Arbitration/Consumers/FAA/Unconscionability: 9th Circuit Holds Arbitration Clause In Consumer Credit Contract Lacking “Holder Rule” Language Is Not Unconscionable, And Doesn’t Fall Under “Public Injunction” Exception to Arb
Dissenting Judge Pregerson Attaches “Dense, Small Print, And Blurry Nine-Page Contract” As Appendix
We posted on December 16, 2012 about the Kilgore v. Keybank oral argument to the Ninth Circuit, sitting en banc. The case involves a putative class action by former students of a failed helicopter flight-training school seeking injunctive relief against the bank that originated their student loans and the loan servicer. The complaint alleged defendants violated the California Unfair Competition Law (UCL), because the Note and contracts with students failed to include language required by the Federal Trade Commission’s “Holder Rule.” This rule requires consumer credit contracts to include language that a holder of the consumer credit contract is subject to claims and defenses which the debtor could assert against the seller of goods or services. In the case of the flight school, students took out loans that the lender quickly resold on the secondary market, and the students of the failed school were left “holding the bag.” The district court found the contractual arbitration clause to be unconscionable. The Court of Appeals, sitting en banc, has now reversed, holding that the arbitration requirement, which includes a class waiver, is not unconscionable, and does not fit into the narrow “public injunction” exception to the arbitration requirement. Kilgore v. Keybank, No. 09-16703 (9th Cir. April 11, 2013) (Hurwitz, J., author) (for publication).
The en banc majority rejected the argument that the Note’s ban on class arbitration is substantively unconscionable under California law; that issue was foreclosed by AT&T Moblility v. Concepcion, 131 S.Ct. 1740 (2011). The risk that students will be saddled with prohibitive arbitration costs was rejected as “too speculative”. The procedural unconscionability argument was also rejected, primarily because the arbitration clause allowed “students to reject arbitration within sixty days of signing the Note.”
A carve-out from the arbitration requirement has been judicially created in Broughton v. Cigna Healthplans of Cal., 988 P.2d 67 (Cal. 1999). Where plaintiffs function as a private attorney general, enjoining future deceptive practices on behalf of the general public, injunction claims are not arbitrable. The hot issue is whether Broughton has also been preempted by the Federal Arbitration Act and Concepcion. However, the Court avoided deciding this important issue by determining that the students were acting to further their own interests, and the action complained about was past rather than prospective action.
Judge Pregerson, dissenting, attaches an an Appendix “the dense, small print, and blurry nine-page contract that Silver State thrust on the students at career fairs and open houses.”
Among the points made by Judge Pregerson are that this is a “take it or leave it” consumer contract introducing at least some procedural unconscionability under the circumstances. Of course, there is the 60 day provision allowing for an opt-out – tough to get around, and never mind that students don’t read the provisions. As to “substantive unconscionability”, a confidentiality provision requires the parties to maintain confidentiality of any claim they arbitrate. This works against plaintiffs who can’t share information, and in favor of the defendant that gets to arbitrate separately with each plaintiff. Filing a civil action costs less than $500; filing the same claim in arbitration runs more than $4000. Finally – and this is interesting – one of the two arbitrators named in the contract ruled in favor of banks and credit card companies, and against consumers 94 % of the time. Judge Pregerson is alone in his dissent.
Arbitration/Employment/Choice of Law/Preemption: Massachusetts Choice of Law Enables Court of Appeal to Uphold Denial of Petition to Arbitrate Employment Discrimination Claims
Waiver of Right to Trial of Employment Claims Was Not Clear and Unequivocal
One of the hottest areas of contention concerning arbitration is the waiver of statutory rights through arbitration, and whether such a waiver is preempted under AT&T Mobility v. Concepcion, 131 S.Ct. 1740 (2011). In Harris v. Bingham McCutchen, B240522 (2nd Dist. Div. 5 March 29, 2013) (O’Neill, J., author 3:0) (published), the Court held that Massachusetts choice of law, required by the employment contract, provided that waiver of the right to try an employment discrimination claim needed to be “clear and unequivocal.” That’s the law in Massachusetts, and the contractual language did not meet that heightened standard.
So why wasn’t this resulted preempted by the Federal Arbitration Act and Concepcion? After all, Concepcion invalidated a class action waiver that peculiarly burdened an arbitration provision in California.
