Almost two years ago in American Express Co. v. Italian Colors, SCOTUS significantly narrowed, but did not overrule, the “effective vindication” doctrine, which allows plaintiffs to invalidate an arbitration agreement if it precludes them from effectively vindicating their federal statutory rights.  A decision today from the Eighth Circuit shows just how difficult it is for plaintiffs to take advantage of the effective vindication doctrine after AmEx.

In Torres v. Simpatico, Inc., a putative class of cleaning business franchisees sued the franchisor and related companies for RICO violations.  The defendants moved to compel individual arbitration, based on language in the franchise agreements.  In response, the plaintiffs argued that the arbitration agreement was unconscionable, and that some defendants were non-signatories and therefore could not enforce the arbitration agreement.  The district court compelled individual arbitration and the Eighth Circuit affirmed.

The plaintiffs raised four arguments as to why the arbitration agreement was unconscionable — “first, the costs to arbitrate will exceed the average claimant’s loss; second, the arbitration claimant must pre-pay the filing fee and other pre-hearing fees; third, the prevailing party is entitled to reimbursement of costs and expenses; and fourth, the agreement limits the franchisee’s available remedies.”  (Quoted from district court opinion.)  The plaintiffs noted that their average loss was $6,100, that individual filing fees would be between $775-975, that average daily fees for arbitrators in four cities were between $1300-$1800, and that their cases would likely take three hearing days.  Therefore, plaintiffs argued the costs of individual arbitration would exceed any individual’s damages.

Keeping in mind the statement from AmEx that “[t]he FAA’s command to enforce arbitration agreements trumps any interest in ensuring the prosecution of low-value claims,” the courts were not interested in the comparison between each class member’s damage and their potential costs of arbitration.  Instead, the Eighth Circuit focused on whether plaintiffs had proven that the costs of arbitration were so high that they could not proceed.  It found the plaintiffs’ proof fells short because the arbitrations would not proceed in any of the four cities for which daily rates were provided, and because the plaintiffs themselves did not submit any affidavits stating that they could not afford the costs of arbitration (they relied on an affidavit of their lawyer to that effect).  In short, the Court held “[t]he Appellants failed to carry their burden to show that the costs of individual arbitration ‘are so high as to make access to the forum impracticable’ or to prevent them from effectively vindicating their rights in the arbitral forum.” [With respect to plaintiffs’ complaint about the limitation of remedies, the court found that was an issue for the arbitrator.]

On the issue of whether the non-signatory defendants could enforce the arbitration agreement, the court found two reasons why they could.  First, those non-signatories were third party beneficiaries of the contract under Missouri law.  But second, the arbitration agreement explicitly bound the franchisee to arbitrate disputes with those parties by stating “all controversies, disputes, or claims between us and our affiliates, and our and their respective members, officers, managers, agents, and/or employees, and you . . . must be submitted for binding arbitration.”

This case gives important guidance for any other potential plaintiffs who hope to make a successful argument under the “effective vindication” doctrine.  Notably: put in individual affidavits from each named plaintiff about his or her inability to pay the filing fees and arbitrator fees; get information on arbitrator rates in cities where the plaintiff’s hearing will likely be heard; and use the new CFPB study to add statistics about how often arbitrators award individual claimant’s their arbitration costs.  Conversely, for drafters of arbitration agreements who want to avoid class actions, consider inserting specific language authorizing the arbitrator to award the claimant his or her filing fees or arbitrator fees if the claim is successful.

Just as I was beginning to worry that arbitration had fallen out of favor at the nation’s highest court… today the Supreme Court announced that it will hear the case of DIRECTV, Inc. v. Imburgia during its October Term, an appeal from a California Court of Appeals.  In DIRECTV, a case pitting Kirkland & Ellis against the aptly named Consumer Watchdog (and other firms), the Court will consider whether parties’ choice of state law to govern enforceability of an arbitration clause can be interpreted as trumping the FAA (and precluding a preemption analysis).

