Last year, the United States Supreme Court issued its seminal decision in AT&T Mobility LLC v. Concepcion (2011) 131 S. Ct. 1740, 179 L. Ed. 2d 742, wherein it held that a class action waiver contained in the arbitration clause in AT&T's customer agreement was not unconscionable. In doing so, the Court held that the Federal Arbitration Act (FAA) preempted the rule enunciated by the California Supreme Court in Discover Bank v. Superior Court (2005) 36 Cal. 4th 148, 30 Cal. Rptr. 3d 76, that a class action waiver in a contract was unconscionable and hence unenforceable where the effect of the waiver was to "cheat" consumers out of small sums of money. The Court, recognizing that the Discover Bank rule applied to all contracts and not just arbitration contracts and therefore would not have been preempted under the then existing test for preemption, added an additional preemption test, to wit, whether the state rule or statute disfavors arbitration. The Court held that the Discover Bank rule disfavored arbitration because 1) the switch from bilateral to class arbitration sacrificed the principal advantage of arbitration--its informality,  2) class arbitration required  procedural formality as evidenced by the rules of the American Arbitration Association which mimicked the Federal Rules of Civil Procedure, and 3) class arbitration increased risk to defendants.

     
One might think that Concepcion validated class action waivers in all California arbitration contracts. But California has other rules and statutes that render unenforceable class action waivers or arbitration clauses in general and hence disfavor arbitration. There is a debate in the courts and elsewhere whether Concepcion extends to these rules and statutes.

     
Perhaps the most common rule that bars the enforcement of a class action waiver in a California arbitration contract is the one that denies enforcement of the waiver (or the contractual right to arbitrate in general) where the plaintiff is asserting what is deemed to be an unwaiveable statutory right. These rules are set forth in Gentry v. Superior Court (2007) 42 Cal. 4th 443, 64 Cal.  Rptr. 3d 773 (statutes protecting employees), Broughton v. Cigna Healthplans of California (1999) 21 Cal. 4th 1066, 90 Cal. Rptr. 2d. 334 (the Consumer Legal Remedies Act), Cruz v. Pacific Healthcare Systems, Inc. (2003) 30 Cal. 4th 303, 133 Cal. Rptr. 2d 58 (Unfair Competition Law), and Franco v. Athens Disposal Company, Inc. (2009) 171 Cal. App. 4th 1277, 90 Cal. Rptr. 3d 539 (Private Attorney General Act).

     
In Plows v. Rockwell Collins, Inc. (C.D. Cal. 2011) 812 F. Supp. 2d 1063, the Court held that while Concepcion  overruled Discover Bank, it did not overrule  Gentry because Discover Bank is a rule about unconscionability, while the rule set forth in Gentry is concerned with the effect of a class action waiver on unwaiveable statutory rights regardless of unconscionability. But in Sanders v. Swift Transportation Co. of Arizona LLC (N.D.  Cal 2012) 843 F. Supp. 2d 1033, 1037, a different federal court noted that Gentry prohibited an arbitration claim outright and that when a state law or rule does so, it is preempted by the FAA, as set forth in Concepcion. There has been a similar split in the courts with respect to the Private Attorney General Act. Compare Brown v. Ralph's Grocery Co. (2011) 197 Cal. App. 4th 489, 500, 128 Cal. Rptr. 3d 854 (statute not preempted) with Quevedo v. Macy's Inc. (N.D. Cal. 2011) 798 F. Supp. 2d 1122 (statute preempted). The desire to keep statutory claims based on public policy in the courts and out of the hands of arbitrators may be a laudable goal, but as expressed by the court in Nelsen v Legacy Partners Residential, Inc. (2012) 207 Cal. App. 4th 1115, 1136, 144 Cal. Rptr. 3d 198, while these rules may be based on the sound public policy of the California legislature, courts are not free to ignore Concepcion's holding that state public policy cannot trump the FAA. Thus, it is doubtful that the rules making unwaiveable statutory claims non-arbitrable will survive Concepcion.

    
Another doctrine that some think could be affected by Concepcion is that of unconscionability, most vividly expressed by the California Supreme Court in Armendariz v. Foundation Health Psychare Services (2000) 24 Cal. 4th 83, 99 Cal. Rptr. 2d 745. Although application of this doctrine will abrogate or limit an arbitration contract, it has been a bulwark against attempts by drafters of adhesion contracts to restrict the ability of their customers or employees to bring certain claims, reduce the statute of limitations, cap damages, and impose other limitations on dispute resolution. But unconscionability is a contractual defense and applies to all contracts, not just arbitration contracts. Section 2 of the FAA states that a written provision to settle a dispute by arbitration is valid "save  upon such grounds as exist in law or in equity for the revocation of any contract". The Concepcion court noted that "this savings clause permits agreements to arbitrate to be invalidated by 'generally applicable contract defenses such as fraud, duress or unconscionability' ". (Emphasis supplied.) 131 S.Ct. at p. 1746.  The doctrine of unconscionability should therefore survive Concepcion.

    
Code of Civil Procedure Section 1281.2(c) is another statute that may be affected by Concepcion. This statute permits a court to deny a petition to compel arbitration where "a party to an arbitration agreement is also a party to a pending court action or special proceeding with a third party, arising out of the same transaction or a series of related transactions and there is a possibility of conflicting rulings on a common issue of law or fact". The statute also permits a court to delay granting the petition where there are other issues between the parties that are subject to a pending court action or special proceeding and the court determines that resolution of these issues may make the arbitration unnecessary. There is no comparable provision in the FAA. Thus, an otherwise valid arbitration agreement subject to the California Arbitration Act may not be enforced because of the happenstance that a third party involved in the dispute is not subject to the arbitration agreement or the dispute includes a non-arbitrable claim as well as an arbitrable claim. The California Supreme Court has already held that Section 1281.2(c) is not preempted by the FAA. Cronus Investments, Inc. v. Concierge Services (2005) 35 Cal. 4th 376, 25 Cal. Rptr. 2d 540. And the United States Supreme Court itself impliedly approved the statute in Volt Information Sciences, Inc. v. Board of Trustess of Leland Stanford Junior University (1989) 489 U.S. 468, 109 S. Ct, 1248, 103 L. Ed, 2d 488, when it held that a California choice of law in the agreement enabled the lower court to apply the statute. But  both decisions was rendered prior to Concepcion. The statute might be saved from preemption because courts are not obliged to deny a petition to compel arbitration in those situations where Section 1281.2(c) applies. They have the discretion to stay the arbitration pending the outcome of the judicial proceeding or stay the judicial proceeding pending the outcome of the arbitration, a result that is also set forth in Section 3 of the FAA.  One also should note that the Concepcion court, citing Volt, stated that parties could agree to specific rules in their arbitration agreements. 131 S. Ct. at p. 1749. and perhaps this was a hint that Section 1281.2(c) would not be preempted. But, given that this statute can result in the denial of enforcement of an otherwise valid arbitration agreement, it is conceivable that it could be found to disfavor arbitration. Such a ruling would be unfortunate, because the spectre of conflicting rulings emanating from an arbitration and a court proceeding is certainly not desirable. Perhaps it is time to amend the FAA to include a provision similar to Section 1281.2(c).

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Paul J. Dubow is an arbitrator and mediator practicing in San Francisco specializing in employment, securities, and commercial transactions. He has been a member of the editorial board of California Litigation for the past 20 years.