This article summarizes the U.S. Supreme Court decisions in Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp. and AT&T Mobility LLC v. Concepción, as well as related earlier decisions. The discussion focuses on the effect of those decisions on arbitration jurisprudence. It was printed in the September 2011 issue of The Colorado Lawyer (Volume 40, Page 47) and will publish in two CBA-CLE Legal Connection blog posts. Reproduced by permission of the Colorado Bar Association. © Colorado Bar Association. All rights reserved.

Editor’s Note: This segment of the article highlights the AT&T Mobility LLC v. Concepción decision. The authors of this article, Dirk W. de Roos and Russell O. Stewart, along with Jay S. Horowitz, presented a CLE program on this subject and addressed the case as one of the most immediate attacks on class action litigation as it now exists. Are class action lawsuits obsolete? This seminar analyzed the decision and what may be its historic (and potentially almost inconceivable) impact on class action litigation. The program is available as a CLE homestudy in two formats: video on-demand and mp3 download.

By Dirk W. de Roos, Russell O. Stewart

In Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp., the U.S. Supreme Court held that no party is obligated to submit to class arbitration under the Federal Arbitration Act (FAA) when an arbitration agreement is silent about the parties’ intent to allow for class arbitration. In the later case of AT&T Mobility LLC v. Concepción, the Court held that the FAA preempted California law mandating class actions as a viable arbitration remedy. This article discusses both opinions and their impact on arbitration in the United States.

The AT&T Mobility v. Concepción Opinion

On April 27, 2011, the U.S. Supreme Court, in a case closely followed by class action attorneys, held that the FAA preempts California’s Discover Bank rule, which had held that consumer collective arbitration waivers were unconscionable and unenforceable. Justice Scalia, writing for a majority in AT&T Mobility v. Concepción,⁵⁵ explained that the California rule mandating the availability of class-wide arbitrations interfered with the FAA’s fundamental purpose of ensuring the enforcement of agreements to arbitrate in an efficient, streamlined procedure. AT&T Mobility fills in the blanks left by Stolt-Nielson and clarifies the Court’s views on class actions and arbitration.

The Discover Bank Rule

Discover Bank v. Superior Court⁵⁶ involved a consumer arbitration agreement that contained an express waiver of any right to maintain a class action. The California Supreme Court ruled that such a waiver was unconscionable in California if it was used in a consumer context and if the disputes between the contracting parties predictably involve small amounts of damages, and when it is alleged that the party with the superior bargaining power has carried out a scheme to deliberately cheat large numbers of consumers out of individually small amounts of money.⁵⁷

The Concepción Facts

Vincent and Liza Concepción signed a contract with AT&T for several cellular telephones. The contract required arbitration of any disputes. The sales agreement further required that claims be brought only in each party’s individual capacity, and not as plaintiffs or class members of any purported class or representative proceeding. In addition, the contract provided that “the arbitrator may not consolidate more than one person’s claims, and may not otherwise preside over any form of a representative or class proceeding.”⁵⁸

Balancing the waiver of class-action rights, the AT&T contract contains terms that are unusually favorable to consumers. For example, if there were an arbitration: (1) AT&T was required to pay all costs for non-frivolous claims; (2) the arbitration must take place in the county where the Concepcións were billed; (3) either party could elect to proceed in small claims court; (4) the Concepcións could choose whether the proceedings would be in person, by telephone, or by submittal; (5) AT&T was precluded from ever seeking attorney fees; and (6) if the Concepcións recovered more than AT&T’s last written settlement offer, AT&T was obligated to pay a $7,500 minimum recovery fee and twice the amount of the Concepcións’ attorney fees.

The Ninth Circuit’s View

A dispute arose when the Concepcións were billed $30.22 in sales tax for their “free” telephones. The Concepcións filed a putative class action complaint in the U.S. District Court in Los Angeles, alleging that AT&T had engaged in false advertising by charging sales tax on phones it advertised as free.

AT&T filed a motion in district court to compel arbitration under the FAA. The district court described the contract favorably, observing that the $7,500 minimum recovery fee was a substantial inducement to arbitrate, and finding that consumers who were members of a class “would likely be worse off” if they pursued their claims through class arbitration instead of individually. Nevertheless, the district court concluded that the arbitration agreement was unconscionable under California law because AT&T had “not shown that bilateral arbitration adequately substituted for the deterrent effects of class actions.”⁵⁹

The Ninth Circuit affirmed, agreeing that the attempted waiver of class action rights was unconscionable.⁶⁰ In addition, the Ninth Circuit reasoned that the Discover Bank rule merely “placed arbitration agreements with class action waivers on the exact same footing as contracts that bar class action litigation outside the context of arbitration.”⁶¹ Because § 2 of the FAA permits arbitration provisions to be declared unenforceable on “such grounds as exist in law or equity for the revocation of any contact,” the Ninth Circuit concluded that California law did not disfavor arbitrations and was not preempted by the FAA.

