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July 31, 2017

After Concepcion, Arbitration Agreement Validity Hinges on State Law

Jeffrey Salas – July 31, 2017

In AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011), and American Express Co. v. Italian Colors Restaurant, 133 S. Ct. 2304 (2013), the U.S. Supreme Court set forth guidelines strongly supporting the enforcement of arbitration provisions under the Federal Arbitration Act (FAA), 9 U.S.C. § 1 et seq. These cases present a hurdle for consumers and employees who are trying to vindicate their rights in court or through class actions. While both cases are binding precedent, lower courts have recently sought to narrow the perceived broad scope of those rulings. In general, the courts are taking a hard look at how contracts were formed, especially contracts of adhesion, which govern most consumer and employment relationships.

Currently, cases that distinguish Concepcion and Italian Colors have been most visible in the employment area. Indeed, to uphold a denial of a motion to compel arbitration, the Seventh Circuit distinguished both Concepcion and Italian Colors on the ground that neither “goes so far as to say that anything that conceivably makes arbitration less attractive automatically conflicts with the FAA, nor does either case hold that an arbitration clause automatically precludes collective action even if it is silent on that point.” Lewis v. Epic Sys. Corp., 823 F.3d 1147, 1158 (7th Cir. 2016). In Lewis, the court looked to the National Labor Relations Act (NLRA), which protects employees beyond the arbitration context, and concluded that arbitration clauses that interfere with the NLRA are invalid: “The protection for collective action found in the NLRA, moreover, extends far beyond collective litigation or arbitration; it is a general principle that affects countless aspects of the employer/employee relationship.” The Sixth and Ninth Circuits have similarly ruled in support of collective litigation rights based on the NLRA, refusing to compel individualized arbitration. See NLRB v. Alt. Entm’t, Inc., No. 16-1385, 2017 U.S. App. LEXIS 9272, at *30 (6th Cir. May 26, 2017); Morris v. Ernst & Young, LLP, 834 F.3d 975 (9th Cir. 2016). The Second, Fifth, and Eighth Circuits, in contrast, have enforced arbitration clauses in those circumstances. See Patterson v. Raymours Furniture Co., 659 F. App’x 40, 41 (2d Cir. 2016); Murphy Oil USA v. NLRB, 808 F.3d 1013 (5th Cir. 2015); Cellular Sales of Mo., LLC v. NLRB, 824 F.3d 772 (8th Cir. 2016). As a result, there is currently a circuit split as to whether arbitration clauses in employee contracts are consistent with the NLRA. A petition for a writ of certiorari was granted in January 2017, and opening briefs were filed in early June 2017. See Nat’l Labor Relations Bd. v. Murphy Oil USA Inc., S. Ct. No. 16-307 (consolidated with two similar cases).

While the U.S. Supreme Court will ultimately resolve the circuit split, more litigation is likely to arise in the context of employer-employee agreements, as plaintiffs may have additional avenues to fight arbitration agreements.

In the consumer context, new decisions have taken a closer look at arbitration/class waiver provisions as part of a larger analysis about how the contract was formed as well as the contract’s terms. Courts have used the FAA’s “savings clause” to invalidate contracts under particular state laws. See 9 U.S.C.S. § 2 (an arbitration contract “shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract”). The decisions are heavily fact-based but take a hard look at fairness in the procedural and substantive issues in the contracts.

Federal courts have looked at both the procedural and substantive aspects of unconscionability. For example, the Seventh Circuit asks “whether the web pages presented to the consumer adequately communicate all the terms and conditions of the agreement, and whether the circumstances support the assumption that the purchaser receives reasonable notice of those terms,” noting that “a person using the Internet may not realize that she is agreeing to a contract at all, whereas a reasonable person signing a physical contract will rarely be unaware of that fact.” Sgouros v. TransUnion Corp., 817 F.3d 1029, 1034–35 (7th Cir. 2016). And the Fourth Circuit took a more substantive approach to the contract at issue in holding that under Maryland law, “the provision binds only Plaintiffs to arbitration, and thus lacks mutuality of consideration.” Noohi v. Toll Bros., Inc., 708 F.3d 599, 610–11 (4th Cir. 2013). Conversely, under South Dakota law, a California federal court held “that plaintiff entered into the arbitration agreement when he was mailed the 2001 Change-in-Terms, failed to take advantage of the opt-out provision, and continued to use the card.” Guerrero v. Equifax Credit Info. Servs., No. CV 11-6555 PSG (PLAx), 2012 U.S. Dist. LEXIS 150428, at *18 (C.D. Cal. Feb. 24, 2012). Facing a similar issue, a Massachusetts federal court held that an arbitration agreement is enforceable where it is manifested during a sign-up process that references that a legal agreement will bind the consumer. Cullinane v. Uber Techs., Inc., No. 14-14750-DPW, 2016 U.S. Dist. LEXIS 89540, at *22–24 (D. Mass. July 11, 2016).

