June 01, 2016 Articles

Does the FAA Preempt California's Severability Rule as Applied to Arbitration Agreements?

By Charles E. Harris II, Sarah E. Reynolds, and Logan A. Steiner

The Supreme Court granted certiorari in MHN Government Services v. Zaborowski to decide whether the Federal Arbitration Act preempts California's arbitration-only severability rule, under which courts are given the discretion to invalidate an arbitration agreement with more than one unconscionable clause or to sever the unconscionable terms and enforce the remainder of the agreement. The answer to this question will have to wait for another day because the parties settled their dispute prior to the scheduled oral argument.

The centerpiece of the FAA, section 2, provides that an arbitration agreement "shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract." 9 U.S.C. ยง 2. The effect of the last clause, often referred to as the "savings clause," is that courts may refuse to enforce an arbitration agreement that would be subject to generally applicable state law contract defenses such as fraud, duress, or unconscionability. However, an arbitration agreement may not be invalidated by state law defenses that affect only those agreements; arbitration agreements and other contract terms must not be subjected to discriminatory treatment. AT&T Mobility LLC v. Concepcion, 563 U.S. 333, 339 (2011).

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