule was not preempted by the FAA because that rule was simply “a refinement of the unconscionability analysis applicable to contracts generally in California.”…
… Under California law, courts may refuse to enforce any contract found “to have been unconscionable at the time it was made,” or may “limit the application of any unconscionable clause.” Cal. Civ. Code Ann. §1670.5(a) (West 1985). A finding of unconscionability requires “a ‘procedural’ and a ‘substantive’ element, the former focusing on ‘oppression’ or ‘surprise’ due to unequal bargaining power, the latter on ‘overly harsh’ or ‘one-sided’ results.” Armendariz v. Foundation Health Pyschcare Servs., Inc., 24 Cal. 4th 83 (2000).
In Discover Bank, the California Supreme Court applied this framework to class-action waivers in arbitration agreements and held as follows:
“[W]hen the waiver is found in a consumer contract of adhesion in a setting in which disputes between the contracting parties predictably involve small amounts of damages, and when 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, then … the waiver becomes in practice the exemption of the party ‘from responsibility for [its] own fraud, or willful injury to the person or property of another.’ Under these circumstances, such waivers are unconscionable under California law and should not be enforced.” 36 Cal. 4th, at 162 (quoting Cal. Civ. Code Ann. §1668).
California courts have frequently applied this rule to find arbitration agreements unconscionable. [citations omitted]
The Concepcions argue that the Discover Bank rule, given its origins in California’s unconscionability doctrine and California’s policy against exculpation, is a ground that “exist[s] at law or in equity for the revocation of any contract” under FAA §2. Moreover, they argue that even if we construe the Discover Bank rule as a prohibition on collective-action waivers rather than simply an application of unconscionability, the rule would still be applicable to all dispute-resolution contracts, since California prohibits waivers of class litigation as well.
When state law prohibits outright the arbitration of a particular type of claim, the analysis is straightforward: The conflicting rule is displaced by the FAA. But the inquiry becomes more complex when a doctrine normally thought to be generally applicable, such as duress or, as relevant here, unconscionability, is alleged to have been applied in a fashion that disfavors arbitration. In Perry v. Thomas, 482 U.S. 483 (1987), for example, we noted that the FAA’s preemptive effect might extend even to grounds traditionally thought to exist “‘at law or in equity for the revocation of any contract.’” Id., at 492, n. 9 (emphasis deleted). We said that a court may not “rely on the uniqueness of an agreement to arbitrate as a basis for a state-law holding that enforcement would be unconscionable, for this would enable the court to effect what … the state legislature cannot.” Id., at 493.
An obvious illustration of this point would be a case finding unconscionable or unenforceable as against public policy consumer arbitration agreements that fail to provide for judicially monitored discovery. The rationalizations for such a holding are neither difficult to imagine nor different in kind from those articulated in Discover Bank. A court might reason that no consumer would knowingly waive his right to full discovery, as this would enable companies to hide their wrongdoing. Or the court might simply say that such agreements are exculpatory—restricting discovery would be of greater benefit to the company than the consumer, since the former is more likely to be sued than to sue. See Discover Bank, supra, at 161 (arguing that class waivers are similarly one-sided). And, the reasoning would continue, because such a rule applies the general principle of unconscionability or public-policy disapproval of exculpatory agreements, it is applicable to “any” contract and thus preserved by §2 of the FAA. In practice, of course, the rule would have a disproportionate impact on arbitration agreements; but it would presumably apply to contracts purporting to restrict discovery in litigation as well.
Other examples are easy to imagine. The same argument might apply to a rule classifying as unconscionable arbitration agreements that fail to abide by the Federal Rules of Evidence, or that disallow an ultimate disposition by a jury (perhaps termed “a panel of twelve lay arbitrators” to help avoid preemption). Such examples are not fanciful, since the judicial hostility towards arbitration that prompted the FAA had manifested itself in “a great variety” of “devices and formulas” declaring arbitration against public policy. And although these statistics are not definitive, it is worth noting that California’s courts have been more likely to hold contracts to arbitrate unconscionable than other contracts. [citations omitted]
The Concepcions suggest that all this is just a parade of horribles, and no genuine worry. “Rules aimed at destroying arbitration” or “demanding procedures incompatible with arbitration,” they concede, “would be preempted by the FAA because they cannot sensibly be reconciled with Section 2.” The “grounds” available under §2’s saving clause, they admit, “should not be construed to include a State’s mere preference for procedures that are incompatible with arbitration and ‘would wholly eviscerate arbitration agreements.’”
We largely agree. Although §2’s saving clause preserves generally applicable contract defenses, nothing in it suggests an intent to preserve state-law rules that stand as an obstacle to the accomplishment of the FAA’s objectives.…
We differ with the Concepcions only in the application of this analysis to the matter before us. We do not agree that rules requiring judicially monitored discovery or adherence to the Federal Rules of Evidence are “a far cry from this case.” The overarching purpose of the FAA, evident in the text of §§2, 3, and 4, is to ensure the enforcement of arbitration agreements according to their terms so as to facilitate streamlined proceedings. Requiring the availability of classwide arbitration interferes with fundamental attributes of arbitration and thus creates a scheme inconsistent with the FAA.
The “principal purpose” of the FAA is to “ensur[e] that private arbitration agreements are enforced according to their terms.” Volt, 489 U.S., at 478. This purpose is readily apparent from the FAA’s text. Section 2 makes arbitration agreements “valid, irrevocable, and enforceable” as written (subject, of course, to the saving clause); §3 requires courts to stay litigation of arbitral claims pending arbitration of those claims “in accordance with the terms of the agreement”; and §4 requires courts to compel arbitration “in accordance with the terms of the agreement” upon the motion of either party to the agreement (assuming that the “making of the arbitration agreement or the failure … to perform the same” is not at issue). In light of these provisions, we have held that parties may agree to limit the issues subject to arbitration, to arbitrate according to specific rules, and to limit with whom a party will arbitrate its disputes. [citations omitted]
The point of affording parties discretion in designing arbitration processes is to allow for efficient, streamlined procedures tailored to the type of dispute. It can be specified, for example, that the decisionmaker be a specialist in the relevant field, or that proceedings be kept confidential to protect trade secrets. And the informality of arbitral proceedings is itself desirable, reducing the cost and increasing the speed of dispute resolution.
… Contrary to the dissent’s view, our cases place it beyond dispute that the FAA was designed to promote arbitration. They have repeatedly described the Act as “embod[ying] [a] national policy favoring arbitration,” Buckeye Check Cashing, 546 U.S., at 443, and “a liberal federal policy favoring arbitration agreements, notwithstanding any state substantive or procedural policies to the contrary,” Moses H. Cone, 460 U.S., at 24. Thus, in Preston v. Ferrer, holding preempted a state-law rule requiring exhaustion of administrative remedies before arbitration, we said: “A prime objective of an agreement to arbitrate is to achieve ‘streamlined proceedings and expeditious results,’” which objective would be “frustrated” by requiring a dispute to be heard by an agency first. 552 U.S., at 357–358. That rule, we said, would “at the least, hinder speedy resolution of the controversy.” Id., at 358.
