The Death Knell for Consumer Class Actions? The Supreme Court Rules That Class Waivers in Consumer Arbitration Agreements are Enforceable and May Not Be Invalidated on the Grounds of State Law Unconscionability

Article

Business & Commercial Litigation Newsletter

June 21, 2011

By: Damian V. SantomauroJennifer Marino Thibodaux

Introduction

In a highly anticipated opinion in AT&T Mobility LLC v. Concepcion et ux., a sharply divided Supreme Court of the United States held that the Federal Arbitration Act (“FAA”) preempts California law that invalidated as unconscionable class action waivers in arbitration agreements in consumer contracts of adhesion. 131 S. Ct. 1740 (2011). While the issue before the Court was the validity of the California law set forth in Discover Bank v. Superior Court, 36 Cal. 4th 148 (2005), the Concepcion decision will likely have far-reaching implications, particular in jurisdictions, such as New Jersey, where class action waivers in arbitration agreements have been found to be unconscionable. Whereas such waivers may previously have been unenforceable, post-Concepcion courts will no longer be permitted to invalidate a class action waiver as unconscionable simply because it deprives the plaintiff consumer of the ability to proceed in arbitration on a class-wide basis.

Synopsis

Vincent and Liza Concepcion contracted for new cell phones and service with AT&T Mobility LLC (“AT&T”). The Concepcions purchased AT&T’s cell phone service and were not charged for their cell phones; they were, however, charged $30.22 as sales tax based on the retail value of the phones. Concepcion, 131 S. Ct. at 1744. The contract between AT&T and the Concepcions provided for arbitration of all disputes, including a class action waiver. The contract also contained several consumer-friendly provisions, including a provision that AT&T pay all costs for non-frivolous arbitration, that arbitration occur in the county where the customer is billed, and that, if the arbitrator awards a customer more money than AT&T’s last settlement offer, AT&T pay a $10,000 recovery plus doubled counsel fees. Id.

The Concepcions filed a class action lawsuit in the district court in California alleging false advertising and fraud claims based upon the $30.22 sales tax on the purportedly “free” phones. AT&T moved to compel arbitration pursuant to the contract, but the district court denied the motion, holding that the arbitration agreement was unconscionable pursuant to the Discover Bank rule, which provides that a class action waiver in an arbitration agreement in a contract of adhesion is unconscionable and unenforceable in settings where the claims involve small amounts of damages. The Ninth Circuit affirmed. Id. at 1744-45.

In a five-to-four decision, the Supreme Court reversed, holding that the FAA preempts California’s Discover Bank rule. Id. at 1753. Specifically, the Court held that the Discover Bank rule “interferes” with the purposes of the FAA, which the Court explained were the “enforcement of private agreements and encouragement of efficient and speedy dispute resolution.” Id. at 1749. As the majority concluded, “[r]equiring the availability of classwide arbitration interferes with fundamental attributes of arbitration and thus creases a scheme inconsistent with the FAA.” Id. at 1748. For these reasons, the majority held that the FAA preempted the Discover Bank rule — and similar state laws — because “[s]tates cannot require a procedure that is inconsistent with the FAA, even if it is desirable for unrelated reasons.” Id. at 1753.

In reaching its conclusion, the Court noted a variety of reasons that “[a]rbitration is poorly suited to the higher stakes of class litigation.” Id. at 1752. First, the Court stated that class arbitration, as compared to informal bilateral arbitration, is “slower, more costly, and more likely to generate procedural morass than final judgment.” Id. at 1750. Second, the Court reasoned that class arbitration “requires procedural formality” due, in part, to the protections awarded to absent class members. Id. at 1752. Third, the Court stated that class arbitration is risky for defendants because arbitration, by its nature, is informal and lacks “multilayered review.” Id. As a result, the Court found it “hard to believe that defendants would bet the company with no effective means of review, and even harder to believe that Congress would have intended to allow state courts to force such a decision.” Id. at 1753. Thus, the Court ruled that the Discover Bank rule — which did just that — was preempted by the FAA.

Practical Effects

Although there have not yet been many decisions interpreting Concepcion, the Supreme Court’s broad statements against class arbitration and in support of class action waiver compelling individual arbitration will likely eliminate the ability of plaintiffs to argue that the existence of a class action waiver in their arbitration agreement is unconscionable or otherwise renders their agreement to arbitrate unenforceable. See, e.g., Day v. Persels & Assocs., LLC, 2011 U.S. Dist. LEXIS 49231 (M.D. Fla. May 9, 2011). Thus, while New Jersey courts have previously ruled that class action waivers in arbitration provisions were unconscionable and unenforceable where the claims at issue were of sufficiently small value, see Muhammad v. County Bank of Rehoboth Beach, Delaware, 189 N.J. 1 (2006), those decisions are no longer viable in light of Concepcion and New Jersey courts will likely enforce those types of class action waivers going forward.

