Articles Posted in Arbitration

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In Class Action Against Sprint Challenging Wireless Telephone Roaming Charges, Whether District Court Erred in Granting Defense Motion to Compel Arbitration of Plaintiff’s Individual Claims Pursuant to Mandatory Arbitration Clause with Class Action Waiver Warranted Certification to Florida Supreme Court because of Uncertainty in Intermediate Appellate Court Opinions Eleventh Circuit Holds

Plaintiff filed a putative class action in Florida federal court against Sprint Solutions and Sprint Spectrum for violations of Florida’s Deceptive and Unfair Trade Practices Act (FDUTPA) and for breach of contract and negligent misrepresentation; specifically, the class action complaint alleged that Sprint “charg[ed] improper roaming fees for calls placed within Sprint’s coverage areas.” Pendergast v. Sprint Nextel Corp., 592 F.3d 1119, 2010 WL 6745, *1, *11 (11th Cir. 2010). The class action complaint improper prayed for monetary damages, as well as declaratory and injunctive relief, and estimated plaintiff’s individual damages to be $20.00. Id. Defense attorneys moved to compel arbitration of plaintiff’s claims on an individual basis, seeking to enforce a mandatory arbitration clause and class action waiver in the Terms and Conditions of plaintiff’s service agreement. Id. The district court granted Sprint’s motion, concluding that under Florida law the arbitration clause and class action waiver were valid, and ordered plaintiff to pursue arbitration of his individual claim, id. Plaintiff appealed; he did not contest the arbitration clause itself but, rather, challenged the class action waiver as procedurally and substantively unconscionable. Id. Further, “because Plaintiff’s contract provides the arbitration and class action waiver clauses are not severable, Plaintiff claims the arbitration clause fails because the class action waiver is unenforceable.” Id. The Eleventh Circuit expressed doubt as to the correct application of state law in this case because of a conflict among decisions in the Florida intermediate appellate courts. Accordingly, the Circuit Court, at page *22, certified the following questions to the Florida Supreme Court:

(1) Must Florida courts evaluate both procedural and substantive unconscionability simultaneously in a balancing or sliding scale approach, or may courts consider either procedural or substantive unconscionability independently and conclude their analysis if either one is lacking?

(2) Is the class action waiver provision in Plaintiff’s contract with Sprint procedurally unconscionable under Florida law?

(3) Is the class action waiver provision in Plaintiff’s contract with Sprint substantively unconscionable under Florida law?

(4) Is the class action waiver provision in Plaintiff’s contract with Sprint void under Florida law for any other reason?

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Illinois Appellate Court Holds Motion to Compel Arbitration of Individual Claims in Class Action Complaint Alleging Violations of Various Consumer Protection Laws, based on Arbitration Clause Containing Class Action Waiver, Properly Denied because Agreement Required Disputes be Heard by National Arbitration Forum which no Longer Conducted Consumer Arbitrations

Plaintiffs filed a putative class action in Illinois state court against Gateway, Intel, Hewlett-Packard and others alleging inter alia violations of various California and Illinois consumer protection statutes; specifically, the class action complaint challenged defendants’ marketing of computers equipped with Intel’s Pentium 4 processor. Carr v. Gateway, Inc., ___ Cal.App.4th ___ (Ill.App. November 24, 2009) [Slip Opn., at 1.] According to the allegations underlying the class action complaint, defendants “have engaged in conduct which is likely to mislead, and has misled, the public through the suppression and concealment from the public of the material fact that there is no benefit to consumers in choosing the Pentium 4 over the Pentium III and that the Pentium 4 is less powerful and slower than the Pentium III and/or the AMD Athlon processors.” Id., at 1-2. The class action also alleged that defendants “made or disseminated misleading statements regarding the power and speed of the Pentium 4.” Id., at 2. Counts IV, V and VI of the class action complaint alleged violations of California’s Consumers Legal Remedies Act (CLRA) and Unfair Competition Law (UCL), and of Illinois’ Consumer Fraud and Deceptive Business Practices Act (the Act); these claims were ultimately severed from the class action complaint and they are the claims at issue in this opinion. Id. Defense attorneys moved the circuit court to dismiss the class action complaint, or to stay the class action and compel plaintiff to arbitrate his individual claim based on an arbitration clause that contained a class action waiver. Id., at 1, 2-3. After holding an evidentiary hearing, id., at 3-4, the court denied the motion on the grounds that arbitration clause “was not a part of the sales contract that was entered into by the parties” and, in any event, would be unenforceable as unconscionable, id., at 4. The Illinois Supreme Court then issued its opinion in Barbara’s Sales, Inc. v. Intel Corp., 227 Ill.2d 45 (2007), see id., at 4-5. (This Blog’s article discussing that opinion may be found here.) The circuit court reaffirmed its order, and Gateway appealed. The appellate court affirmed.

