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Federal Preemption: The FAA Trumps GBL 399-c’s Prohibition of Mandatory Arbitration Agreements

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  • Posted on: Apr 13 2022

By: Jeffrey M. Haber

Mandatory arbitration has been around for a long time. It is a mechanism used by, among others, businesses to require consumers to arbitrate their disputes rather than litigate their claims in a court of law. Although in theory a consumer can opt-out of the arbitration requirement, in reality to do so would mean that he or she would not obtain the product or service. For example, a person cannot buy something online, subscribe to a service, or join a club or organization without agreeing to the provider’s “terms of service” – terms that typically include mandatory arbitration requirements or other conditions precedent to a claim.

[Ed. Note: we previously wrote about the foregoing issue here.]

A mandatory arbitration clause, much like any negotiated arbitration provision, typically specifies the arbitration provider (such as, JAMS or the AAA), the location for the arbitration, and the rules that will be applied in arbitration (such as the Commercial Rules of the AAA). In addition, as seen more recently, a mandatory arbitration clause will prohibit the individual from bringing his/her claim as a class action. 

The use of mandatory arbitration agreements can be traced to the U.S. Supreme Court’s endorsement of arbitration and its interpretation of the Federal Arbitration Act (“FAA”). For example, in AT&T Mobility v. Concepcion, the Court held, in a 5-4 ruling, that corporations could ban individuals from enforcing their rights through a class action even when the individual’s claims were too small and more suitable for class treatment.1 In Epic Systems Corp. v. Lewis, a majority of the Court (again, in a 5-4 decision) held that the FAA required the courts “to enforce arbitration agreements according to their terms” and that as such employers could require employees to submit all work-related disputes to individual arbitration, as opposed to class or collective litigation.2

In Lobel v. CCAP Auto Lease, Ltd., a court in the commercial division of the New York Supreme Court in Westchester County dismissed a consumer class action on the grounds that the arbitration clause at issue required individual arbitration, notwithstanding the prohibition of mandatory arbitration under GBL § 399-c. Lobel v. CCAP Auto Lease, Ltd., 2022 N.Y. Slip Op. 50256(U) (Sup. Ct., Westchester County Apr. 8, 2022) (here). As discussed below, both New York state and federal courts have held that the FAA preempts GBL § 399-c.

The Primary Principles at Issue in Lobel

Federal law strongly favors the enforcement of arbitration agreements. The U.S. Supreme Court has described the FAA as being “designed to promote arbitration,” “embod[ying] [a] national policy favoring arbitration,” and reflecting “a liberal federal policy favoring arbitration agreements, notwithstanding any state substantive or procedural policies to the contrary.”3 As with the FAA, New York also has a “long and strong public policy” favoring the enforcement of arbitration agreements.4 

The FAA provides that agreements to arbitrate are “valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.”5 When an agreement to arbitrate falls within the scope of the FAA, federal law, not state law, “governs [the] issue” of arbitrability.”6 This is critical when, as in Lobel, a state law (e.g., GBL § 399-c) is inconsistent with federal law.

Under New York law, mandatory arbitration agreements in consumer transactions are prohibited.7 In that regard, GBL § 399-c provides, in relevant part, that “[n]o written contract for the sale or purchase of consumer goods … to which a consumer is a party, shall contain a mandatory arbitration clause …. The provisions of a mandatory arbitration clause shall be null and void.”8 Notwithstanding, both state and federal courts in New York have held that GBL § 399-c is preempted by the FAA.9 

Lobel v. CCAP Auto Lease, Ltd.

Plaintiff alleged that on or about July 31, 2018, he entered into a lease agreement (the “Lease”) with Chrysler to lease a 2018 Jeep Grand Cherokee for a 36-month term ending on July 21, 2021. The Lease provided for a total monthly payment of $539.97, which included payment for plaintiff’s proportionate share of the New York State sales tax due thereunder. 

