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Will California Strike Again? The Latest Word From the California Supreme Court On Enforcing Arbitration Agreements

Posted in Arbitration

The California Supreme Court has a long history of inventing new rules—either from common law or as “glosses” on statutes—to invalidate arbitration agreements entered into by consumers and employees. For example, in 2005, that court announced a new unconscionability rule—the“Discover Bank” doctrine, which was named after one of the parties to the case—that effectively blocked enforcement of every consumer arbitration agreement that did not permit class procedures. The U.S. Supreme Court’s landmark decision in AT&T Mobility LLC v. Concepcion held that the Federal Arbitration Act (“FAA”) preempted the Discover Bank rule.

Will the California Supreme Court faithfully apply Concepcion and the U.S. Supreme Court’s other recent rulings overturning lower courts’ refusals to enforce arbitration agreements? Or will it try to formulate new grounds for prohibiting arbitration, requiring the U.S. Supreme Court to intervene yet again to vindicate the Federal Arbitration Act’s “liberal federal policy favoring arbitration agreements, notwithstanding any state substantive or procedural policies to the contrary.” With four significant arbitration cases now pending before the California Supreme Court, we are likely to find out in the next 12 to 24 months.

The first of these decisions, handed down on October 17 in Sonic-Calabasas A, Inc. v. Moreno (pdf)—in which our firm filed an amicus brief (pdf)—contains a distinctly mixed message. In response to the U.S. Supreme Court’s order granting certiorari and vacating and remanding the case in light of Concepcion, the California Court overturned its own prior ruling invalidating the arbitration agreement, correctly holding that its original rationale could not stand. In an opinion by Justice Liu, the Court went on to discuss—although not explicitly mandate—a brand-new approach to unconscionability analysis that reintroduces the precise legal principle that the U.S. Supreme Court held preempted in Concepcion and rejected again this year in American Express Co. v. Italian Colors Restaurant. And it does so through an unconscionability standard specially constructed to apply only to arbitration contracts, notwithstanding the FAA’s express preemption of arbitration-specific contract enforcement standards.

Did the California Supreme Court, finding its prior decision clearly precluded by Concepcion, decide to create a new basis for refusing to enforce arbitration agreements that is different in appearance but the same in effect as its now-invalid ruling? The court’s musing about unconscionability doctrine is not tethered to any holding, because the court specifically leaves the question of unconscionability for determination on remand. And the court repeatedly says that its new analysis is simply “one factor” that could be considered in the unconscionability inquiry.

Even more important, the majority’s musing does not actually require a lower court to do anything in any particular case. As Justice Corrigan, who joined the majority, explained in her concurring opinion, the decision “does not require trial courts to adopt a new procedure or analytic approach”; rather “[c]onsiderations outlined in the majority’s opinion may be relevant to [unconscionability] analysis, but lower courts retain discretion to weigh these considerations as appropriate in each particular case.” That qualification is important, because if a California court were to apply this new test to invalidate an arbitration agreement, that ruling plainly would be subject to reversal on the ground that such state-law rulings are preempted on multiple grounds by the FAA.

Companies defending arbitration clauses in California now must be prepared to explain why, as a matter of California law, courts should not—indeed, must not—rest an unconscionability finding on this new analysis, as well as why a refusal to enforce an arbitration agreement based on the California Supreme Court’s new rationale would violate the FAA. If the California courts do not heed those warnings, the state’s law of unconscionability is on track for a return trip to the U.S. Supreme Court.

We discuss the Sonic decision in much greater depth here.