The appellate court began its analysis by observing that the lower court denied Gateway’s motion to compel “primarily on its finding that the Agreement was not a part of the contract for the purchase of the Gateway computer.” Carr, at 6. If the arbitration clause was part of the contract, it called for any disputes to be “resolved exclusively and finally by arbitration administered by the National Arbitration Forum (NAF) and conducted under its rules,” id. However, during the pendency of the appeal, “the NAF has ceased administering consumer arbitrations.” Id. Noting that it could “affirm the circuit court’s order on any basis in the record,” the appellate court analyzed” the impact the unavailability of the NAF has upon the validity of the arbitration provision.” Id. Gateway argued that section 5 of the Federal Arbitration Act (FAA) provides a “method” exists for selecting “an alternative arbitration forum” under its contract with consumers, id., at 6-7. The appellate court rejected this claim, finding that “the specific designation of the NAF as the exclusive arbitration forum is an integral part of the arbitration clause in the Agreement.” Id., at 7. Because NAF was no longer available to resolve consumer disputes under the Agreement, and because the FAA “cannot be used to reform the arbitration provision,” the appellate court affirmed the circuit court’s order denying Gateway’s motion to compel arbitration. Id., at 8.

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Class Action Challenging Advertisement of “Free” Phones may Proceed as Putative Class Action Despite Arbitration Clause Containing Class Action Waiver because under California Law Class Action Waiver Rendered Arbitration Clause Unconscionable Ninth Circuit Holds

Plaintiffs filed a putative class action against AT&T Mobility challenging its “offer of a ‘free’ phone to anyone who signs up for its service” because AT&T “charges the new subscriber sales tax on the retail value of each ‘free’ phone.” Laster v. AT&T Mobility LLC, 584 F.3d 849 (9th Cir. 2009) [Slip Opn., at 14387, 14390.] Defense attorneys moved to compel plaintiffs to arbitrate their claims individually, rather than as part of a class action, pursuant to an arbitration clause that requires arbitration of disputes and prohibits class actions. Id., at 14390. Plaintiffs argued that because federal jurisdiction was predicated on diversity, California law governed the district court’s interpretation of the arbitration clause and, under California law, “both the arbitration clause and the class action waiver [were] unconscionable, hence, unenforceable.” Id. The district court denied AT&T’s motion based on the Ninth Circuit opinion in Shroyer v. New Cingular Wireless Services, Inc., 498 F.3d 976 (9th Cir. 2007). Id., at 14390-91. On appeal, defense attorneys argued that the arbitration clause was distinguishable from the one at issue in Shroyer because “this arbitration clause provides for a ‘premium’ payment of $7,500…if the arbitrator awards the customer an amount greater than [AT&T’s] last written settlement offer,” id., at 14391. Defense attorneys also argued that “the Federal Arbitration Act (FAA) preempts California’s unconscionability law.” Id. The Ninth Circuit found the provision for a premium payment did not sufficiently distinguish the case from Shroyer and that the FAA does not preempt California law; accordingly, the Circuit Court affirmed the district court order.

Plaintiffs executed a Wireless Service Agreement with AT&T and received free cell phones by agreeing to a 2-year contract. Laster, at 14391. However, AT&T charged plaintiffs $30 in sales tax for the phones, calculated by using the full retail value of the phones. Id., at 14391-92. As noted above, the Agreement contained an arbitration clause that required arbitration of disputes and barred class actions. Id., at 14392. Plaintiffs filed suit in California federal court alleging that AT&T’s advertisement for a free phone was fraudulent; AT&T thereafter amended the Agreement to include the “premium payment clause” and, later still, moved to compel plaintiffs to arbitrate their claims on an individual basis, not as a class action, based on the revised arbitration clause. Id. The district court denied the motion, holding that the class action waiver in the arbitration clause rendered it unconscionable under California law and that the FAA did not preempt California law regarding unconscionability. Id.

