Ninth Circuit Limits the FAA in a Case with Potentially Far-Reaching Implications

“Sign this contract, which contains an arbitration clause, and pay up, or you’re going to jail!”  Consumers in California faced this situation, which was addressed by the Ninth Circuit this week in a case called Breazeale v. Victim Services, Inc., No. 15-16549 (9th Cir. Dec. 27, 2017) (click here for a copy of the opinion). I was involved as an amicus in this case.

The defendants were basically collections agencies working together with local district attorneys to help administer a deferred prosecution program for consumers accused of writing bad checks.  If you wrote a bad check, you would receive a letter, on the letterhead of the local district attorney’s office, describing probable criminal prosecution and jail time for writing a bad check.  The letter also states you could avoid criminal prosecution by enrolling in a bad check diversion program, which is administered by private entities under contract with the local district attorney.  To successfully complete this diversion program and avoid prosecution, the individual must complete classes, pay restitution to the victim, and pay fees for the diversion program.  The letter sent to the individuals also included an arbitration clause for any dispute arising from this diversion program.

The plaintiffs filed a class action alleging that the defendants’ administration of the diversion program violated state and federal consumer protection laws governing collection abuses.  The district court refused to enforce the arbitration clause contained in the letters received by the plaintiffs, and the Ninth Circuit affirmed.

Relying on the history and original intent of the FAA (an approach I appreciate and which more courts should follow), the Ninth Circuit recognized that the FAA was designed for privately negotiated commercial agreements.  However, the agreement here was not a commercial, negotiated agreement.  The agreement at issue was in effect a plea deal between an individual and a party acting on behalf of a prosecutor in order to resolve alleged violations of criminal law.  The FAA, which does not apply to this agreement, therefore provided no basis to compel arbitration.

The Ninth Circuit also relied on federalism arguments, noting that the FAA should not apply in this context because states have primary authority for defining and enforcing their own criminal law.

I appreciate the court’s reasoning and sensible limitations to the FAA, and the court’s rationale can have implications in several other contexts.  More courts, especially the Supreme Court, should rely on the original intent and language of the FAA.  For example, consider religious arbitration and family law matters.  Under the Ninth Circuit’s decision in the Breazeale case, the FAA should not apply because the FAA only governs privately-negotiated commercial agreements.  The Ninth Circuit’s broad rationale would stop the application of the FAA in any non-commercial setting.  Also, consider a retainer agreement containing an arbitration clause between a lawyer and client, and suppose a dispute between the client and attorney involves violations of a state’s ethics code. Because the regulation of the legal profession is traditionally a matter of state concern, the Ninth Circuit’s federalism rationale in Breazeale suggests the FAA should not apply.  Also, consider an assault case between two citizens of the same state, and suppose a tort action is filed in state court arising out of the assault (I’ve seen many employment cases involving this fact pattern where an employee is assaulted at work).  What federal interest is there in applying the FAA to such a state court action involving state tort law?   The Ninth Circuit’s FAA opinion regarding non-commercial settings and federalism can have implications in several other settings where arbitration is currently used.

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