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Tuesday, May 27, 2014

Tiri v. Lucky Chances: Court Holds that Arbitration "Delegation Clause" Is Not Unconscionable

In Tiri v. Lucky Chances, Inc. (5/15/14) --- Cal.App.4th ---, the Court held that an arbitration agreement may delegate to an arbitrator the authority to decide whether the agreement is enforceable, and such a "delegation clause" is not procedurally unconscionable. 

The agreement at issue in Tiri provided: 
The Arbitrator, and not any federal, state, or local court or agency, shall have the exclusive authority to resolve any dispute relating to the interpretation, applicability, enforceability, or formation of this Agreement, including, but not limited to, any claim that all or any part of this Agreement is void or voidable. 
Slip op. at 2-3. The trial court found the arbitration agreement procedurally unconscionable, and the Court of Appeal reversed, holding as follows: 

Applicability of the Federal Arbitration Act (FAA) was immaterial because federal and state law incorporate the same policies regarding enforcement of arbitration agreements. Slip op. at 5-6. 

Under Rent-A-Center, West, Inc. v. Jackson (2010) 561 U.S. 63, 72 (Rent-A-Center), which applies equally to cases arising under the FAA and the California Arbitration Act (CAA), "while courts may consider enforceability challenges specific to delegation clauses, the arbitrator is to consider challenges to the arbitration agreement as a whole." Slip op. at 6-7. 

Also under Rent-A-Center, a delegation clause is effective if: (1) its language is clear and unmistakable; and (2) it is not revocable under state contract defenses such as fraud, duress, or unconscionability. Slip op. at 7-8. The delegation clause here was clear and unmistakable. Slip op. at 7-9. 

The agreement was not revocable as unconscionable under state law. Although it was procedurally unconscionable (slip op. at 12-13), the delegation clause was not substantively unconscionable because it "is not overly harsh, and does not sanction one-sided results." Slip op. at 14. 

The plaintiff argued that other clauses of the arbitration agreement were substantively unconscionable, but this argument was unavailing. Under Rent-A-Center, the court may consider only the unconscionability of the delegation clause itself, and not the unconscionability of the arbitration agreement as a whole. Slip op. at 15-16. 

Finally, the Court considered whether delegation clauses are per se substantively unconscionable. Slip op. at 16-17. The Court concluded that any such per se rule would be invalid under AT&T Mobility LLC v. Concepcion (2011) 563 U.S. ___, 131 S.Ct. 1740 (discussed here). Slip op. at 17-18. Because the delegation clause was not substantively unconscionable, the trial court erred in denying the defendant's motion to compel arbitration. Slip op. at 18. 

Tiri v. Lucky Chances is available here

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