Ninth Circuit Holds Order Compelling Arbitration is Not Appealable

Multiple plaintiffs filed purported class action lawsuits against defendant Consumerinfo.com, Inc., alleging violations of California's consumer protection laws.  Each plaintiff had purchased a credit report monitoring program from the defendant.  The terms and conditions of the purchase included an arbitration clause.  The district court stayed the actions, ordered individual arbitration of each plaintiff's claims, and denied 28 U.S.C. § 1292(b) certification for interlocutory appeal.  The plaintiffs timely appealed.

In Johnson v. Consumerinfo.com, The Ninth Circuit dismissed the appeals, finding that the Judicial Improvements and Access to Justice Act, codified as 9 U.S.C. § 16, bars appeals of all orders compelling arbitration, including collateral ones.  Plaintiffs "creative[ly]" argued that because section 16(b) expressly bars appeals of "interlocutory" orders compelling arbitration, orders compelling arbitration that might be considered "final" under the collateral order doctrine are appealable.  But, after examining the statutory language of the Act, as well as its overall design, objectives, and legislative history, the court disagreed.

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Second District Upholds Arbitration Agreement That Gives Employer Unilateral Power to Modify

The Second Appellate District has held that an arbitration agreement is not illusory simply because only the drafting party may modify or terminate the agreement. In Casas v. CarMax Auto Superstores California LLC, the appellate court reversed the lower court's order denying CarMax's motion to compel arbitration of a former employee's claims stemming from the termination of his employment.

The lower court found that the arbitration agreement was illusory because only CarMax could unilaterally modify or terminate the agreement, and it could notify employees of any such changes indirectly, simply by posting notification at all CarMax locations. In reversing the lower court's order, the appellate court first distinguished the primary case that order relied upon, Sparks v. Vista Del Mar Child & Family Services. The appellate court distinguished Sparks on the grounds that it involved an agreement that permitted the employer to change the arbitration agreement with no notice at all to employees, and that the brief agreement was hidden in a handbook that the employee simply acknowledged receiving.

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9th Circuit Concludes that Participation in Pretrial Litigation Does Not Waive the Right to Contractual Arbitration

In Richards v. Ernst & Young, LLP, the 9th Circuit Court of Appeals concluded that a party’s pretrial participation in litigation does not constitute a waiver of its right to contractual arbitration. The 9th Circuit reversed the district court’s ruling denying defendant Ernst & Young’s motion to compel arbitration, holding that plaintiff had not established any prejudice as a result of defendant’s alleged delay in compelling arbitration.

Plaintiff Michelle Richards brought the underlying class-action complaint against her former employer, defendant Ernst and Young, based on wage and hour claims. The Court relied on its analysis from Fisher v. A.G. Becker Paribas Inc. in determining whether defendant waived its right to compel arbitration. 791 F.2d 691, 694 (9th Cir. 1986). In Fisher, the Court laid out a three-prong test necessary for a party to prove waiver of the right to arbitration: “(1) knowledge of an existing right to compel arbitration; (2) acts inconsistent with that existing right; and (3) prejudice to the party opposing arbitration resulting from such inconsistent acts.” Id. Plaintiff was unable to satisfy the third prong, failing to establish prejudice.

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9th Circuit Addresses Application of California Unconscionability Law to Arbitration Agreements

With the publication of its decision in Chavarria v. Ralphs Grocery Co., the Ninth Circuit shed further light on the state of California unconscionability law as it applies to arbitration agreements. In Chavarria, the court invalidated Ralphs' employee arbitration agreement under what it deemed a traditional unconscionability analysis. The court found that this application of the unconscionability doctrine did not disproportionately affect arbitration agreements, and thus was not preempted by the FAA under the U.S. Supreme Court's decision in AT&T Mobility LLC v. Concepcion.

First, the Ninth Circuit concluded that the district court's unconscionability determination had been correct. The court agreed with the lower court that Ralphs' employee arbitration agreement was both procedurally and substantively unconscionable. It found that the agreement was procedurally unconscionable primarily because it was provided to Chavarria on a "take it or leave it" basis, and was not given to her until three weeks after her employment began. The court found that it was substantively unconscionable because it (1) provided for an arbitrator selection process that, in practice, meant Ralphs almost always would choose the arbitrator, (2) precluded the use of institutional arbitrators such as the AAA or JAMS, which had rules in place to ensure the selection of a neutral arbitrator, and (3) required the arbitrator to apportion the arbitrator's fees evenly between Ralphs and the employee at the outset of the arbitration, before any determination of the merits of the claim. 

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California Supreme Court: Unconscionability Rule Is Valid If It Does Not Interfere with "Fundamental Attributes of Arbitration"

Though the case arose in the context of an employment contract, Sonic-Calabasas A, Inc. v. Moreno (Sonic II), issued on October 17, 2013, potentially has implications for all arbitration agreements. In its lengthy decision, discussed in more detail below, the California Supreme Court took the opportunity to explicate the state of California's unconscionability doctrine in light of the Supreme Court's 2011 decision in AT&T Mobility LLC v. Concepcion (more on Concepcion here) and its more recent 2013 decision in American Express Co. v. Italian Colors Restaurant (more on Italian Colors here). The California high court reiterated that the unconscionability doctrine is viable under the Federal Arbitration Act's savings clause, and determined that Concepcion only requires that it not "interfere with fundamental attributes of arbitration" or be applied in any way that discriminates against arbitration. The fact that even-handed application of an unconscionability rule would have a disproportionate impact on arbitration agreements is not enough to implicate the limits of the FAA, according to the Court's opinion.