California’s Discover Bank rule similarly interferes with arbitration. Although the rule does not require classwide arbitration, it allows any party to a consumer contract to demand it ex post. The rule is limited to adhesion contracts, but the times in which consumer contracts were anything other than adhesive are long past.6 [citations omitted] The rule also requires that damages be predictably small, and that the consumer allege a scheme to cheat consumers. The former requirement, however, is toothless and malleable (the Ninth Circuit has held that damages of $4,000 are sufficiently small, see Oestreicher v. Alienware Corp., 322 Fed. Appx. 489, 492 (2009) (unpublished)), and the latter has no limiting effect, as all that is required is an allegation. Consumers remain free to bring and resolve their disputes on a bilateral basis under Discover Bank, and some may well do so; but there is little incentive for lawyers to arbitrate on behalf of individuals when they may do so for a class and reap far higher fees in the process. And faced with inevitable class arbitration, companies would have less incentive to continue resolving potentially duplicative claims on an individual basis.
Although we have had little occasion to examine classwide arbitration, our decision in Stolt-Nielsen is instructive. In that case we held that an arbitration panel exceeded its power under §10(a)(4) of the FAA by imposing class procedures based on policy judgments rather than the arbitration agreement itself or some background principle of contract law that would affect its interpretation. We then held that the agreement at issue, which was silent on the question of class procedures, could not be interpreted to allow them because the “changes brought about by the shift from bilateral arbitration to class-action arbitration” are “fundamental.” 130 S. Ct. at 1776. This is obvious as a structural matter: Classwide arbitration includes absent parties, necessitating additional and different procedures and involving higher stakes. Confidentiality becomes more difficult. And while it is theoretically possible to select an arbitrator with some expertise relevant to the class-certification question, arbitrators are not generally knowledgeable in the often-dominant procedural aspects of certification, such as the protection of absent parties. The conclusion follows that class arbitration, to the extent it is manufactured by Discover Bank rather than consensual, is inconsistent with the FAA.
First, the switch from bilateral to class arbitration sacrifices the principal advantage of arbitration—its informality—and makes the process slower, more costly, and more likely to generate procedural morass than final judgment.…[B]efore an arbitrator may decide the merits of a claim in classwide procedures, he must first decide, for example, whether the class itself may be certified, whether the named parties are sufficiently representative and typical, and how discovery for the class should be conducted. A cursory comparison of bilateral and class arbitration illustrates the difference. According to the American Arbitration Association (AAA), the average consumer arbitration between January and August 2007 resulted in a disposition on the merits in six months, four months if the arbitration was conducted by documents only. As of September 2009, the AAA had opened 283 class arbitrations. Of those, 121 remained active, and 162 had been settled, withdrawn, or dismissed. Not a single one, however, had resulted in a final award on the merits. For those cases that were no longer active, the median time from filing to settlement, withdrawal, or dismissal—not judgment on the merits—was 583 days, and the mean was 630 days.7
Second, class arbitration requires procedural formality. The AAA’s rules governing class arbitrations mimic the Federal Rules of Civil Procedure for class litigation. And while parties can alter those procedures by contract, an alternative is not obvious. If procedures are too informal, absent class members would not be bound by the arbitration. For a class-action money judgment to bind absentees in litigation, class representatives must at all times adequately represent absent class members, and absent members must be afforded notice, an opportunity to be heard, and a right to opt out of the class. At least this amount of process would presumably be required for absent parties to be bound by the results of arbitration.
We find it unlikely that in passing the FAA Congress meant to leave the disposition of these procedural requirements to an arbitrator. Indeed, class arbitration was not even envisioned by Congress when it passed the FAA in 1925; as the California Supreme Court admitted in Discover Bank, class arbitration is a “relatively recent development.” 36 Cal. 4th, at 163. And it is at the very least odd to think that an arbitrator would be entrusted with ensuring that third parties’ due process rights are satisfied.
Third, class arbitration greatly increases risks to defendants. Informal procedures do of course have a cost: The absence of multilayered review makes it more likely that errors will go uncorrected. Defendants are willing to accept the costs of these errors in arbitration, since their impact is limited to the size of individual disputes, and presumably outweighed by savings from avoiding the courts. But when damages allegedly owed to tens of thousands of potential claimants are aggregated and decided at once, the risk of an error will often become unacceptable. Faced with even a small chance of a devastating loss, defendants will be pressured into settling questionable claims. Other courts have noted the risk of “in terrorem” settlements that class actions entail [citation omitted], and class arbitration would be no different.
Arbitration is poorly suited to the higher stakes of class litigation. In litigation, a defendant may appeal a certification decision on an interlocutory basis and, if unsuccessful, may appeal from a final judgment as well. Questions of law are reviewed de novo and questions of fact for clear error. In contrast, 9 U.S.C. §10 allows a court to vacate an arbitral award only where the award “was procured by corruption, fraud, or undue means”; “there was evident partiality or corruption in the arbitrators”; “the arbitrators were guilty of misconduct in refusing to postpone the hearing … or in refusing to hear evidence pertinent and material to the controversy[,] or of any other misbehavior by which the rights of any party have been prejudiced”; or if the “arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final, and definite award … was not made.” The AAA rules do authorize judicial review of certification decisions, but this review is unlikely to have much effect given these limitations; review under §10 focuses on misconduct rather than mistake. And parties may not contractually expand the grounds or nature of judicial review. We find it hard to believe that defendants would bet the company with no effective means of review, and even harder to believe that Congress would have intended to allow state courts to force such a decision.
… The dissent claims that class proceedings are necessary to prosecute small-dollar claims that might otherwise slip through the legal system. But States cannot require a procedure that is inconsistent with the FAA, even if it is desirable for unrelated reasons. Moreover, the claim here was most unlikely to go unresolved. As noted earlier, the arbitration agreement provides that AT&T will pay claimants a minimum of $7,500 and twice their attorney’s fees if they obtain an arbitration award greater than AT&T’s last settlement offer. The District Court found this scheme sufficient to provide incentive for the individual prosecution of meritorious claims that are not immediately settled, and the Ninth Circuit admitted that aggrieved customers who filed claims would be “essentially guarantee[d]” to be made whole. Indeed, the District Court concluded that the Concepcions were better off under their arbitration agreement with AT&T than they would have been as participants in a class action, which “could take months, if not years, and which may merely yield an opportunity to submit a claim for recovery of a small percentage of a few dollars.”
* * *
Because it “stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress,” California’s Discover Bank rule is preempted by the FAA. The judgment of the Ninth Circuit is reversed, and the case is remanded for further proceedings consistent with this opinion.
Justice THOMAS, concurring.
… Section 2 provides that “[a] written provision in … a contract … to settle by arbitration a controversy thereafter arising out of such contract … shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” Significantly, the statute does not parallel the words “valid, irrevocable, and enforceable” by referencing the grounds as exist for the “invalidation, revocation, or nonenforcement” of any contract. Nor does the statute use a different word or phrase entirely that might arguably encompass validity, revocability, and enforceability. The use of only “revocation” and the conspicuous omission of “invalidation” and “nonenforcement” suggest that the exception does not include all defenses applicable to any contract but rather some subset of those defenses.
… Examining the broader statutory scheme, §4 can be read to clarify the scope of §2’s exception to the enforcement of arbitration agreements. When a party seeks to enforce an arbitration agreement in federal court, §4 requires that “upon being satisfied that the making of the agreement for arbitration or the failure to comply therewith is not in issue,” the court must order arbitration “in accordance with the terms of the agreement.”
Reading §§2 and 4 harmoniously, the “grounds … for the revocation” preserved in §2 would mean grounds related to the making of the agreement. This would require enforcement of an agreement to arbitrate unless a party successfully asserts a defense concerning the formation of the agreement to arbitrate, such as fraud, duress, or mutual mistake. Contract defenses unrelated to the making of the agreement—such as public policy—could not be the basis for declining to enforce an arbitration clause.