The case started in 2008 as a putative class action asserting false advertising and violation of California statutes based on DIRECTV’s allegedly improper charge of early termination fees.  In May of 2011, just after Concepcion was decided, and after a class had been certified on at least one theory, the defendant moved to stay the action and compel individual arbitration.  (Before that, it decided such a motion would be futile under California precedent.)  The district court denied the motion and the appellate court confirmed that result.

The key provisions from the agreement are these:

“Neither you nor we shall be entitled to join or consolidate claims in arbitration by or against other individuals or entities, or arbitrate any claim as a representative member of a class or in a private attorney general capacity. Accordingly, you and we agree that the JAMS Class Action Procedures do not apply to our arbitration. If, however, the law of your state would find this agreement to dispense with class arbitration procedures unenforceable, then this entire Section 9 is unenforceable.”


“The interpretation and enforcement of this Agreement shall be governed by the rules and regulations of the Federal Communications Commission, other applicable federal laws, and the laws of the state and local area where Service is provided to you. This Agreement is subject to modification if required by such laws. Notwithstanding the foregoing, Section 9 shall be governed by the Federal Arbitration Act.”

The California Court of Appeals used California contract law to interpret the phrase “if . . . the law of your state would find this agreement . . . unenforceable” as meaning ““the law of your state without considering the preemptive effect, if any, of the FAA.”  Therefore, it held that because the “class action waiver is unenforceable under California law, so the entire arbitration agreement is unenforceable.”  The opinion acknowledged, but disregarded, Ninth Circuit precedent interpreting the same provision and reaching the opposite result.

The question that was presented to SCOTUS for consideration is this:

Whether the California Court of Appeal erred by holding, in direct conflict with the Ninth Circuit, that a reference to state law in an arbitration agreement governed by the Federal Arbitration Act requires the application of state law preempted by the Federal Arbitration Act.

I expect that this decision will clear up some of the confusion that exists about what kind of contract language is required to choose operation of state arbitration law, as opposed to merely which state’s law will govern interpretation of the arbitration agreement, and whether it is ever possible to completely contract around the FAA.

In other SCOTUS news, the Court denied cert in the Opalinski case, that presented the issue of whether the availability of class arbitration is a gateway issue of arbitrability that courts should presumptively decide.  (I heard about that denial from SCOTUS guru @lylden himself at a dinner in Saint Paul!  It’s like hearing who will be kicked off SYTYCD directly from Cat Deeley …)

What’s one way to derail a potentially large collective action about Fair Labor Standards Act violations?  To implement a new arbitration policy within days, thereby ensuring that your current employees cannot join the court case.  At least, that was the successful tactic used by a Chicago restaurant recently.

In Conners v. Gusano’s Chicago Style Pizzeria, __ F.3d __, 2015 WL 1003860 (8th Cir. Mar. 9, 2015), a former server alleged the restaurant where she had worked violated the FLSA.  She planned to represent other current and former servers at the restaurant.  However, a month later, the restaurant rolled out a new arbitration agreement for employees (but gave them the option of opting out as well, and explicitly explained that the agreement prevented the employee from joining the Conners action).  The plaintiffs (the original woman and other former servers who had already opted in), asked the court to enjoin the restaurant from using its new arbitration agreement to reduce the number of potential plaintiffs.  The district court granted the plaintiffs’ motion “to prevent a chilling effect on future collection actions under the [FLSA],” and enjoined the restaurant from enforcing the arbitration agreement against anyone who wanted to become a plaintiff in the action.