Specifically, the Court held that an arbitration agreement's requirement to waive statutorily-afforded Berman protections, while not per se unconscionable, is one factor that a court may consider in determining whether the arbitration agreement as a whole is unconscionable. It is reasonable to presume that courts will soon be entertaining arguments that Sonic II's logic should be extended.

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U.S. Supreme Court Holds Cost Cannot Defeat Class Arbitration Waiver

The U.S. Supreme Court reversed the Second Circuit in American Express Co. v. Italian Colors Restaurant and held that under the Federal Arbitration Act, courts could not invalidate a contractual waiver of class arbitration merely because the cost of individual arbitration would exceed potential recovery.

In American Express, the plaintiffs were a group of merchants that had entered into an agreement with defendant American Express to accept its credit cards. The agreement contained an arbitration clause that waived the plaintiffs’ rights to class arbitration. Nevertheless, the plaintiffs filed a class action suit against American Express, alleging that the defendant had violated federal antitrust law – specifically, §1 of the Sherman Act. Defendant filed a motion to compel individual arbitration pursuant to the agreement and the FAA, which the district court granted. Plaintiffs appealed. The Second Circuit Court of Appeals reversed and remanded, holding that the waiver of class arbitration was unenforceable because the cost of individual arbitration was prohibitively high.

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Court of Appeal Reverses Order Compelling Arbitration

The California Court of Appeal for the Second Appellate District held in Vargas v. SAI Monrovia B, Inc. that an arbitration provision in a sale contract for the purchase of a vehicle was not enforceable because it was both procedurally and substantively unconscionable.

In Vargas, plaintiffs purchased a new car at a dealership owned by defendant SAI Monrovia B, Inc. The sale contract, which contained an arbitration clause, was assigned to Chase Auto Finance Corporation, a second defendant. Plaintiffs alleged that they experienced problems with the car shortly after the sale. Despite taking the car to the dealership and contacting the manufacturer, the third defendant, plaintiffs alleged the problems were not remedied. Plaintiffs filed a putative class action complaint alleging violations of the Consumer Legal Remedies Act, the Automobile Sales Finance Act, the California Unfair Competition Law, the Song-Beverly Consumer Warranty Act, and the California Tire Recycling Act. The dealer and Chase moved to strike class allegations and to compel arbitration. The trial court granted defendants’ motion to strike as well as the motion to compel for eight of the nine causes of action. Plaintiffs appealed.

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U.S. Supreme Court Declines to Vacate Arbitrator's Ruling Authorizing Class Arbitration

In Oxford Health Plans LLC v. Sutter, the United States Supreme Court held that under §10(a)(4) of the Federal Arbitration Act (FAA), an arbitrator's decision to authorize class arbitration would survive judicial review so long as the arbitrator had acted within his delegated duty when interpreting a contract.

In Oxford, Sutter, a doctor, entered into a contract with Oxford to provide medical services.  Sutter filed a putative class action in New Jersey Superior Court, alleging that Oxford failed to pay him and other physicians in a timely manner. Oxford moved to compel arbitration. The trial court granted the motion and the parties agreed to let an arbitrator determine whether the contract authorized class arbitration. When the arbitrator concluded that it did, Oxford filed a motion in federal court to vacate the decision, asserting that the arbitrator had acted beyond his scope of power under §10(a)(4) of the FAA. The District Court denied the motion and the Third Circuit affirmed, holding that that because both parties had contracted to allow an arbitrator to interpret whether the contract authorized class arbitration, the arbitrator did not exceed his powers under §10(a)(4) of the FAA. 

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Ninth Circuit Holds Non-Signatory Cannot Invoke Arbitration

The Ninth Circuit held in Rajagopalan v. NoteWorld, LLC that a defendant could not invoke an arbitration clause in a contract to which it was not a party, either as a third-party beneficiary or through equitable estoppel.  

In Rajagopalan, plaintiff entered into a contract with First Rate Debt Solutions (“First Rate”) for debt settlement services. The contract included an arbitration clause. Plaintiff later cancelled the service and sought a full refund from defendant NoteWorld, LLC, the payment processor. NoteWorld partially refunded the payment, explaining that because it was an independent third party that merely provided a vehicle for payment processing, it was not responsible for Plaintiff’s contractual obligations to First Rate. Plaintiff filed a putative class action, alleging violations under RICO and Washington state law. NoteWorld moved to compel arbitration.  The district court denied the motion, holding the arbitration provision was unconscionable, and NoteWorld could neither invoke the arbitration agreement as a third-party beneficiary nor through equitable estoppel. 

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Ninth Circuit En Banc Panel Upholds Arbitration Provision, Declines to Consider Whether Concepcion Preempts Broughton-Cruz.

Last year, in Kilgore v. Keybank, a three judge panel held that the Federal Arbitration Act (FAA) preempted California's Broughton-Cruz rule, which exempts a public injunction claim from arbitration. (See Broughton v. Cigna and Cruz v. Pacificare).  In Kilgore, former students of Silver State, a now-defunct private helicopter school, filed a putative class action case against Key Bank and other defendants for violations of California's Unfair Competition Law after the school closed its doors and filed for bankruptcy, leaving plaintiffs without a diploma, certificate, or other accreditation.  Plaintiffs each borrowed between $50,000 and $60,000 from KeyBank to finance their vocational education and signed loan contracts containing an arbitration clause which stated that plaintiffs waived their rights to litigate any claim in court or proceed with any claim on a class basis unless the plaintiffs opted out of the arbitration clause by a date certain. The three judge panel held that the Broughton-Cruz rule did not survive the Supreme Court's landmark decision in AT&T Mobility LLC v. Concepcion because the Rule "prohibits outright the arbitration of a particular type of claim" and reversed the district court's denial of the plaintiffs' motion to compel arbitration.

