The main thrust of AT& T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011) is that when state law prohibits the arbitration of a particular type of claim, the conflicting state law is preempted and displaced by the FAA.
In AT&T, Vincent and Liza Concepcion (the “Concepcions”) purchased cell phones from AT&T Mobility LCC (“AT&T”)and the contract of adhesion that they Concepcions signed provided for arbitration of all disputes between the parties. A&T had advertised that the phones were free, but nonetheless charged the Concepcions $ 30.22 in taxes. The Concepcions' suit was consolidated with similar claims in a class action suit filed in federal court alleging that AT&T had engaged in false advertising and fraud by charging sales tax on cell phones it advertised were free.
AT&T moved to compel arbitration under the terms of its contract with the Concepcions---the terms of the contract disallowed class arbitration. However, both the federal district court and the Ninth Circuit refused to grant AT&T’s motion to compel. Both courts reasoned that the arbitration provision at issue was unconscionable under California's Discover Bank rule, which provided that class-action waivers in consumer contracts of adhesion were unconscionable in cases where a party with superior bargaining power was alleged to have cheated large numbers of consumers out of individually small sums of money.
However, in the end, as stated above, the Court held that the Federal Arbitration Act of 1925 preempted state laws that prohibited contracts from disallowing class-wide arbitration, such as the Discover Bank rule. As its main pillar of reasoning, the Court portrayed the central policy of the FAA as enforcing arbitration agreements as they are written. As such, the FAA preempted any state law or policy, whether announced by legislatures or courts, that aimed specifically to limit the enforceability of arbitration agreements, or "that derive[ed] their meaning from the fact that an agreement to arbitrate is at issue." Such "discriminatory" laws and policies, or so the Court stated, were not the kinds of grounds "at law or in equity for the revocation of any contract" that were permissible defenses to arbitration agreements under § 2 of the FAA. California's Discover Bank rule, the Court concluded, operated to bar or limit arbitration provisions in a discrete manner, as opposed to putting arbitration agreements "on the exact same footing" as other species of contract. And consequently, the Discover Bank rule was preempted by the FAA.
The dissenting opinion found no grounds for FAA preemption of California law that described grounds for refusing to enforce "class action waivers." According to the dissent, the California Court's interpretation of general statutory requirements as making certain class-action waivers in consumer contracts exculpatory and unconscionable under California law represented "application of a more general [unconscionability] principle" to specific circumstances. Because the rule "applie[d] equally to class action litigation waivers in contracts without arbitration agreements as it d[id] to class arbitration waivers in contracts with such agreements," it put arbitration agreements on the same footing with some other contracts and "[could not] fairly be characterized as a targeted attack on arbitration."
As one article noted:
The lynchpin of Scalia's rationale is that under the FAA neither unconscionability nor any state law regulating exculpatory contract provisions can operate in a way that relies "on the uniqueness of an agreement to arbitrate." Yet the suggestion that the Discover Bank rule is discriminatory in its operation in the context of arbitration provisions is belied by the fact that in deciding Discover Bank, the California Court relied heavily on America Online, Inc. v. Superior Court, a decision denying enforcement to a contractual waiver of class action in a consumer contract without an arbitration clause. The case involved a subscription agreement that included Virginia forum-selection and choice-of-law clauses. However, because Virginia does not permit consumer class actions, the court reasoned that the provisions were the "functional equivalent of a contractual waiver" of the right to bring a class action. The court concluded that the effective denial of class-wide remedies would "substantially diminish the rights of California residents" and denied enforcement to the "waiver," thereby paving the way for a class-action suit in court. Analogous decisions involving nonarbitration contexts have been reached by a number of courts, and Discover Bank has itself been relied upon as a precedent in decisions striking down class-action waivers in contracts without arbitration clauses. As the Washington Supreme Court explained, in circumstances such as these, "[t]he arbitration clause is irrelevant to the unconscionability"; exculpatory clauses "do not change their character merely because they are found within a clause labeled 'Arbitration.'"
As far as the diverging opinions concerning whether the Discover Bank rule discriminated against arbitration are concerned, I have to agree with the dissent’s opinion. Just because the application of a rule has been primarily argued and applied in one context, it does not follow that the rule discriminates against that particular context. At best, arbitration was discriminated against through practice, not by the rule itself. Perhaps this was enough for the majority.
Who do you agree with on this point? The majority or the dissent?
I agree with you and the dissent. It makes complete sense that exculpatory clauses don't change their character simply because they're found within an arbitration clause. Yet, that's precisely what the majority opinion effectively says. The majority takes an unconscionability analysis and shifts it into the realm of the FAA in saying that it's preempted. To me, the decision represents a general hostility toward class arbitration (i.e., SCOTUS views class arbitration as fundamentally different from bilateral arbitration and shouldn't be allowed), and due to that hostility, the majority is willing to hang its hat on any sort of analysis that could support its decision and underlying motivation. Here, the majority hangs its hat on reasoning that appears very stretched.
ReplyDeleteI agree with the dissent in this case which found no grounds for FAA preemption of California law. As a result of these decisions the Supreme Court has made it really clear that they are actively against class action arbitration. This time the Supreme Court used the FAA as a tool to combat class action arbitration, but in the end I keep asking myself . . . why? Why does the Supreme Court have such a deep hatred for class action arbitration. I can only see negatives in not allowing class arbitration. For instance, incentivizing corporations to defraud their customers created economic waste (the misappropriations of these funds through fraudulent means shifts these funds from a more productive avenue to a dead end).
ReplyDeleteThe reasoning in the Concepcion case is baffling. The text of the FAA is clear that a contract with an agreement to arbitrate will be valid, irrevocable, and enforceable, "save upon such as grounds as exist at law or in equity for the revocation of any contract." If unconscionability is not such a ground existing at law under traditional contract theory, then I don't know what is. The Court states that, "although § 2's saving clause preserves generally applicable contract defenses, nothing in it suggests an intent to preserve state-law rules that stand as an obstacle to the accomplishment of the FAA's objectives." However, it's unclear how a prohibition on class action waivers is an obstacle to the accomplishment of the FAA's objectives. Justice Scalia writes that requiring class wide arbitration "interferes with fundamental attributes of arbitration and thus creates a scheme inconsistent with the FAA." One argument for this is that a class action arbitration thwarts the informality of arbitration. And yet, the process of certifying a class does not necessarily mean that an arbitration proceeding has lost elements of informality. The Court also argues that the stakes are higher for defendants in class arbitrations--but this is not the same argument as Scalia's original argument, which is that the goals of the FAA, of enforcing arbitration agreements, will be thwarted.
ReplyDeleteI think what's interesting is that parties have to challenge the arbitration clause itself in order to prevent compulsory arbitration, and yet the court is here saying that the doctrine of unconscionability cannot be formulated towards specific arbitration-relevant provisions.
ReplyDeleteHowever, I feel there are 2 rationales for this. Firstly, unconscionability is necessarily a very broad test and thus it is unusual for it to be boiled down to something as specific as not being able to ban class-resolution. The specific nature of this test towards an issue easily associated with arbitration gives the court reason to say it can be pre-empted. Secondly, the decision appears to suggest that types of terms that can tend to affect arbitration agreements more than other contracts will be considered to be specifically aimed at them. Thus, general rules can be espoused to judge unconscionability, for example, but if they have a disproportional effect on arbitration agreements they will be deemed to be contrary to the FAA.