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Plaintiffs in Class Action Challenging Late Fees Imposed on Credit Card Accounts and Contesting Enforceability of Arbitration Clause that Includes a Class Action Waiver were Entitled to Conduct Limited Discovery to Support Claim that Class Action Waiver was Unconscionable Rhode Island Federal Court Holds

Plaintiffs filed a putative class action against Bank of America alleging violations of the federal Truth in Lending Act (TILA) and breach of credit card agreements based on the late fees charged by the Bank on credit card accounts; the class action complaint also sought a declaration that the arbitration clause in the credit card agreements, which included a class action waiver, was unenforceable. Trombley v. Bank of America Corp., 636 F.Supp.2d 151, 152 (D.R.I. 2009). The Bank argued that the credit card agreements “include an enforceable arbitration provision, which provides that Delaware law is the governing authority, precludes class actions, and designates the National Arbitration Forum (‘NAF’) for arbitration proceedings.” Id., at 153. Defense attorneys moved to compel arbitration of the class action’s claims on an individual basis based on the class action waiver in the arbitration clause; plaintiffs opposed the motion, arguing that the class action waiver was unconscionable and therefore unenforceable. Id., at 152. Plaintiffs also sought additional time to respond to the Bank’s motion, in order to conduct discovery concerning the unconscionability of the class action waiver. Id., at 153. The Bank opposed plaintiffs’ request for additional time, asserting that the motion to compel arbitration presented issues that were “largely legal questions and that the information necessary to support the plaintiffs’ arguments is available to them without discovery.” Id. The district court granted plaintiffs additional time to conduct discovery and, accordingly, postponed ruling on the motion to compel arbitration.

Preliminarily, the district court observed that the arbitration clause contains an express exception which provides that any challenge to the class action waiver is to be decided by the court rather than by an arbitrator. Trombley, at 152-53. The federal court also noted that it was plaintiffs’ burden to establish that the arbitration clause was unconscionable, and that plaintiffs’ request for additional time was for purposes of conducting “limited discovery” concerning the Bank’s assertion that the class action claims “are subject to arbitration.” Id., at 153. Specifically, plaintiffs argued “that they need[ed] discovery to challenge the class action waiver in the arbitration provision with factual support that the waiver is unconscionable because it operates as a bar to the claims raised in this case.” Id., at 154. The district court agreed that plaintiffs were entitled to conduct discovery relevant to the issue of whether, because of the small amounts involved in any individual claim “has resulted in few or no individual claims being brought against [the Bank],” id. And with respect to the question of unconscionability, the district court held that plaintiffs were entitled to “limited discovery to address the procedures used by [the Bank] to sign up credit card members and the substantive issues of the costs and the alleged institutional bias of the NAF,” id. Accordingly, the federal court granted plaintiffs 60 days for the purpose of conducting “discovery limited to the enforceability of the class action waiver provision and the procedural and substantive unconscionability of the arbitration provision.” Id.

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District Court Erred in Refusing Motion to Stay Class Action Against Bank and Compel Arbitration of Individual Claim based on Arbitration Clause with Class Action Waiver because Class Action Waiver, and Cost-Sharing Provision, of Arbitration Clause did not Render Provision Unconscionable Eighth Circuit Holds

Plaintiff filed a putative class action in Missouri state court against Chase Bank alleging that it had imposed penalties on credit card holders and that it had violated Missouri’s Merchandising Practices Act (MMPA); in essence, the class action complaint alleged that Chase improperly increased the interest rate charged on credit card balances. Cicle v. Chase Bank USA, 583 F.3d 549, 2009 WL 3172157, *1 (8th Cir. 2009). According to the allegations underlying the class action complaint, plaintiff’s credit card with Chase initially “carried a 7.99% annual percentage rate (APR) on unpaid balances,” but then “increased dramatically, to 25.99%.” Id. When asked about the increase, the Bank responded that “a credit agency had reported her as past due on an unrelated loan or account, so Chase increased the APR from the 7.99% ‘Preferred Customer Pricing’ rate.” Id. Defense attorneys removed for the class action to federal court under CAFA (Class Action Fairness Act of 2005) and on the ground of federal question jurisdiction under the National Bank Act (NBA). Id. The Bank then asked the district court to stay the class action to compel plaintiff to arbitrate her individual claim pursuant to the terms of the arbitration clause in her Cardmember Agreement, which included a class action waiver. Id. The district court denied the defense motion, concluding that the class action waiver and the provisions for cost-sharing were unconscionable under Missouri law, id., at *3. The Eighth Circuit reversed, holding that the class action waiver was neither substantively nor procedurally unconscionable.