The en banc panel, however, declined to rule on the issue of whether Concepcion preempts Broughton-Cruz.  Instead, the Court found that it did not need to reach the broad issue of whether or not Broughton-Cruz remains viable because the plaintiffs' claims in this instance did not fall within Broughton-Cruz' purview.  (See Kilgore v. Keybank.)  Specifically, the Court held that plaintiffs' claims did not fall within the "narrow exception to the rule that the FAA requires state courts to honor arbitration agreements" because the requested prohibitions against reporting defaults or seeking enforcement of the subject notes would only benefit approximately 120 putative class members.  The Court noted that the central premise of Broughton-Cruz is that "the judicial forum has significant institutional advantages over arbitration in administering a public injunctive remedy, which as a consequence will likely lead to the diminution or frustration of the public benefit if the remedy is entrusted to arbitrators."  The Court found that the concern for the public at large was inapplicable here because, by plaintiffs' own admission, the class affected by the alleged practices is small, the alleged statutory violations have ceased, and there is no real prospective benefit to the public at large from the relief sought by plaintiffs. 

The Court also held that the requested injunction against disbursing loans to sellers who do not include Holder Rule language in their contracts fell outside of the Broughton-Cruz rule because it only related to past harms.  As alleged in the plaintiffs' complaint, KeyBank has since completely withdrawn from the private school loan business and is not engaging in other comparable transactions.

Consequently, the en banc panel reversed the denial of defendants' motion to compel arbitration and remanded with instructions to compel arbitration. 

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First Appellate District Upholds Arbitration Provision in Adhesive Consumer Contract

 After an extensive analysis of procedural and substantive unconscionability, the First District California Court of Appeal upheld an arbitration provision contained in an adhesive, form automobile finance contract.  In Vasquez v. Greene Motors, Inc., the First District reversed the trial court's order finding procedural and substantive unconscionability and denying arbitration on those grounds.  Citing AT&T Mobility LLC v. Concepcion, the appellate court also rejected the plaintiff's argument that the arbitration provision was unconscionable because it contained a class action arbitration waiver and prohibited the arbitration of "public" claims.  The First District ordered the trial court to enter an order directing arbitration under the terms of the sales contract.

Plaintiff Vasquez sued a car dealer and the assignee of his loan for damages in connection with the terms of his auto financing.  The trial court denied the defendants' petition to compel arbitration on the ground that the provision was unconscionable.  The First District reversed and remanded.

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First Appellate District Finds Arbitration Provision Unconscionable

In Natalini v. Import Motors, Inc., the First District California Court of Appeal adopted a narrow reading of the U.S. Supreme Court's landmark decision in AT&T Mobility LLC v. Concepcion as it pertained to arbitration provisions and specifically declined to follow the Second District's decision in Flores v. West Covina Auto Group, a factually similar case.

In Natalini, the plaintiff filed a class action complaint against a car dealer, claiming that the car dealer sold the car and tires as new when, in fact, they were used.  The car dealer filed a petition to compel arbitration pursuant to a provision in the sales contract which provided that either party may elect to have a dispute decided by arbitration.  The trial court denied the car dealer's motion to compel arbitration on the grounds that the arbitration provision was unconscionable. 

On appeal, the car dealer claimed that the Supreme Court's holding in Concepcion prevents the application of the unconscionability doctrine to arbitration provisions.  In Concepcion, the Supreme Court held that the Discover Bank Rule, which classified most collective-arbitration waivers in consumer contracts as unconscionable, was preempted by the Federal Arbitration Act (FAA).  The First District rejected the car dealer's argument, quoting the Ninth Circuit in Kilgore v. KeyBankwhich held that "Concepcion did not overthrow the common law contract defense of unconscionability whenever an arbitration clause is involved.  Rather, the [c]ourt reaffirmed that the [FAA's] savings clause preserves generally applicable contract defenses such as unconscionability, so long as those doctrines are not 'applied in a fashion that disfavors arbitration.'"  The court specifically rejected the car dealer's argument that the court's focus on a lack of mutuality or bilaterality in an arbitration provision constitutes the application of a contract defense "in a fashion that disfavors arbitration" in violation of Concepcion.

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FAA Mandates Enforcement of Class Arbitration Waivers

Relying on the U.S. Supreme Court’s landmark 2011 decision in AT&T Mobility LLC v. Concepcion, the Second District California Court of Appeal recently held in Flores v. West Covina Auto Group that the Federal Arbitration Act (FAA) preempts a California statute that mandates the availability of class actions to consumers bringing claims under its ambit.  The court affirmed the trial court’s order compelling arbitration and concluded that the class arbitration waiver contained in the form auto sales contract was enforceable.

California’s Consumer Legal Remedies Act (CLRA) provides that any consumer entitled to bring an action under the CLRA may also bring his or her claims as a class action suit. The CLRA further provides, in a separate section, that “[a]ny waiver by a consumer of the provisions of [the CLRA] is contrary to public policy and shall be unenforceable and void.” Among other holdings in the case, the Second District concluded that, under Concepcion, the FAA preempts this antiwaiver provision of the CLRA. Enforcing the CLRA’s antiwaiver provision “would essentially allow consumers to demand classwide arbitration ex post, when the parties never agreed to that. … Just as the Discover Bank rule was inconsistent with the FAA because it manufactured class arbitration rather than making it consensual, so is the CLRA’s antiwaiver provision. Applying Concepcion, we hold that the CLRA’s prohibition against class waiver is preempted by the FAA because it stands as an obstacle to the accomplishment and execution of the full purposes and objectives of the FAA.”