The Eighth Circuit reversed.  It found that the plaintiffs “lacked standing to challenge the current employees’ arbitration agreement,” which deprived the district court of jurisdiction to enjoin enforcement of the new arbitration agreement.  Critically, the court did not buy the argument that the new arbitration agreement caused plaintiffs to suffer a “concrete and particularized injury” in the form of an increased pro rata share of litigation expenses.  The court faulted plaintiffs for failing to provide any evidence that the current employees were going to join the lawsuit, even without an arbitration agreement.  It noted that at the time the motion was filed, no current employees had joined the collective action, and the plaintiffs’ counsel could offer nothing other than “a hopeful guess” that current employees would eventually join the cause.

In short, the court concluded that “one must resort to pure speculation to conclude the former employees’ portion of the litigation costs is any greater than it would have been absent the agreement.  This does not satisfy Article III.”

The problem with this decision is that it feels impractical to expect plaintiffs, whose lawsuit is just a few weeks old, to already have evidence available of what classes of employees will opt in to the collective action.  In short, if other circuits adopt this approach, this tactic could be an effective way to reduce the size of new class or collective actions whose representative is a former employee.

In my last post, I shared some of the highlights from the first half of the new CFPB Arbitration Study.  This post covers the second half of the report, with juicy information gleaned from CFPB’s analysis of almost 2,000 actual consumer arbitrations and its comparison of those results to actual consumer court actions.

Arbitration Outcomes

The AAA gave the CFPB access to information about 1850 total disputes filed with it in 2010, 2011, and 2012 relating to credit cards, checking accounts, payday loans, (GPR) prepaid cards, student loans, and auto loans.  The average claim made by a consumer was $27,000, and the average claim made by the financial institution was $16,011 (debt collection).  The bulk of the claims related to credit cards, with auto loans and students loans following a distant second and third.  Arbitration was usually completed within 5-8 months. Of the disputes resolved by arbitrators, 74% were resolved by an arbitrator who also was appointed on at least one other consumer arbitration in the sample set.

32% of the consumer arbitrations filed in 2010 and 2011 were resolved on the merits.  (The rest either settled or ended in another fashion.)  Of the 158 cases in which the consumer had an affirmative claim, arbitrators provided consumers with relief in 20% of them, with an average award around $5,400.  “When consumers were provided relief on their claims, consumers won an average of 57 cents for every dollar they claimed.”  In contrast, of the 244 affirmative claims by companies that resulted in an award, arbitrators provided the companies relief in 93% of those disputes, with an average award of $12,500 (“companies won 98 cents for every dollar claimed” in the cases where companied were provided relief).  (That could be read as indicating bias.  But, it could also mean that an unpaid debt is inherently easier to prove than a FDCPA (or other consumer) claim.)

If you’ve ever wondered how often the AAA appoints a new arbitrator after receiving a “factual objection” to the arbitrator’s service, the CFPB found that happened in response to 68% of objections in these consumer arbitrations.

With respect to attorneys’ fees, consumers who were represented and took their claims all the way to an award received fees in 14% of those cases, with an average fee award of $8,148.  Companies also received attorneys’ fees in 14% of disputes resolved by the arbitrators, with an average award of $3,387.

Litigation Outcomes

Individual Federal Court Claims 2010-2012

If there were about 2,000 individual consumer arbitrations filed in these six areas in three years, how many individual federal actions were filed?  3,462 — and 2,621 of those related to credit cards.  A whopping 87% of the individual actions asserted FDCPA claims.  And 93% of the individual plaintiffs requested a jury.  The individual federal cases were concluded in an average of 171 days.

Of those individual claims that were resolved within the study period, 48% resolved by settlement, 3.7% were dismissed on a dispositive motion, 6.8% resulted in a judgment in favor of the consumer (another 41% of cases may have settled, but the docket did not clearly indicate).  Most of the cases that the consumer won were by default (78 of 82).  The average amount awarded the consumer was $13,131.  (The CFPB could not calculate the ratio of damages to claim, because unlike arbitration demands, complaints generally have generic statements about their damages like “more than 75,000.”)

