This article discusses three June 2019 developments that highlight how state law can mitigate some of the harms of forced arbitration and its proliferation across worker and consumer contracts. Most notable is a Ninth Circuit decision affirming that arbitration clauses cannot prevent consumers from seeking broad-based public injunctions, and that such relief must be available either in court or in arbitration.
The importance of state law in limiting the harms of forced arbitration is magnified by recent failures at the federal level to limit forced arbitration. In 2017, the CFPB’s rule limiting arbitration of class actions was blocked by Congress, and in 2018, the Supreme Court concluded that arbitration clauses in employment agreements could prevent workers from joining together in class actions, even though federal labor laws protect the rights of workers to engage in concerted action. There are other examples too: in July 16, 2019, the federal Centers for Medicare and Medicaid Services issued a final rule overruling its prior rule that would have limited arbitration in nursing home agreements. (The prior rule had been stayed by a federal court.) And, as described in another NCLC article, while a Department of Education rule prohibits schools that receive federal funds from using or enforcing arbitration agreements, the Trump Administration has signaled that it aims to repeal the rule as quickly as it can.
State Law’s Ability to Limit Arbitration Despite Federal Arbitration Act (FAA) Preemption
The preemptive effect of the FAA is broad, but it should not be overstated. State law cannot treat arbitration agreements with disfavor relative to other contractual terms, and they cannot treat the arbitration forum with disfavor relative to a public forum. Moreover, states cannot even require that consumers or workers have access to class action procedures in arbitration, because according to the Supreme Court, class actions necessarily call for procedural complexity that is inconsistent with arbitration. See NCLC’s Consumer Arbitration Agreements § 3.3.2.
Nevertheless, this article describes powerful ways that state law can still help consumers limit the impact or application of arbitration agreements.
Ninth Circuit: Arbitration Agreement Cannot Waive Consumers’ Right to Seek Public Injunctive Relief
Blair v. Rent-A-Ctr., Inc., 928 F.3d 819 (9th Cir. 2019) is an important decision affirming an individual’s right, despite language in an arbitration clause to the contrary, to utilize state laws that provide for “public injunctive relief”—statutes that provide relief by enjoining a practice for the benefit of the public and not limiting the scope to the consumer bringing the action.
The Supreme Court has ruled that arbitration agreements can prevent class actions in court or in arbitration notwithstanding state law to the contrary because the FAA protects bilateral dispute resolution as a “fundamental attribute of arbitration.” See NCLC’s Consumer Arbitration Agreements § 3.3.2. But Blair and related cases stand for the proposition that the FAA does not preempt state laws that provide individual litigants with broad, public injunctive relief.
California law allows consumers in certain contexts to pursue public injunctive relief as a way of encouraging broad enforcement of statutory protections. In 2013, the Ninth Circuit ruled that claims seeking public injunctive relief could be brought before an arbitrator and did not require a court proceeding. See Ferguson v. Corinthian Colleges, Inc., 733 F.3d 928, 934 (9th Cir. 2013). A prior state rule carving those claims out of arbitration entirely was preempted by the FAA because it treated the arbitration forum as inferior to litigation. Pursuant to the FAA, arbitrators can do anything that courts can do so long as they are authorized to do so via agreement.
Especially in the wake of this ruling, businesses began drafting their arbitration agreements to provide that the arbitrator does not have any power to award public injunctive relief. In McGill v. Citibank, N.A., 393 P.3d 85 (Cal. 2017), the California Supreme Court ruled that California law prohibited such waivers and that this rule was not preempted by the FAA.
On June 28, in Blair v. Rent-A-Ctr., Inc., the Ninth Circuit agreed with the California Supreme Court’s analysis. Unlike the California rule struck down in Ferguson, the McGill rule is not hostile to arbitration in particular. Instead it “derives from a general and long-standing prohibition on the private contractual waiver” of the right to pursue public injunctive relief in any forum.
