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Thursday, August 7, 2014

Malone v. Superior Court: Court of Appeal Upholds Arbitration "Delegation Clause"

In Malone v. Superior Court (California Bank & Trust) (6/17/14) --- Cal.App.4th ---, the Court considered whether a delegation clause -- one that delegates to the arbitrator issues regarding the enforceability of the arbitration clause -- is unconscionable. Malone a predates the California Supreme Court's decision in Iskanian, but it still is worth noting. 

The defendant in a wage and hour class action, CB&T, moved to compel arbitration, and the plaintiff opposed on unconscionability grounds. The defendant argued that the arbitration agreement's delegation clause required the arbitrator to decide the issue, and the plaintiff argued that the delegation clause itself was unconscionable. The trial court found that the delegation clause was not unconscionable and compelled arbitration. The plaintiff took a writ, which the Court of Appeal denied, holding as follows:

If a party challenges the enforceability of a delegation clause alone, the court determines the issue. If a party challenges the enforceability of the arbitration agreement in its entirety, the arbitrator determines the issue. Slip op. at 8-9.

To be enforceable, a delegation clause must be clear and unmistakable. Slip op. at 9-10.

Earlier cases held that delegation clauses were substantively unconscionable on three grounds: (1) such clauses are outside the reasonable expectation of the parties; (2) such clauses are not bilateral; and (3) the arbitrator has a self-interest in finding arbitration agreements enforceable. Slip op. at 10-15.

The delegation clause here was bilateral in that either party may challenge the enforceability of the agreement, and any such challenge would be referred to an arbitrator. Slip op. at 15-16.

The Federal Arbitration Act (FAA) preempts any finding that a delegation clause is substantively unconscionable because the clause raises an inference of bias on the part of arbitrators purportedly acting in their own financial interests. Slip op. at 16-24. Any such finding would be "nothing more than an expression of a judicial hostility to arbitration, based on the assumption that a paid decisionmaker cannot be unbiased...." Slip op. at 23.

The arbitration clause at issue was not "outside the reasonable expectations of the parties." Slip op. at 24-25.

The opinion is available here.

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