Who’s afraid of the FAA?

Academic commentators have documented California courts' continued "hostility" and "continued possessiveness of their jurisdiction over certain arbitration cases." Lyra Haas, "The Endless Battleground: California's Continued Opposition to the Supreme Court's Federal Arbitration Act Jurisprudence," 94 B.U. L. Rev. 1419, 1455 (2014). A recent decision from Division 8 of the 2nd District Court of Appeal -- Williams, et al. v. W. 102nd St. Inc., et al., 2020 DJDAR 9312 (Aug. 24, 2020) -- shows just how far the courts are willing to go to insulate California public policy from the preemptive effect of the Federal Arbitration Act.

Civil Code Section 1953(a)(4) declares "void as contrary to public policy" "[a]ny provision of a lease or rental agreement of a dwelling by which the lessee agrees to modify or waive ... [h]is procedural rights in litigation in any action involving his rights and obligations as a tenant." It "establishes the general rule that a tenant of residential premises cannot validly agree, in a residential lease agreement, to binding arbitration to resolve disputes regarding his or her rights and obligations as a tenant." Jaramillo v. JH Real Estate Partners, Inc., 111 Cal. App. 4th 394, 403-04 (2003). In Williams, Division 8 held that Civil Code Section 1953(a)(4) barred enforcement of "arbitration provisions in lease agreements." This holding cannot be squared with U.S. Supreme Court precedent.

Civil Code Section 1953(a)(4) -- as interpreted in Williams and Jaramillo -- cannot be meaningfully distinguished from Labor Code Section 229, which permits "[a]ctions ... for the collection of due and unpaid wages ... [to] be maintained without regard to the existence of any private agreement to arbitrate." Over 30 years ago the U.S. Supreme held that the FAA preempted Section 229. Perry v. Thomas, 482 U.S. 483, 492 (1987). It is very difficult -- if not impossible -- to avoid the conclusion that the FAA preempts the application of Civil Code Section 1953(a)(4) to invalidate arbitration agreements covered by the FAA. The Williams panel surely had this problem in mind, as it was careful to note that it "do[es] not address whether, under federal law, the arbitration agreements would be void," finding that the appellant failed to "discharge[ its] ... burden" of demonstrating that the FAA applied.

As well it should. Section 2 of the FAA applies it to any "written provision in any ... contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract." In Allied-Bruce Terminix Companies, Inc. v. Dobson, 513 U.S. 265 (1995), the Supreme Court held that the phrase "involving commerce" in Section 2 was broader than Congress' usual formulations, such as "in commerce" or "within the flow of commerce." Accordingly, in the FAA, Congress "inte[ded] to exercise its Commerce Clause powers to the full." Id. at 273-74.

In Russel v. U.S., 471 U.S. 858 (1985), the Supreme Court held that 18 U.S.C. Section 884(i), which criminalizes "damage or destruction" by "fire or an explosive" or "any ... property ... used in ... [or] affecting interstate ... commerce" applied to arson attempted by the owner of a two-unit commercial apartment building, finding that "[t]he rental of real estate is unquestionably ... an activity" "that affects interstate commerce." Id. at 862.

The inescapable conclusion which follows from Allied-Bruce and Russel is that the FAA applies to leases for commercial or residential leases as a matter of law. Nevertheless, Williams reached a contrary conclusion without any hint that it wrestled with either Allied-Bruce or Russel.

Perhaps Division 8 did not feel the need to address Russel because in a 2014 unpublished ruling it rejected an argument that Russel compelled such a conclusion. Tito v. Lotus Property Services, Inc., B249999 (2nd Dist., Nov. 21, 2014). There is a curious parallel between Williams and Tito -- in Tito, Division 8 applied Labor Code Section 229 to invalidate an employment-related arbitration agreement signed by residential apartment managers, notwithstanding Perry. But any attempt to distinguish Russel's criminal law holding from the application of the FAA runs smack into an insurmountable obstacle: Allied-Bruce cites Russel with approval -- for the proposition that the "phrase -- 'affecting commerce' -- normally signals Congress' intent to exercise its Commerce Clause powers to the full." Allied-Bruce, 513 U.S. at 273.

Division 8 distinguished Russel in Tito by pointing out that Russel addressed "a question of statutory interpretation and the reach of a federal statute," while in Tito it faced a question concerning the "the factual scope of employees' activities, and with whether those activities involve interstate commerce." These are different words to describe the same question. In Russel, someone acted on (i.e., tried to burn down) residential rental property. In Tito, someone acted on (i.e., managed) residential real estate property. Russel held that that because such properties, as a matter of law, "affect[] ... interstate commerce," acting on them (trying to burn the down) affects interstate commerce. Allied-Bruce held that scope of "interstate commerce" is equally broad under the FAA. By parity of reasoning, Tito should have applied the FAA to the arbitration agreements in question.

To be fair, Division 8 is not the only division in the 2nd District to apply Jaramillo's interpretation of Civil Code Section 1953(a)(4) to invalidate arbitration agreements without any seeming consideration of Russel, Allied-Bruce, or the FAA preemption principles outlined in Perry (among many other Supreme Court decisions). So have Divisions 1 (Vishnevetska v. Sunset Place Apts., Inc., B298573 (2nd Dist., May 26, 2020)); 5 (Reynolds v. Royal Garden Apartments, Inc., B298112 (2nd Dist., Aug. 11, 2020); De Huerta v. 11121 Arminta Street, Inc., B296831 (2nd Dist., May 6, 2020)) and 6 (Harris v. University Village Thousand Oaks, CCRC, LLC, 49 Cal. App. 5th 847 (2020)), along with the 1st District (Freile v. Lincecum, A135010 (1st Dist., Feb. 20, 2013)), and the Appellate Division of the L.A. Superior Court (RHB Management Co. v. Lew, BV024404 (L.A.S.C., Dec. 26, 2003)).

Only Division 2 seems to be aware there is a problem here. In a 2018 unpublished decision, it declined to invalidate a residential lease arbitration clause based on Section 1953, affirming denial of enforcement based on procedural and substantive unconscionability principles that apply under the FAA. Cerneka v. Russell No. 8 Santa Monica Properties, LLC, B288972 (2nd Dist., June 28, 2018). But it side-stepped the issue because the trial court rejected the Section 1953 argument, proceeding on the assumption that the FAA preempted Section 1952, and the tenants conceded that the FAA governed.

In short, while many courts have enforced Civil Code Section 1953(a)(4) prohibition on lease-related arbitration agreements, none have confronted in a published decision the very serious issues presented by the interaction of Section 1953, Russel, Allied-Bruce, and FAA. A few have addressed the issues only glancingly in unpublished opinions, and most completely ignore them (again, in unpublished decisions). This is all too often the way skirmishes go on the endless battleground of California's FAA jurisprudence. I would think the supremacy clause demands more. 