Pfeiffer Thigpen
FitzGibbon & Ziontz LLP

Sep 2 2011

In AT&T Mobility v. Concepcion on April 27, 2011, the US Supreme Court held that the Federal Arbitration Act preempted California unconscionability law, Cal. Civ. Code Ann. §1670.5(a), which as interpreted in Discover Bank v. Superior Court, 36 Cal. 4th 148, 113 P. 3d 1100 (2005), had found class-action waivers in arbitration agreements to be unenforceable as they were unconscionable. The Supreme Court held that federal policy favoring arbitration required the enforcement of AT&T's arbitration provision, even though it prohibited class-wide arbitration, despite the California law described above to the contrary.

Cases such as Concepcion highlight the importance of drafting arbitration agreements carefully to select what law will be applied to interpret and enforce an arbitration provision, the Federal Arbitration Act or the California Arbitration Act found in the Code of Civil Procedure at Sections 1281 et seq. There are tensions among such choice-of-law selections, however, as after the California Supreme Court opinion in Cable Connection, Inc. v. DIRECT TV, Inc. from 2008 it has been confirmed that the CAA now permits parties to draft arbitration provisions that provide for judicial review of the award if the arbitrator has exceeded his or her powers. Specifically, arbitration provisions can expressly confirm that the arbitrator does not have the power to commit errors of law, and provide for review to correct such errors. In Cable Connection the provision included the following language:

“The arbitrators shall not have the power to commit errors of law or legal reasoning, and the award may be vacated or corrected on appeal to a court of competent jurisdiction for any such error.”

and the Court permitted judicial review of the arbitral award to ensure that it complied with applicable law. Thus, with careful drafting showing clear intent, parties who apply the CAA can provide for such judicial review. Federal law, however, does not permit the parties to provide for judicial review of an award in such circumstances, as Sections 10 and 11 of the FAA are exclusive. See Hall Street Associates, L.L.C. v. Mattel, Inc., 552 U.S. 576 (2008).

Given these recent developments and potential tensions based on choice-of-law considerations, careful drafting of arbitration provisions is more important than ever and will depend on a case-by-case basis what is appropriate for client needs. In particular, the use of a "one size fits all" arbitration provision is not appropriate and clients should carefully review their contracts to decide if they wish to include an arbitraiton provision at all, and if so, how it should be tailored to their circumstances.

If you have questions about the use of or language in the arbitration provisions in any of your contracts, please contact Tom FitzGibbon to discuss making sure they are up to date and that they meet your particular needs.

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Tom FitzGibbon has significant experience in drafting, enforcing and defending against arbitration provisions, including in the class action context, under the FAA and the CAA and in state and federal courts. Tom also has significant experience in handling arbitrated matters before such providers and forums as the AAA, JAMS and FINRA.