In recent companion decisions, the North Carolina Court of Appeals had to decide whether a governing North Carolina Supreme Court decision concerning class actions had to yield to a decision of the United States Supreme Court.
A contract is generally governed by state law, but when that contract includes an arbitration clause, the provisions of the Federal Arbitration Act come into play. The United States Supreme Court has wrestled with the intersection of the arbitration-friendly FAA and state law contractual defenses against contractual enforcement – like “unconscionability” – since at least the 1967 decision of Prima Paint Corp. v. Flood & Conklin Manufacturing Co., 388 U.S. 395 (1967). The FAA clearly prevents a state law from directly invalidating an arbitration clause – that is exactly what the FAA was enacted to prevent. But sorting out the perimeters of state law and the penumbra of the FAA is not always easy. See, for instance, the Supreme Court’s decision in Volt Information Sciences, Inc. v. Stanford University, 489 U.S 468 (1989), where Court held that the parties had agreed to a state-law provision that was otherwise antithetical to the FAA’s policies and remedial scheme.
Not only is it difficult to draw the FAA/state-law line, but the federal and North Carolina courts historically have reached opposite conclusions. In AT&T Mobility LLC v. Concepcion, 563 U.S. 321 (2010), the Supreme Court applied its FAA/unconscionability analysis to an arbitration clause containing a class action waiver. The Court held that under the FAA a state court can’t use state law “unconscionability” to get rid of a class action waiver contained in arbitration agreement. But the North Carolina Supreme Court, in a pre-Concepcion case, had adopted the opposite approach. In Tillman v. Commercial Credit Loans, Inc., 362 N.C. 93 (2008), North Carolina’s highest court said that “substantive unconscionability” could preclude enforcement of an arbitration clause prohibiting joinder of claims and class actions.
So what gives? The Court of Appeals of North Carolina concluded in a recent decision that Tillman is no longer good law because the legal theories upon which it was based have been undermined by the United States Supreme Court. The decision, Torrence v. Nationwide Budget Finance (N.C. Ct. App. Feb. 4, 2014), was unanimous, and the North Carolina Supreme Court need not take the case on discretionary review. The Court of Appeals reiterated its ruling in another case raising the issue, Knox v. First Southern Cash Advance (N.C. Ct. App. Feb. 4, 2014), decided the same day. So, for now at least, contractual waivers of class proceedings contained in arbitration provisions are fair game in North Carolina. Stay tuned for whether the North Carolina Supreme Court wants to weigh in concerning the Court of Appeals’ reading of its precedent.