From JDSupra, Randy Haj and Scott Luskin discuss recent California cases in which the courts addressed which laws apply and in which they found some provisions in arbitration agreements unconscionable. Randy and Scott write:
FAA or CAA? Drafter Can Pick and Choose Which Act Applies to Enforcement and Procedural Questions
In Victrola 89, LLC v. Jaman Properties 8 LLC, the court considered whether the FAA or CAA applied to an agreement governed by “California law,” but whose enforcement was “governed by the [FAA].” The answer was critical to the defendant, a seller of real estate. If the FAA applied, the court was required to compel arbitration against the plaintiff/buyer. But under the CAA, the court had discretion not to compel arbitration because the lawsuit named other parties that were not required to arbitrate. The trial court applied the CAA, forcing the seller to litigate in court.
The appellate court rejected that ruling. It held that the agreement could (and did) make the FAA applicable to enforcement issues, while procedural matters were governed by the CAA. The key term was that enforcement was “governed by the [FAA].” Because moving to compel involved enforcing the agreement, the FAA applied and the trial court had to compel arbitration of the buyer’s claim.
Caution – Arbitration Clauses Invalidated as “Unconscionable”
In three other recent decisions– Lange v. Monster Energy Company; Dougherty v. Roseville Heritage Partners; and Dennison v. Rosland Capital LLC—the courts refused to enforce arbitration clauses that included some combination of the following terms:
- a punitive damages waiver on common law claims;
- a clause lowering the standard to obtain a preliminary injunction;
- a pre-dispute jury trial waiver;
- selecting an arbitration provider that restricted discovery to arbitrator-approved depositions and document demands, and prohibited interrogatories or requests for admissions;
- a one-sided attorney fee clause in the company’s favor;
- a limitation on the company’s liability for “consequential, incidental, indirect, punitive or special damages;” and
- shortening the time for a consumer to file suit to one year.
One of these terms on its own probably wouldn’t lead the court to invalidate an entire arbitration agreement. But a combination of these terms together with procedural unfairness, like unequal bargaining power between an employee and his or her employer, could lead to enforcement issues. If your company’s form includes the above terms, the agreement and the circumstances under which it is signed should be reviewed by an experienced professional to minimize enforceability issues later.
n experienced professional to minimize enforceability issues later.