The answer is that the heightened waiver standard under Massachusetts law does not discriminate against arbitration, because it applies as well to any contractual provision that limits statutory rights in an employment discrimination case. “[The] rule states only that as a matter of the Commonwealth’s general law of contract, a private agreement that purports to waive or limit—whether in an arbitration clause or in some other contract provision—the employee’s otherwise available right to seek redress for employment discrimination through the remedial paths set out in [Massachusetts General Law chapter] 151B, must reflect that intent in unambiguous terms.” Warfield v. Beth Israel Deaconess Medical Center, Inc., 454 Mass. 390, 399-400 (Mass. 2009) (italics added by me for emphasis).
TIP for California legislators: A statute that provides a heightened standard for waiver of statutory rights might survive Concepcion if it applies to all contracts, not just to arbitration provisions.
Arbitration/Automobiles/Unconscionability: Arbitration Provision In Automobile Purchase Held Procedurally But Not Substantively Unconscionable
“Sliding Scale” Unconscionability Analysis Saves Arbitration Provision
In a published decision, the Court of Appeal reverses the trial court’s denial of a petition to compel arbitration based on an automobile purchase contract. Vasquez v. Greene Motors, Inc., Case No. A134289 (1st Dist. Div. 1 March 27, 2013) (Margulies, Acting P.J., author 3:0) (published).
These contracts will be found procedurally unconscionable to some degree, because they are “take it or leave it” contracts of adhesion. “In light of the minimal level of procedural unconscionability and the absence of significant substantive unconscionability, however, we reverse the trial court’s denial of the petition to compel.”
So what was the “minimal level” of substantive unconscionability here?
First, the first $2,500 in costs fell upon the seller, after which the buyer was responsible, subject to cost shifting by the arbitrator at the end of the proceeding. Unconscionable? Outside the area of employment, said the Court, it is not unconscionable for the plaintiff to pay costs.
Second, an appeal to three arbitrators was possible if the award was zero, or over $100,000. Unconscionable? No, said the Court. The buyer was most likely to appeal awards of zero, and the seller was most likely to appeal awards over $100,000. So there were advantages and disadvantages to each.
Third, self-help and small claims were exempted from arbitration. Unconscionable? No, said the Court, because the self-help exemption benefited sellers, and the small claim exemption benefited buyers.
Fourth, the contract required class action waivers and arbitration of statutory claims. Unconscionable? No, said the Court, AT&T Mobility, LLC v. Concepcion, 131 S.Ct. 1740 (2011) (Concepcion) permits waiver of class action claims in arbitration. I note that Concepcion does not expressly address arbitration of statutory claims. (While the Court of Appeal says that the same rationale applies to permitting waiver of class action claims and to “preemption of the statutory ban on class action waivers,” what is not clear to me is whether arbitration here required arbitrating other statutory claims.)
Bottom line: the order denying the petition to compel arbitration is reversed.
Arbitration/Construction of Agreement: Agreement Providing Alternative of Arbitration Did Not Require Binding Mediation
Sometimes “May” Means “Shall” and Sometimes “May” Means “May”
When does an ADR provision that provides for arbitration require arbitration?
Truplug, the inventor of a product used as an emergency plug for boat leaks, sued Forespar, which had exclusive rights to market the product, for misrepresentation and negligence in marketing the Truplug product. After the trial court denied Forespar’s motion to compel arbitration, Forespar appealed. Truplug v. Forespar Products Corp., Case No. G046983 (4th Dist. Div. 3 April 2, 2013) (O’Leary, P.J., author 3:0) (unpublished).
The problem presented by the ADR provisions was that they were a mish-mash. Thus, one sentence read, “the parties shall try in good faith to settle the dispute by mediation . . . before resorting to arbitration, litigation, or some other dispute resolution procedure.” Another sentence read: “In the event . . . mediation does not resolve the dispute, either party may deliver a copy thereof to the American Arbitration Association . . . “ Yet another sentence read, “Whenever a party desires to institute litigation proceedings against the other party concerning this Agreement, it shall provide written notice . . . “ And another sentence provided that actions shall be brought in the County of Orange.
Appellant Forespar argued that the use of the word “may” meant that a party had the option to arbitrate, and that arbitration was triggered by a party’s choice to arbitrate. In fact there are cases holding that mandatory arbitration will be triggered when a party “may” arbitrate and opts to arbitrate.