Class Actions in State and Federal Court 2010-2012

In addition to the individual cases, CFPB found 470 putative class actions filed in federal court (and another 92 filed in state courts with searchable electronic records — OR, UT, OK, and NY, plus individual counties in IL, TX, FL, and CA).  Juries were requested in 80% of the class actions.  Almost half of those cases related to credit cards.  And the majority of the claims were federal or state statutory claims (FDCPA, TCPA, TILA, Deceptive Trade Practice, etc.)  The median time to close a federal class action was around 215 days (though MDL classes took around 600 days).  Class actions in state court took longer than federal court — about 400 days on average.

Most class cases settled — either by non-class settlement (CFPB estimates 60%) or a class settlement approved by the court (12%).  Another 10% of cases ended when the defendant won a dispositive motion.  Consumers obtained a judgment in their favor in only 1.8% of class cases, usually through default judgment.  No class action in the sample went to trial.

In 94 of those putative class actions, companies moved to compel arbitration, and courts granted the motion half of the time. In the 46 classes that were compelled to arbitration, CFPB was able to identify only 12 that subsequently demanded arbitration, two of which filed as putative classes in arbitration.  Similarly, for the six individual cases that were compelled to arbitration, CFPB found only one that subsequently went to arbitration.

Small Claims Court

In an effort to see if consumers are taking advantage of their arbitration carve-outs allowing claims to proceed in small claims court, CFPB searched for filings in jurisdictions where those records are accessible.  It found that credit card issuers are filing many debt collection matters in small claims court, but very few consumers are filing affirmative claims.  For example, there were 7,905 credit card debt collection cases in Harris County, Texas alone, but 870 small claims court cases filed by consumers across 31 jurisdictions combined.

Class Action Settlements 2008-2012

 To determine the benefit of class litigation, CFPB analyzed consumer financial class action settlements that took place from 2008-2012.  The 419 settlements in that time period involved more than 350 million class members (not necessarily 350M unique people) and resulted in $2.7 billion in total relief.  For the 105 settlements where a determination was possible, the average claims rate was 21% (i.e. the plaintiffs recovered 21% of the dollars they sought).  On average, it took the classes 690 days to get to a settlement.

Which Comes First — Private or Public Action?

The report presents findings about whether public enforcement of consumer protection statutes usually comes before or after similar class actions filed by private citizens.  It found that where there are overlapping actions, “public enforcement activity was preceded by private activity 71% of the time.  In contrast, private class action complaints were preceded by public enforcement activity 36% of the time.”  So, don’t knock the creativity of the plaintiffs’ bar.

Does Arbitration Lead To Cheaper Products?

The final section of the report analyzes whether arbitration agreements in financial products leads to lower prices for consumers.  After acknowledging that it is difficult to test that assertion on a broad level, the report looked at one example to test the cause and effect.  In that example, a number of credit cards agreed to remove their arbitration clauses for three and a half years as a result of a settlement.  The CFPB found no statistically significant evidence that those companies raised their prices more or differently from comparable companies with no change in ADR.

What Have We Learned?

My brain is a little fried from all the numbers and graphs and words, but here are some initial reactions from the information in the report:

  • Individual consumer actions settle more often in court than in arbitration.  Put differently, more cases get heard on the merits in arbitration.  (32% of cases are resolved on merits in arbitration, compared to about 10% in court.);
  • Arbitrators are repeat players, just like financial institutions, and plaintiffs’ lawyers;
  • Arbitration is not necessarily faster than litigation (comparing individual arbitrations to individual federal litigation);
  • Parties who don’t show up will lose — both in arbitration and in court (the volume of defaults surprised me);
  • Courts grant more damages to consumers than arbitrators do;
  • A large percent of plaintiffs will not bother prosecuting their claims if they have to go to arbitration (instead of remaining in court); and
  • Eliminating class actions can be a huge financial benefit to the financial institutions.  Whether you think that is also a benefit to the economy overall or not likely depends on your politics.

Watch this space for news on what the CFPB recommends going forward.