On or about June 22, 2021, plaintiff executed a one-month Lease Extension Authorization, which extended the Lease to August 30, 2021. Plaintiff alleged that Chrysler improperly added to the $539.97 monthly payment a charge of $45.22 for New York State sales tax – a tax amount that he had already paid at the outset of the Lease. 

On or about August 3, 2021, plaintiff executed a two-month Lease Extension Authorization by which the Lease was further extended to October 30, 2021. Plaintiff alleged that once again Chrysler added to the $539.97 monthly payment an additional monthly charge of $45.22 for New York State sales taxes that had already been paid. 

Relevant to the court’s decision, the Lease contained a broad arbitration clause. In pertinent part, the clause provided that “ANY AND ALL CLAIMS [WOULD] BE RESOLVED BY INDIVIDUAL ARBITRATION AND NOT IN COURT” if one of the parties “REQUESTS ARBITRATION.”  The arbitration clause also provided that by signing the Lease, plaintiff would be waiving “ALL RIGHTS TO PROCEED IN A CLASS ACTION OR CLASS ARBITRATION.”

Based upon the foregoing allegations, plaintiff asserted claims for unjust enrichment and for violation of GBL § 349. Plaintiff brought the action in his individual capacity and on behalf of similarly situated consumers who: (1) leased motor vehicles from Defendants; (2) “rolled” the sales tax associated with their lease transactions into the monthly lease payments that they made thereafter; (3) extended the vehicles’ lease terms at the end of their respective original terms; and (4) have been charged sales tax in connection with their lease extensions on the same portions of their monthly lease payments which already reflect prior sales tax that had been charged, such that they paid a purported “tax upon a tax”.

Defendants moved to compel a non-class arbitration pursuant to CPLR § 7503(a). 

Defendants argued that the FAA applied and that under the FAA the arbitration clause in the Lease was valid, irrevocable, and enforceable. Since the FAA governed the issue, defendants claimed that the FAA pre-empted any state law provision, such as GBL § 399-c, that was inconsistent with the agreement’s enforceability. 

Defendants also claimed that plaintiff’s two causes of action fell within the scope of the arbitration, since the sales tax charged under the Lease arose out of or was related to the Lease. Defendants further argued that, as a matter of contract interpretation, plaintiff was prohibited from pursuing class-wide arbitration as the arbitration clause unambiguously provided that “any and all claims [would] be resolved by individual arbitration,” and that plaintiff “waive[d] all rights to proceed in a class action or class arbitration”. 

In opposition, plaintiff argued that sales taxes, and a vendor’s duty to collect such taxes, arise out of New York State tax statutes, and not private contracts. As such, the FAA did not apply because the dispute involved intrastate commerce. And, because only intrastate activity was at issue, the FAA did not preempt New York law, and the Lease’s arbitration provision was null and void pursuant to GBL § 399-c.

Plaintiff further argued that defendants’ motion should be denied because they did not meet their burden of proving a clear and unequivocal agreement to arbitrate claims for the imposition of an unauthorized “tax upon a tax”. Plaintiff maintained that defendants did not show that plaintiff’s claims fell within the scope of the Lease because they did not arise out of or relate to the “Vehicle, the Lease” or “any claim based on or arising from an alleged tort”. 

The motion court granted the motion.

As an initial matter, the court found that plaintiff failed to avail himself of the opt-out opportunity allowed under the Lease: “It is … undisputed that notwithstanding the provision in [the arbitration provision] of the Lease that expressly stated Plaintiff’s ‘right to opt out of arbitration . . . within 30 days after execution of the Lease,’ Plaintiff never notified Defendants that he was exercising his right to opt out of arbitration, neither during the 30-day opt out period or at any time thereafter.”