The Cardmember Agreement contained an arbitration clause, governed by the Federal Arbitration Act (FAA), that required arbitration on an individual basis of any dispute with the bank; specifically, the arbitration clause contained a class action waiver, prohibiting the cardmember from bringing “a class action or other representative action” and precluding the cardmember from being “part of any class action or other representative action.” Cicle, at *1-*2. The arbitration was to be binding, and covered “any claim, dispute or controversy by either you or us against the other, or against the employees, parents, subsidiaries, affiliates, beneficiaries, agents or assigns of the other, arising from or relating in any way to the Cardmember Agreement, any prior Cardmember Agreement, your credit card Account or the advertising, application or approval of your Account (‘Claim’).” Id., at *2. The arbitration clause provided an exception for small claims court matters, id. With respect to costs, the arbitration clause provided that the Bank would pay for the filing fee (up to $500) and, “if there is a hearing, we will pay any fees of the arbitrator and arbitration administrator for the first two days of that hearing.” Id. The agreement provided that all other fees would be “allocated in keeping with the rules of the arbitration administrator and applicable law,” and that each side otherwise would be responsible for their own attorney fees and costs, regardless of whether they prevailed, unless the arbitrator orders otherwise based on “any applicable law.” Id. Reviewing the district court’s decision de novo, see id., at *3, the Eighth Circuit reversed its refusal to enforce the arbitration clause.

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Class Action Waiver in Arbitration Clause Unconscionable thereby Warranting Denial of Motion to Compel Plaintiff to Arbitrate Individual Claims rather than Pursue Labor Law Class Action Complaint California State Court Holds

Plaintiff, the general manager of an El Pollo Loco restaurant, filed a putative class action against El Pollo Loco alleging violations of California’s labor code; the class action complaint alleged inter alia that defendant misclassified its general managers as exempt when they “spent the majority of their time performing nonmanagerial tasks” and that it wrongfully denied its general managers overtime compensation and meal breaks. Olvera v. El Pollo Loco, Inc., 173 Cal.App.4th 447, 451 (Cal.App. 2009). As part of his employment, plaintiff received written materials that, in part, required that all work-related disputes be resolved through binding arbitration, governed by the Federal Arbitration Act (FAA). Id., 449-50. Class action litigation was prohibited, but the parties were permitted “to conduct discovery and bring motions in an arbitration as provided by the Federal Rules of Civil Procedure,” id., at 450. Defense attorneys moved to compel arbitration of the class action complaint as to plaintiff’s individual claims only, id., at 451. Plaintiff opposed the motion to compel arbitration, arguing that the arbitration clause was unconscionable; defense attorneys argued that the clause was not unconscionable because employees were not required to sign the acknowledgement form by which they were bound to the arbitration clause. Id., at 452. The trial court denied the motion to compel arbitration, concluding that the clause was both procedurally and substantively unconscionable. Id., at 453. Under California law, an order denying a motion t compel arbitration is an appealable order. Cal. Code Civ. Proc., § 1294. Defendant appealed, and the Court of Appeal affirmed.

After summarizing the relevant law regarding arbitration agreements, see Olvera, at 453-54, the appellate court turned first to the issue of procedural unconscionability. The Court of Appeal explained at page 454, “Procedural unconscionability focuses on oppression or unfair surprise, while substantive unconscionability focuses on overly harsh or one-sided terms.” (Citations omitted.) California courts view these two factors on a sliding scale: “The more procedural unconscionability is present, the less substantive unconscionability is required to justify a determination that a contract or clause is unenforceable. Conversely, the less procedural unconscionability is present, the more substantive unconscionability is required to justify such a determination.” Id., at 454 (citations omitted). The appellate court found that the arbitration clause was procedurally unconscionable because of (1) the unequal bargaining power between the employees and the employer, which “makes it likely that the employees felt at least some pressure to sign the acknowledgment and agree to the new dispute resolution policy” even if the company insists that they were not required to do so, and (2) agreement to the dispute resolution procedure was “not an informed decision” because the description of the dispute resolution policy “was totally inaccurate.” Id., at 455-56.

