Can State Law Place A Limitation On The Federal Arbitration Act? (Fast Auto v. Maldonado)

Placing limitations upon (Photo by Marilyn Swanson)

By: Donald L Swanson

Currently before the U.S. Supreme Court on a Petition for writ of certiorari is Fast Auto Loans, Inc. v. Maldonado, Case No. 21-31 (Petition filed 7/7/2021).

The Question

In Fast Auto v. Maldonado, the question is this:

  • Can state law place a limitation the operation of the Federal Arbitration Act?

The General Answer

The general answer is, of course, “No.” The U.S. Supreme Court has previously declared:

  • When parties contract for arbitration, “indicating their intention to use individualized rather than class or collective action procedures,” their obligation to comply with such contract is protected “pretty absolutely.”  Epic Systems Corp. v. Lewis, 138 S. Ct. 1612, 1621 (2018).

The Petition’s History

The Fast Auto v. Maldonado Petition is from a ruling by the California Supreme Court that California’s McGill Rule (which prevents arbitration of certain claims) is controlling, notwithstanding the terms and provisions of the Federal Arbitration Act.

The California Supreme Court in Fast Auto v. Maldonado follows a Ninth Circuit opinion on the same subject: Blair v. Rent-A-Center, Inc., 928 F.3d 819 (9th Cir. 2019).

The Blair v. Rent-A-Center Rationale

Here’s an abbreviated version of the Ninth Circuit’s rationale in Blair v. Rent-A-Center.

–Federal Arbitration Act provisions

The Act directs courts to treat arbitration agreements as “valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.”

A saving clause in the Act excuses arbitration based on “generally applicable contract defenses, such as fraud, duress, or unconscionability,” unless the defense targets arbitration by name or by “interfering with fundamental attributes of arbitration.”

–California’s McGill Rule

California consumer protection statutes authorize a public injunction remedy, when the primary purpose and effect of the injunction is to prohibit unlawful acts that threaten future injury to the general public.

Private injunctions “resolve a private dispute” between the parties and “rectify individual wrongs.”  Whereas, public injunctions benefit “the public directly by the elimination of deceptive practices,” not the plaintiff who “has already been injured, allegedly, by such practices and is aware of them.”

California’s Supreme Court held in McGill that:

  • an agreement to waive the right to seek public injunctive relief violates California’s statute providing that “a law established for a public reason cannot be contravened by a private agreement”;  
  • public injunctive relief available under consumer protection statutes is “by definition” primarily “for the benefit of the general public” and qualifies as a defense under the Act’s saving clause;
  • waiver “of the right to seek public injunctive relief under these statutes would seriously compromise the public purposes the statutes were intended to serve”;
  • therefore, such waivers are “invalid and unenforceable under California law”;
  • the McGill contract is an arbitration agreement waiving plaintiff’s right to seek a public injunction through litigation; and
  • a waiver, preventing plaintiff from seeking a public injunction in any forum, is unenforceable under California law.

Petitioner’s Argument in Fast Auto v. Maldonado

The Petitioner in Fast Auto Loans, Inc. v. Maldonado, by contrast, asserts that California’s McGill rule is preempted by the Federal Arbitration Act and cannot provide an exception because:

  • The Act requires courts to “enforce arbitration agreements according to their terms”;
  • Arbitration agreements requiring individualized arbitration are “protected pretty absolutely” by the Act;
  • State law is preempted, if it is an obstacle to the accomplishment and execution of the full proposes and objectives of the Act;
  • States cannot carve out particular categories of disputes from the operation of the Act; and
  • State courts must abide by the Act, which is the supreme law of the land under the U.S. Constitution and the opinions of the U.S. Supreme Court.

Conclusion

It will be interesting to see what the U.S. Supreme Court does with the Fast Auto Loans, Inc. v. Maldonado Petition.

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