Under this reading, the question here would be whether California’s Discover Bank rule relates to the making of an agreement. I think it does not.…
The court’s analysis and conclusion [in Discover Bank] that the arbitration agreement was exculpatory reveals that the Discover Bank rule does not concern the making of the arbitration agreement. Exculpatory contracts are a paradigmatic example of contracts that will not be enforced because of public policy.… Refusal to enforce a contract for public-policy reasons does not concern whether the contract was properly made.
Justice BREYER, with whom Justice GINSBURG, Justice SOTOMAYOR, and Justice KAGAN join, dissenting.
The Federal Arbitration Act says that an arbitration agreement “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 (emphasis added). California law sets forth certain circumstances in which “class action waivers” in any contract are unenforceable. In my view, this rule of state law is consistent with the federal Act’s language and primary objective.…
The California law in question consists of an authoritative state-court interpretation of two provisions of the California Civil Code. The first provision makes unlawful all contracts “which have for their object, directly or in-directly, to exempt anyone from responsibility for his own … violation of law.” Cal. Civ. Code Ann. §1668 (West 1985). The second provision authorizes courts to “limit the application of any unconscionable clause” in a contract so “as to avoid any unconscionable result.” §1670.5(a).
.… The Discover Bank rule does not create a “blanket policy in California against class action waivers in the consumer context.” Provencher v. Dell, Inc., 409 F. Supp. 2d 1196, 1201 (C.D. Cal.2006). Instead, it represents the “application of a more general [unconscionability] principle.” Gentry v. Superior Ct., 42 Cal. 4th 443, 457 (2007). Courts applying California law have enforced class-action waivers where they satisfy general unconscionability standards. [citations omitted] And even when they fail, the parties remain free to devise other dispute mechanisms, including informal mechanisms, that, in context, will not prove unconscionable.
The Discover Bank rule is consistent with the federal Act’s language. It “applies equally to class action litigation waivers in contracts without arbitration agreements as it does to class arbitration waivers in contracts with such agreements.” 36 Cal. 4th, at 165–166. Linguistically speaking, it falls directly within the scope of the Act’s exception permitting courts to refuse to enforce arbitration agreements on grounds that exist “for the revocation of any contract.” 9 U.S.C. §2 (emphasis added). The majority agrees.…
The majority’s … view (that Discover Bank stands as an “obstacle” to the accomplishment of the federal law’s objective) rests primarily upon its claims that the Discover Bank rule increases the complexity of arbitration procedures, thereby discouraging parties from entering into arbitration agreements, and to that extent discriminating in practice against arbitration. These claims are not well founded.
For one thing, a state rule of law that would sometimes set aside as unconscionable a contract term that forbids class arbitration is not (as the majority claims) like a rule that would require “ultimate disposition by a jury” or “judicially monitored discovery” or use of “the Federal Rules of Evidence.” Unlike the majority’s examples, class arbitration is consistent with the use of arbitration. It is a form of arbitration that is well known in California and followed elsewhere. Indeed, the AAA has told us that it has found class arbitration to be “a fair, balanced, and efficient means of resolving class disputes.” And unlike the majority’s examples, the Discover Bank rule imposes equivalent limitations on litigation; hence it cannot fairly be characterized as a targeted attack on arbitration.
… For another thing, the majority’s argument that the Discover Bank rule will discourage arbitration rests critically upon the wrong comparison. The majority compares the complexity of class arbitration with that of bilateral arbitration. And it finds the former more complex. But, if incentives are at issue, the relevant comparison is not “arbitration with arbitration” but a comparison between class arbitration and judicial class actions. After all, in respect to the relevant set of contracts, the Discover Bank rule similarly and equally sets aside clauses that forbid class procedures—whether arbitration procedures or ordinary judicial procedures are at issue.
Why would a typical defendant (say, a business) prefer a judicial class action to class arbitration? AAA statistics “suggest that class arbitration proceedings take more time than the average commercial arbitration, but may take less time than the average class action in court.” Data from California courts confirm that class arbitrations can take considerably less time than in-court proceedings in which class certification is sought. And a single class proceeding is surely more efficient than thousands of separate proceedings for identical claims. Thus, if speedy resolution of disputes were all that mattered, then the Discover Bank rule would reinforce, not obstruct, that objective of the Act.
The majority’s related claim that the Discover Bank rule will discourage the use of arbitration because “[a]rbitration is poorly suited to … higher stakes” lacks empirical support. Indeed, the majority provides no convincing reason to believe that parties are unwilling to submit high-stake disputes to arbitration. And there are numerous counterexamples. [citations omitted]
Further, even though contract defenses, e.g., duress and unconscionability, slow down the dispute resolution process, federal arbitration law normally leaves such matters to the States. A provision in a contract of adhesion (for example, requiring a consumer to decide very quickly whether to pursue a claim) might increase the speed and efficiency of arbitrating a dispute, but the State can forbid it. [state court case citations omitted] The Discover Bank rule amounts to a variation on this theme. California is free to define unconscionability as it sees fit, and its common law is of no federal concern so long as the State does not adopt a special rule that disfavors arbitration.
Because California applies the same legal principles to address the unconscionability of class arbitration waivers as it does to address the unconscionability of any other contractual provision, the merits of class proceedings should not factor into our decision. If California had applied its law of duress to void an arbitration agreement, would it matter if the procedures in the coerced agreement were efficient?
Regardless, the majority highlights the disadvantages of class arbitrations, as it sees them. But class proceedings have countervailing advantages. In general agreements that forbid the consolidation of claims can lead small-dollar claimants to abandon their claims rather than to litigate. I suspect that it is true even here, for as the Court of Appeals recognized, AT&T can avoid the $7,500 payout (the payout that supposedly makes the Concepcions’ arbitration worthwhile) simply by paying the claim’s face value, such that “the maximum gain to a customer for the hassle of arbitrating a $30.22 dispute is still just $30.22.”
What rational lawyer would have signed on to represent the Concepcions in litigation for the possibility of fees stemming from a $30.22 claim? In California’s perfectly rational view, nonclass arbitration over such sums will also sometimes have the effect of depriving claimants of their claims (say, for example, where claiming the $30.22 were to involve filling out many forms that require technical legal knowledge or waiting at great length while a call is placed on hold). Discover Bank sets forth circumstances in which the California courts believe that the terms of consumer contracts can be manipulated to insulate an agreement’s author from liability for its own frauds by “deliberately cheat[ing] large numbers of consumers out of individually small sums of money.” 36 Cal. 4th, at 162–163. Why is this kind of decision—weighing the pros and cons of all class proceedings alike—not California’s to make?
Sabia v. Orange County Metro Realty, Inc.
Court of Appeal of California, Second District 227 Cal. App. 4th 11 (2014)
In this appeal we are presented with the recurring issue of the reach of the United States Supreme Court’s decision in AT&T Mobility LLC v. Concepcion (2011) as it impacts unconscionability as a state law defense to arbitration provisions. The unconscionability defense has been the subject of three relevant California Supreme Court cases filed both before and after Concepcion—Armendariz v. Foundation Health Psychcare Servs. (2000) 24 Cal. 4th 83 (Armendariz); Sonic-Calabasas A, Inc. v. Moreno (2011) 51 Cal. 4th 659 (Sonic I), vacated and remanded by Sonic-Calabasas A, Inc. v. Moreno (2011) 132 S. Ct. 496; Pinnacle Museum Tower Assn. v. Pinnacle Market Development (US), LLC (2012) 55 Cal. 4th 223 (Pinnacle); and Sonic-Calabasas A, Inc. v. Moreno (2013) 57 Cal. 4th 1109 (Sonic II), cert. den. (2014) 134 S. Ct. 2724. Each of these cases upholds unconscionability as a viable defense to an arbitration provision.