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FAA does not Enlarge Federal Court Jurisdiction but Simply Permits District Court to Entertain Petition to Compel Arbitration where Jurisdiction Exists but for Arbitration Clause, and while District Courts may “Look Through” Pleadings to Decide Petition under FAA Section 4, Counterclaims are not Removable if Complaint is not Subject to Federal Court Jurisdiction Supreme Court Holds

Discover Card filed a “garden-variety, state-law-based contract action” against a cardholder in Maryland state court to collect $10,610.74, plus interest and attorney fees; the cardholder agreement provided for arbitration of “any claim or dispute” between Discover and the cardholder, and included a class action waiver in that it prohibited “any claims as a representative or member of a class.” Vaden v. Discover Bank, 129 S.Ct. 1262, 1268-69 and n.2 (2009). The cardholder answered and filed a putative class action counterclaim that also asserted only state law claims, id., at 1268. According to the allegations underlying the class action counterclaim, “Discover’s demands for finance charges, interest, and late fees violated Maryland’s credit laws.” Id. Neither Discover nor the cardholder invoked the arbitration clause in the cardholder agreement. Id., at 1268-69. In response to the class action counterclaim, Discover petitioned the federal court for an order compelling arbitration under § 4 of the Federal Arbitration Act (FAA), id., at 1269 (9 U.S.C. § 4). Though the class action claims were brought under state law, Discover argued that the counterclaims were governed by § 27(a) of the Federal Deposit Insurance Act (FDIA), which “prescribes the interest rates state-chartered, federally insured banks like Discover can charge, ‘notwithstanding any State constitution or statute which is hereby preempted.’” Id. Discover’s argument was that the cardholder’s state law claims were preempted by the FDIA and, accordingly, the federal court had jurisdiction to rule on Discover’s petition under the FAA. Id. The district court granted Discover’s petition and ordered arbitration of the cardholder’s individual claims. Id. The cardholder appealed: the Fourth Circuit questioned whether the district court had federal question jurisdiction over Discover’s FAA petition; the Circuit Court remanded the case to the district court with instructions to “‘look through’ the § 4 petition to the substantive controversy between the parties” and to make “an express determination whether that controversy presented ‘a properly invoked federal question.’” Id. (citations omitted). On remand, the cardholder conceded that his state law claims were completely preempted by the FDIA because Discover was a federally insured bank; based on this concession, the district court held it had federal-question jurisdiction and again granted the petition compelling arbitration. Id. This time, the Fourth Circuit affirmed. Id. The Supreme Court reversed.

Under Section 4 of the FAA, a district court may consider a petition to compel arbitration “if the court would have jurisdiction, ‘save for [the arbitration] agreement,’ over ‘a suit arising out of the controversy between the parties.’” Vaden, at 1267-68. The petition for certiorari presented the Supreme Court with two questions “concerning a district court’s subject-matter jurisdiction over a § 4 petition”: First, “Should a district court, if asked to compel arbitration pursuant to § 4, ‘look through’ the petition and grant the requested relief if the court would have federal-question jurisdiction over the underlying controversy?” And second, “[I]f the answer to that question is yes, may a district court exercise jurisdiction over a § 4 petition when the petitioner’s complaint rests on state law but an actual or potential counterclaim rests on federal law?” Id., at 1268. The High Court summarized its holding at page 1268 as follows, “A federal court may ‘look through’ a § 4 petition and order arbitration if, ‘save for [the arbitration] agreement,’ the court would have jurisdiction over ‘the [substantive] controversy between the parties.’” But the Supreme Court reversed the Fourth Circuit’s decision because it had “misidentified the dimensions of ‘the controversy between the parties’ by ignoring that the lawsuit originated with “Discover’s claim for the balance due on Vaden’s account” – “Given that entirely state-based plea and the established rule that federal-court jurisdiction cannot be invoked on the basis of a defense or counterclaim, the whole ‘controversy between the parties’ does not qualify for federal-court adjudication.” Id. Accordingly, the Supreme Court reversed.