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9th Circuit Sets Scope of Preemption in Overdraft Litigation

In Gutierrez, et al. v. Wells Fargo Bank, NA, the Ninth Circuit Court of Appeals recently held that the National Bank Act preempts California’s Unfair Competition Law (“UCL”) insofar as the UCL’s unfair business practices prong bars a national bank’s practice of posting debit card transactions in a particular (i.e., high-to-low) order.  The Court held, however, that federal law does not preempt California’s consumer protection laws with respect to claims that a bank’s representations concerning the posting order were fraudulent or misleading.

The Gutierrez plaintiffs filed suit against Wells Fargo upon learning that the bank posts debit card transactions (from the previous day) to its customers’ accounts in high-to-low order, regardless of the order in which the transactions actually occurred. This practice has the potential to turn a single overdraft fee into many overdrafts. The plaintiffs contended that the bank’s posting practice violates the UCL as an unfair business practice and that Wells Fargo also violated the fraudulent prong of the UCL by representing to customers that debit card purchases were deducted “immediately,” reinforcing their natural expectation that transactions would be processed chronologically.

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Court of Appeal Holds Concepcion Overrules Gentry

In Iskanian v. CLS Transportation Los Angeles, LLC, the Second District California Court of Appeal held that the U.S. Supreme Court's ruling in AT&T Mobility v. Concepcion invalidates the class waiver test in Gentry v. Superior Court.

Plaintiff Iskanian was a driver for defendant CLS.  In 2006, plaintiff filed a putative class action complaint against CLS alleging wage and hour and other Labor Code violations.  In March 2007, the Superior Court granted CLS's motion to compel arbitration.  Plaintiff appealed and, in light of the recently decided Gentry decision, the Court of Appeal issued a writ of mandate directing the Superior Court to reconsider its ruling.  On remand, CLS voluntarily withdrew its motion to compel arbitration.

Plaintiff filed an amended complaint adding a claim for violation of California's Unfair Competition Law (Bus. & Prof. Code 17200, et seq.).  Plaintiff brought the claims in his amended complaint as an individual, as a putative class representative, and in a representative capacity under the Labor Code Attorneys General Act of 2004 (Lab. Code 2698, et seq.) (PAGA).  The Superior Court granted plaintiff's motion for class certification on October 29, 2009.  In April 2011, defendant brought a renewed motion to compel arbitration in light of Concepcion, which the trial court granted.  Plaintiff appealed.

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9th Circuit Holds that FAA Preempts Broughton-Cruz Rule

In its first post-Concepcion case involving the enforceability of arbitration clauses, the U.S. Court of Appeals for the Ninth Circuit reversed the district court's denial of the plaintiffs' motion to compel arbitration, holding that the Federal Arbitration Act (FAA) preempts California's exemption of public injunctive relief for arbitration.

In Kilgore v. KeyBank, the plaintiffs brought a putative class action against KeyBank and other defendants for violations of California's Unfair Competition Law (UCL) in connection with private student loans extended to plaintiffs for flight instruction at Silver State Helicopters, LLC (SSH), a private helicopter vocational school.  The Plaintiffs filed suit against KeyBank after SSH closed its doors and filed for bankruptcy, leaving plaintiffs without a diploma, certificate, or other accreditation for their training.

Plaintiffs and each putative class member borrowed between $50,000 and $60,000 from KeyBank and signed loan contracts which contained an arbitration clause informing plaintiffs that they could opt out of the clause and if they did not, that they would waive their rights to litigate any claim in court and proceed with any claim on a class basis.  The Notes also contained several conspicuous statements warning plaintiffs of the consequences of signing the agreement and cautioning them to read it thoroughly.

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California Courts Narrowly Construe Concepcion

Nine months now have passed since the U.S. Supreme Court’s landmark decision in AT&T Mobility LLC v. Concepcion (2011) 131 S.Ct. 1740, 179 L.Ed.2d 742. Concepcion held that section 2 of the Federal Arbitration Act (“FAA”) preempts California’s so-called “Discover Bank rule,” under which certain class arbitration waivers in consumer contracts were unenforceable as unconscionable. Since the decision, California courts have grappled with the scope of Concepcion’s holding. Several decisions considering trial court orders denying arbitration based on the unconscionability of a class action waiver have affirmed those decisions on other grounds, and thus avoided addressing the Concepcion issue. 

Those decisions that have squarely addressed Concepcion have interpreted it narrowly. Not a single California appellate case decided since Concepcion has involved an application of Concepcion’s holding to find that an arbitration provision containing a class action waiver was valid and enforceable. Meanwhile, more than one federal district court has now held that an arbitration agreement with a class action waiver was enforceable under Concepcion. (See Blau v. AT&T Mobility (N.D. Cal. Jan. 3, 2012) No. C 11–00541 CRB, 2012 WL 10546; Estrella v. Freedom Financial (N.D. Cal. July 5, 2011) No. C 09–03156 SI, 2011 WL 2633643.)