We are bound by precedent established by our Supreme Court and are not free to anticipate what the United States Supreme Court might decide if presented with the case currently before us.…[W]e conclude that the arbitration provision here was unconscionable principally because it applied only to plaintiffs. We therefore reverse the trial court’s order granting a motion to compel arbitration.
Facts and Procedural History
Frank Sabia and eight other persons filed a class action complaint against mortgage foreclosure consultant The Home Defender Center and several other persons and entities allegedly affiliated with Home Defender for fraud, breach of contract, and other statutory and common law claims, alleging that they were duped into signing their agreements and lost the money they paid for services that were never rendered.
Defendants brought a petition to compel arbitration based on the following provision in their written agreement with plaintiffs: “If a dispute arises between Home Defender Center and Client regarding Home Defender Center’s actions under this agreement and Client files suit in any court other than small claims court, Home Defender Center will have the right to stay that suit by timely electing to arbitrate the dispute under the Business and Professions Code, in which event Client must submit the matter to such arbitration. The parties agree to bring any such action or proceeding in a state or federal court of competent jurisdiction in Orange County, California, and that jurisdiction and venue are proper in Orange County.”…
Plaintiffs opposed the petition,…[asserting that] the arbitration provision was void under the doctrine of unconscionability.… Plaintiffs’ opposition was supported by declarations from four of the nine named plaintiffs…[stating] that Spanish was their native language and that defendant Viveros explained in Spanish that Home Defender would try to obtain a loan modification for them. Viveros said that their up-front fee payments would be held in escrow and returned to them if Home Defender failed to obtain a loan modification. Viveros then handed them a pile of English-language documents that included their agreement with Home Defender and told them not to worry about the contents because they stated in English what she had explained to them in Spanish. Viveros never mentioned that the agreement included an arbitration provision. Sabia said Viveros told her to hurry and sign the documents because Viveros needed to leave right away.
Plaintiffs contended the arbitration provision was procedurally unconscionable because the declarations showed they signed adhesion contracts written in English when the terms were explained in Spanish … They contended the arbitration provision was substantively unconscionable because it applied to only actions brought by them, leaving Home Defender free to sue in court for any claims it might have. Plaintiffs also contended that this defect could not be cured by severing it from the provision.
In reply, defendants argued that the lack of mutuality in the one-sided arbitration provision was not grounds for invalidating that provision under Concepcion.… Defendants also asserted the agreement was not procedurally unconscionable because, as evidenced by some of the plaintiffs’ own handwritten letters and notes…, they could read and write in English. Defendants also pointed to Spanish-language forms signed by the plaintiffs stating that plaintiffs had read the documents presented to them. They also contended that the provision was not substantively unconscionable because mutuality of obligations was not a prerequisite to forming a valid contract.…
… The trial court found that plaintiffs did not “show that the agreements are unconscionable to such a degree that they should not be enforced.” On the issue of procedural unconscionability, the trial court said that the mere fact that the agreements were adhesion contracts was not enough, and that the plaintiffs’ “generalized assertions” that they were told the contract repeated in English what they had been told in Spanish was also insufficient to show procedural unconscionability. Plaintiffs’ alleged failure to obtain Spanish translations of the documents was also insufficient.…[The trial court also found that the provision was not substantively unconscionable and] ordered arbitration as to plaintiffs’ individual claims alone.…
The defense of unconscionability has two components—procedural unconscionability and substantive unconscionability.… Both must be present, but not in the same degree. Instead, a sliding scale is employed, and the greater the presence of one component of unconscionability, the less of the other there need be in order to determine that a contract is not enforceable.
4. THE ARBITRATION AGREEMENT WAS SUBSTANTIVELY UNCONSCIONABLE
(A) THE AGREEMENT IS UNCONSCIONABLY ONE-SIDED
(i) Overview of the Law Regarding Bilaterality
Although an arbitration provision need not mandate that all claims between employer and employee be arbitrated in order to avoid a finding of unconscionability, “an arbitration agreement imposed in an adhesive context lacks basic fairness and mutuality if it requires one contracting party, but not the other, to arbitrate all claims arising out of the same transaction or occurrence or series of transactions or occurrences.” (Armendariz, supra) The arbitration provision at issue in Armendariz lacked mutuality because it required employees, but not employers, to arbitrate claims arising out of a wrongful termination. As a result, an employee fired for stealing trade secrets would have to arbitrate his wrongful termination claim while the employer remained free to litigate its trade secrets claims.…
(ii) Application of Armendariz and Its Progeny to this Case
The terms of Home Defender’s arbitration agreement bring it within the rationale of these decisions.… First, by its terms, only plaintiffs must arbitrate their superior court claims if Home Defender so chooses, leaving Home Defender free to sue its clients for any claims it might have. Second, it appears directly aimed at limiting a client’s access to the courts to the $10,000 small claims threshold of recovery. (Code Civ. Proc., §116.221.) In other words, plaintiffs who sustain anything more than a relatively modest amount of damages above and beyond the amount of the fees they paid—such as the loss of their home due to inaction or improper action by Home Defenders—must arbitrate. As the decisions cited above make clear, this type of one-sidedness is substantively unconscionable.…
Although one-sided arbitration provisions may be justified by business realities that create a special need for the advantage, those realities must either be explained in the contract or factually established. The contract contains no such explanation and Home Defenders has never raised the issue. We therefore conclude that the provision is substantively unconscionable.
(B) THE ARMENDARIZ ONE-SIDEDNESS RULE SURVIVES CONCEPCION
… State courts may not rely on the uniqueness of an agreement to arbitrate as a basis for holding that the agreement is unconscionable because that would allow the courts to do what the state legislatures cannot. (Concepcion, supra, 131 S. Ct. at 1747.) Examples of such rulings, the Concepcion court said, would be cases finding a consumer arbitration agreement unconscionable because it did not provide for judicially monitored discovery, did not apply the rules of evidence, or did not allow for a jury to decide the case. Such holdings would “have a disproportionate impact on arbitration agreements” even though they seemingly fell under the savings clause of FAA section 2 as part of the generally applicable state law defense of unconscionability.
The Discover Bank rule regarding class actions similarly interfered with arbitration, the Concepcion court held. While the rule did not require class wide arbitration, it essentially allowed any party to a consumer contract to demand it after the fact. Although parties to an arbitration agreement are free to provide for class wide proceedings, such proceedings are generally unsuited to arbitration because they make it more time consuming, expensive, and formal. Imposing them on the parties when not provided for by their arbitration agreement was therefore inconsistent with the FAA’s policy of enforcing arbitration agreements according to their terms.
… Defendants contend the rule of one-sidedness as applied by Armendariz and other decisions violates Concepcion because a lack of perfect mutuality of obligation is not generally grounds to invalidate a contract under California law. As a result, defendants argue, those decisions impose on arbitration agreements a degree of mutuality above and beyond what is ordinarily required for contracts generally, and hence do not come within the FAA section 2 savings clause.
Although Armendariz preceded Concepcion by 11 years, the Armendariz court considered and rejected this precise contention. After adopting the “modicum of bilaterality” rule…, the Armendariz court distinguished the concept that lack of mutuality does not render a contract illusory from the principles of unconscionability. “We conclude … that in the context of an arbitration agreement imposed by the employer on the employee, such a one-sided term is unconscionable. Although parties are free to contract for asymmetrical remedies and arbitration clauses of varying scope,… the doctrine of unconscionability limits the extent to which a stronger party may, through a contract of adhesion, impose the arbitration forum on the weaker party without accepting that forum for itself.” (Armendariz, supra, at 118.)
