Courts Examined Pre-Emption And Unconscionability in 2003
This year has seen significant case law in the area of contractual arbitration. Courts have addressed important issues, such as Federal Arbitration Act pre-emption, unconscionability and the mandatory arbitration of many types of disputes.
• Pre-emption. The Federal Arbitration Act embodies a strong public policy favoring arbitration. Consequently, federal law pre-empts conflicting state laws.
In Ting v. AT&T, 319 F.3d 1126 (9th Cir. 2003), the 9th Circuit split with the 7th Circuit on whether the Telecommunications Act of 1996 impliedly pre-empts a state-law challenge of unconscionability to an arbitration provision in a telephone company's consumer service agreement. The court held that prohibitions against discriminatory rate applications did not pre-empt state-law challenges. Contra, Boomer v. AT&T Corp., 309 F.3d 404 (7th Cir. 2002).
In Jevne v. Superior Court, 2003 Cal.App.LEXIS 1714 (Cal. App. Nov. 19, 2003), the court held that California's Judicial Council ethics standards are pre-empted when the arbitration is subject to the Federal Arbitration Act and other federal regulatory schemes, for example, in securities cases.
The court in Mayo v. Dean Witter Reynolds, 258 F.Supp.2d 1097 (N.D. Cal. 2003), amended, 260 F.Supp.2d 979 (2003), held that the Federal Arbitration Act and New York Stock Exchange rules pre-empted California ethics standards preventing a plaintiff from proceeding before panel selected consistent with those standards.
In Citizens Bank v. Alafabco Inc., 123 S.Ct. 2037 (2003) (per curiam), the Supreme Court held that a debt-restructuring agreement was a contract involving commerce within the meaning of the Federal Arbitration Act, even though the debtor and creditor both were located in the same state.
The Alafabco court noted that the debt was incurred for the purpose of conducting interstate business and created as part of creditor's general practice of making commercial loans subject to federal regulation. Moreover, the debtor's assets, including goods assembled from out-of-state parts, secured the restructured debt.
• Opt-out provisions. In Circuit City Stores Inc. v. Mantor, 335 F.3d 1101 (9th Cir. 2003), the employer gave an employee an "opt-out" form, with which he could elect not to be bound by the arbitration agreement, but pressured the employee not to opt out and threatened to fire him if he did.
The 9th Circuit held that the arbitration agreement was procedurally unconscionable: "The fact that [the employer] pressured and even threatened [the employee] into assenting to the arbitration agreement demonstrates that he had no meaningful opportunity to opt-out of the program."
• Venue and forum-selection clauses. In Alan v. Superior Court, 111 Cal.App.4th 217 (2003), the court held that forum-selection clauses in adhesive agreements found to be unreasonable or unjust may be challenged on the grounds of unconscionability or on other grounds, such as fraud and undue influence. If the chosen out-of-state location is not "reasonable and just," then the parties must adjudicate the dispute in a California court.
• Unilateral termination provisions. The court in Ingle v. Circuit City Stores Inc., 328 F.3d 1165 (9th Cir. 2003), noted that arbitration agreements that are so one-sided that they undermine the neutrality of the proceedings may be unenforceable. Ingle held that an agreement allowing the employer to terminate or modify the agreement unilaterally will be presumed substantively unconscionable.
• Confidentiality clauses. The Ting court also held that a provision requiring the arbitration to remain confidential may be substantively unconscionable. The court noted that, while secrecy provisions appear facially neutral, in fact, they usually favor corporations over individuals.
• Fee and cost provisions. The 9th Circuit in Mantor, held that a requirement that an employee pay Circuit City a $75 "filing fee" to initiate an arbitration was substantively unconscionable. No payment to an employer is required to file a lawsuit; and indigent plaintiffs are exempt from having to pay court fees.
McManus v. CIBC World Markets Corp., 109 Cal.App.4th 76 (2003), held that a court may sever an unconscionable cost-splitting provision, which required the employee to pay costs that it would not have to pay in court, and enforce the balance of the arbitration agreement.
• Appeal provisions. The court in Little v. Auto Stiegler Inc., 29 Cal.4th 1064 (2003), held that a one-sided "appeal" provision, which, in effect, gave the employer the right to a second arbitration to overturn a sizable arbitration award, was substantively unconscionable but severable, so the court enforced the rest of the agreement.
• Severability. To assess whether unconscionable terms may be severed, a court considers whether the unconscionable provision is "central" or "collateral" to the purpose of the contract. Mantor.
Severance is not appropriate where the agreement is completely one-sided, compelling the employee, but not the employer, to arbitrate all claims. O'Hare v. Municipal Resource Consultants, 107 Cal.App.4th 267 (2003).
• Employment claims. The 9th Circuit has joined all other circuits in holding Title VII does not bar compulsory arbitration agreements. EEOC v. Luce, Forward, Hamilton & Scripps, 345 F.3d 742 (9th Cir. 2003) (en banc) (overruling Duffield v. Robertson Stephens & Co., 144 F.3d 1182 (9th Cir. 1998).
However, the Little court held that the minimum procedural requirements of Armendariz v. Foundation Health Psychcare Services Inc., 24 Cal.4th 83 (2000), are not confined to claims under the Fair Employment and Housing Act but extend to nonstatutory public-policy claims, such as wrongful termination in violation of public policy.
• RICO claims. It is still unclear whether arbitration agreements barring an award of punitive damages are enforceable if RICO claims may be affected. The court in PacifiCare Health Systems Inc. v. Book, 123 S.Ct. 1531 (2003), held that the arbitrator must decide whether ambiguous agreements that bar punitive damages prohibit a RICO treble-damage award.
• Unfair-competition claims. Parties may not be compelled to arbitrate claims for injunctive relief affecting the public under Business & Professions Code Section 17200. Cruz v. PacifiCare Health Systems, Inc., 30 Cal.4th 303 (2003). But it is unclear whether arbitrators may enjoin violations of the unfair-competition law in an action brought by a private plaintiff "on behalf of the general public" when the action is designed primarily to rectify individual wrongs and only incidentally for the public benefit.
Similarly, Cruz held that parties cannot be compelled to arbitrate actions to enjoin false advertising under Section 17500. But claims for damages, restitution or disgorgement of profits under the above statutes are arbitrable, including claims sought on a classwide basis. No need exists for long-term supervision or modification of such claims.
• Child-support claims. Agreements to submit future child-support issues to binding arbitration are void as against public policy because they deprive the court of jurisdiction to modify child support. Marriage of Bereznak & Heminger, 110 Cal.App.4th 1062 (2003).
• Class-action suits. If an arbitration provision does not expressly permit or prohibit classwide arbitration, then a determination of contractual intent is for the arbitrator, not the court. Green Tree Fin'l Corp. v. Bazzle, 123 S.Ct. 2402 (2003).
Richard Chernick is an arbitrator and mediator and is managing director of the JAMS Arbitration Practice. He is a co-author of The Rutter Group's "California Practice Guide - Alternative Dispute Resolution."
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