Yesterday, a California appellate court issued a detailed, treatise-like analysis of FAA preemption, unconscionability, and delegation clauses in arbitration agreements. The court ultimately compelled arbitration of the underlying employment dispute by upholding the enforcement of a delegation clause providing that “[t]he arbitrator has exclusive authority to resolve any dispute relating to the interpretation, applicability, or enforceability of this binding arbitration agreement.” See Malone v. Superior Court, No. B253891 (Cal. Ct. App. June 17, 2014) (click here for a copy of the decision).
The appellate court found that under the Supreme Court’s Concepcion decision, the FAA preempts a finding that a delegation clause is substantively unconscionable on the grounds that an arbitrator would have a financial interest in finding an arbitration clause enforceable. According to the appellate court, such a finding of unconscionability reflects an inappropriate judicial hostility or mistrust of arbitration.
The appellate court also briefly discussed the “reasonable expectations” test as applied to the delegation clause. In a footnote, the court stated that such delegation clauses are “much less uncommon” today than in 1995 when the Supreme Court decided its landmark First Options case. The appellate court explained that the rules of both JAMS and the AAA now provide for arbitrators to decide on the enforceability of and arbitration agreement, and thus today, delegation clauses are “more likely to be within the reasonable expectations of the parties.”
As for the “reasonable expectations” test, I find it hard to accept that a DELEGATION clause would be within the reasonable expectations of an average member of the public. If you survey 100 people about arbitration in general, it is unlikely that more than a handful can explain what arbitration involves. Taking an additional step, it is even less likely that a person will understand the significance of a delegation clause. In my opinion, the jury provision of section 4 of the FAA is underutilized, and a jury should be asked to apply a state’s contract law or “reasonable expectations” test. (But I realize this case arose in a state court system, and thus, section 4 is not applicable since this section explicitly refers to federal courts.)