The Third Circuit Court of Appeals has held that the Federal Arbitration Act does not preclude a court from applying state law unconscionability principles to void a class arbitration waiver. At the district court, American Express argued that plaintiff should be required to arbitrate his claims on an individual basis because Utah law governed the class arbitration waiver clause, and expressly allowed class arbitration waivers in consumer credit agreements. In opposition, plaintiff argued that, as a New Jersey resident, New Jersey law applied and that application of Utah law would violate New Jersey’s public policy against class arbitration waivers, so New Jersey choice of law principles dictated that the choice of Utah law was invalid. The district court agreed with American Express and dismissed the complaint.

In the ensuing appeal, the Third Circuit passed on its prior opinion in Gay v. CreditInform, 511 F.3d 369 (3d Cir. 2007), where the court applied the parties’ contractual choice of Virginia law in concluding that the waiver was valid, rejecting Pennsylvania cases on the unconscionability issue as being preempted by the FAA. According to the court, this issue in Gay appeared to be dicta. But “[w]hether dicta or not,” the defense New Jersey law provides to class arbitration waivers is “a general contract defense” that applies to all waivers of classwide actions, not simply those that also compel arbitration. Thus, following the Ninth Circuit’s lead in Lowden v. T-Mobile USA, Inc., 512 F.3d 1213 (9th Cir. 2008), the court held that the application to an arbitration provision of a general ban on class action waivers was not preempted by the FAA because the ban applies equally to a contract that permits only individual, not class, litigation. Having so concluded, the court next turned to the question of whether New Jersey courts would enforce Utah law allowing class arbitration waivers. After reviewing the salient New Jersey Supreme Court decisions, the court decided that class arbitration waivers violate fundamental New Jersey public policy “as applied to small-sum cases.” The court next determined that New Jersey’s policy against such waivers conflicted with Utah law and that, although both states had significant contacts with the litigation, it seemed likely that the New Jersey Supreme Court would determine that New Jersey had a materially greater interest than Utah in the enforceability of a class arbitration waiver that could operate to preclude a New Jersey resident from relief under New Jersey law. Accordingly, New Jersey law applied and the waiver was held to be unconscionable. Homa v. American Express Co., Case No. 07-2921 (3d Cir. Feb. 24, 2009).