Posted on: 2/22/2012
Carolyn Thiess
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I. Introduction
Class action lawsuits arise when the court finds that individuals with claims against common defendants are joined by common questions of law or fact which predominate over individual questions, and that a class action is superior to other methods of adjudication in order to most fairly and efficiently resolve the controversy.1 Class action lawsuits, often involving large numbers of consumers who have purchased the same products or services, allow small claims that ordinarily would not be worth the time and expense of individual lawsuits, to be combined with similar claims to proceed in adjudication against a common defendant.2
The U.S. Supreme Court's implementation of the modern Rule 23 of the Federal Rules of Civil Procedure, Fed. R. Civ. Pro. 23, in 1966 began a new age of high profile class action litigation that has done much to shape the social, political and business environment prevalent in the United States today.3 Over the same period of time plaintiff and defense lawyers, politicians, consumer and business groups have repeatedly worked to shape in their favor the rules under which class actions can be pursued and certified, with plaintiffs positioning themselves to take advantage of aspects of Rule 23 favorable to them and defendants or potential defendants implementing safeguards to shield themselves from the potentially high damages that can sometimes be awarded.4 Also, during the time frame of the modern Rule 23 the use of class action type procedures in arbitrations, and efforts by business and defense groups to limit class claims in arbitrations, has resembled the pro and anti-class action debates about Rule 23 cases.5
The Supreme Court's recent decision in AT&T Mobility, LLC v. Concepcion,6 represents the most recent development in the long struggle to shape class action litigation in contractually agreed to arbitrations and is reviewed and examined in this case comment. The case examined the enforceability of a contract provision agreed to by customers of AT&T Mobility (AT&T) in what was claimed to be a contract of adhesion, which limited certain customer claims to arbitration and also effectively prevented Plaintiffs Vincent and Liza Concepcion from participating in a class action against AT&T for improperly charging a small sales tax for cell phones advertised as free. The case also provided yet another view of the continuing struggle over the permissible limits of class action litigation, and specifically whether contract provisions between businesses and their customers that would limit customer access to class actions and class action arbitration proceedings are enforceable.
II. Statement of the Facts in AT&T Mobility, LLC v. Concepcion
In February 2002, Vincent and Liza Concepcion entered into an agreement for the sale and servicing of cellular telephones with AT&T Mobility, LLC (AT&T).7 The cellular contract agreement provided that arbitration of all claims and disputes between the parties must be brought in the parties' "individual capacity, and not as a plaintiff or class member in any purported class or representative proceeding."8 The AT&T service agreement included the provision of free cellular telephones, which the Concepcions were not charged for; however they were charged $30.22 in sales tax based on the retail value of the phones.9
In March 2006, the Concepcions filed a complaint against AT&T in the United States District Court for the Southern District of California.10 Their complaint was later consolidated into a previously filed putative class action suit, Laster v. T-Mobile USA, Inc., No. 05cv1167 DMS, 2008 WL 5216255 (S.D. Cal. Aug. 11, 2008), alleging, among other things, that AT&T had engaged in false advertising and fraud by charging various amounts of sales tax on cellular phones it advertised to consumers as free.11 In March 2008, AT&T moved to compel individual arbitration of the Concepcions' claim based on the above quoted terms of their agreement prohibiting them from participating in class or representative proceedings.12 The Concepcions opposed the motion, contending that the individual arbitration agreement was both unconscionable and unlawfully exculpatory because it disallowed them from participating in class action proceedings.13 The District Court denied AT&T's motion, relying on the California Supreme Court's decision in Discover Bank v. Superior Court, 36 Cal. 4th 148, 113 P. 3d 1100 (2005) and finding that the arbitration agreement was unconscionable because AT&T failed to show that individual arbitration was an adequate substitute for the class action (including the deterrent effects class actions typically provide) in which the Concepcions' case was included.14 The United States Court of Appeals for the Ninth Circuit affirmed, also relying on Discover Bank, and held that the arbitration provision was unconscionable under California law.15 The United States Supreme Court granted AT&T's Petition for Writ of Certiorari to determine whether the Federal Arbitration Act preempts state law rules like the Discover Bank rule, which would limit the enforceability of arbitration agreements, including contract restrictions on class and representative proceedings.16
