2013 is shaping up to be the year that that party ended for state evasion of the Federal Arbitration Act. States have traditionally relied on a number of stratagems to avoid the preemptive force of the FAA’s “liberal federal policy favoring arbitration.” (Moses H. Cone Mem’l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24 ). One was to hide behind the FAA’s “savings clause,” which permits states to refuse to enforce arbitration agreements on “such grounds as exist at law or in equity for the revocation of any contract.” 9 U.S.C. § 2. The savings clause preserves generic contract defenses such as fraud, duress or unconscionability, and ensures that they are not preempted. States made liberal use of the savings clause to avoid the FAA’s enforcement mandate by deploying a veneer to generality to save rules aimed at limiting the enforcement of arbitration agreements.
In Mortensen v. Bresnan Communications, LLC (July 15, 2013), the 9th Circuit sent a message to state courts to “get real” about this stratagem—it will no longer be tolerated. Noting that “the FAA gives a strong boost to arbitration,” the 9th Circuit held that “Concepcion crystalized the directive . . . that the FAA’s purpose is to give preference (instead of mere equality) to arbitration provisions. [Citation omitted.] Concepcion outlaws discrimination in state policy that is unfavorable to arbitration by further limiting the savings clause.” Accordingly, “[w]e take Concepcion to mean what its plain language says: Any general state-law contract defense, based in unconscionability or otherwise, that has a disproportionate effect on arbitration is displaced by the FAA.”
Although the 9th Circuit agreed that the state law defense at issue—a Montana rule barring enforcement of take-it-or-leave-it contracts that contain terms outside the “reasonable expectations” of consumers—had application to more than just arbitration agreements, that was not enough to save the rule from the FAA. It noted that the rule was first applied to an arbitration agreement, and most applications of the rule found in the published caselaw dealt with arbitration agreements. The 9th Circuit looked beyond the veneer of general application to conclude that the rule was preempted by FAA.
Mortensen will doubtless have its biggest impact in California, where challenges to the validity of state supreme court decisions such as Gentry v. Superior Court, 42 Cal.4th 443 (2007), cert. denied sub nom Circuit City Stores, Inc. v. Gentry, 552 U.S. 1296 (2008) (declining to enforce employment-related arbitration agreement that did not provide for class relief) and Armendariz v. Foundation Health Psychcare Services, Inc., 24 Cal.4th 83 (2000) (declining to enforce employment-related arbitration agreement that did not contain specific procedural safeguards) are pending at various levels of the state and federal courts.
Three cheers for substance over form! The days of hiding behind hollow formalism to avoid the FAA are coming to end!