[arbitrationblog/archives/preemption/alltops.htm]

Arbitration Blog


A blog for employment lawyers, human resources professionals, and union representatives.

This page contains entries under the topic: "Preemption" | Main

June 27, 2005

Anti-class-action clause was unconscionable

A bank-customer agreement's arbitration provision had a clause forbidding classwide arbitrations. The California Supreme Court (4-3) says that was unconscionable and unenforceable. Discover Bank v. Superior Court (California 06/27/2005).

Basic facts: Discover Bank amended its agreement with credit cardholders by sending them a notice that added a requirement that disputes be resolved through arbitration, and that prohibited class action arbitrations. Cardholders accepted the new arbitration provision by continuing to use their cards. The contract provided that it was "governed by federal law and the law of Delaware."

Cardholders' suit claimed that the bank charged late fees (about $29) when payment was received after 1:00 p.m. on the due date, resulting in damages that were small as to individuals but large in the aggregate.

The bank sought an order compelling arbitration on an individual basis.

Basic holding of the California Supreme Court:

  • The anti-class-action clause was unconscionable under California law.
  • The Federal Arbitration Act (FAA) does not preempt California law on the unconsionability of class-action waivers.
  • The whole case might be governed by Delaware law, so the court remanded for a lower court decision on that aspect.

The dissent (by three of the seven judges) agreed that the FAA did not preempt, but argued that the case should be decided under Delaware law which allows class action waivers. They saw no need to decide anything about unconsionability under California law.

My view:

  • The unconsionability reasoning was quite narrow. The court said:
    We do not hold that all class action waivers are necessarily unconscionable. But when 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, at least to the extent the obligation at issue is governed by California law, 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.” (Civ. Code, § 1668.) Under these circumstances, such waivers are unconscionable under California law and should not be enforced.
    Questions:
    • What is a "consumer contract"?
    • What are "small amounts of damages"?
    • What is "a scheme to deliberately cheat large numbers of consumers"?
    • Will a choice of law clause (e.g., providing that Delaware law applies) result in enforcement of a clause that is lawful in the other state but unconscionable in California?

  • Pre-dispute arbitration clauses in employment agreements are left up in the air by this case.

    • Most such cases will involve much more than $29 in damages.
    • How many employment disputes can be characterized as "a scheme to deliberately cheat large numbers of consumers" or employees?

Posted June 27, 2005 by Ross Runkel, Editor at LawMemo, publisher of Employment Law Memo. Try it.

May 23, 2005

NASD rules preempt state ethics rules for arbitrators

The California Supreme Court says the National Association of Securities Dealers (NASD) rules preempt California's "Ethics Standards For Neutral Arbitrators in Contractual Arbitration," and all of the California ethics rules are preempted. Jevne v. Superior Court (California 05/23/2005).

This case was between a brokerage and a customer, and will have an impact on employee-employer arbitrations conducted by the NASD.

California and the NASD both have rules requiring disclosures by neutral arbitrators, and California's are more extensive and complex. Both California and the NASD have rules under which arbitrators can be disqualified.

The NASD rules were specifically approved by the Securities Exchange Commission, which gave them the force of federal law and ultimately the power of the federal government to preempt state law.

The court identified four types of possible preemption: (1) where the federal statute expressly preempts (not here), (2) where the federal statute occupies a whole field of law (not here), (3) where it is actually impossible to comply with both federal and state law requirements (not here), and (4) where the state law could prevent or impair accomplishment of the purposes and objectives of the federal law (Bingo, that's it).

The logic: NASD is regulated by the Securities Exchange Commission (SEC), which is created by the Securities Exchange Act (SEA). SEA's objectives: fair dealing and investor protection. All NASD rules are reviewed and approved by the SEC, so they have the force of law. SEC's opinion is that California's rules have three negative effects on NASD arbitrations: (1) increased administrative costs, (2) reduction of the number of available arbitrators (because many are unwilling to comply), and (3) reduction of nationwide uniformity of NASD arbitrations.

Other California ethics rules could not be severed, said the court, so the whole works was preempted.

My view: We got the same result from the 9th Circuit in Credit Suisse v. Grunwald (9th Cir 03/01/2005), although the reasoning was a little different. [See blog]

Now the question is whether there is any possibility that the outcome will be different for employment arbitrations conducted by NASD. It seems the outcome would be the same.