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U.S. Supreme Court Admonishes Courts to Enforce Arbitration

In a pointed per curiam opinion, the United States Supreme Court recently reiterated that both state and federal courts must apply the "emphatic federal policy in favor of arbitral dispute resolution."  State courts "have a prominent role to play as the enforcers of agreements to arbitrate."

In KPMG LLP v. Cocchi, the Court held that when a party moves to compel arbitration, "state and federal courts must examine with care the complaints seeking to invoke their jurisdiction in order to separate arbitrable from nonarbitrable claims.  A court may not issue a blanket refusal to compel arbitration merely on the grounds that some of the claims could be resolved by the court without arbitration."   In this respect, the FAA "leaves no place for the exercise of discretion.. ."

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CFPB Proposes Scope of Non-Bank Supervision

The new Consumer Financial Protection Bureau has issued a Notice and Request for Comment on the proposed scope of its Dodd-Frank supervisory authority for certain non-depository institutions. The CFPB's Notice outlines potential criteria for defining the scope of this supervisory authority and  identifies six potential other markets that CFPB may supervise: (1) debt collection; (2) consumer reporting; (3) consumer credit and related activities; (4) money transmitting; (5) check cashing and related activities; (6) prepaid cards; and (7) debt relief services.

Section 1024 of Dodd-Frank grants supervisory authority to the CFPB for "covered persons" in the residential mortgage, private education lending, and payday lending markets. In other markets, CFPB would have supervisory authority only over a "larger participant."  Dodd-Frank assigned CFPB the task of issuing a rule on or before July 21, 2012, to identify these other markets and to define "larger participant."

CFPB seeks public comment on the criteria and threshold to define a "larger participant" and on the data to be used in measuring these criteria. CFPB also seeks public comment on the consideration of whether the six "other markets" should be included in the initial rule and/or whether additional markets should be included. 

Concepcion Impact Has Begun in California Cases

The impact from the U.S. Supreme Court's decision last week in AT&T Mobility v. Concepcion has begun in California cases.  In two orders issued after Concepcion, California federal courts have granted motions to compel arbitration on an individual basis where the subject arbitration provision contained a class action waiver.  Each of these courts also held that the Federal Arbitration Act preempts California's exemption of claims for public injunctive relief from arbitration. See Arrellano v T-Mobile USA, Inc. (N.D. Cal., May 16, 2011 Order Granting Motion to Compel Arbitration and Stay Claims for Injunctive Relief); Zarandi v. Alliance Data Systems Corp. (C.D. Cal., May 9, 2011 Order Granting Defendants' Motion to Compel Arbitration and Stay Proceedings). 

US Supreme Court: FAA Preempts Discover Bank Rule

The U.S. Supreme Court today issued its opinion in AT&T Mobility LLC v. Concepcion, reversing the Ninth Circuit opinion below and holding that California's Discover Bank rule is preempted by the Federal Arbitration Act, 9 U.S.C. § 2 ("FAA").

In Concepcion, plaintiffs filed suit in federal district court alleging false advertising and fraud, asserting AT&T charged sales tax on cellular telephones advertised as "free."  AT&T moved to compel arbitration. The district court denied the motion, citing Discover Bank v. Superior Court, 26 Cal.App. 4th 148 (2005), which held class action waivers in most consumer arbitration agreements are unconscionable, and therefore subject to the FAA's savings clause and not preempted. The Ninth Circuit affirmed.

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Here Comes the Consumer Financial Protection Bureau

The Consumer Financial Protection Bureau has a new website, and is making significant personnel additions, creating its internal structure, and otherwise preparing for the commencement of its official authority in July.  The CFPB is also blogging, tweeting, facebooking, youtubing, and hiring.

Among many other things, the CFPB's website defines the scope of its "Core Functions" as follows:

* Conduct rule-making, supervision, and enforcement for Federal consumer financial protection laws;
* Restrict unfair, deceptive, or abusive acts or practices;
* Create a center to take consumer complaints;
* Promote financial education;
* Research consumer behavior;
* Monitor financial markets for new risks to consumers; and
* Enforce laws that outlaw discrimination and other unfair treatment in consumer finance.

In December, the U.S. Treasury announced the creation of a new Consumer Inquiry and Complaint database, to be maintained by the CFPB, to track, collect, analyze, and refer consumer inquiries and complaints about consumer financial products and services, scheduled to take effect today.  The CFPB has also announced the creation of a future Consumer Response Center to receive consumer complaints and inquiries related to consumer financial services.

One to Watch: AT&T Mobility, LLC v. Concepcion

The U.S. Supreme Court has granted cert in AT&T Mobility, LLC v. Concepcion, an appeal from the 9th Circuit case Laster v. AT&T Mobility, LLC, to consider whether the Federal Arbitration Act preempts states from conditioning the enforcement of an arbitration agreement on the availability of particular procedures.  In Laster, the 9th Circuit rejected AT&T's argument that the FAA preempts California law that holds class arbitration waivers unconscionable.

"Wall Street Reform and Consumer Protection Act" Is Now Law

President Obama today signed the "Wall Street Reform and Consumer Protection Act," which will bring comprehensive changes to consumer financial services, and to consumer finance litigation, including mortgages, credit cards, retail credit, debt collection, arbitration, preemption, and auto finance.  See details about the changes coming, as seen by the White House, and the President's signing remarks.

Financial Regulatory Reform is (Almost) a Done Deal

The U.S. Senate voted 60-39 yesterday to pass the Wall Street Reform and Consumer Protection Act, which the White House says President Obama will sign into law next week.  While consumer finance attorneys digest the massive changes coming with this comprehensive bill (in mortgages, credit cards, retail credit, debt collection, arbitration, preemption, and auto finance), the scope of the changes will likely depend on the implementing regulations, and how these regulations are interpreted by Courts.

