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Class Action Waivers

On December 7, 2005, the California Court of Appeal issued its opinion in the Discover Bank v. Superior Court (Boehr) case, following remand from the Supreme Court.  (134 Cal. App. 4th 886 (2005).)  The Supreme Court, after reversing the prior decision on the ground that the Federal Arbitration Act would not preempt a state-law rule finding a class waiver to be unconscionable, remanded the case for resolution of whether the Delaware choice-of-law provision, which would presumably permit such waivers, would be enforced. 

In this decision, the Court of Appeal held that, under Delaware law, class waivers are enforceable.  More significantly, the court held that, on the facts of this case, choice of law would be honored because, even assuming California would not find such waivers unconscionable, California does not have a materially greater interest in the determination of that issue than does Delaware.

Practice Tip: While good news, the case arguably leaves companies with consumer arbitration and class waiver clauses vulnerable to judicial or arbitral class actions in cases brought by California residents asserting causes of action arising under California law.  If those companies are outside California, such classes ought to be limited to California only.  If they are in California, they could be nationwide. 

For more information, please contact James McGuire at jmcguire@mofo.com

Consumer Arbitration Gets A Boost

California has led the assault on consumer arbitration, but businesses that were about to give up hope of enforcing their consumer arbitration clauses in California shouldn’t throw in the towel just yet.  There may be cause for optimism. In Jones v. Citigroup, Inc., No. G033663, 2006 Cal. App. LEXIS 87 (Jan. 26, 2006), the Court of Appeal reversed a trial judge who refused to compel arbitration in a case involving a class action waiver.  The appellate court noted that plaintiffs were allowed to opt out of the arbitration clause and continue using the card until it expired, and then pay off the balance according to the terms of the existing agreement.  This consumer choice allowed the arbitration clause to be enforced against a claim of unconscionability. 

A similar result obtained in Gentry v. Superior Court (Circuit City Stores, Inc.), No. B169805, 135 Cal. App. 4th 944 (Jan. 19, 2006), an employment case.  There, the appellate court held that a class action waiver in an employment agreement was neither procedurally nor substantively unconscionable. 

Practice Tip: If you want a chance at having your arbitration clause (with a class action waiver clause) enforced, Gentry and Jones point the way.  You need to introduce the arbitration clause through a change-in-terms provision that allows consumers to opt out of arbitration while still retaining their credit privileges. 

For more information, please contact James McGuire at jmcguire@mofo.com.

Let The Arbitrator Decide

On February 21, the United States Supreme Court reaffirmed the rule that a claim of fraud that is not specific to the arbitration clause itself, but rather, goes to the contract as a whole, must be decided by the arbitrator and not the court.  In Buckeye Check Cashingv.Cardegna, No. 04-1264 (Feb. 21, 2006), plaintiffs entered into deferred-payment transactions with Buckeye Check Cashing and, each time, they signed an arbitration agreement.  Plaintiffs sued in Florida state court, alleging that Buckeye violated various Florida usury laws, rendering the clause criminal on its face. The Florida Supreme Court held that enforcing an arbitration agreement in a contract challenged as unlawful would violate state public policy and contract law. 

The Supreme Court disagreed.  Justice Scalia, writing for the majority in a decision in which only Justice Thomas dissented, held that regardless whether the claim is brought in federal or state court, a challenge to the validity of a contract as a whole, and not specifically to the arbitration clause within it, must go to the arbitrator and not the court.

In a similar vein, the Eleventh Circuit ordered arbitration and a stay of underlying state-court proceedings in Terminix International Co. v. Palmer Ranch Limited Partnership, 432 F.3d 1327 (11th Cir. 2005), where the arbitration agreements at issue contained several restrictions on available remedies.  The Court reversed the district court’s conclusion that the provisions were unconscionable because of the remedial restrictions, holding that the arbitrator would have the authority to rule on its own jurisdiction, including the validity of any of the provisions of the arbitration agreements. 

For more information, please contact James McGuire at jmcguire@mofo.com.

You Gotta Know When To Fold ‘Em

An internet gambler was ordered to arbitrate his dispute with his credit card company.   In Anonymous v. J.P. Morgan Chase & Co., No. 05 Civ. 2442 (JGK), 2005 U.S. Dist. LEXIS 26083 (S.D.N.Y. Oct. 31, 2005), "Anonymous" sued his credit card company for jackpot damages of "no less than $800,000," contending that Chase violated New York law by allowing plaintiff to run up approximately $40,000 in credit card charges that he used to pay for gambling losses on the internet.  The District Court granted Chase’s motion to stay the case pending arbitration, holding that the arbitration provisions of plaintiff’s cardmember agreement were enforceable and not unconscionable under both Delaware and New York law.  Maybe it’s just us, but we think that "Anonymous" needs to "know when to walk away, know when to run." 

For more information, please contact Rebekah Kaufman at rkaufman@mofo.com.

Arbitration Unavailable Under The CROA

In Alexander v. U.S. Credit Management, Inc., 384 F. Supp. 2d 1003 (N.D. Tex. 2005), the Northern District of Texas ruled that consumer claims under the Credit Repair Organizations Act are not subject to arbitration.  The court held that the "right to sue" provision of the CROA operated to void any arbitration agreements that waived a consumer’s right to pursue legal actions against credit repair organizations under the CROA.

For more information, please contact James McGuire at jmcguire@mofo.com.