However, looking “at the arbitration language in the context of the entire Agreement,” the Court of Appeal concluded that there was no “clear agreement to arbitrate any and all controversies between the parties,” sinking Forestar’s argument.
The Merrimac sinks the Cumberland. 1862. Library of Congress.
The order of the trial court was affirmed.
TIP: If you are arguing in favor of arbitration, emphasize “contractual arbitration being a favored method of resolving disputes, every intendment will be indulged to give effect to such proceedings.” Titan Group, Inc. v. Sonoma Valley County Sanitation Dist., 164 cal.App.3d 1122, 1127 (1985). If you are opposing arbitration, argue that there is no clear and unequivocal agreement to waive the right to a court trial of controversies between the parties. Wolschlager v. Fidelity National Title Ins. Co., 111 Cal. App.4th 784, 789 (2003).
Arbitration/Scope/Costs: Arbitrator’s Failure To Declare Prevailing Party And Denial Of Statutory Costs To Winner No Ground For Reversal
Arbitration, Law, and Equity
Our next case reminds me of a hoary legal story. Clarence Darrow handles a legal matter for William Randolph Hearst, and telegrams him: “Justice has prevailed.” Hearst’s reply: “Appeal immediately!”
Appealing an arbitration result is often a long shot, because arbitration is more geared to equity and finality than to legal exactitude.
The point is brought home in Plummer v. Day/Eisenberg, Case No. G046567 (4th Dist., Div. 3 Mar. 22, 2013) (Ikola, J., author; 3-0) (unpublished). The arbitrator’s failure to declare a prevailing party and denial of statutory costs to the winner did not permit a different result. “An arbitrator does not exceed his or her powers by deciding an issue submitted for arbitration under the arbitration agreement. (Pierotti v. Torian (2000) 81 Cal.App.4th 17, 25 (Pierotti); see also Corona v. Amherst Partners (2003) 107 Cal.App.4th 701, 705 (Corona) [scope of arbitration and powers of arbitrator defined in accordance with agreement].)” Here, the submission to the arbitrator was broad enough to include the question of costs. And an error of fact or law is ordinarily not reason enough to reverse a judgment confirming an arbitrator’s award.
Judgment affirmed.
Arbitration/Employment/Unconscionability: Second District, Division 8 Tanks Employment Arbitration Provision On Basis of Unconscionability
Main Problem is One-Sidedness of Arbitration Provision
Compton v. Superior Court, Case No. BC448343 (2nd Dist. Div. 8 March 19, 2013) (published) starkly presents the conflicting views of judges confronted with deciding whether an employment arbitration provision is unconscionable.
Leasa Compton appealed the order granting her former employer, American Management Services’s (AMS’s) petition compelling her to arbitrate her class action complaint for violations of Labor Code provisions governing payment of wages. Appellant Compton raised two issues: (1) the employer had waived arbitration by litigating extensively; (2) the arbitration provision was unconscionable.
Justice Rubin, with Justice Flier concurring, authored the opinion reversing the trial court’s order. The first issue – waiver of the right to arbitrate through delay – was not addressed, perhaps because the employer sought arbitration, after extensive litigation, but immediately after Concepcion was decided by the United States Supreme Court, opening up the argument for employer that it would have been futile for it to seek arbitration before Concepcion was decided, holding class action waivers in arbitration are not per se unenforceable. In any case, the issue of delay and waiver did not need to be addressed, because Justice Rubin disposed of the enforceability of the arbitration provision issue on the grounds of procedural and substantive unconscionability.
The trial court’s decision was reviewed on a de novo standard, as there appeared to be no facts in dispute. The provision was procedurally unconscionable, presented on a “take it or leave it” basis, as a condition for unemployment, unaccompanied by the applicable arbitration rules. Substantive unconscionability resulted because the provision required employees to arbitrate claims they were most likely to bring, while allowing the employer to go the judicial route for certain claims it was more likely to bring; statutory rights to attorney’s fees might not be applied in arbitration; and the statute of limitations provisions seemed to favor the employer.
Justice Bigelow, dissenting, believes that Concepcion has changed the landscape, and that the Majority failed to pay it proper homage. She concludes that the arbitration provision is not "so ‘tainted with illegality’ as to render it wholly unenforceable”, that an injunctive relief carve-out for litigating trade secret and unfair competition cases “could be easily severed”, and that she is not “offended by the procedural path to litigation here.”
Plenty to chew on here for advocates on both sides.