Are You Ready to RRRRumble Arbitration Style?

The California Supreme Court and the U.S. Supreme Court have almost come to blows over the extent of preemption the Federal Arbitration Act ("FAA"), which mandates enforcement of valid arbitration agreements, exercises over state law. The sparring match between California's Supreme Court and the U.S. Supreme Court over preemption of the FAA stems from a decision made in the Kentucky Supreme Court.  In May, the U.S. Supreme Court reversed a Kentucky Supreme Court decision invalidating an arbitration agreement entered into by the personal representatives of decedents using powers of attorney.  The Kentucky Supreme Court concluded that access to courts and juries are "fundamental constitutional rights" that are "sacred" and "inviolate" under Kentucky law.  Given the sanctity of those rights, the court reasoned the personal representatives of the decedents did not have rights under the decedents' powers of attorney to waive them.  The U.S. Supreme Court vacated that decision on the basis that the FAA preempted the Kentucky Supreme Court's reluctance to enforce arbitration.  While recognizing the continuing viability of state law contract defenses, like fraud or unconscionability, the U.S. Supreme Court would not allow a state to implement "legal rules that apply only to arbitration or that derive their meaning from the fact that agreement to arbitrate is at issue . . . for example [any state] law prohibiting outright the arbitration of a particular type of claim."1

The California Supreme Court came back swinging in April, invalidating an arbitration agreement that it determined waived a statutory right to a "public injunction."   In McGill v. Citibank, the parties stipulated that the agreement at issue prohibited consumers from seeking public injunctive relief in any forum, not just in arbitration.  The California Supreme Court cast the statutory right to a public injunction as an "unwaivable public right" - similar to the language used by the Kentucky Supreme Court and struck down by the U.S. Supreme Court a month prior.  Nevertheless, the California Supreme Court found precedent to support its position in an earlier U.S. Supreme Court case, AT&T Mobility LLC v. Concepcion, upholding a waiver in an arbitration agreement of the right to pursue class action lawsuits.  Thus, the California Supreme Court reasoned it could partially invalidate the arbitration waiver and allow Citibank's consumers to pursue public injunction claims in court.

The boxing match among the federal and state courts over the scope of the FAA's preemption will likely continue.  Our advice to clients - stay out of the ring!  For companies organized under the laws of the State of Delaware or that have their principal place of business there, you have a ringer in your corner with the Delaware Rapid Arbitration Act, effective June 22, 2015. The Act puts its best foot forward right away: its purpose is "to give Delaware business entities a method by which they may resolve business disputes in a prompt, cost-effective and efficient manner."   The Act must be invoked by specific reference in an arbitration agreement between the parties.  At least one party to the agreement must be a business entity and no party to the agreement may be a consumer, a homeowners maintenance association or civic association (or similar entity charged with duties to maintain public areas or common facilities).

Once a valid agreement invokes the Act, the parties are deemed to have waived objections based upon the procedures under the Act, as well as personal jurisdiction in Delaware.  The Act also provides that the arbitrator is to decide both substantive and procedural arbitrability - not just whether the conditions for arbitration are met - usually decided by the arbitrator, but also whether the dispute is within the scope of the agreement, usually decided by the Court.  Importantly, for those who have their principal place of business in Delaware or generally do business in the state, invocation of the Act in any agreement specifically waives objections to the arbitrator's power and authority to grant relief, "including to award any legal or equitable remedy appropriate in the sole judgment of the arbitrator."

The takeaway from this current round is to review your arbitration agreements.  If you deal with consumers, make sure there is a venue where a public injunction may be pursued.  If you are dealing with non-consumers, take a look at whether the Delaware Rapid Arbitration Act is available to invoke in your agreements.

1 Kindred Nursing Ctrs. L.P. v. Clark