From a practical perspective, there may be fewer consumer class action litigations filed as more businesses begin to incorporate arbitration agreements containing class action waivers into their consumer contracts. Moreover, because the class action mechanism provides a basis for consumers to pursue smaller value claims in the aggregate when they would otherwise not be worth pursuing on an individual basis, the Concepcion decision may result in a some consumer claims simply not being raised in either litigation or arbitration. In addition, use of class waivers in arbitration provisions may also become more prevalent in employment agreements as the rationale underlying the Concepcion decision will likely be applicable to employment agreements as well.

There has been some speculation that the Concepcion decision sounds the death knell for consumer class actions and that all consumer claims will, going forward, be resolved in individual arbitration, if at all, unless the parties expressly include a provision agreeing to class arbitration. Such speculation is both premature and not likely to come to fruition. It is more likely there will be a significant reduction in the number of class arbitrations. However, while Concepcion is likely to be broadly applied by federal and state courts, it is unlikely to eliminate all consumer class actions.

First, some businesses that do not currently have arbitration agreements in their consumer or employee contracts may elect to continue to do so notwithstanding Concepcion. Claims by consumers or employees against those business that do not have an arbitration agreement could still potentially proceed as class actions.

Second, Concepcion only addresses class waivers in arbitration provisions contained in contracts between the consumer and the company. Thus, as a practical matter, there is a direct and enforceable contract between the parties. It is less clear the extent to which an arbitration provision (regardless of whether it contains a class waiver) could compel individual arbitration in other situations (for example, purchases through the internet, purchases from the company through a third-party vendor, etc.). Thus, there may be a variety of consumer-type actions that could be asserted as class actions simply because those plaintiffs are not parties to the arbitration agreement and/or the arbitration provision cannot be enforced against those plaintiffs.

Third, legislators, at the urging of consumer groups, may press Congress to amend the FAA to overturn Concepcion. Indeed, the Arbitration Fairness Act, which potentially could alter the impact of the Concepcion decision by eliminating mandatory arbitration, was recently reintroduced in Congress, although it likely has little chance of passing Congress.

Fourth, neither Concepcion, nor the Supreme Court’s decision in Stolt-Nielsen S. A. v. AnimalFeeds Int’l Corp., 130 S. Ct. 1758 (2010), precludes class arbitration where the parties do not agree that their arbitration agreement is silent on the issue. In Stolt-Nielsen, the Court ruled that a party may not be forced to arbitrate on a class-wide basis unless there is a contractual basis for finding that it agreed to class arbitration. However, the parties in that case expressly agreed that their arbitration agreement was silent on class arbitration in that they had not reached an agreement on the issue. As such, the decision does not compel the conclusion that class arbitration is always foreclosed. Indeed, there may be circumstances where, in the absence of an express reference to class arbitration one way or the other, an arbitrator or a court may find that the parties agreed to class arbitration. See Sutter v. Oxford Health Plans LLC, 2011 U.S. Dist. LEXIS 17123 (D.N.J. Feb. 22, 2011) (“Here, after giving full consideration to Stolt-Nielsen, [the arbitrator] concluded that the contractual basis between these parties, i.e. their arbitration agreement, clearly and unambiguously expressed their intent to authorize class action arbitration despite omission of the words ‘class action.’ Simply put, Stolt-Nielsen does not militate a contrary result.”).

Fifth, the Concepcion Court expressly recognized that, while a class action waiver is not in and of itself unconscionable, class action waivers and arbitration agreements in general may still be found unconscionable for other reasons. Specifically, the Court stated that: “States remain free to take steps addressing the concerns that attend contracts of adhesion — for example, requiring class action-waiver provisions in adhesive arbitration agreement to be highlighted.” 138 S.Ct. at 1750. Existing State laws with respect to the procedural and substantive unconscionability of arbitration provisions likely remain unaffected by Concepcion and, as such, it is likely that some arbitration provisions containing class action waivers will still be invalidated on these grounds.

Conclusion

Although the Concepcion decision is of recent vintage and involved a California law, it is clear that it will be applied in other jurisdictions and will preclude plaintiffs from arguing that a class action waiver in their arbitration agreement is unconscionable. As such, whereas arbitration with consumers previously may not have been a palatable proposition to business because of the potential for a class arbitration, Concepcion arms these businesses with the ability to obtain the benefits of an individual consumer arbitration without the threat of it morphing into class-wide liability.

Prudent companies that do not currently have arbitration provisions in their consumer agreements (or employment contracts) should consider including them and incorporating a class action waiver. Certainly, those businesses that currently have arbitration provisions in their consumer contracts (or employment contracts) without class action waivers should add a class action waiver to obtain the benefit of the Concepcion decision. Of course, in crafting any arbitration provision (regardless of whether it contains a class action waiver) in a consumer contract, companies should be cognizant that Concepcion was limited to the validity of class action waivers and does not preclude a state from invalidating an arbitration agreement for substantive or procedural unconscionability. Thus, it will still be imperative for companies to ensure that their arbitration agreements comport with the applicable law on unconscionability so that they may be enforceable in the event an action is filed against them.