Earlier this week, the Ninth Circuit issued two rulings addressing FAA preemption. As explained below, the Ninth Circuit applied Concepcion to strike down a state law in one decision, but in the other decision, the Ninth Circuit issued a sensible interpretation limiting the broad scope of FAA preemption under Concepcion.
In Ferguson v. Corinthian Colleges, Inc., No. 11-56965 (9th Cir. Oct. 28, 2013) (click here for a copy of the opinion), the Ninth Circuit held that the FAA preempted a California law exempting from arbitration certain claims for injunctive relief. Under California law, known as the Broughton-Cruz rule, consumers acting as private attorneys general under California consumer protection statutes could seek injunctive relief in court, despite being subject to an enforceable arbitration agreement. The Ninth Circuit reasoned that under the Supreme Court’s Concepcion ruling, the FAA would preempt any law prohibiting the arbitration of a particular type of claim, and as a result, the FAA preempted the Broughton-Cruz rule.
In Chavarria v. Ralphs Grocery Co., No. 11-56673 (9th Cir. Oct. 28, 2013) (click here for a copy of the decision), the district court denied an employer’s motion to compel arbitration, finding that the agreement was unconscionable. On appeal, the employer argued the agreement was not unconscionable, and in the alternative, the FAA preempts the district court’s invalidation of the arbitration agreement. The Ninth Circuit found the agreement was invalid under California’s generally-applicable law of unconscionability. The agreement was presented on a take-it-or-leave-it basis, and its terms were not given to the employee until three weeks after the employee had agreed to be bound by the terms. Also, several terms were unfair or substantively unconscionable.
As for preemption, the Ninth Circuit rejected the employer’s arguments that the FAA preempted the district court’s unconscionability analysis. In its ruling, the Ninth Circuit reined in or qualified some of the broad preemption language from the Supreme Court’s Concepcion decision. In Concepcion, the Supreme Court stated that the FAA can preempt state laws having a “disproportionate impact” on arbitration. The agreement at issue in Chavarria contained a problematic cost provision, where the arbitrator would allocate significant fees to both the employer and employee at the beginning of the arbitration, regardless of the merits. The Ninth Circuit explained that any state law that invalidated this provision would of course have a “disproportionate impact” on arbitration because this provision is arbitration specific. However, invalidation of this term would not disfavor arbitration; invalidating this term would simply help make arbitration fair. The Ninth Circuit suggested that the broad preemptive language from Concepcion cannot be read to invalidate state rules requiring some level of fairness in arbitration. In other words, the FAA cannot preempt a state law that merely has a “disproportionate impact” on arbitration; in order to be preempted, the law must also disfavor arbitration and not seek to make arbitration fairer.
It is good to see the Ninth Circuit try to rein in some of the broad and vague preemptive language from Concepcion. There are disturbing lower court opinions that conflict with the Ninth Circuit’s new Chavarria holding by interpreting Concepcion more broadly. For example, in a case called Lucas v. Hertz Corp., a federal district court addressed an unconscionability challenge to an arbitration agreement for not permitting sufficient discovery. The court reasoned that after Concepcion, limitations on arbitral discovery no longer can support a finding of substantive unconscionability because such a ruling is arbitration specific and would have a disproportionate impact on arbitration. However, under the Ninth Circuit’s Chavarria holding, a court could still invalidate an arbitration clause for severely limiting discovery; such a ruling would be aimed at making arbitration a fairer process.