The last waltz with the FAA

Last month, I described the California Supreme Court's latest move in its long struggle to throw off the yoke of the Federal Arbitration Act (FAA) as "The Arbitration Two-Step" (April 18, 2017). Monday's decision from the U.S. Supreme Court in Kindred Nursing Centers Ltd. Partnership v. Clark, 2017 DJDAR 4461 (May 15, 2017), definitively lays the Two-Step to rest. Ultimately at stake in California is the validity of two recent California Supreme Court decisions: McGill v. Citibank, N.A., 2 Cal. 5th 945 (2017), and Iskanian v. CLS Transp. Los Angeles, LLC, 59 Cal. 4th 348 (2014).

The question in Kindred Nursing was whether the Section 2 of the FAA preempted a Kentucky rule barring enforcement of an arbitration agreement entered into by an agent under a power of attorney that did not clearly and specifically authorize the agent to agree to arbitrate. The Kentucky Supreme Court reasoned that an agent cannot waive a principal's "fundamental constitutional rights" without such a clear and specific grant of authority, and that the right to a jury trial was such a right. Because this rule applied to any contract that waived "fundamental constitutional rights" - it did not single out arbitration for special treatment, and thus did not run afoul of the FAA.

A nearly unanimous U.S. Supreme Court (as he has for over 20 years, Justice Clarence Thomas dissented on the ground that the FAA does not apply to the states - a view that no other justice has ever joined) said "no." Section 2 of the FAA "established an equal-treatment principle": courts may deny enforcement of arbitration agreements based on "generally-applicable contract defenses," but not on defenses that "apply only to arbitration or derive their meaning from the fact that an agreement to arbitrate is at issue" (quoting AT&T Mobility LLC v. Concepcion, 563 U.S. 333, 339 (2011)). Accordingly, the FAA not only preempts state rules that discriminate on their face against arbitration, but also "any rule that covertly accomplishes the same objective by disfavoring contracts that (oh so coincidentally) have the defining features of arbitration agreements." (A careful reader will no doubt notice the unusual level of snark from the court.) Observing that waiver of a jury trial is "the primary characteristic of an arbitration agreement," the U.S. Supreme Court concluded that Kentucky's clear statement rule "is too tailor-made to arbitration agreements - subjecting them, by virtue of their defining trait to uncommon barrier."

There is no principled distinction between the reasoning of the Kentucky Supreme Court in Kindred Nursing, and the California Supreme Court in McGill and Iskanian. In McGill, the court held that provisions in an arbitration agreement forbidding the arbitrator to issue a ruling on a consolidated, class or representative basis mean that by agreeing to arbitration, the plaintiff had agreed to waive her statutory right to seek injunctive relief on behalf of the public in any forum. Such a waiver ran afoul of Civil Code Section 3513's prohibition on the waiver of "a law established for a public reason," rendering the arbitration agreement void. Since this is a generally applicable contract defense, the California Supreme Court reasoned, it is not preempted by the FAA.

This rule, in Kindred Nursing's words, "covertly accomplishes the ... objective [of disfavoring arbitration] by disfavoring contracts that (oh so coincidentally) have the defining features of arbitration agreements." The court's decision in Concepcion clearly teaches that "claim aggregation" devices of group litigation - like class relief - are antithetical to arbitration and cannot be grafted onto arbitration procedures without express assent. Accordingly, class relief waivers - like the one in McGill - must be enforced, something the California Supreme Court acknowledged in Iskanian, when it held that Concepcion compelled it to reverse its prior ruling in Gentry v. Superior Court, 42 Cal. 4th 443 (2007), cert. denied sub nom Circuit City Stores, Inc. v. Gentry, 552 U.S. 1296 (2008).

The same conclusion follows with regard to the second holding in Iskanian - in which it saved the corollary to Gentry established in Franco v. Athens Disposal Co., 171 Cal. App. 4th 1277 (2009), and Brown v. Ralphs Grocery Co., 197 Cal. App. 4th 489 (2011), which applied the Gentry rule to representative PAGA actions.

Iskanian held that a waiver of representative relief in arbitration "frustrates PAGA's objectives" of permitting employees to act in a representative capacity, constitutes a waiver of the rights conferred by PAGA, and thus runs afoul of Civil Code Section 3513 (just as in McGill). Just as in McGill, this rule plainly "covertly accomplishes the ... objective [of disfavoring arbitration] by disfavoring contracts that (oh so coincidentally) have the defining features of arbitration agreements," for the very same reasons as in McGill. Representative relief - no less than class relief - is fundamentally antithetical to the purpose of arbitration. Excluding such relief, not less than excluding the right to a jury trial, is fundamental to what arbitration is.

It's déjà vu all over again. The California Supreme Court staked out a broad limitation on arbitration in Gentry, brushing aside FAA preemption concerns, only to have the U.S. Supreme Court undermine its reasoning in Concepcion, forcing it to quickly reverse itself in Iskanian. Then the California court staked a different limitation on arbitration in Iskanian and McGill, only to have the U.S. Supreme Court undermine its reasoning in Kindred Nursing. Perhaps it is time the California courts stopped waltzing around the dance floor in an attempt to evade the broad preemptive force of the FAA, and fell into step with the supreme law of the land.