Alert September 05, 2012

Third Circuit Holds that Federal Arbitration Act Preempts State Law

The United States Court of Appeals for the Third Circuit held that the Federal Arbitration Act preempted the application of the New Jersey Supreme Court decision in Muhammad v. County Bank of Rehoboth Beach, 912 A.2d 88 (N.J. 2006), which required a finding that a class-arbitration waiver in a credit card agreement was unconscionable and unenforceable. Plaintiff-appellant sought to bring a putative class action, but the lower court dismissed the case and required individual arbitration based on the class-action arbitration waiver contained in the credit card agreement. The Third Circuit upheld the lower court’s ruling, finding that the district court did not err by reinstating its prior order compelling arbitration, even though the factual record established that plaintiff-appellant could not effectively vindicate his statutory rights under the arbitration agreement. The Court reasoned that under the FAA, individual arbitration was plaintiff-appellant’s only remedy. Specifically, the Court noted that the FAA was enacted due to judicial hostility toward arbitration agreements and that the Supreme Court’s decisions in AT&T Mobility LLC v. Concepcion, 130 S.Ct. 3322 (2010) and Stolt-Nielson S.A. v. Animal Feed International Corp., 130 S.Ct. 1758 (2010), preclude courts from compelling class-arbitration when the parties have not agreed to it. In the Court’s view, if plaintiff-appellant were successful on appeal, there “were two possible remedies: [o]rdering a class-arbitration or invalidating [the] arbitration agreement so that he could proceed in a judicial action.” Since Concepcion and Stolt-Nielson precluded an order for class-arbitration, the only remedy would be invalidation of the arbitration agreement, which would be inconsistent with the FAA.