Turning to the question of whether federal or state law applied, the court concluded that the FAA governed the dispute. The court explained that plaintiff, a New York resident, had acknowledged in the complaint that he obtained lease financing from a Delaware corporation and that defendants actively participated in interstate commerce by providing financing for automobile dealers and consumers throughout the United States. Such allegations, concluded the court, were sufficient to show the existence of interstate commerce. Since the FAA applied, the court held that it pre-empted application of GBL § 399-c.

Next, the court held that the arbitration clause in the Lease was valid and enforceable. Looking at the language of the clause, the court found it to be “unambiguous” and “broad” such that any reasonable person would understand that they agreed to binding arbitration over any claim, dispute or controversy. 

The court also held that whether the dispute should be arbitrated was for the arbitrator to decide. The court explained that since the arbitration clause incorporated the rules of the AAA, it was for the arbitrator to determine issues of arbitrability. Under Rule 9 of the Consumer Arbitration Rules and Mediation Procedures of the AAA, noted the court, “[t]he arbitrator shall have the power to rule on his or her own jurisdiction, including any objections with respect to the existence, scope, or validity of the arbitration agreement or to the arbitrability of any claim or counterclaim.”  

[Ed. Note: this Blog recently examined the gatekeeper rule here.]

The court noted that even if the parties did not incorporate the rules of the AAA, and the court was required to decide the issue of arbitrability, it would compel arbitration: “it is equally clear that the two related causes of action in the Complaint are entirely grounded in allegations concerning the sales tax charged under the Lease, and thus ‘arise out of’ the Lease.” The court rejected plaintiff’s contention that because the complaint focused on the collection of New York State sales taxes, the two causes of action did not “aris[e] out of or relate[] to the Vehicle [or] th[e] Lease”. “A plain reading of the Complaint,” said the court, “reflects that its two related causes of action challenge the terms and conditions of the Lease, namely what amount of sales tax, if any, should be assessed against Plaintiff and others who have extended their respective leases, and thus those claims fall within the scope of the Lease’s broad arbitration clause.”  

As a final matter, the court rejected plaintiff’s argument that the non-signatory defendants should be compelled to defend themselves in court. The court held that “[d]efendants are entitled to enforce [the arbitration clause] of the Lease pursuant to the doctrine of equitable estoppel.” Under New York law, courts will “estop a signatory from avoiding arbitration with a nonsignatory” where “the issues the nonsignatory is seeking to resolve in arbitration are intertwined with the agreement that the estopped party has signed”. In other words, said the court, “Plaintiff cannot have it both ways such that he cannot, on the one hand, seek to hold the nonsignatory liable pursuant to duties imposed by the agreement, which contains the arbitration provision, but, on the other hand, deny the arbitration’s applicability because the defendant is a nonsignatory’”. (Citations and internal quotation marks omitted). 

[Ed. Note: this Blog examined the doctrine of equitable estoppel in the context of arbitration here, here, and here.]


Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP.

This article is for informational purposes and is not intended to be and should not be taken as legal advice.

References

  1. 563 U.S. 333 (2011).
  2. 138 S. Ct. 1612 (2018).
  3. AT&T, 563 U.S. at 345-46 (citations omitted).
  4. E.g., American Intl. Specialty Lines Ins. Co. v. Allied Capital Corp., 35 N.Y.3d 64, 70 (2020).
  5. 9 U.S.C. § 2.
  6. Blimpie Intl., Inc. v. D’Elia, 277 A.D.2d 69, 70 (1st Dept. 2000) (quoting, Moses H. Cone Mem. Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24 (1983)). See also N.J.R. Assoc., L.P. v. Tausend, 19 N.Y.3d 597, 601-02 (2012).
  7. GBL § 399-c.
  8. GBL § 399-c(2).
  9. See, e.g., Marino v. Salzman, 51 Misc. 3d 131[A], 2016 N.Y. Slip Op. 50410[U] (App. Term, 2d Dept., 9th & 10th Jud Dists. 2016); Andersen v. Walmart Stores, Inc., 2017 WL 661188, at *8 (W.D.N.Y. 2017).
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