Armendariz then rejected the notion that enforcing this bilaterality rule singled out arbitration agreements for suspect status in contravention of the FAA.…[T]he Armendariz court said, “the ordinary principles of unconscionability may manifest themselves in forms peculiar to the arbitration context. One such form is an agreement requiring arbitration only for the claims of the weaker party but a choice of forums for the claims of the stronger party. The application of this principle to arbitration does not disfavor arbitration.” Armendariz, supra, at 119.
According to Armendariz, the judicial forum affords plaintiffs the advantages of discovery and the fact that judges and juries are more likely to follow the law instead of splitting the difference as arbitrators often do, thereby reducing damage awards. “An employer may accordingly consider a court to be a forum superior to arbitration when it comes to vindicating its own contractual and statutory rights, or may consider it advantageous to have a choice of arbitration or litigation when determining how best to pursue a claim against an employee. It does not disfavor arbitration to hold that an employer may not impose a system of arbitration on an employee that seeks to maximize the advantages and minimize the disadvantages of arbitration for itself at the employee’s expense. On the contrary, a unilateral arbitration agreement imposed by the employer without reasonable justification reflects the very mistrust of arbitration that has been repudiated by the United States Supreme Court….”
Decisions of both the California and federal courts hold that Concepcion still permits voiding an arbitration provision that applies to only the party with the weaker bargaining strength, or is otherwise oppressively one-sided. [citations omitted]
Most important, our Supreme Court has recently affirmed the continued vitality of the unconscionability defense in general, and the bilaterality doctrine in particular, after Concepcion.
…[T]he court in Pinnacle, supra, considered the enforceability of an arbitration provision that a condominium developer included in the recorded covenants, conditions, and restrictions (CCRs) that required those who later purchased condominiums to arbitrate any construction related disputes.… Although ultimately concluding that the arbitration provision was not unconscionable, the Pinnacle court considered the HOA’s contention that the provision was substantively unconscionable under Armendariz because it applied to only the homeowners and therefore lacked bilaterality.…[B]y distinguishing its facts from those in Armendariz, the Pinnacle court both rejected the defense in the case before it and also implicitly held that the Armendariz rule of bilaterality is still good law in California.
In Sonic II, supra, our Supreme Court reversed its previous decision in Sonic I, supra, which held that even though an employer could require its employees to arbitrate wage disputes, it was against public policy for those arbitration provisions to require the employee’s waiver of his right to a “Berman hearing,” a statutory dispute resolution procedure. On remand from the United States Supreme Court with directions to reconsider Sonic I in light of Concepcion, the Sonic II court held that its blanket prohibition against Berman waivers violated the principles set forth in Concepcion. However, the court also held that the waiver could be invalidated under unconscionability principles if the arbitration provision did not provide a dispute resolution mechanism that offered benefits and protections roughly comparable to those found in Berman hearings, and remanded the matter to the trial court so that issue could be developed and adjudicated.
As part of its analysis, the Sonic II court…[noted] that even after Concepcion, unconscionability remained a valid defense to a petition to compel arbitration so long as its application did not interfere with the fundamental attributes of arbitration. It described the doctrine in terms of bargains that were unreasonably one-sided, referred to Armendariz as the “seminal California case” concerning unconscionability in the context of adhesive arbitration agreements (id. at 1159), and cited Stirlen, 51 Cal. App. 4th at 1532, which Armendariz relied on, for the rule that the unconscionability doctrine seeks to protect against contract terms that are overly harsh. The court also cited Armendariz for the proposition that the FAA does not preempt general unconscionability principles merely because they are applied in the specific context of arbitration.
When Pinnacle and Sonic II are read together, they show that the California Supreme Court still applies the Armendariz bilaterality rule when determining whether to invalidate an arbitration provision on the ground of unconscionability.
This makes sense in light of the issues actually decided in Concepcion. As noted, Discover Bank announced a per se rule of unconscionability as to class action waivers in consumer adhesion contracts where it was alleged the seller had cheated many consumers out of small sums of money. Concepcion held that the Discover Bank rule was inimical to arbitration, and was therefore inconsistent with the FAA, because it required parties to an arbitration agreement to arbitrate class claims even when the agreement specifically excluded such claims. That factual setting is not analogous to the issue raised here. If anything, the rule of bilaterality as we apply it here promotes arbitration because its chief complaint is that the party with superior bargaining strength has excluded its own claims from the arbitration process.13
In short, Concepcion, a class action case, did not discuss the modicum of bilaterality standard adopted by Armendariz, an unconscionability not a class action case, and Concepcion did not overrule Armendariz. We are therefore bound to follow our Supreme Court and apply Armendariz here.…14
5. THE AGREEMENT IS PROCEDURALLY UNCONSCIONABLE
… We conclude that the trial court erred when it…[found] that plaintiffs’ failure to read or inability to understand the contract did not make it procedurally unconscionable.… The rule that failure to read a contract may not avoid its enforcement applies only in the absence of unconscionable overreaching. In fact, the failure to read the contract helps establish actual surprise. [citations omitted]
Of course, even a finding that a party’s failure to read the document may have contributed to procedural unconscionability does not end the inquiry. In some cases the level of substantive unconscionability may be so low that the modicum of procedural unconscionability is insufficient to render the contract unenforceable. We next consider whether the arbitration provision was procedurally unconscionable in light of the circumstances surrounding the execution of the parties’ agreement.
We agree that the arbitration provision was not concealed in the three-page written contract. The agreement is short and the arbitration provision is as conspicuous as any other provision. However, plaintiffs were presented with other documents at the same time, including: (1) a one-page description of Home Defender’s services; (2) a one-page list of “DO’s & DON’T’S”; (3) a two-page document granting power of attorney to defendants; (4) a two-page authorization to release information; (5) a one-page deposit receipt with instructions on when plaintiffs’ fees could be released to defendants; (6) a combined eight pages of small print, densely worded California Association of Realtors forms concerning agency disclosures and listing agreements for plaintiffs’ homes; and (7) the Spanish language form stating that plaintiffs had read all the other forms.
In examining the circumstances surrounding plaintiffs’ execution of these documents, we begin with…“hardship” letters written by plaintiffs [to Home Defender] to support their need for mortgage foreclosure consulting services and a home loan modification. Distilled, the plaintiffs detailed a variety of unfortunate circumstances, ranging from business failure, job loss, wage and hour cutbacks, divorce, and damage to homes due to flooding or wildfires, that placed them in jeopardy of foreclosure and necessitated a mortgage modification to save their homes.
Next, according to plaintiffs’ uncontested declarations, Viveros told them that Home Defender could get their mortgage payments reduced. After explaining in Spanish how the program worked, Viveros presented them with many documents, claimed that the documents stated in English what she had just told them in Spanish, and told them to sign.… The clear import of their declarations is that when Viveros told them to sign the documents after claiming they simply repeated what she had told them, she was effectively telling them there was no need to read them.…
Defendants also contend that plaintiffs could have obtained mortgage foreclosure consulting services elsewhere. However, they provide no evidence to support that claim, which also overlooks the fact that in ordinary consumer transactions, where consumers have little incentive to seek out alternatives, the mere theoretical opportunity to have gone elsewhere will not preclude a finding of unconscionability. We believe this rule applies here because Viveros was not entirely a stranger to plaintiffs. Flores had used her as a real estate agent in a previous transaction. He felt comfortable with Viveros because she spoke Spanish and all of their communications were carried out in that language. Viveros contacted Flores about a home loan modification, and Flores referred Campos, Sabia, and Cruz to her. It appears that this referral was the reason why plaintiffs chose Viveros and the other defendants, making it far less likely they would have looked elsewhere for the same services.
