The California Court of Appeals' October 16, 2012 decision
in Sherf v. Rusnak/Westlake, et al. invalidates a
California law prohibiting class action waivers in consumer
contracts. Under this ruling, marketers, including online
marketers, may use arbitration waivers to compel arbitration and
avoid class actions. However, such waivers cannot be hidden
within the contract or contain provisions that are overly harsh,
one-sided, or oppressive. Therefore, marketers should
continue to include fair, clear and conspicuous class action
waivers.
AT&T Mobility LLC v.
Concepcion
In Concepcion, the cellular telephone contract between
the parties provided for arbitration of all disputes, but
prohibited classwide arbitration. When the cell phone
purchasers brought a putative class action alleging false
advertising and fraud, the carrier moved to compel arbitration
pursuant to the contract. The federal district court and the
Court of Appeals for the Ninth Circuit each held that the
arbitration provision in the parties' agreement was
unconscionable under California law because it disallowed classwide
proceedings.
The Supreme Court reversed the appellate and trial courts, noting
that the principal purpose of the Federal Arbitration Act
("FAA") is to ensure the enforcement of private
arbitration agreements according to their terms so as to facilitate
streamlined proceedings. Accordingly, the rule
"[r]equiring the availability of classwide arbitration
interferes with fundamental attributes of arbitration and thus
creates a scheme inconsistent with the FAA." Thus, the
Supreme Court held that California's rule requiring the
availability of classwide arbitration is preempted by the
FAA.
Sherf v. Rusnak/Westlake, et al.
In Sherf, the plaintiff disputed certain service fees the
defendants charged him following plaintiff's purchase of an
automobile from defendants. The parties' contract
contained an arbitration waiver provision informing the plaintiff
that, if the parties arbitrated a dispute, the plaintiff waived his
right to participate as a class representative or class member on
any class claim, including any right to class
arbitration.
Notwithstanding the arbitration requirement and class action
waiver, the plaintiff brought suit alleging several class action
causes of action. The defendant moved to compel arbitration
of all causes of action under the terms of the contract. The
trial court denied the motion, finding that the class action waiver
violated California's Consumers Legal Remedies Act
("CLRA"), which permits class actions and finds
unenforceable and void as contrary to public policy a
consumer's purported waiver of the CLRA.
On appeal, the California Court of Appeal reversed the trial court
and remanded the case. The appeals court found that the class
action waiver was enforceable under the Supreme Court's
decision in Concepcion. The court concluded that
Concepcion "expressly holds that the FAA preempts and
invalidates the [California] rule... that conditioned 'the
enforceability of certain arbitration agreements on the
availability of classwide arbitration procedures.'"
The court also rejected the plaintiff's argument that consumer
contracts can be invalidated to vindicate statutory rights,
including those rights under the CLRA to bring a class action and
seek injunctive relief. Citing Concepcion, the court
noted that "nothing in FAA 'suggests an intent to preserve
state-law rules that stand as an obstacle to the accomplishment of
the FAA's objectives,' and arbitration agreements must be
enforced 'notwithstanding any state substantive or procedural
policies to the contrary.'"
Importantly, the appeals court remanded the case to the trial
court to decide whether the specific waiver at issue was
unconscionable, and thus tasked the trial court with deciding
whether the waiver demonstrated any procedural and substantive
unconscionability. The appellate court did so because, under
the FAA, applicable contract defenses such as fraud, duress, and
unconscionability may invalidate arbitration agreements.
Impact of Sherf v. Rusnak/Westlake,
et al.
The Sherf decision reinforces the strong policy favoring
the enforcement of arbitration agreements. It clarifies that
marketers, including online marketers, may use arbitration waivers
to compel arbitration and avoid class actions, even where state law
creates a statutory right to bring a class action. Because
generally applicable contract defenses such as fraud, duress, and
unconscionability may invalidate such arbitration agreements,
however, marketers must continue to make clear and conspicuous
disclosures of all contract terms so that courts will uphold the
enforceability of arbitration agreements.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