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Trial Court Order Denying Defense Motion to Dismiss Labor Law Class Action and Compel Arbitration of Individual Claim based on Class Action Waiver in Unsigned Arbitration Agreement Proper because Class Action Waiver Unenforceable as Contrary to Public Policy California State Court Holds

Plaintiff, a delivery driver for a Domino’s Pizza owned by Western Pizza, filed a putative class action Western Pizza alleging labor law violations; the class action complaint asserted inter alia that defendant failed to reimburse its drivers for business expenses, and failed to pay minimum wage or provide itemized wage statements. Sanchez v. Western Pizza Enterprises, Inc., 172 Cal.App.4th 154 (Cal.App. 2009) [Slip Opn., at 2, 5]. Defense attorneys moved to dismiss the class action and compel arbitration, id., at 6. The parties were subject to an undated arbitration agreement that contained a class action waiver provision, id., at 3-4; the arbitration agreement was “not a mandatory condition of employment,” but it was governed by the Federal Arbitration Act (FAA), id., at 3. Further, though Western Pizza would pay all arbitration fees, “Except as otherwise required by law, each party shall bear its own attorney fees and costs.” Id. The arbitration agreement further provided that the arbitrator “shall be responsible for resolving any disputes over the interpretation or application of this Arbitration Agreement.” Id. With respect to the class action waiver, the agreement provided, “[T]he Arbitrator shall not consolidate or combine the resolution of any claim or dispute between the two Parties to this ADR Agreement with the resolution of any claim by any other party or parties, including but not limited to any employee of the Company. Nor shall the Arbitrator have the authority to certify a class under Federal Rule of Civil Procedure Rule 23, analogous state rules, or Arbitrator’s rules pertaining to class arbitration, and the Arbitrator shall not decide claims on behalf of any other party or parties.” Id., at 4. Plaintiff’s counsel argued that the class action arbitration waiver was unenforceable and that plaintiff would not agree to arbitration unless the class action waiver was stricken. Id., at 5. Defense counsel countered that the enforceability of the arbitration agreement, including the class action waiver, must be determined by the arbitrator. Id., at 6. The trial court denied the motion to compel arbitration, id., at 6-7. The California Court of Appeal affirmed.

After stating that the FAA does not preempt California law because it does not conflict with California law, see Sanchez, at 7-8, the Court of Appeal concluded that the enforceability of the arbitration agreement, including the class action waiver, was properly determined by the trial court rather than the arbitrator, id., at 8-11. The appellate court then turned to the enforceability of the class action arbitration waiver, and held that it was unenforceable as contrary to public policy. See id., at 11-35. We do not discuss the opinion in detail, as it follows the ground set forth in articles summarizing similar opinions that rely on Gentry v. Superior Court, 42 Cal.4th 443 (Cal. 2007) and Discover Bank v. Superior Court, 36 Cal.4th 148 (Cal. 2005). At bottom, the appellate court affirmed the trial court order denying the motion to dismiss the class action and compel arbitration. Id., at 36.

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In Labor Law Class Action, Trial Court Erred in Granting Defense Petition to Compel Plaintiff to Arbitrate his Claims on an Individual Basis because Class Action Waiver in Arbitration Agreement Signed by Employee was Unconscionable California State Court Holds

Plaintiff, a trash truck driver, filed a putative class action against his former employer, Athens Disposal, alleging labor law violations; the class action complaint asserted that Athens denied its employees meal and rest periods. Franco v. Athens Disposal Co., Inc., 171 Cal.App.4th 1277 (Cal.App. 2009) [Slip Opn., at 2]. According to the allegations underlying the class action, Athens failed to pay its employees overtime, and failed to provide meal periods or to pay employees an additional hour of compensation for each workday that they missed a meal period. Id., at 3. Defense attorneys moved to dismiss the class action complaint and to compel arbitration based on the terms of the employment agreement with plaintiff, id., at 2. The employment agreement contained an arbitration clause as well as a provision waiving class action relief or the right to bring an action in “a private attorney general capacity.” Id. Plaintiff countered that the class action waiver was unconscionable, id. The trial court disagreed and granted Athens’ motion to compel plaintiff to proceed with arbitration on an individual basis. Id. The California Court of Appeal reversed, concluding that the class action arbitration wavier was unconscionable “given ‘the modest size of the potential individual recovery, the potential for retaliation against members of the class, [and] the fact that absent members of the class may be ill informed about their rights.’” Id. (quoting Gentry v. Superior Court, 42 Cal.4th 443, 463 (Cal. 2007)). The appellate court further held that the arbitration clause was unconscionable in that it sought to prevent plaintiff from serving as a private attorney general, it conflict with California’s Private Attorneys General Act of 2004 (PAGA). Id.

