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California Court Invalidates Law Prohibiting the Use of Class Action Waivers

10.22.12
Kymberly Kochis and Dominic Anamdi

The California Court of Appeal for the Second District rejected the state’s attempt to prohibit the waiver of class action agreements, changing how insurers should approach mandatory arbitration provisions. In 2011, the Supreme Court of the United States held in AT&T Mobility, LLC v. Concepcion that the Federal Arbitration Act (FAA) preempts state laws prohibiting the use of class action waivers in arbitration agreements. A California Court of Appeal recently applied the Concepcion decision, Sherf v. Rusnak/Westlake, nullifying the state’s authority to prohibit the waiver of class action rights in arbitration agreements. Although the defendant in Sherf was not an insurer, this case is of particular importance to carriers because it reinforces the applicability of mandatory arbitration provisions in state court.

California’s authority to prohibit class action waivers comes from the California Consumers Legal Remedies Act (CLRA), which creates a statutory remedy for consumers who suffer damages as a result of a business’ unfair or deceptive practices. The CLRA expressly permits the use of class actions and asserts that “any waiver … is contrary to public policy and shall be unenforceable and void.” Cal. Civ. Code § 1751. In Sherf, a consumer sued his car dealership, alleging the dealership improperly charged a statutory tire fee for a vehicle that did not include a spare tire. The consumer also alleged that he was improperly charged for a tire service contract for a vehicle that did not qualify for the service plan. The complaint included a class action cause of action pursuant to the CLRA. The dealership moved to compel arbitration, strike the class action claims and stay the proceeding until the completion of arbitration, arguing that the consumer waived his class action rights in the underlying sale contract.

In its ruling, the trial court acknowledged Concepcion, but reasoned it did not invalidate the CLRA’s anti-waiver provision because the provision in the CLRA was “facially neutral.” The California Court of Appeal disagreed and reversed. The court reasoned that “Concepcion rejects the argument that class action waivers in consumer contracts can be invalidated in order to vindicate statutory rights even if the statutory right is desirable for other reasons.” Sherf at *5. The court held that, under Concepcion, the CLRA could not automatically invalidate the underlying arbitration agreement. However, since the FAA permits arbitration agreements to be invalidated by generally applicable contract defenses, the court remanded the case for the trial court to decide whether the arbitration agreement was unconscionable under general principles of California law.

The Sherf case reinforces the strong federal policy favoring the enforcement of arbitration agreements. Therefore, if a particular state has no regulation prohibiting the use of arbitration clauses in insurance contracts, a reasonable arbitration clause may be binding and enforceable.


NOTE: This article is an interpretation of current law and is offered for informational purposes only. This material is not legal advice and should not be construed or used as a substitute for the advice of an attorney.