Today, the U.S. Supreme Court denied the petition for certiorari in the Iskanian case from the California Supreme Court.  In doing so, SCOTUS allowed one of the most interesting Federal Arbitration Act interpretations in recent years to stand.  As you may recall, the decision held that the Federal Arbitration Act did not apply to labor code enforcement lawsuits brought by employees pursuant to California’s Private Attorneys General Act.  The California court reasoned that those claims are really state enforcement actions, without any arbitration agreement governing the claims.  This opens up a new line of argument for putative class actions — can they piggyback on Iskanian and argue that their lawsuit is properly viewed as public enforcement of a statute and therefore the arbitration agreement does not apply?  It will be interesting to see if plaintiffs in other states make use of this decision.

[At least one arbitration case still has a certiorari petition pending: Opalinski.]


A few months ago, the Ninth Circuit found that the arbitration agreement in Barnes & Noble’s website was not enforceable.  This week, the Ninth Circuit found that the arbitration agreement Sirius XM Radio relied upon was not enforceable because the user did not know he had any agreement with Sirius XM, let alone an arbitration agreement.  Knutson v. Sirius XM Radio Inc., __ F.3d__, 2014 WL 5802284 (9th Cir. Nov. 10, 2014).

The plaintiff in this case purchased a Toyota truck.  The truck came with a 90-day trial subscription to Sirius XM satellite radio.  The plaintiff did not have to sign any documents to receive or activate the radio, it was activated just after his purchase.  Over a month later, the plaintiff received a “Welcome Kit” in the mail from Sirius XM.  The kit had a customer agreement with an arbitration provision.  The plaintiff did not pay any attention to the Welcome Kit. The plaintiff also did not ask to end his trial subscription.

Five days after the trial subscription ended, the plaintiff brought a putative class action suit against Sirius XM.  He alleged that Sirius XM made three unauthorized calls to him that violated the Telephone Consumer Protection Act.  Sirius XM quickly moved to compel arbitration, pointing out that not only did the dispute belong in arbitration, but the plaintiff had waived his right to a class action in the arbitration provision.  The district court granted the motion and the Ninth Circuit reversed.

The Ninth Circuit found that Sirius XM and the plaintiff never formed any contract at all.  First, applying California contract law, the court found that at the time of the truck purchase, no reasonable person would understand that he had agreed to arbitrate with Sirius XM.   Indeed, there was no reason to think the plaintiff had entered into a contract with anyone but Toyota.  Second, the court found that the plaintiff’s continued use of the radio service after receiving the Welcome Kit did not operate to form a contract with Sirius XM. (The Welcome Kit stated that if the subscription was not canceled within 3 days of activation, the customer was deemed to have accepted the terms.)  The court concluded the customer was not obligated to review the entire Welcome Kit and act on it because “there was no effective notice that action was required.”

Although the court refused to acknowledge three “shrinkwrap” cases from California district courts were rightly decided, it distinguished them anyway.  (Those cases had all upheld agreements provided to a customer after the initial point of sale.)  It summarized that “[h]ere, by contract, there is no evidence that Knutson purchased anything from Sirius XM, or ever knew that he was entering into a  contractual relationship with the satellite radio service provider.”  Because there was no initial transaction between the parties, in other words, the customer had no reason to closely review things in the mail from Sirius.  As a public service, the court even explained how Toyota and Sirius XM could remedy this situation going forward.  (Give notice in Toyota’s purchase agreement or other literature.)

A retailer/service provider should now consider that: a general term of use on its website is not sufficient to bind customers to arbitration; an arbitration agreement provided after the customer agrees to the service may not be sufficient (whether paper or electronic); and any arbitration agreement will not be upheld if the customer did not have reasonable notice of the terms at the time of purchase (see Zakaib and these cases).  This is fair.  If companies are going to be able to reap major litigation benefits by using arbitration agreements (precluding class actions and restricting types of damages, for example), consumers should at least have the option of reviewing those provisions and saying “no thanks.”