In its petition to compel arbitration and to dismiss the class action, Athens argued that the arbitration agreement was governed by the Federal Arbitration Act (FAA). Franco, at 3-4. Indeed, the employment agreement expressly provided that it was governed by the FAA, and that any arbitration would be conducted under the employment arbitration rules of the American Arbitration Association (AAA). Id., at 4. The petition to compel arbitration was simplicity itself: “Under the FAA, arbitration was mandatory.” Id. Plaintiff argued that the class action waiver was invalid under Discover Bank v. Superior Court, 36 Cal.4th 148 (Cal. 2005), which defense counsel sought to distinguish. Id., at 4-5. The trial court agreed that Discover Bank did not cover employment cases and granted the motion to compel. Id., at 5. Plaintiff sought reconsideration based on Gentry, which the trial court denied based in part on its conclusion that plaintiff’s meal and rest period claims were not suitable for class action treatment because of the specific inquiries that would be required of the various claims. See id., at 5-7.

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District Court Erred in Dismissing Class Action Based on Arbitration Clause in Credit Card Agreement and Class Action Waiver in Arbitration Clause because New Jersey Law rather than Utah Law Applied and, under Facts Underlying Class Action Complaint, New Jersey would not Enforce Class Action Arbitration Waiver Third Circuit Holds

Plaintiff filed a class action against American Express and American Express Centurion Bank (collectively “Amex”) alleging violations of New Jersey’s Consumer Fraud Act; the class action complaint asserted that Amex misrepresented the terms of its “Blue Cash” credit card reward program, which allegedly promised customers up to 5% cash back on purchases made with the card. Homa v. American Express Co., ___ F.3d ___, 2009 WL 440912, *1 (3d Cir. February 24, 2009). According to the allegations underlying the class action, plaintiff (a New Jersey resident filing the putative class action on behalf of other New Jersey residents) was denied “failed to award him the promised amount of cash back in violation of the New Jersey Consumer Fraud Act.” Id. The credit card underlying the class action claims was subject to a cardholder agreement that required arbitration of any disputes and that included a class action waiver, requiring that any claim “be arbitrated on an individual basis … [with] no right or authority for any Claims to be arbitrated [as] a class action.” Id. The Agreement included also a choice-of-law provision that stated Utah law governed any disputes, id. Defense attorneys moved to compel arbitration of the putative class action claims on individual basis; the defense argued in part that Utah law expressly permits class action arbitration waivers in consumer credit agreements. Id. Plaintiff opposed the motion on the ground New Jersey law would prohibit enforcement of the class action waiver and that application of Utah law to deny class action relief would violate New Jersey’s public policy. Id. The district court treated the motion as a motion to dismiss under Rule 12(b)(6) and granted the motion, dismissing the class action complaint with prejudice. Id. Plaintiff appealed and the Third Circuit reversed.

According to the Third Circuit, “This appeal raises important issues under state law. Nevertheless, we must first consider whether the Federal Arbitration Act (‘FAA’), 9 U.S.C. §§ 1-16, precludes this Court from applying state law unconscionability principles to void a class-arbitration waiver. We conclude that it does not.” Homa, at *1 (citing Doctor’s Associates, Inc. v. Casarotto, 517 U.S. 681, 687 (1996)). As part of that analysis, the Circuit Court determined whether Utah law or New Jersey law governed the dispute. Id., at *2-*3. The Court concluded that “the Supreme Court of New Jersey might well find that the application of Utah law allowing class-arbitration waivers in the context of a low-value consumer credit suit violates a fundamental policy of New Jersey.” Id., at *3 (footnote omitted). But the Third Circuit found also that it must first address whether “the FAA and this Court’s decision in Gay v. CreditInform, 511 F.3d 369 (3d Cir. 2007), preclude us from applying New Jersey unconscionability principles to a class-arbitration waiver.” Id. Based on its analysis of the FAA, id., at *3-*5, the Circuit Court held that its prior decision in Gay does not preclude the Court from relying on New Jersey law to invalidate the class action arbitration waiver, id., at *5. And the Court further concluded that if New Jersey law governed the dispute then the district court erred in granting the motion to dismiss the class action because “the class-arbitration waiver violates fundamental New Jersey public policy as applied to small-sum cases,” id., at *6. So the critical issue was whether Utah law or New Jersey law applied.

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