Furthermore, unlike a prohibition against class action waivers, the rule does not interfere with the fundamental attributes of arbitration. Because individual claims for public injunctive relief do not implicate the private claims of absent parties, the Ninth Circuit held that “neither state law nor constitutional due process gives rise to, let alone requires, procedural formality in the arbitration of public injunctive relief.” In particular, even though claims for public injunctive relief may be difficult and complicated, that is because of the substantive complexities of the claim and remedy, not its procedural complexity. But nothing about complex substantive issues should be inconsistent with the fundamental attributes of arbitration, at least per federal arbitration law, which is premised in part on the capacity of arbitration to resolve complicated issues.
As a result, the Ninth Circuit in Blair ruled that the arbitration clause’s limit on public injunctive relief was unenforceable. It also held that the provision could not be severed from the rest of the agreement and thus ruled the whole arbitration agreement unenforceable. The consumer could bring the public injunction action in court.
If the agreement had been drafted differently, the court might have severed the provision, and then the action for public injunctive relief would be brought before an arbitrator. An arbitrator’s award of such relief would need to be confirmed by a court, but there are few grounds to resist confirmation of an arbitration award. In fact, the defendant would be in a far weaker position seeking to undo an arbitrator’s award than if a trial court had issued the injunction. After a court’s confirmation of the arbitration award, the broad-based injunction has the same binding effect as a court-issued injunction.
Practical Implications of the Blair Ruling
The Blair decision has obvious importance for consumers utilizing California statutes providing for public injunctive relief. Individuals can seek such relief whether they bring the action in court or are forced into arbitration. While California is in the forefront in enacting statutes providing for public injunctive relief, there are a surprising number of such statutes in other states.
For example, state statutes prohibiting unfair or deceptive acts and practices (UDAP statutes) in Alaska, the District of Columbia, Florida, Iowa, New York, and Ohio either explicitly provide or have been interpreted as allowing individual consumers to seek broad-based injunctive relief. See Alaska Stat. § 45.50.535(a); D.C. Code § 28-3905(k); Davis v. Powertel, Inc., 776 So. 2d 971 (Fla. Dist. Ct. App. 2000); Iowa Code § 714H.5(1); McDonald v. North Shore Yacht Sales, Inc., 513 N.Y.S.2d 590 (N.Y. Sup. Ct. 1987); Johnson v. Jos. A Bank Clothiers, Inc., 2015 WL 1476451 (S.D. Ohio Mar. 31, 2015). See generally NCLC’s Unfair and Deceptive Acts and Practices § 126.96.36.199.3. The consumer bringing the action though may have to show that she has been injured or will benefit from the injunction. NCLC’s Unfair and Deceptive Acts and Practices §§ 188.8.131.52, 184.108.40.206.
Unfair and deceptive practices statues are just one example of state legislation providing for public injunctive relief. Federal and state antitrust laws are another example.
State legislatures are always free to enact such legislation combating perceived abuses through the help of private litigation. Such legislation should be a particularly attractive solution where public enforcement resources are inadequate to address systemic violations on their own. So long as such a statute does not add procedural complexity, arbitration provisions that waive remedies under these statutes should be unenforceable.
State Supreme Court Decision Shows How State Law Decides Who Can Enforce and Who Is Bound by an Arbitration Clause
On June 24, the Colorado Supreme Court issued an important decision on the application of the state law doctrine of equitable estoppel to arbitration agreements. See Santich v. VCG Holding Corp., 443 P.3d 62 (Colo. 2019). The decision shows that state courts interpreting state law can have a marked effect on the enforceability of arbitration agreements without running afoul of the FAA.
A common arbitration question is whether a business not a party to an arbitration agreement, such as a debt collector or telemarketer, can take advantage of an arbitration agreement because of its relationship to a party to that agreement. A similar issue is whether a consumer is bound by an arbitration agreement even though not named in the agreement, such as whether one family member’s agreement to arbitration binds other family members.