Similarly, state courts have struck down arbitration agreements both on substance and procedure. A lack of mutuality in the arbitration obligations has been a reoccurring theme, from Noohi to state court opinions. In rejecting an arbitration agreement on that basis, the Arkansas Supreme Court explained, “we do not treat agreements to arbitrate differently than other contracts, and our analysis here thus does not violate Concepcion.” Bank of the Ozarks, Inc. v. Walker, 487 S.W.3d 808, 813 (Ark. 2016). The Montana Supreme Court similarly affirmed the denial of an arbitration clause for lack mutuality: “We conclude that the District Court’s finding of unfavorable treatment and unconscionability was correct because the arbitration clause lacked mutuality.” Glob. Client Sols., LLC v. Ossello, 367 P.3d 361 (Mont. 2016).

Arbitration agreements have also been unenforceable where they limit damages or for lack of notice or other defects in compliance with legal obligations. For example, in Penilla v. Westmont Corp., the California Court of Appeal relied on a pre-Concepcion case, Gentry v. Superior Court, 165 P.3d 556, 574 (Cal. 2007), to note the problems of arbitration clauses that are “unfairly one sided” in terms of the damages available to a claimant. 3 Cal. App. 5th 205, 223 (2016). In Scamardella v. Legal Helpers Debt Resolution, L.L.C., New Jersey’s intermediate appellate court refused to enforce an arbitration clause based on the lack of notice: “The lack of notice defeats any assertion the parties agreed to forgo resolution outside an arbitral forum.” No. A-4170-14T3, 2016 N.J. Super. Unpub. LEXIS 885, at *11 (N.J. Super. Ct. App. Div. Apr. 19, 2016). And in State v. CSLK Properties, LLC, Minnesota’s intermediate appellate court determined that an arbitration clause that conflicted with Minnesota’s statutory scheme for the apportionment of condemnation awards between landowners and lessees (they are to be decided by court-appointed commissioners) was invalid. 2012 Minn. App. Unpub. LEXIS 374, at *14 (Minn. Ct. App. May 7, 2012).

Courts also have been willing to expand the unconscionability analysis to the fairness of contracts, looking at whether remedies are practically available to consumers. See Brewer v. Mo. Title Loans, 364 S.W.3d 486, 495 (Mo. 2012) (“The obstacle to dispute resolution posed by these provisions is illustrated by the simple fact that no customer has utilized the arbitration clause to recover. As arbitration is the only remedy, this means that no customer has obtained relief. As a result, far from fulfilling the purpose of the federal act of providing a prompt and informal method of resolving disputes, the arbitration clause here is itself ‘an obstacle to the accomplishment of the act’s objectives.’”).

Even a court’s perception of fairness has brought arbitration clauses under scrutiny. See King v. Bryant, 763 S.E.2d 338 (N.C. Ct. App. 2014) (unpublished) (refusing to enforce arbitration in a “harsh, one-sided, and oppressive instrument that is, at least in part, substantively unconscionable”), aff’d, 795 S.E.2d 340 (N.C. 2017); Gandee v. LDL Freedom Enters., Inc., 293 P.3d 1197, 1203 (Wash. 2013) (“As our above analysis shows, the arbitration clause at issue here contained numerous unconscionable provisions based on the specific facts at issue in the current case.”); Figueroa v. THI of N.M. at Casa Arena Blanca LLC, 306 P.3d 480 (N.M. Ct. App. 2012) (“We therefore decline to follow these other jurisdictions’ approaches to the application of substantive unconscionability that is inconsistent with our own. . . . [T]he terms of this arbitration agreement were unfairly and unreasonably one-sided and thereby, substantively unconscionable.”).

To be sure, courts have upheld arbitration agreements that they have not deemed unconscionable. See Leonard v. Del. N. Cos. Sport Serv., No. 4:15 CV 1356 CDP, 2016 U.S. Dist. LEXIS 89295, at *13 (E.D. Mo. July 11, 2016) (“lack of mutuality with regard to an arbitration agreement is not unconscionable so long as there is proper consideration as to the whole agreement”); Johnson v. CoStar Grp. Inc., No. 13-cv-8600-RA, 2014 U.S. Dist. LEXIS 99643, at *12 (S.D.N.Y. July 21, 2014) (“Because we cannot say ‘with positive assurance’ that a claim [of unconscionability] [i]s not within the scope of the arbitration clause, we cannot say that the presumption in favor of arbitration has been overcome.”).

Overall, despite Concepcion and Italian Colors, lower courts view arbitration clauses in a broader context based on the procedural and substantive aspects of the contract or the arbitration provision itself and will not enforce clauses that are procedurallyor substantively unfair or unequal contracts to the extent that the state’s law gives the same treatment to all contracts.

Jeffrey Salas – July 31, 2017