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.. ."
The plaintiffs in Cocchi were individuals and entities who purchased limited partnership interests in certain limited partnerships known as the Rye Funds. The Rye Funds were invested with Bernard Madoff and suffered significant losses as a result. The plaintiff investors sued several entities, including the auditing firm, KPMG. They alleged four claims against KPMG: (1) negligent misrepresentation; (2) violation of the Florida Deceptive and Unfair Trade Practices Act (FDUTPA); (3) professional malpractice; and (4) aiding and abetting a breach of fiduciary duty.
KPMG moved to compel arbitration based upon the audit services agreement between KPMG and the fund manager defendants. The trial court denied the motion, and the Court of Appeal affirmed. The Court of Appeal found, among other things, that two of the claims were direct rather than derivative, so that they could not be arbitrated under applicable state law. The Court of Appeal failed to address the arbitrability of the other two claims asserted against KPMG. Because of this failure, the Supreme Court vacated the Court of Appeal's judgment and remanded the case for a determination of whether either of the remaining two claims required arbitration.
The KPMG decision sends a clear message to state and federal courts that they must enforce valid agreements to arbitrate, and that the Supreme Court will continue to ensure that enforcement.
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.
In its opinion reversing the Ninth Circuit, the Supreme Court first noted generally that the FAA reflects a "liberal federal policy favoring arbitration" and that anything that "stands as an obstacle to the accomplishment and execution of the full purposes and objectives" of the FAA is preempted. Specifically, the Court held that California's Discover Bank rule is preempted by the FAA because "[r]equiring the availability of class-wide arbitration interferes with fundamental attributes of arbitration and creates a scheme inconsistent with the FAA."
in its analysis, the Court identified a number of ways in which the Discover Bank rule interferes with arbitration and is therefore inconsistent with the FAA: (1) class arbitration makes the process slower, more costly, and more likely to generate procedural disputes; (2) class arbitration requires procedural formality, which is inconsistent with arbitration's essential informality; and (3) class arbitration significantly increases risks to defendants, who could be subject to a class-wide arbitration award with minimal rights to challenge errors on appeal or otherwise to overturn the award.
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.
The Ninth Circuit reversed, holding that the issue of whether the arbitration agreement was enforceable was for a court, not an arbitrator, to decide. Specifically, the Court held that where "when a party specifically challenges the validity of arbitration provisions within a larger contract, apart from the validity of the contract as a whole, a court decides the threshold question of the enforceability of the arbitration provisions," notwithstanding the fact that the agreement provides that an arbitrator should make that decision. The Ninth Circuit remanded for the Court to consider all of Jackson's arguments that the agreement was unconscionable.
The Supreme Court granted review to consider whether an arbitrator or a court should decide enforceability of an arbitration agreement.
"Arbitration Fairness Act" Still Looming
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. Significantly, the Act would also expressly assign the task of determining the enforceability of arbitration agreements to courts under federal law, not to arbitrators, contrary to a long line of federal cases holding the opposite. Federal courts have long held that attacks on the validity of an entire contract, as distinct from attacks aimed at the arbitration clause, are to be determined by the arbitrator. The Act provides that its "effective date" would be the date of enactment, but also provides that it "shall apply with respect to any dispute or claim that arises on or after such date." This effectively makes the Act retroactive, since it would invalidate predispute arbitration agreements that a party sought to enforce in certain disputes after the Act's effective date.
The Consumer Bankers Association has issued a public letter urging opposition of the Act.
Supreme Court's Term Included Arbitration Preemption Ruling
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.
Judge Alex asserted that the contract was void because Preston was acting as a "talent agent" under California law without the requisite license from the California Labor Commission. Preston responded that he was merely a "personal manager" and needed no such license. California law vests primary jurisdiction over such license disputes in the California Labor Commission. (Cal. Labor Code § 1700.44.)
The Court has consistently held, however, that "attacks on the validity of an entire contract, as distinct from attacks aimed at the arbitration clause, are within the arbitrator's ken." Analyzing the conflict between state law and the FAA, the Court held that the "procedural proscriptions" of state law "conflict with the FAA's dispute resolution regime" and were therefore preempted. The effect of preemption here was that that the arbitrator would decide the licensing issue, not the Labor Commission.
If California law placed primary jurisdiction for the dispute in state court, there would be little doubt that under the Court's prior rulings, the FAA would preempt. The news from Preston is that the same result obtains where California law would vest primary jurisdiction in an administrative agency.