Courts too often have expanded the doctrine of equitable estoppel to require arbitration in these contexts, particularly where a signatory plaintiff sues a non-signatory. As explained in NCLC’s Consumer Arbitration Agreements Chapter 7, in many cases courts have concluded in the context of arbitration agreements that equitable estoppel applies based solely on the relationship between a non-signatory and a signatory or the closeness of the relationship between the claim against the non-signatory and claims that are or could have been raised against a signatory.
The rationale for these decisions often hinges on the purported federal or state policies in favor of arbitration. But commentators have noted that the policy should not apply until a court has concluded that an arbitration agreement requires the parties to have their dispute resolved through arbitration. The expansion of equitable estoppel law for arbitration agreements inappropriately treats arbitration clauses as a “super contract” entirely inconsistent with basic principles of contract law. See Richard Frankel, The Arbitration Clause As Super Contract, 91 Wash. U.L. Rev. 531 (2014).
In Santich, the Colorado Supreme Court rejected a prior Colorado Court of Appeals decision that had relied on much of this arbitration-specific case law in federal and state courts around the country. The Colorado Supreme Court concluded that those other decisions erred because they applied an arbitration-specific standard, when instead, the conventional common law standard for equitable estoppel should apply.
Santich was originally brought as a federal case. The plaintiffs, concerned that the court would follow other federal decisions and find that equitable estoppel applied, asked the court to certify to the Colorado Supreme Court the question of the scope under Colorado law of equitable estoppel. The Colorado Supreme Court ruled that equitable estoppel, even in the arbitration context, requires proof of the traditional four elements, including detrimental reliance on the words or actions of the party against whom estoppel is sought. It rejected a special alternative definition applicable only to arbitration cases that did not require the traditional element of detrimental reliance, as long as the estoppel was predicated upon the interconnectivity of claims and actions taken in concert by signatories and non-signatories to an arbitration agreement.
By rejecting the “super” status of equitable estoppel in the arbitration context, the Colorado Supreme Court has interpreted state law in a way that dramatically limits the enforceability of arbitration agreements in disputes against non-signatories. This is an important example of how a state court or a state legislature can limit the parties who can take advantage of or can be bound by an arbitration agreement simply by applying traditional notions of equitable estoppel and not allowing special treatment for arbitration agreements. Such an action does not run afoul of the FAA.
Vermont Legislation Encourages Courts to Throw Out Unconscionable Arbitration Agreements
Vermont Senate Bill 18 became law on June 19, 2019, and will be effective October 1, 2020, adding Vt. Stat. Ann. tit. 9, § 6055. The statute encourages courts to throw out unconscionable arbitration clauses and adds penalties for their inclusion in consumer agreements.
The legislation has three important provisions. First it creates a rebuttable presumption that certain terms are substantively unconscionable when included in a standard form contract that the individual does not have a meaningful opportunity to negotiate:
- Terms requiring a venue in a state outside Vermont;
- Waivers of jury trial or right to bring a class action;
- Waiver of the right to seek punitive damages;
- Terms limiting the time within an action can be brought;
- Fees and costs greater than a court proceeding.
Second, it encourages courts to throw out contracts with unconscionable terms as opposed to simply severing the one unconscionable provision and enforcing the rest of the contract. This is perhaps the key provision in the statute because courts often enforce agreements simply by severing specific unconscionable provisions. The Vermont law instructs courts when deciding whether to throw out a contract or only sever one term to consider the actual purposes of the parties and whether severing of a term would create an incentive for contract drafters to include similar illegal or unconscionable terms.
Third, the statute provides that if a party seeks to enforce a provision that is found to be unconscionable, that party violates the state deceptive practices statute and is liable for $1000 per violation and attorney fees. This provision also seeks to deter drafters from packing their agreements with unconscionable terms knowing that at worst a court will enforce the agreements in the absence of those terms.
