The Supreme Court Holds the Federal Arbitration Act Trumps State-La...

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June 2011 Issue

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The Supreme Court Holds the Federal Arbitration Act Trumps State-Law Public Policy
By Amy T. Brantly and Oleg Elkhunovich

In AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011), the United States Supreme Court, in a 54 decision, held that the Federal Arbitration Act (FAA) preempts Californias rule that arbitration provisions containing class action waivers in adhesion contracts are generally unconscionable, and thus unenforceable. The likely practical result of this decision is the end of many, if not most, consumer class actions. The facts of the case are simple. Vincent and Liza Concepcion entered into a cellular phone purchase and service agreement with AT&T. The contract provided for arbitration of all disputes between the parties and required that claims be brought in the parties individual capacity, and not as a plaintiff or class member in any purported class or representative proceeding. Id. at 1744. The Concepcions contract provided for the provision of a free phone, yet they were charged $30.22 in sales tax based on the phones retail value. They sued and their complaint was subsequently consolidated with a putative class action alleging that AT&T had engaged in false advertising and fraud by charging sales tax on phones it advertised as free. AT&T moved to compel arbitration, but the District Court for the Southern District of California denied the motion, relying on the California Supreme Courts decision in Discover Bank v. Superior Court, 36 Cal. 4th 148 (2005) and finding that the arbitration provisions class action waiver was unconscionable. The Ninth Circuit subsequently affirmed. Id. at 1744-45. The Supreme Court reversed. Writing for the majority, Justice Scalia stated that Californias Discover Bank rule interferes with arbitration, and is preempted by the FAA. Id. at 1750. The Court reasoned that [r]equiring the availability of classwide arbitration interferes with fundamental attributes of arbitration and thus creates a scheme inconsistent with the FAA, Id. at 1748, and that although the Discover Bank rule does not require classwide arbitration,

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it allows any party to a consumer contract to demand it ex post. Id. at 1750. Thus, the Court held that class arbitration, to the extent it is manufactured by Discover Bank rather than consensual, is inconsistent with the FAA. Id. at 1751. The practical effect of Concepcion is profound. The decision is clearly a boon for businesses, which now can and certainly will include class waivers into the arbitration provisions in their contracts, including consumer contracts of adhesion. Moreover, the courts are now less likely to find such consumer contracts unconscionable no matter what state law provides. Thus, consumer class actions based on contracts of adhesion containing a class action waiver, are likely not viable after Concepcion. Further, the implications of the Supreme Court decision are not limited to service contracts or even consumer contracts for that matter, but equally apply to every other transaction where a contract is signed, except for relatively narrow exceptions imposed by Congress (e.g., class actions involving credit reporting laws, debt collection, and residential mortgage loans). Indeed, Concepcion has already been applied in the employment law context to require individual arbitration of claims by employees against their employer. DAntuono v. Service Road Corp., No. 3:11-cv-00033, 2011 WL 2175932 (D. Conn. May 25, 2011). Although, to date, few courts have applied Concepcion, those that have illustrate the impact on class actions. For example, in Bernal v. Burnett, Civ. No. 10cv01917, 2011 WL 2182903 (D. Colo. June 6, 2011), the federal district court found that arbitration provisions in the adhesion contracts between the students and private universities were not unconscionable in light of Concepcion, even though the court observed that it would likely have found that the Arbitration Agreements at issue here unconscionable pursuant to the [Colorado unconscionability] analysis if it were issuing this decision pre-Concepcion. Id. at *6. Notably, the arbitration clause at issue did not contain a class waiver clause, and yet the court believed that Concepcion has fundamentally changed the unconscionability analysis. Indeed, the court explicitly recognized that Concepcion was a serious blow to consumer class actions and likely foreclosed the possibility of any recovery for many wronged individuals. Id. at *7. Yet, the court felt bound to find that the arbitration provision at issue was not unconscionable even where it probably would have been under Colorado precedent. Whether Concepcion is good public policy is hotly debated. Pro-business advocates argue that the decision will curb lawyer-driven class actions, which hurt rather than benefit consumers, who end up bearing the cost through higher prices. On the other hand, consumer rights advocates observe that the reality of the legal process means that wronged individuals will not have the ability to prosecute small-dollar claims, which would now slip through the legal system, as the Concepcion dissent opined. Id. at 1753. The majority opinion was dismissive of these issues concluding that States cannot require a procedure that is inconsistent with the FAA, even if it is desirable for unrelated reasons. Id. at 1753. Thus, with state courts and legislatures clearly out of power to regulate arbitration agreements, it is up to Congress to weigh the policy considerations and decide whether Concepcion should be overturned through legislation. One such bill, dubbed The Arbitration Fairness Act of 2011, has already been introduced. Additionally, section 1028 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the legislation regulating the

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financial industry, directs the newly created Consumer Financial Protection Bureau to study arbitration agreements with the goal of potential regulation of those found to be anti-consumer or against public interest. Until Congress acts, the Supreme Court has essentially given businesses the power to draft agreements to avoid class-wide adjudication of plaintiff claims. Amy T. Brantly is Of Counsel at Susman Godfrey L.L.P. in Los Angeles. She represents plaintiffs and defendants in complex business litigation, including class actions, and can be reached at abrantly@susmangodfrey.com. Oleg Elkhunovich is an Associate at Susman Godfrey L.L.P. in Los Angeles. He can be reached at oelkhunovich@susmangodfrey.com.

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