Posted May 23, 2005 by Ross Runkel, Editor at LawMemo, publisher of Employment Law Memo. Try it.

March 20, 2005

Volt revisited, with a twist

The Federal Arbitration Act (FAA) preempts state law that is contrary or frustrates the FAA's purposes. But parties can agree to state law arbitration rules and avoid FAA preemption. A simple matter of allowing folks to voluntarily opt out of the FAA. Volt Information Services v. Stanford University 489 US 468 (1989).

Cronus Investments v. Concierge Services (California 03/10/2005) put a twist on Volt.

The parties agreed to follow California law, and that the designation of California law "shall not be deemed an election to preclude application of the [FAA], if it would be applicable." A multi-party set of disputes arose, involving six agreements, some with and some without arbitration clauses. All this went to court, and the trial judge stayed the arbitrations pending resolution of the court litigation - as allowed by California Code of Civil Procedure 121.2 subdivision (c).

State law question - choice of laws

The California Supreme Court held that agreeing to use California law meant agreeing to use California's arbitration statutes.

Federal law question - preemption

(1) The court saw no actual conflict between the FAA and the California statute. This was based in large part on a finding that FAA Sections 3 and 4 (directing "courts of the United States" to stay court trials until arbitration has taken place, and directing "United States district court[s]" to order parties to proceed to arbitration) do not apply in state courts, and thus have no preemptive effect.

(2) The court saw no conflict with the spirit of the FAA, and said that the state law actually fosters the federal policy favoring arbitration. "It is an evenhanded law that allows the trial court to stay arbitration proceedings while the concurrent lawsuit proceeds or stay the lawsuit while arbitration proceeds to avoid conflicting rulings on common issues of fact and law amongst interrelated parties."

Significance of the case

I would not read much "law" into this case. It really means only that the parties are allowed to decide for themselves whether they want the procedural rules of the FAA or the procedural rules of the state statute to control.

Posted March 20, 2005 by Ross Runkel, Editor at LawMemo, publisher of Employment Law Memo. Try it.

March 03, 2005

NASD rules preempt state ethics rules for arbitrators?

The 9th Circuit says NASD rules preempt state ethics rules for arbitrators in employment disputes. The California Supreme Court hears arguments on a similar preemption issue on March 8, 2005.

The 9th Circuit case: Credit Suisse v. Grunwald (9th Cir 03/01/2005) [pdf]. Under Credit Suisse's Employment Dispute Resolution Program, Grunwald was obligated to use arbitration to resolve his employment dispute. He wanted arbitration conducted by the American Arbitration Association (AAA), but Credit Suisse preferred arbitration conducted by the National Association of Securities Dealers (NASD).

Why would it matter? California has a statute requiring neutral arbitrators to make extensive disclosures relating to potential conflicts of interest, and these would apply in an AAA arbitration. NASD rules also require disclosures but they are partly in conflict with the California rules.

The 9th Circuit held that the California rules are preempted and do not apply to NASD arbitrations.

The theory in brief: NASD is a private organization regulated by the Securities Exchange Commission (SEC). Acts of Congress can preempt state law and so can regulations of agencies such as the SEC. The arbitration rules adopted by the NASD were approved by the SEC, and therefore have preemptive force. Some California rules are preempted because they directly conflict with NASD rules; some are preempted because they would be an obstacle to executing Congress' purposes.

The California case: Jevne v. Superior Court, to be argued in the California Supreme Court March 8. Court of Appeal decision is Jevne v. Superior Court (California Court of Appeal 11/09/2003) [pdf]. This is not an employment case, but the court similarly held that the NASD arbitration rules preempted California's rules.

Interesting that the 9th Circuit decision is not binding on California courts. Although California is geographically within the 9th Circuit, it is a separate court system. So let's wait and see whether the cases come out the same. It could be that California doesn't think that the rules of a private organization (NASD) can preempt state law.

Posted March 03, 2005 by Ross Runkel, Editor at LawMemo, publisher of Employment Law Memo. Try it.

Google
Search WWW Search LawMemo.Com
This form will search the LawMemo.Com web site.
It does not include the Caselaw Database.