The impact of the Vermont statute is sharply reduced because it exempts from its provisions agreements entered into by financial institutions and regulated creditors, motor vehicle installments sales contracts, and contracts involving recreational activities. The law should still apply, however, to telemarketing contracts, contracts involving unregulated creditors, and other contracts covering consumer goods and services.
While the Vermont statute is limited in scope, there is no reason why other states could not enact similar legislation without such exemptions. Because the statute does not treat arbitration differently than other contracts, the FAA should not preempt the Vermont statute (other than potentially the provision dealing with jury trials and class actions). The Vermont statute is modeled after NCLC’s Model State Consumer and Employment Justice Enforcement Act, Title IV.
Other State Law Limiting the Harm of Arbitration Agreements
NCLC’s Model State Consumer and Employment Justice Enforcement Act contains ten stand-alone titles, each presenting language that a state can adopt that will have the effect of limiting the impact of arbitration agreements. The model act also contains commentary explaining why FAA preemption should not apply to these ten titles:
Title I: Delegation of State Enforcement Authority allows individuals to bring actions on behalf of the state and not for their own benefit. Since the action is on behalf of the state, an arbitration clause binding an individual does not apply. Title I addresses the problem that arbitration provisions, by limiting private enforcement of state law, place undue pressure on state enforcement resources. Those resources can be supplemented by individuals bringing actions on behalf of the state. Good examples are statutes allowing whistleblowers or injured workers or consumers who have evidence of a violation to bring a qui tam lawsuit on behalf of the state. California has enacted such legislation, the Private Attorney General Act, for enforcement of some labor standards. See Cal. Lab. Code §§ 2698–2699.5 (West). Other states are considering similar legislation.
Title II: Conditions on Persons Doing Business with the State is based upon the state’s authority, pursuant to its market participant powers, to prohibit the entities with which it does business from forming or enforcing forced arbitration clauses in employment and consumer contracts.
Title III: Clear Notice and Single Document Rule requires that merchants and employers provide clear notice of all material terms in language that the consumer or employee can understand. For consumer contracts, Title III also requires that material terms be included in a single document. Such “material terms” include forced arbitration clauses.
Title IV: Unconscionable Terms in Standard Form Contracts sets out types of contractual terms that are presumptively unconscionable, including terms requiring the individual to waive substantive rights or to resolve her dispute in a far-off forum. Title IV creates a presumption that such terms are not severable from the agreement thereby making the inclusion of such terms an unfair and deceptive practice. The Vermont law is based on this Title.
Title V: Prohibition of Forced Arbitration Clauses under State Law is a catch-all provision that prohibits the enforcement of forced arbitration clauses in employment and consumer contracts that are not covered by the FAA, including in contracts for insurance as well as in employment contracts for transportation workers.
Title VI: Data Disclosure Requirements for Arbitration Providers regulates private companies that administer arbitrations and sets out data disclosure requirements. For example, arbitration administrators must disclose how many consumer and employment arbitrations are conducted during specified time periods, the arbitrator conducting the arbitration, and the award.
Title VII: Appellate Jurisdiction removes the jurisdiction of appellate courts to consider appeals from denials of motions to compel arbitration, preventing costly and prolonged litigation regarding the applicability of an arbitration clause that a court has declined to enforce.
Title VIII: Preventing Respondents from Improperly Delaying the Arbitration Proceeding provides that if a respondent in an arbitration proceeding fails to pay arbitration fees, the administrator must either administer the arbitration or promptly refuse to move forward with the arbitration and notify the parties in writing of that refusal.
Title IX: Effect of Opt-Out Provisions provides that there is a rebuttable presumption that the right to opt out of a standard form contract for a period of days does not bear on whether the contract is procedurally conscionable.
Title X: Remedy for Drafter Overreach in Standard Form Contracts sets out factors for courts to consider in determining whether to strike only an unenforceable provision or the whole agreement.