We next consider Viveros’s failure to provide a version of the agreements in Spanish, in violation of Civil Code section 1632. Even though it appears that Viveros violated Civil Code section 1632, the statute itself is inapplicable because plaintiffs do not seek rescission. And, as defendants point out, plaintiffs’ hardship letters show a certain proficiency in the English language. Further, because plaintiffs, in reliance on Viveros, did not read the documents, her failure to provide a Spanish translation of the documents arguably had little effect on the outcome. However, the undisputed fact that Viveros explained the agreements in Spanish and had plaintiffs sign a Spanish language acknowledgment that they had read the forms shows that plaintiffs were more comfortable discussing complex concepts and contractual arrangements in their native language. Viewed in that light, even though plaintiffs do not seek relief under Civil Code section 1632, Viveros’s violation of that provision could be viewed as part of a scheme to conceal from plaintiffs all the essential terms of the documents they were signing, including the arbitration provision, thereby contributing to procedural unconscionability.
Summing up, the evidence shows that plaintiffs were presented a stack of English language documents and effectively told not to read them because they reflected what Viveros had explained to them in Spanish. The form contract, presented under these circumstances, was adhesive. Given plaintiffs’ economic circumstances and their preference for dealing with Viveros based on either past experience or Flores’s referral, we conclude there was sufficient oppression and surprise to create more than a minimum of procedural unconscionability.…
6. THE UNCONSCIONABLE TERMS CANNOT BE SEVERED
We may either refuse to enforce an arbitration provision if it is permeated by unconscionability, or sever or restrict the offending portions. Plaintiffs contend the arbitration provision is not severable. Defendants do not contest that assertion on appeal and we agree with it.…[The arbitration] provision is substantively unconscionable because it effectively requires plaintiffs to arbitrate their claims while leaving Home Defender free to sue in court for any claims it might have. There is no language in this provision that could be severed to make it bilateral. Instead, it would have to be rewritten to state that either party may require the other to arbitrate its claims. However, our power to sever does not include the power to reform the contract by augmenting it with additional terms.…
GRIMES J., Dissenting.
Respectfully, I dissent, not because of a conviction that the majority opinion misapprehends how our Supreme Court would construe Concepcion as it applies in this case, but because I am unable to set aside my doubts. I would have preferred to stay this case to obtain the benefit of the opinions in cases now pending decision in our Supreme Court that, it appears, will shed light on at least some of the unresolved issues concerning the enforceability of arbitration agreements governed by the Federal Arbitration Act that are claimed to be unconscionable.… The Supreme Court is, as I write, continuing to develop the law in this area; and with so many uncertainties, I cannot agree with my colleagues that the arbitration agreement here is unenforceable under federal law construing the FAA.…
… The majority focuses on language in Armendariz to the effect that the doctrine of unconscionability prevents enforcement of one-sided arbitration agreements…. As the majority notes, Armendariz rejected the argument that requiring mutuality of arbitration disfavored arbitration agreements in contravention of the FAA, reasoning in part that an arbitration agreement compelling one but not both parties to arbitrate disputes reflects a mistrust of arbitration that has been repudiated by the high court. The majority reasons that a rule prohibiting one-sided arbitration agreements promotes arbitration by requiring both parties to arbitrate their disputes.
Assuming the language in Armendariz concerning one-sided arbitration agreements was part of the holding in that case, and not dicta, nonetheless,…[t]he Supreme Court may have decided Armendariz differently if Concepcion had been the law in 2000, in part because Concepcion indicates the way to promote arbitration is to enforce arbitration agreements on their terms, not to refuse to enforce them under principles that discriminate against arbitration agreements and which are not neutral principles applicable to contracts generally.…
Concepcion determined “a court may not ‘rely on the uniqueness of an agreement to arbitrate as a basis for a state-law holding that enforcement would be unconscionable,” (131 S. Ct. at 1747), nor may it enforce “state-law rules that stand as an obstacle to the accomplishment of the FAA’s objectives,” including the objective of “‘ensur[ing] that private arbitration agreements are enforced according to their terms.’” (Id. at 1748.) Before Concepcion, the high court explained in Perry v. Thomas (1987) 482 U.S. 483, that the FAA preempts a state unconscionability rule that discriminates against arbitration. “A state-law principle that takes its meaning precisely from the fact that a contract to arbitrate is at issue does not comport with [the FAA’s savings clause]. A court may not, then, in assessing the rights of litigants to enforce an arbitration agreement, construe that agreement in a manner different from that in which it otherwise construes nonarbitration agreements under state law.” (Perry, at 492, fn. 9.)
Refusing to enforce an arbitration agreement because it does not require both parties to arbitrate their disputes appears contrary to the decisions in Concepcion and Perry, because there is no general principle of California contract law that promises must be mutual in order to be enforceable. California law does not require mutuality of every term and provision in a contract, so long as each party has made binding obligations in consideration for their respective promises. Under general principles of California contract law, it is not unconscionable to include terms in a contract that benefit one party but not the other, so long as there is consideration for the contract.
… The reasoning and analysis of Armendariz, and the decisions by the intermediate appellate courts holding that one-sided arbitration agreements are unconscionable,… rest on special judge-made rules that apply only to arbitration agreements, and not on general principles of contract law. Because of this, it appears that a rule requiring mutuality of arbitration agreements would run contrary to the FAA as interpreted by Concepcion because it discriminates against arbitration, requiring arbitration clauses be mutual but not imposing that requirement on other contract provisions. (Mortensen v. Bresnan Communications, LLC (9th Cir. 2013) 722 F.3d 1151, 1159–1161 [FAA preempts Montana reasonable expectations/fundamental rights rule because it “disproportionally applies to arbitration agreements, invalidating them at a higher rate than other contract provisions”…]; see also Allied–Bruce Terminix Cos. v. Dobson (1995) 513 U.S. 265, 281 [“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.…[T]hat kind of policy would place arbitration clauses on an unequal ‘footing,’ directly contrary to the [FAA’s] language and Congress’ intent.”].)….
Questions and Comments
(1) Which opinion in Concepcion seems most sound? Note that the enacting Congress clearly had no intent whatsoever regarding class waivers because the class mechanism did not exist in 1925, and the legislative history indicates that Congress was focused on providing merchants rather than consumers and employees with an alternative forum for dispute resolution. See generally Moses, Arbitration Law: Who’s In Charge, 40 Seton Hall L. Rev. 147 (2010). What, then, justifies the majority’s conclusion that class arbitration waivers should be preempted? As a matter of policy, should states have been left to experiment with enforcement of these clauses? Does promotion of a national market somehow justify a single rule that favors individual rather than class arbitration?
(2) AT&T’s arbitration clause was uncommonly generous to customers who wished to pursue individual claims against the company. To what extent might this factor have influenced the Court’s conclusion? If a clause is less generous to the consumer, would a state court be permitted to strike the arbitration clause? Could it strike a class waiver?
(3) To what extent does the outcome in Concepcion turn on the majority’s hostility to class arbitration? The Sabia majority hints that it thinks Concepcion is directed to class actions rather than to a widespread limitation of the unconscionability doctrine. The Sabia dissent seems to disagree. Which is correct?