A few things are clear now.  First, the OTS is fading away.  Second, consumer arbitration may be too.  Third, federal preemption is likely to be more difficult to obtain in consumer finance litigation.

Conference Reaches Deal on Financial Regulatory Reform

The House-Senate Conference to reconcile financial regulatory reform reached a final agreement on the legislation on Friday.  The "Dodd-Frank Wall Street Reform and Consumer Protection Act" calls for the creation of the Consumer Financial Protection Bureau, an independent agency to be housed at the Federal Reserve, with a broad mandate to regulate consumer financial services of virtually all types.

The Consumer Financial Protection Bureau will have an independent director appointed by the President and confirmed by the Senate, with an independent budget and independent rule writing, examination, and enforcement authority.  The CFPB consolidates consumer protection responsibilities of the OCC, OTS, FDIC, Federal Reserve, NCUA, HUD, and the FTC.  Among other things, the legislation also creates a new Office of Financial Literacy to disseminate information to consumers and a new consumer hotline for consumer questions.

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Tracking the Conference on Financial Regulatory Reform

The House-Senate Conference to reconcile financial regulatory reform legislation begins today.  Track the conference with the House Financial Services Committee or the Senate Banking Committee.  The hearing also will be broadcast live on C-SPAN and webcast live at the House Financial Services Committee site.

Senate Passes Financial Regulatory Bill

The U.S. Senate yesterday passed the financial regulatory bill, S.3217, the "Restoring American Financial Stability Act."  The comprehensive bill includes broad new regulation of derivatives, executive compensation, systemic risk, investor rights, mortgages, credit-rating agencies, hedge funds and private equity, insurance, and consumer financial protection.

Significantly, this Senate version of financial regulation calls for a new, quasi-independent Bureau of Consumer Financial Protection within the Federal Reserve.  The House version of financial regulation, passed in December, would create an independent, free-standing Consumer Financial Protection Agency.  Both the House and Senate bills would limit federal preemption of consumer finance laws in certain ways.  The Senate bill includes a detailed preemption provision.

One to Watch: Should an Arbitrator Decide Enforceability?

The U.S. Supreme Court yesterday heard oral argument in Jackson v. Rent-A-Center West, Inc., which poses the question whether the enforceability of an arbitration agreement should be decided by an arbitrator or by a court.

In Jackson, plaintiff Antonio Jackson, a former employee of defendant Rent-A-Center West, sued alleging race discrimination and retaliation. Rent-A-Center moved to dismiss and to compel arbitration, based on the parties' arbitration agreement which provided, among other things, that the arbitrator had exclusive authority to decide any issue related to the "interpretation, applicability, enforceability or formation" of the arbitration agreement. Jackson asserted that the arbitration agreement was unconscionable and therefore unenforceable. The district court granted defendant's motion to dismiss and entered an order compelling arbitration, holding that the issue of enforceability of the arbitration agreement was for the arbitrator to decide. The district court also issued an alternative holding that Jackson had not shown the agreement was substantively unconscionable. Jackson appealed.

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Senate Banking Committee Unveils Financial Reform Plan

The Senate Banking Committee unveiled its version of financial regulatory reform yesterday, including issuing a summary of highlights of the bill as well as the proposed bill.  The 1336-page bill differs in substantial respects from the House version passed in December

Most significantly with regard to consumer finance regulation, the Senate version does not include an independent Consumer Financial Protection Agency, but would house that function at the Federal Reserve.  Specifically, Title X of the Senate Version calls for the creation of a "Consumer Financial Protection Bureau" to operate independently within the Federal Reserve.

Surveying Developments in Consumer Finance Regulation

A number of significant legislative changes occurred in 2009 related to consumer finance regulation.

The most significant potential change—the Consumer Financial Protection Agency Act—is still in flux as it moves through the U.S. Senate. However, the version of the CFPA passed by the U.S. House contains several provisions of which every practitioner should be aware. New regulations governing credit card products and overdraft fees will also significantly impact consumer finance practice.

See a summary of recent developments in consumer finance regulation.

A Closer Look: Arbitration Under House Version of CFPA

The Wall Street Reform and Consumer Protection Act of 2009, H.R. 4173, passed by the U.S. House on December 11, 2009, contains provisions that could have a significant limiting effect on the enforcement of consumer arbitration provisions. 

Section 4208 of the Act, entitled "Authority to Restrict Mandatory Predispute Arbitration," gives the Director of the proposed Consumer Financial Protection Agency the power to issue regulations to "prohibit or impose conditions or limitations on" a pre-dispute arbitration provision if the Director "finds that such a prohibition or imposition of conditions or limitations are in the public interest and for the protection of consumers."  This provision mirrors the arbitration limiting provisions of the Arbitration Fairness Act, and could effectively prohibit the enforcement of mandatory arbitration provisions in consumer finance agreements.

House Passes Consumer Financial Protection Agency Act

On December 11, 2009, the U.S. House of Representatives passed the “Wall Street Reform and Consumer Protection Act of 2009,” H.R. 4173. This sweeping legislation—a combination of several bills, including a modified version of the Consumer Financial Protection Agency Act, formerly HR 3126—includes broad new regulation of derivatives, executive compensation, systemic risk, investor rights, mortgages, credit-rating agencies, hedge funds and private equity, insurance, and consumer financial protection.

