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August 2012

California Court of Appeal Reaffirms the FAA Preempts the CLRA's Prohibition Against Class Action Waivers

In the wake of the U.S. Supreme Court’s decision in AT&T Mobility LLC v. Concepcion1, the California Fourth District Court of Appeal recently held, in Caron v. Mercedes-Benz Financial Services USA LLC, et al. (“Caron”), that a contract containing an arbitration provision and a waiver of the right to arbitrate any issues as a class action is enforceable, despite the Consumers Legal Remedies Act’s (“CLRA”) prohibition against such class action waivers.

This ruling enhances a company’s ability to include enforceable arbitration provisions in its standard contracts and to avoid a court forum in favor of a private arbitration. Based on this decision, businesses covered by the Fourth District Court of Appeal’s jurisdiction can be more confident that their arbitration clauses, including any waiver of rights to bring a class action, will be enforceable.  

In Caron, plaintiff Caron filed a complaint against the company where she purchased her automobile alleging various class and individual claims under the CLRA, the Automobile Sales Finance Act, and unfair competition law. She also alleged additional individual claims for false advertising, intentional and negligent misrepresentation, Vehicle Code violations, and Song-Beverly Consumer Warranty Act violations. Defendants petitioned to compel Caron to arbitrate her individual claims and stay the action pursuant to the arbitration provision in the sales contract.  Caron primarily argued in her opposition that the class action waiver in the arbitration provision rendered the entire provision unenforceable because, under Fisher v. DCH Temecula Imports, LLC2 , the arbitration provision meant that she waived her statutory right to bring a class action under the CLRA3. Defendants argued in their reply that the Federal Arbitration Act (“FAA”) preempted Fisher therefore prohibiting the trial court from invalidating the arbitration provision’s class action waiver.

On appeal, the Court of Appeal largely followed the position taken in AT&T Mobility where the U.S. Supreme Court held that a state could not prohibit class action waivers. The Court of Appeal, relying on numerous governing principles regarding FAA preemption, held that the FAA preempts the CLRA’s prohibition against class action waivers.  First, the FAA was designed to overrule the judiciary’s longstanding refusal to enforce agreements to arbitrate. Second, in enacting the FAA, Congress declared a national policy favoring arbitration and withdrew the power of the states to require a judicial forum to resolve claims where the contracting parties chose to instead resolve disputes through arbitration. Third, although the FAA contains no express pre-emptive provision, state law may be pre-empted to the extent that it actually conflicts with federal law. Fourth, citing AT&T Mobility LLC v. Concepcion, the principle purpose of the FAA is to ensure that arbitration agreements are enforced. Fifth, the FAA’s displacement of conflicting state law is well-established. Sixth, the FAA preempts state statutes that expressly invalidate arbitration agreements. Finally, the FAA preempts state statutes that do not expressly invalidate arbitration agreements but have been judicially interpreted to do so. 

Thus, the Caron court reversed the lower court’s order and held that the FAA preempts the CLRA and Caron’s waiver of her right to arbitrate any dispute as a class action is enforceable.

Businesses have long relied on arbitration clauses in agreements to help keep contractual disputes out of the court system and out of the public eye, preferring to resolve matters in the less costly and more efficient arbitration forum. Business can continue to protect themselves through arbitration agreements and from class actions in this manner as well. Based on the Caron decision, businesses covered by the Fourth District Court of Appeal’s jurisdiction can be more confident that their arbitration clauses containing waivers of rights to participate in a class action will be enforceable. 

1(2011) 131 S. Ct. 1740, 1748.
2(2010) 187 Cal.App.4th 601.
3Plaintiff also asserted two other arguments that Defendants failed to properly authenticate the contracts and that the arbitration provision was unconscionable. The Court of Appeal quickly addressed the authentication issue finding that the contract had been authenticated. The Court of Appeal remanded the second issue of unconscionability back to the lower court since that court had not addressed that issue because it found the issue moot when it rendered the arbitration provision unenforceable.



Commercial Litigation