Two state supreme courts found consumer arbitration agreements unenforceable in the past week: Arkansas and New Jersey. Arkansas grounded its decision on the lack of mutuality in the consumer arbitration agreement (similar to Missouri’s recent ruling). Alltel Corp. v. Rosenow, 2014 WL 4656609 (Ark. Sept. 18, 2014). New Jersey grounded its decision on the arbitration agreement’s failure to clarify that the consumer was giving up its right to a court trial. Atalese v. U.S. Legal Servs. Group, __ A.3d __, 2014 WL 4689318 (N.J. Sept. 23, 2014).

Alltel is a consumer class action alleging that a cell phone provider engaged in a deceptive trade practice when it charged early termination fees. The company moved to limit the class to exclude customers with arbitration provisions, and later to compel arbitration with those customers, and the trial court denied those motions. On appeal, the Supreme Court of Arkansas affirmed the lower court’s finding that the arbitration agreement was unenforceable.

Critically, the Alltel arbitration agreement was preceded by this clause “If we do not enforce any right or remedy available under this Agreement, that failure is not a waiver.” The court construed that clause as “Alltel clearly reserv[ing] to itself the option of pursuing remedies other than arbitration, without the consequence of waiver. Moreover that reservation and protection was limited solely to Alltel and was not extended to the customer.” Therefore, the court found the arbitration agreement was invalid because it lacked mutuality. The court also found that its result was not preempted by the FAA, because Arkansas considers “the doctrine of mutuality” when analyzing all contracts. However, the opinion does not appear to cite any case outside the arbitration context to support that statement. (That’s Problem Number One with this decision, ie. preemption and Concepcion. Problem Number Two is that the court ignores the Prima Paint doctrine by looking outside the arbitration agreement to find the lack of mutuality. )

Atalese is an individual claim by a consumer who contracted with a debt-adjustment company, and then sued for violations of the consumer fraud act, among other claims. The contract stated that “any claim or dispute” related to the agreement “shall be submitted to binding arbitration” and that “any decision of the arbitrator shall be final and may be entered into any judgment in any court of competent jurisdiction.” The company moved to compel arbitration. The trial court granted that motion and the intermediate appellate court affirmed.

The New Jersey Supreme Court reversed, largely by characterizing arbitration as a waiver of a citizen’s right under the New Jersey Constitution to a trial by jury and assuming that “an average member of the public may not know…that arbitration is a substitute for the right to have one’s claim adjudicated in a court of law.” Given that framing of the issue, the court found the arbitration clause lacked “clear and unambiguous language that the plaintiff is waiving her right to sue or go to court to secure relief,” and therefore was unenforceable. Like the Arkansas court, New Jersey tried to shield itself from Concepcion by positioning its decision as a general application of New Jersey contract law. The opinion has a string cite that continues for half a page, in which all the opinions cited relate to waivers of statutory rights. Notably, though, the court does not address the fact that SCOTUS has not found the Sixth Amendment right to a jury trial an impediment to enforcing arbitration agreements.

What can we say about these two cases and last post’s Missouri case? I can find ways that each of them contravene federal case law, but it is unlikely that SCOTUS will take the time to correct them. However, these cases do point to a real need to clarify the Concepcion decision. If the intent of the Concepcion decision was to tamp down on state courts’ creativity in developing “general state law doctrines” that invalidate arbitration, it is simply not doing its job.

In a victory for advocates who worry that the odds are impossibly stacked against consumers in some arbitral fora, the Seventh Circuit found that a class of borrowers did not have to proceed with arbitration conducted by the Cheyenne River Sioux Tribe (“Tribe”) in South Dakota “because the arbitral mechanism specified in the agreement is illusory.” Jackson v. Payday Financial, LLC, __ F.3d __, 2014 WL 4116804 (7th Cir. Aug. 22, 2014).

