This post first appeared on the Securities Arbitration Alert blog. The blog’s editor-in-chief is George H. Friedman, Chairman of the Board of Directors for Arbitartion Resolution Services, Inc.
The California Supreme Court has agreed to review a case on FAA preemption of California Code of Civil Procedure sections 1281.97 and 1281.98.
We covered in SAA 2024-11 (Mar. 14) Hohenshelt v. Superior Court, No. B327524 (Calif. Ct. App. 2 Feb. 27, 2024), not for the holding, but for the scathing dissent. Justice John Shepard Wiley Jr.’s dissent in Hohenshelt offered an excellent primer on SCOTUS decisions on Federal Arbitration Act preemption of California law disadvantaging arbitration. We borrow heavily from our past coverage. We repeat below essentially verbatim its core (brackets and ellipses in original).
Statute in Question
Enacted in 2019, California Code of Civil Procedure sections 1281.97 and 1281.98:
“provide that if a company or business that drafts an arbitration agreement does not pay its share of required arbitration fees or costs within 30 days after they are due, the company or business is in ‘material breach’ of the arbitration agreement. (Code Civ. Proc., §§ 1281.97, subd. (a)(1); 1281.98, subd. (a)(1). In the case of such a material breach, an employee or consumer can, among other things, withdraw his or her claim from arbitration and proceed in court. (§§ 1281.97, subd. (b)(1); 1281.98, subd. (b)(1).)”
Justice Wiley’s Dissent
“By again putting arbitration on the chopping block, this statute invites a seventh reprimand from the Supreme Court of the United States. Recall the past six.
“Over and over again, with determined but unavailing persistence, the Supreme Court of the United States has rebuked California state law that continues to find new ways to disfavor arbitration.
“First, the high court held the Federal Arbitration Act set forth a federal policy favoring arbitration that was clear and in unmistakable conflict with California’s ‘requirement that litigants be provided a judicial forum for resolving wage disputes. Therefore, under the Supremacy Clause, the [California] statute must give way.’ (Perry v. Thomas (1987) 482 U.S. 483, 491 [preempting California law].)
“Second, the high court held the Federal Arbitration Act preempted California state law referring certain disputes initially to an administrative agency. ‘When parties agree to arbitrate all questions arising under a contract, the [Federal Arbitration Act] supersedes state laws lodging primary jurisdiction in another forum, whether judicial or administrative.’ (Preston v. Ferrer (2008) 552 U.S. 346, 359; see also id. at pp. 349–350, 355–356.)
“Third, the high court’s decision in AT&T Mobility v. Concepcion (2011) 563 U.S. 333, 337–338, 352 preempted California’s rule that class-action waivers in arbitration agreements were unconscionable.
“Fourth, in DIRECTV, Inc. v. Imburgia (2015) 577 U.S. 47, the high court pointedly addressed California’s continuing defiance of federal law. The ‘Supremacy Clause forbids state courts to dissociate themselves from federal law because of disagreement with its content or a refusal to recognize the superior authority of its source. . . . The Federal Arbitration Act is a law of the United States, and Concepcion is an authoritative interpretation of that Act. Consequently, the judges of every State must follow it.’ (Id. at p. 53 [preempting California law].)
“Fifth, the decision in Lamps Plus, Inc. v. Varela (2019) 587 U.S. __ [139 S.Ct. 1407, 1414–1415] reversed the Ninth Circuit for applying a California state law requiring courts to construe ambiguities against the drafter, a rule that applied with peculiar force, said California law, in the case of a contract of adhesion, like the arbitration contract there at issue. The proper approach required the federal Act’s default rule, which is that ‘ambiguities about the scope of an arbitration agreement must be resolved in favor of arbitration.’ (Id. at p. 1418.) The Lamps Plus decision thus preempted a California law disfavoring arbitration.
“Sixth, Viking River Cruises, Inc. v. Moriana (2022) 596 U.S. 639, 662 preempted a California arbitration law that invalidated contractual waivers of the right to assert representative claims under California’s Private Attorneys General Act. Federal law established an equal treatment principle: state courts may invalidate an arbitration agreement based on generally applicable contract defenses like fraud or unconscionability, but not on legal rules that apply only to arbitration or that derive their meaning from the fact that an agreement to arbitrate is at issue. (Id. at p. 649.)
“So, the federal arbitration preemption rule is simple. The Federal Arbitration Act preempts a state rule that ‘singles out arbitration agreements for disfavored treatment.’ (Kindred Nursing Centers L.P. v. Clark (2017) 581 U.S. 246, 248.)
“This California statute ‘singles out arbitration agreements for disfavored treatment.’ No other contracts are voided on a hair-trigger basis due to tardy performance. Only arbitration contracts face this firing squad. This statute thus is preempted.
“California cannot create a rule specific to the arbitration context that contravenes the arbitration on which the parties agreed. After six epistles, we should get the message.”
Review Request Granted
The California Supreme Court on June 12 agreed to review the case, No. S284498.
(ed: *We’ll be sure to track this one. **An Alert h/t to Editorial Board member Peter R. Boutin, Esq., of Keesal, Young & Logan, for alerting us to this decision.)