Title IV of the Act (sections 4001 – 4901) provides for the creation of a Consumer Financial Protection Agency (section 4101 – 4703), a new, independent federal agency to oversee virtually every aspect of consumer financial services, including mortgages, credit cards, debit cards, car loans, gift cards, credit reporting agencies, debt collectors, and financial advisers. Certain merchants, such as auto dealers and pawnbrokers, would be exempted.

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Financial Regulatory Reform Moves Out of Committee

The House Financial Services Committee on Thursday voted to approve the Consumer Financial Protection Agency Act, HR 3126. 

The legislation is changing in significant ways as it moves through the legislative process.  Among the revisions from the administration's original plan, the Committee's approved version would vest authority over the proposed Consumer Financial Protection Agency in a single director, as opposed to a 5-member board.  The approved version of the legislation also includes a compromise on federal preemption, which permits the federal regulator to preempt state consumer financial protection laws only after a written finding that the state law “prevents or significantly interferes” with a federally regulated bank or thrift’s exercise of its powers.

Powers of the Proposed Consumer Financial Protection Agency

Subpart F, sections 161 through 166, of the Consumer Financial Protection Agency Act of 2009 (HR 3126, July 8, 2009) provides for the transfer of broad areas of power to regulate consumer financial protection functions from a variety of federal agencies and the Federal Reserve to the proposed Consumer Financial Protection Agency.

In general, the CFPA would have the authority and accountability to supervise, examine, and enforce consumer financial protection laws, including mortgages, credit cards, student loans, auto loans, payday loans, and more. The Act would transfer functions and personnel to the new CFPA and provide for interim powers for the Secretary of Treasury pending the establishment of the CFPA and the completion of the transfer of powers and people.

Financial Regulatory Reform Moving Forward

Legislation for federal financial regulatory reform, introduced by the Obama administration in June, is moving forward through the legislative process.  Treasury Secretary Geithner testified before the House Financial Services Committee on September 23.

The proposed financial regulatory reform legislation in the U.S. House is the Consumer Financial Protection Agency Act of 2009 in the House (HR 3126).  The Financial Services Committee has issued a section-by-section summary of the proposed legislation as well as a September 25 discussion draft.

Track the progress of the legislation at the administration's Financial Stability website.

"Arbitration Fairness Act" Rises Again

The Arbitration Fairness Act of 2007 has been re-introduced as the Arbitration Fairness Act of 2009 (H.R. 1020).  The 2009 version, the same text as the 2007 version, has been referred to the Subcommittee on Commercial and Administrative Law.  

If passed in its current form, the bill would expressly invalidate arbitration agreements—retroactively—in employment, consumer, or franchise disputes and in any “dispute arising under any statute intended to protect civil rights or to regulate contracts or transactions between parties of unequal bargaining power.”

U.S. Supreme Court Decides Vaden v. Discover Bank

The U.S. Supreme Court this week decided Vaden v. Discover Bank, a closely-watched case which more clearly defines the limits of federal jurisdiction under Section 4 of the Federal Arbitration Act, 9 U.S.C. §1 et seq. ("FAA").

In Vaden, Discover Bank's servicing affiliate filed a Maryland state court action to collect an unpaid credit card balance, asserting only state law claims.  Vaden counterclaimed, asserting Discover's finance charges, interest, and late fees violated Maryland law.  Separately, Discover Bank filed a petition to compel arbitration in the U.S. District Court for the District of Maryland, asserting that Vaden's state-law counterclaims were completely preempted by federal law, specifically §27 of the Federal Deposit Insurance Act, 12 U.S.C. 1831d(a).  The district court granted the petition to compel arbitration and stayed the state court action.  Vaden appealed.  The Fourth Circuit eventually affirmed, after remanding for a determination of federal question jurisdiction.

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One to Watch: Arbitration and Complete Preemption

On October 6, 2008, the U.S. Supreme Court heard oral argument in Vaden v. Discover Bank, an appeal from Discover Bank, Discover Financial Services v. Vaden, 489 F.3d 594 (4th Cir. 2007), which will have a significant impact on arbitration and the doctrine of complete preemption.

Vaden arises out of a dispute between credit cardholder and a card issuer.  In 2003, Discover Financial Services, a servicing subsidiary of Discover Bank, filed suit against cardholder Vaden in Maryland state court to collect a $10,000 delinquent debt.  Vaden filed a putative class action counterclaim in state court, alleging, among other state law causes of action, violation of Maryland's usury laws.  Discover Financial Services and Discover Bank filed a free-standing petition to compel arbitration in the U.S. District Court of Maryland, pursuant to Section 4 of the Federal Arbitration Act ("FAA").  Discover asserted that Vaden's state law claims were completely preempted by the Federal Deposit Insurance Act, 12 U.S.C. §1811 et seq.  ("FDIA").  The district court granted Discover's motion to compel arbitration.  Vaden appealed.

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9th Circuit Remands Class Arbitration Waiver

The Ninth Circuit last week addressed choice of law considerations in the context of a class wide arbitration waiver.  In Hoffman v. Citibank (South Dakota), N.A., the Ninth Circuit held that the district court's analysis of California choice of law was flawed, and remanded for the district court to re-analyze whether California or South Dakota law applies to the class arbitration waiver.

In Hoffman, Citibank issued a credit card to Hoffman in 1994 which contained a choice of law provision favoring South Dakota law.  In a mailing in 2001, Citibank gave Hoffman notice of a change in the arbitration provision of the cardholder agreement, including a waiver of class arbitration.  Hoffman did not object and continued to use the card.