The plaintiffs had each borrowed money through a website and agreed to pay 139% in interest each year. Their agreements provided that any disputes would be resolved by arbitration “conducted by the Cheyenne River Sioux Tribal Nation by an authorized representative in accordance with its consumer dispute rules.” The arbitrator would be a Tribal Elder or members of the Tribal Council.   The agreement also provides it is governed by the laws of the Tribe.

The plaintiffs sued for violation of Illinois usury and consumer fraud statutes. The defendants moved to dismiss for improper venue, arguing that the claims had to be brought in arbitration. The district court granted the defendants’ motion. But before the Seventh Circuit would hear the appeal, it asked the district court to engage in fact finding about the Tribe’s arbitration rules and mechanisms. The district court found the Tribe had “virtually no experience in handling claims made against defendants through private arbitration” and that the Tribe appeared to have been selected in “an attempt to escape otherwise applicable limits on interest charges. As such, the promise of a meaningful and fairly conducted arbitration was a sham and an illusion.”

The Seventh Circuit reversed the district court, concluding that the plaintiffs’ claims should not have been dismissed. It reached that conclusion based on applying two different analyses.

First, it applied the rule that forum selection clauses (like the one here selecting arbitration by the Tribe) are enforceable unless “unreasonable under the circumstances.” Here, the court found the forum selection was illusory and therefore unreasonable because the Tribe “does not authorize Arbitration…does not involve itself in the hiring of …arbitrator[s], and [] does not have consumer dispute rules.”

Second, the Seventh Circuit considered the enforceability of the arbitration agreement under Illinois law (which applied if the agreement’s choice of Tribal law was invalid). Under Illinois law, the court found that the arbitration agreement was unconscionable. It found it was procedurally unconscionable (despite the plaintiff’s having the right to opt out) because the plaintiffs could not have found out about the dispute resolution process and rules, since there were none. It was substantively unconscionable because the dispute resolution mechanism did not exist and any arbitrator was likely to be biased.

In response to an argument that such a finding of unconscionability was preempted under Concepcion, the court said “[i]t hardly frustrates FAA provisions to void an arbitration clause on the ground that it contemplates a proceeding for which the entity responsible for conducting the proceeding has no rules, guidelines, or guarantees of fairness.”

Finally, the Seventh Circuit rejected an argument that the dispute should at least be heard by the courts of the Tribe. (“There simply is no colorable claim that the courts of the [Tribe] can exercise jurisdiction over the plaintiffs.”) The dismissal was reversed and the case remanded to the district court for further proceedings.

In my view, the most interesting thing about this opinion is the way it differs from other opinions about arbitration agreements in payday loan documents. At least two state court decisions finding those arbitration agreements unconscionable were later reversed, based on the reasoning of Concepcion and federal preemption. That likely explains the Seventh Circuit’s focus on federal common law about forum selection clauses as an alternative basis to simple “unconscionability” under Illinois law.

In a footnote in Sutter, SCOTUS hinted that the question of whether an arbitration agreement allowed for class arbitration may be one of the “gateway” questions of arbitrability that are presumptively for courts to decide. Last year, the Sixth Circuit went one step further, finding that the availability of class arbitration defaults to the courts. And this week, the Third Circuit agreed.

In Opalinksi v. Robert Half Int’l, Inc., __ F.3d __, 2014 WL 3733685 (3d Cir. July 30, 2014), a putative class of plaintiffs sued their employer. Their employment agreements called for arbitration, but said nothing about whether classwide arbitration was permitted. The employer moved to compel arbitration and the district court granted that motion, finding that the arbitrator should determine whether class arbitration was available.