(4) The upshot of Concepcion is that in most contexts companies can use arbitration clauses to defeat class actions altogether. Is this a good result? Some have suggested that companies place arbitration clauses in their standard form agreements primarily as a device to circumvent class proceedings. See Eisenberg, Miller & Sherwin, Arbitration’s Summer Soldiers: An Empirical Study of Arbitration Clauses in Consumer and Nonconsumer Contracts, 41 U. Mich. J. L. Reform 871, 894 (2008).
(5) Is the Concepcion majority correct that forcing parties to arbitrate through class proceedings will discourage them from choosing arbitration? Presumably companies derive multiple benefits from arbitration, but it does seem clear that many companies steer far clear of class action arbitration (as opposed to class action litigation). For example, Discover Card provided in its agreement for court litigation rather than arbitration in the event that its class arbitration provision was struck down. Issacharoff & Delaney, Credit Card Accountability, 73 U. Chi. L. Rev. 157 (2006). But see Skirchak v. Dynamics Research Corp., 508 F.3d 49, 63 (1st Cir. 2007) (“At oral argument we asked the parties whether each would prefer to be in arbitration even if the class action waiver clause was stricken. The company said it would prefer to be in arbitration; the plaintiffs agreed.”).
(6) After Concepcion, would it be permissible for a state to refuse to enforce a class arbitration waiver unless the waiver is conspicuously presented in the arbitration agreement with bold type or capital letters? In footnote 6, the Concepcion majority opinion suggests that this regulation of class waivers would be permissible. Prior to Concepcion, the Utah legislature enacted such a rule for application to arbitration clauses found in credit card agreements. Utah Code Ann. §704C-4-105(2)(c)(i)-(ii) (2006). Is this an effective substitute form of regulation? Is it even permissible under the FAA? In Doctor’s Associates, Inc. v. Casarotto, 517 U.S. 681 (1996), the Supreme Court held that a Montana statute that required notice of an arbitration clause to be provided in conspicuous type on the first page of a contract was preempted by the FAA. As with California’s treatment of class waivers in Concepcion, Montana’s statute impermissibly treated arbitration agreements differently than other contracts. How then can Utah’s statute be upheld? Does Concepcion limit the reach of Casarotto, and if so, how? Does it matter that the Montana statute applied to all contracts but the Utah statute just applies to consumer credit card agreements? If so, why?
(7) More generally, if the Sabia dissent is correct that states cannot specially apply any laws or contract doctrines to arbitration clauses, then how can states use those doctrines to ensure the fairness of arbitration clauses? Presumably the fairness of a contract clause turns on the substance of a clause and the context in which it is used—isn’t that always an individualized rather than a general treatment? And if Concepcion really does merely reinforce the general proposition that states cannot treat arbitration clauses differently from the way they treat other clauses, what was wrong with the Discover Bank rule? It appeared to treat class waivers the same, whether applied in arbitration or litigation.
(8) Note that the Supreme Court’s interpretation of the FAA forces states to treat the enforcement of arbitration clauses differently than they typically treat choice-of-court clauses. Recall from Section B that state courts are permitted to regulate the enforcement of choice-of-court clauses as they see fit, with most willing to enforce them unless they are somehow unreasonable or unfair. In contrast, arbitration clauses can only be scrutinized using generally applicable contract doctrines, and those doctrines apparently cannot be modified to take into account the peculiar circumstances of arbitration. Specifically, recall the California court’s conclusion in America Online, that the Virginia choice-of-court clause was not enforceable. If the company had opted for the same laws and procedures in arbitration (to be held in Virginia) rather than in the Virginia courts, could the California courts refuse to enforce the arbitration clause?
(9) Should the parties (or the contract drafter) be permitted to choose the applicable law for providing the content of the general contract law defenses? Courts vary in their views on this question. See, e.g., Bridge Fund Capital Corp. v. Fastbucks Franchise Corp., 622 F.3d 996 (9th Cir. 2010) (California forum law applied instead of Texas law designated in the contract); Schnuerle v. Insight Communications Co., 2010 WL 5129850 (Ky.) (Kentucky forum law applied instead of New York law designated in the contract); Coady v. Cross Country Bank, 729 S.W.2d 732 (Wis. Ct. App. 2007) (Wisconsin forum law rather than Delaware law chosen by the parties applies); Bragel v. General Steel Corp., 2006 WL 2623931 (Mass. Super.) (unpublished opinion) (Colorado law selected by the parties applies); Spann v. American Express Travel Related Services Co., 224 S.W.3d 698 (Tenn. Ct. App. 2006) (Utah law chosen by the parties applies); Hubbert v. Dell Corp., 359 Ill. App. 3d 976 (2005) (applying Texas law designated in the contract).
(10) Some of the major arbitration associations have put into place standards designed to ensure that individuals subject to arbitration as a consequence of terms found in a business’s standard form agreement are not deprived of fundamental rights. The AAA, for example, posts a Consumer Due Process Protocol, see www.adr.org/sp.asp?id=22019, which must be substantially satisfied as a prerequisite to AAA administration of the claim. The Protocol requires that the consumer be given fair notice of both the arbitration provision and its import. Fees chargeable to the consumer are quite modest while any remaining fees must be paid by the business. The consumer must be given the option to proceed in small claims court instead of arbitration. Furthermore, the arbitrator must retain the ability to grant any remedy that would be available in court. JAMS posts Minimum Standards of Procedural Fairness, www.jamsadr.com/rules-consumer-minimum-standards/,its own Protocol to be applied to similar contracts. JAMS minimum standards are even more onerous. In addition to requirements similar to those found in the AAA Protocol, the arbitration agreement must be reciprocally binding (if the consumer must arbitrate, so too must the company). Furthermore, consumers must be entitled to: (1) participate in the selection of the arbitrator; (2) make reasonable discovery requests; and (3) obtain a hearing in her hometown area. Does the evolution of such protocols suggest that Court oversight of arbitration clauses is unnecessary? Or might the arbitration association actions be attributable to court disapproval of the former state of arbitration for standard form contracts? Do you predict that arbitration associations will engage in more or less self-regulation in the aftermath of Concepcion?
1. Federal courts applying California’s conflicts law have also adhered to this approach. The mainstream nature of this approach is further reflected by a recent study indicating that 15 states other than California follow the general approach of the Restatement Second.
4. As noted above, a different result might obtain under Restatement section 187, subdivision (1), which appears to allow the parties in some circumstances to specify the law of a state that has no relation to the parties or their transaction. The Restatement gives these two illustrations: “4. In State X, A establishes a trust and provides that B, the trustee, shall be paid commissions at the highest rate permissible under the local law of state Y. A and B are both domiciled in X, and the trust has no relation to any state but X. In X, the highest permissible rate of commissions for trustees is 5 per cent. In Y, the highest permissible rate is 4 per cent. The choice-of-law provision will be given effect, and B will be held entitled to commissions at the rate of 4 per cent. 5. Same facts as in Illustration 4 except that the highest permissible rate of commissions in X is 4 per cent and in Y is 5 per cent. Effect will not be given to the choice-of-law provision since under X local law the parties lacked power to provide for a rate of commissions in excess of 4 per cent and Y, the state of the chosen law, has no relation to the parties or the trust.” (Rest., §187, subd. (1), com. c., illus. 4 & 5, p. 564; italics added.)