Hoffman later sued Citibank, alleging that Citibank had improperly retroactively increased cardholders' interest rates, among other things.  Citibank removed the case to federal court and moved to compel arbitration.  The district court applied South Dakota law pursuant to the choice of law provision.  Holding that the class arbitration waiver was not unconscionable under South Dakota law, the district court granted Citibank's motion to compel arbitration of plaintiff's claims on an individual basis.  Hoffman moved to certify the ruling for immediate appeal.  The district court granted the motion and the Ninth Circuit granted Hoffman's petition to be heard.

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Your Scorecard For New Laws and Regulations

For those fans scoring at home, there are many revised, amended, proposed or new regulations and laws recently enacted or on deck in Sacramento and DC in consumer finance.  Many more are likely to come.  A summary of the most recent: 

California law


• Mortgages: new foreclosure procedures are now law in Civil Code §§2923.5, 2923.6 and 2929.3 and Code of Civil Procedure §1161b.

Federal law


•  Credit Cards:  the 2008 Credit and Debit Card Receipt Clarification Act, now law, clairifies the Fair and Accurate Credit Transactions Act of 2003;
•  Credit Cards and Deposit Accounts: "unfair or deceptive acts or practices" are refined and redefined in revisions to Regulation AA, revisions to Regulation DD, and revisions to Regulation Z;
•  Mortgages: Regulation X would get a makeover in HUD's proposed rule amending the Real Estate Settlement Procedures Act;
•  Arbitration:  the proposed "Arbitration Fairness Act of 2007" would slice and dice the Federal Arbitration Act;  the "Automobile Arbitration Fairness Act of 2008," would eviscerate pre-dispute arbitration provisions in auto sales or lease contracts.

"Automobile Arbitration Fairness Act" Still Alive

Although certain recent decisions of the U.S. Supreme Court indicate support for the Federal Arbitration Act, 9 U.S.C. § 1 et seq., arbitration is still under attack in Congress.  As noted last week, the "Arbitration Fairness Act of 2007" is still alive and moving through committee in the House of Representatives.  The "Automobile Arbitration Fairness Act of 2008," which would eviscerate pre-dispute arbitration provisions in auto sales or lease contracts is also moving through committee.

The Automobile Arbitration bill provides that any "controversy arising out of a motor vehicle consumer sales or lease contract," entered after the effective date of the Act "may not be settled by arbitration unless, after such controversy arises, all the parties to such controversy agree in writing to settle such controversy by arbitration."  The bill would also require any arbitration award to "include a brief, informal discussion of the factual and legal basis for the award."

"Arbitration Fairness Act" Still Looming

The "Arbitration Fairness Act of 2007," which caused a flurry of criticism and commentary when it was introduced in July 2007, is still alive and continuing its journey through committee.  The Act would amend several provisions of the Federal Arbitration Act, making sweeping changes to the enforceability of arbitration provisions. 

The Act would expressly invalidate arbitration agreements—retroactively—in employment, consumer or franchise disputes and in any "dispute arising under any statute intended to protect civil rights or to regulate contracts or transactions between parties of unequal bargaining power."  Specifically, in the context of a "consumer dispute," broadly defined, the Act would make a "predispute arbitration agreement" invalid and unenforceable. Continue Reading...

Issuance of Credit Card (Still) Not Subject to CLRA

The Fourth District California Court of Appeal reaffirmed in a published opinion that the issuance of a credit card is not subject to the California Consumers Legal Remedies Act ("CLRA") (Civ. Code § 1750 et seq.).  In Ball v. FleetBoston Financial Corporation, the Court of Appeal affirmed the Superior Court's denial of plaintiff's motion for leave to amend her complaint to allege violations of the CLRA and to seek declaratory relief against card issuer FleetBoston, citing prior cases that established "the CLRA does not apply to the issuance of a credit card."

In Ball, plaintiff sued FleetBoston (later Bank of America) for a violation of California's unfair competition law, Business and Professions Code § 17200 et seq., alleging that FleetBoston's cardholder agreement was procedurally and substantively unconscionable.  She later filed an amended complaint adding additional allegations of substantive unconscionability.  When Ball filed her complaint and first amended complaint, she did not have a credit card account with FleetBoston.  After Proposition 64 and subsequent cases confirmed that a non-cardholder had no standing to sue under 17200, Ball opened a credit card account and sought leave to amend her complaint for a second time to allege her new customer status, to allege violations of the CLRA, and to seek declaratory relief.  The Superior Court denied plaintiff's motion for leave to amend.  Plaintiff appealed.
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Supreme Court's Term Included Arbitration Preemption Ruling

In the Supreme Court term just completed, the Court continued its support for the preemptive power of the Federal Arbitration Act, 9 U.S.C. § 1 et seq. ("FAA").  In Preston v. Ferrer, 128 S.Ct. 978 (2008), the Court held that when parties agree to arbitrate all questions under a contract, the FAA preempts state laws placing primary jurisdiction in another forum, whether that forum is a court or administrative agency. 

Preston involved a fee dispute between Alex Ferrer, more commonly known as TV's "Judge Alex," and Los Angeles entertainment attorney Arnold Preston.  The fee contract contained a provision providing that the parties would arbitrate “any dispute ... relating to the terms of [the contract] or the breach, validity, or legality thereof ... in accordance with the rules [of the American Arbitration Association].”  The Court held that this arbitration provision preempts California law to the extent that it placed primary jurisdiction for the dispute in the California Labor Commission. 

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