The appellate court disagreed. It held that “whether an agreement provides for classwide arbitration is a ‘question of arbitrability’ to be decided by the District Court.” In support of its holding, the Third Circuit likened the decision about whether a class can go forward in arbitration to other arbitrability decisions that default to judges, like whether non-signatories are bound to arbitrate. The Third Circuit also noted that while procedural questions are generally for arbitrators, the availability of class arbitration has been construed by the Supreme Court as “not solely [] a question of procedure” but instead a “substantive gateway dispute.”

I predict there will be more circuit court cases finding that judges are the presumptive decisionmakers about class arbitration in the months to come.

p.s. There is only one week left to make sure ArbitrationNation stays in the ABA Blawg 100… Here is the link to use: .

This week the Supreme Court of California held that the FAA preempts California’s 2007 Gentry ruling, one that protected employees from nearly all class action waivers in arbitration agreements.  Iskanian v. CLS Transp. Los Angeles, LLC, __ P.3d__, 2014 WL 2808963 (Cal. June 23, 2014).  However, asserting its Californian-ness, the court found an clever way of ruling that arbitration agreements in employment contracts may still not waive a particular type of joint action: representative actions brought under California’s Private Attorneys General Act.

The decision reads like a Greatest Hits of Arbitration Law – 2014 edition.  It touches on almost every hot issue in arbitration law in recent years: Concepcion and FAA preemption; vindication of statutory rights; waiver of the right to arbitrate; and the fight over whether federal labor laws can trump the Federal Arbitration Act (the D.R. Horton issue).  (Are the 14 different groups of amici in the case to blame for the plethora of issues?!  Or is that what drew them there??)  The holdings on those issues track what courts around the country have done:

  • California found that “[u]nder the logic of Concepcion, the FAA preempts Gentry’s rule against employment class waivers.  (Gentry made it possible to invalidate a class action waiver if class arbitration will be “a significantly more effective practical means of vindicating the rights of the affected employees than individual litigation or arbitration.”)
  • California agreed with other federal courts that Sections 7 and 8 of the National Labor Relations Act do not override the FAA’s mandate to enforce arbitration agreements, even those agreements with class action waivers.
  • California recognized that a party who gives up on compelling arbitration in light of a precedential decision that makes enforcing the arbitration clause futile (in this case, Gentry), does not thereby waive its right to arbitrate.

But on one issue, the Iskanian decision ventured into uncharted territory.  The issue was what the court should do with the employee’s claim, in a representative capacity, under California’s Private Attorneys General Act for Labor Code violations by his employer.  The arbitration agreement stated “that class action and representative action procedures shall not be asserted” in arbitration.  The court found that an employee’s right to bring a PAGA representative action is not waivable under California law.  That holding was grounded in two California statutes that prohibit parties from using their contract to avoid responsibility for violations of statutes.  While the employer argued that the employee could bring his PAGA claim on an individual basis, the court found that would frustrate the objective of the act: “to punish and deter employer practices that violate the rights of numerous employees.”

The court then had to analyze whether its new holding (that the ability to bring a PAGA claim on a representative basis cannot be waived) was preempted by the FAA.  It held it was not.  The court found that the PAGA claims fall outside the ambit of the FAA, because the FAA is concerned with disputes between private parties, while PAGA actions are really state enforcement proceedings against an employer.  The court found support for its holding in the legislative history of the FAA, and especially the lack of any mention of qui tam actions becoming arbitrable as a result of the legislation.  The court also noted that enforcement of wage and hour laws are well within the state’s historic police powers.

“Simply put, a PAGA claim lies outside the FAA’s coverage  because it is not a dispute between an employer and an employee arising out of their contractual relationship.  It is a dispute between an employer and the state, which alleges directly or through its agents…that the employer has violated the Labor Code.”

This is the first time I have seen a state court find that their arbitration case law is not preempted because the FAA did not even apply to it.  The distinction that California draws makes logical sense.  But I can’t imagine SCOTUS ignoring California’s attempt to define some of its arbitration precedent as outside the scope of the FAA.  I predict this case will end up on SCOTUS’ docket.