The Supreme Court’s Reversal

Justice Scalia, writing for five Justices, reversed the Ninth Circuit and held that notwithstanding California law, as a matter of federal law, class action waivers in arbitration clauses are not unconscionable. The Court first recalled that the FAA was adopted by Congress in response to widespread judicial hostility to the arbitration process. The FAA provides in relevant part that state laws disfavoring or refusing to enforce arbitration provisions are preempted. It states:

A written provision in any maritime transaction or a contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction . . . shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.⁶²

Under this section, arbitration provisions and agreements must be placed on equal footing with other contracts, and enforced according to their terms. Furthermore, the final phrase of the section permits agreements to be invalidated by generally applicable contract defenses, such as fraud, duress, or unconscionability, but not by defenses that apply only to arbitration or that derive their meaning from the fact that an arbitration agreement is at issue.

The Court noted that the California Supreme Court in Discover Bank held that agreements were unconscionable and unenforceable if: (1) the waiver is found in a consumer contract of adhesion; (2) the setting is likely one of a small amount of damages; and (3) there is an allegation that the party with superior bargaining power has carried out a scheme to deliberately cheat large numbers of consumers out of individually small amounts of money. The Court observed that California courts had frequently applied the Discover Bank rule to find class action waiver provisions unconscionable, and that California judges were more likely to hold unconscionable contracts to arbitrate when compared to other contracts.

The Court began its analysis with the observation that the preemption inquiry becomes complex when a doctrine of general applicability, such as unconscionability, “is alleged to have been applied in a fashion that disfavors arbitration.” As examples, Justice Scalia suggested that states might attempt to prohibit all agreements that fail to provide for judicially monitored discovery. Although such a rule would be generally applicable, it would in practice disfavor arbitration. Other examples might be a state law that declares unconscionable any agreements that fail to follow the Federal Rules of Evidence, or a state law that disallows any agreement that does not permit an ultimate disposition by a jury. These examples have historical analogies in judicial treatment of arbitration before the FAA was enacted in 1925.

Justice Scalia concluded that the overarching purpose of the FAA is to ensure the enforcement of arbitration provisions according to their terms so as to facilitate streamlined dispute resolution proceedings. That being so, the Discover Bank rule requiring the availability of class-wide arbitration interferes with the fundamental attributes of arbitration and thus created a scheme inconsistent with the FAA.

The Court held that the Discover Bank rule violates § 2 of the FAA by imposing an arbitration condition to which both parties had not agreed. The California court’s attempt to limit the rule to contracts of adhesion is essentially meaningless, because “the time in which consumer contracts [are] anything other than adhesion [is] long past.”⁶³ Moreover, the purported limitation that the damage be “small” is “toothless and malleable,” and the requirement of an alleged “scheme to cheat” has no limiting effect. The Court concluded that, faced with inevitable class arbitration, companies would have less incentive to continue to resolve potentially duplicative claims on an individual basis.

The Court found additional support for its holding in Stolt-Nielsen.⁶⁴ As detailed above, in Stolt-Nielsen, the Court held that an arbitration panel exceeded its power under § 10 of the FAA by imposing class procedures based on policy judgment rather than the arbitration agreement itself or some background principle of contract law. The agreement at issue there could not be interpreted to allow such changes because the “changes brought about by the shift from bilateral arbitration to class-action arbitration are fundamental.”⁶⁵ Class actions involve absent parties and require different procedures, which makes confidentiality more difficult. Class arbitration, to the extent it is manufactured by Discover Bank rather than consensual, thus is inconsistent with and stands as an obstacle to accomplishment of the purposes of Congress enacting in the FAA.

The Court noted that the switch from bilateral to class arbitration sacrifices one advantage of arbitration—its informality. Indeed, any class action will require procedural formality to satisfy concerns of due process noted in Phillips Petroleum v. Shutts.⁶⁶ Among other things, the class representative must adequately represent absent class members, and absent members must be afforded notice and an opportunity to opt out of the class. Class action arbitrations also greatly increase the risks to defendants, and the lack of review of arbitration awards makes it likely that errors will go uncorrected. Arbitration is poorly suited to the higher stakes of class litigation, and parties may not contractually expand the scope of judicial review. The majority concluded:

[W]e find 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 states to force such a decision.⁶⁷

The Concepción decision concludes by noting that with the favorable dispute resolution procedures in AT&T’s contract, the Concepcións’ individual claim was likely to be resolved, and the Concepcións would be better off pursing their individual arbitration claims instead of participating in a class action.

Conclusion

Concepción makes clear that class action waivers in arbitration clauses are not unconscionable and should be enforced in all fifty states. Concepción is a pro-arbitration decision, and is likely to result in more arbitrations of consumer contracts and greater use of class action waivers such as those used by AT&T. Absent some legislative changes to the FAA’s breadth of preemption, Concepción also may substantially curtail class actions in contractual disputes.

Notes

55. Concepción, supra note 2.

56. Discover Bank v. Superior Court, 36 Cal. 4th 148 (2005).

57. Id. at 162.

58. Concepción, supra note 2 at 2 n.2.

59. Laster v. T-Mobile, USA, Inc., 2008 WL 5216255 (S.D.Cal., Aug. 11, 2008).

60. Laster v. AT&T Mobility LLC, 584 F.3d 849 (9th Cir. 2009).

61. Id. at 857.

62. 9 U.S.C. § 2.

63. Concepción, supra note 2 at 12.

64. Stolt-Nielsen, supra note 1.

65. Concepción, supra note 2 at 13.

66. Phillips Petroleum v. Shutts, 472 U.S. 797, 811-12 (1985).

67. Concepción, supra note 2 at 16-17.

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