5. To be more precise, we note that Restatement section 187, subdivision (2) refers not merely to the forum state—for example, California in the present case—but rather to the state “… which, under the rule of §188, would be the state of the applicable law in the absence of an effective choice of law by the parties.” For example, there may be an occasional case in which California is the forum, and the parties have chosen the law of another state, but the law of yet a third state, rather than California’s, would apply absent the parties’ choice. In that situation, a California court will look to the fundamental policy of the third state in determining whether to enforce the parties’ choice of law. The present case is not such a situation.
6. There may also be instances when the chosen state has a materially greater interest in the matter than does California, but enforcement of the law of the chosen state would lead to a result contrary to a fundamental policy of California. In some such cases, enforcement of the law of the chosen state may be appropriate despite California’s policy to the contrary. Careful consideration, however, of California’s policy and the other state’s interest would be required. No such question is present in this case, and we thus need not and do not decide how Restatement section 187 would apply in such circumstances.
7. As we have noted, the choice-of-law clause states: “This agreement shall be governed by and construed in accordance with Hong Kong law.…” (Italics added.) The agreement, of course, includes the choice-of-law clause itself. Thus the question of whether that clause is ambiguous as to its scope (i.e., whether it includes the fiduciary duty claim) is a question of contract interpretation that in the normal course should be determined pursuant to Hong Kong law. The parties in this case, however, did not request judicial notice of Hong Kong law on this question of interpretation (Evid. Code, §452, subd. (f)) or supply us with evidence of the relevant aspects of that law (Evid. Code, §453, subd. (b)). The question therefore becomes one of California law.
1. I agree with the majority that the scope of the choice-of-law clause in this contract is a question that would ordinarily be determined under Hong Kong law. I further agree with the majority that, since the parties neither produced any evidence of Hong Kong law relating to this subject nor requested judicial notice of any such law, we may apply California law to ascertain the scope of the clause.
2. Despite the majority’s artfully crafted argument, the words “governed by” do not assist in defining what causes of action the choice-of-law clause was intended to address. Rather, the parties defined the scope of their choice-of-law clause by choosing the phrase “[t]his agreement.”
2. Banek was not forced into this investment decision, but chose to negotiate an agreement with the defendant. Having negotiated that agreement, including several changes beneficial to Banek’s position, it is now attempting to escape one of the contract’s provisions.
The price that Banek paid for its franchise reflected the terms of the agreement. We are hesitant to void the choice of law provision because that would mean Banek would be getting more than it bargained for.
3. Various aspects of the MFIL evidence that it represents public policy of Michigan: provisions for enforcement by both public and private actions, Mich. Comp. Laws Ann. §§445.1531, 445.1535; the imposition of joint and several liability of owners, directors, officers, and employees of the franchisor, [Id.] §445.1532; recovery of attorney fees in private actions, [Id.] §445.1531; and the imposition of penalties and fines, including up to seven years imprisonment and up to $10,000 in fines, [Id.] §445.1538. Enforcement of the act’s provisions by the attorney general would not be affected by a choice of law provision in a franchise contract.
4. North Dakota Century Code §9-08-06 (2006) states that “[e]very contract by which anyone is restrained from exercising a lawful profession, trade, or business of any kind is to that extent void” except selling the goodwill of a business and partnership relations.
15. At the very least, the clause was an effort to eliminate all uncertainty as to the nature, location, and outlook of the forum in which these companies of differing nationalities might find themselves. Moreover, while the contract here did not specifically provide that the substantive law of England should be applied, it is the general rule in English courts that the parties are assumed, absent contrary indication, to have designated the forum with the view that it should apply its own law. It is therefore reasonable to conclude that the forum clause was also an effort to obtain certainty as to the applicable substantive law.
6. At oral argument, counsel for AOL suggested for the first time that a Virginia court might apply California’s consumer protection law to resolve this dispute. Not only was this suggestion legally unsupported, but we find it counter-intuitive to believe that a Virginia court would invoke California law to resolve a contract-based consumer dispute against a Virginia domiciliary where the parties agreed to have Virginia law applied, and where Virginia has a statutory consumer protection law of its own.
1. A motion to certify a class of citizens of twenty-three other states was pending before the district court when the dismissal was ordered.
5. See, e.g., Fru-Con Constr. Corp. v. Controlled Air, Inc., 574 F.3d 527, 538 (8th Cir. 2009) (“[E]nforcement … of the contractual forum selection clause was a federal court procedural matter governed by federal law.”); Doe 1 v. AOL LLC, 552 F.3d 1077, 1083 (9th Cir. 2009) (“We apply federal law to the interpretation of the forum selection clause.”); Ginter ex rel. Ballard v. Belcher, Prendergast & Laporte, 536 F.3d 439, 441 (5th Cir. 2008) (“We begin with federal law, not state law, to determine the enforceability of a forum-selection clause.”); Phillips v. Audio Active Ltd., 494 F.3d 378, 384 (2d Cir. 2007) (“[T]he rule set out in M/S Bremen applies to the question of enforceability of an apparently governing forum selection clause, irrespective of whether a claim arises under federal or state law.”); P & S Bus. Machs. v. Canon USA, Inc., 331 F.3d 804, 807 (11th Cir. 2003) (“Consideration of whether to enforce a forum selection clause in diversity suit is governed by federal law.…”); Jumara v. State Farm Ins. Co., 55 F.3d 873, 877 (3d Cir. 1995) (“[T]he effect to be given a contractual forum selection clause in diversity cases is determined by federal not state law.”).
1. See Ohio Rev. Code Ann. §2915.02(A) (2003) (prohibiting any person from engaging in “conduct that facilitates any game of chance conducted for profit” or “engag[ing] in betting or in playing any scheme or game of chance as a substantial source of income or livelihood”); Ohio Rev. Code Ann. §2915.01(D) (2003) (defining poker as a game of chance); Ohio Rev. Code Ann. §3763.01 (2003) (gaming contracts void).
3. See 18 U.S.C. §1084 (2000) (unlawful to “use a wire communication facility for the transmission in interstate and foreign commerce of bets and wagers on sporting events and contests, and for the transmission of a wire communication which entitled the recipient to receive money and credit as a result of bets and wagers”); 18 U.S.C. §1962(c) (2000) (“It shall be unlawful for any person employed by or associated with any enterprise engaged in, or the activities of which affect, interstate or foreign commerce, to conduct or participate, directly or indirectly, in the conduct of such enterprise’s affairs through a pattern of racketeering activity or collection of unlawful debt.”)
1. Section 1 of the FAA, provides in part, “… but nothing herein contained shall apply to contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce.” 9 U.S.C. §1.
3. The guaranteed minimum recovery was increased in 2009 to $10,000.
6. Of course, States remain free to take steps addressing the concerns that attend contracts of adhesion—for example, requiring class-action-waiver provisions in adhesive arbitration agreements to be highlighted. Such steps cannot, however, conflict with the FAA or frustrate its purpose to ensure that private arbitration agreements are enforced according to their terms.
7. The dissent claims that class arbitration should be compared to class litigation, not bilateral arbitration. Whether arbitrating a class is more desirable than litigating one, however, is not relevant. A State cannot defend a rule requiring arbitration-by-jury by saying that parties will still prefer it to trial-by-jury.
13. The presence of the class waiver plays no part in our analysis, which is instead based on the generally applicable contract defense of unconscionability in light of the very one-sided nature of the arbitration provision. We also note that plaintiffs … have effectively conceded that if the arbitration provision is enforceable then class wide dispute resolution is not available.
14. The California Supreme Court has granted review of numerous Court of Appeal decisions that have tackled several issues left by Concepcion’s wake, including some which have both found and rejected unconscionability in this context.…[Citation to 11 cases currently pending before the California Supreme Court omitted.]