III. Legal Background of AT&T Mobility, LLC v. Concepcion
The Federal Arbitration Act (FAA), 9 U.S.C. §§ 1-16 (1925), enacted in response to judicial hostility towards arbitration agreements,17 provides in relevant part that a commercial contract's arbitration provision shall be "valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract."18 However, the Act also permits arbitration agreements to be declared unenforceable through general contract defenses such as fraud, duress, or unconscionability, but not by defenses that are only applicable to arbitration or stem from the fact that an arbitration agreement is the basis for controversy.19
In California, where the instant case began, courts have the statutory authority to refuse to enforce any contract found "to have been unconscionable at the time it was made," or may "limit the application of any unconscionable clause."20 This statute, applied by the California Supreme Court in a prior case to bar a similar class wide arbitration waiver included in a consumer contract of adhesion, Discover Bank 36 Cal. 4th at 162, formed the basis of the Ninth Circuit's decision affirming the Concepcion District Court's decision denying AT&T's motion to compel arbitration.21 The same Discover Bank rule later became the focus of the US Supreme Court's decision in the instant case.22
The Concepcion Court specifically examined whether the above described Discover Bank rule conflicted with the FAA's fundamental purposes of "embod[ying] [a] national policy favoring arbitration,"23 and "a liberal federal policy favoring arbitration agreements, notwithstanding any state substantive or procedural policies to the contrary."24 The court also examined the procedural aspects of classwide arbitrations, noting several aspects of classwide arbitration that are procedurally and fundamentally different than traditional "bilateral arbitration" between individual parties.25
As noted above, California courts have sometimes found arbitration agreements to be unenforceable when they are included in contracts of adhesion, in claims by individuals over small amounts of damages, and when it is alleged that a party with superior bargaining power has carried out a scheme to cheat large numbers of consumers out of small sums of money.26 The instant case represents a significant departure from such prior holdings and establishes a new precedent that when state law prohibits outright the arbitration of a particular type of claim, the state rule may be preempted by the FAA and the written arbitration agreement thus enforced.27
IV. Analysis of the Decision in AT&T Mobility, LLC v. Concepcion
A. The AT&T Mobility, LLC v. Concepcion Opinion
In AT&T Mobility, LLC v. Concepcion, the majority held that the FAA preempts California's judicial rule regarding the unconscionability of class arbitration waivers in consumer contracts, thus greatly expanding the enforceability of contract arbitration provisions restricting consumers from pursuing class actions, class arbitrations or other representative proceedings.28 The majority opinion, delivered by Justice Scalia, expressly rejected the Discover Bank rule because in the majority's view the rule is inconsistent with the purpose of the FAA and thus is preempted.29 Specifically, the majority reasoned that allowing the rule to remain in force would greatly obstruct the purpose and usefulness of the FAA,30 which is to "ensur[e] that private arbitration agreements are enforced according to their terms."31 By establishing that corporations may, through classwide arbitration waivers inserted into the terms of their agreements with consumers, effectively bar consumers from joining together to pursue class action claims against the corporation with which they have contracted, Concepcion has been deemed by some as the most important business case of the year and possibly the "end [of] class action litigation in America as we know it."32 However, the future and significance of the Concepcion opinion must be viewed in light of the sharply split opinions issued by the Court (Justices Scalia, Roberts, Kennedy and Alito signing the majority opinion, concurred in by Thomas, and a substantial dissent written by Justices Breyer, Gisburg, Sotomayor and Kagan).33
Justice Thomas' separate concurring opinion in Concepcion focused on limitations of the scope of the FAA, specifically that the FAA requires enforcement of an arbitration agreement unless a party successfully challenges the formation of the agreement, such as by proving fraud or duress.34 Justice Thomas opined that the FAA should be interpreted as a whole and that Section 4 of the FAA limits Section 2's strict enforcement of arbitration agreements, by requiring that if the formation of the arbitration agreement is proper the court must order arbitration "in accordance with the terms of the agreement."35 In his view, Justice Thomas would not apply the Discover Bank rule to the issue in the Concepcion case, because the Discover Bank rule does not relate to the making of the arbitration agreement.36 Therefore, in Justice Thomas' view the Discover Bank rule is not a ground for revocation of any contract and reading Section 2 in light of Section 4 of the FAA, the FAA dictates that the arbitration agreement at issue is to be enforced and the Discover Bank rule be preempted.37
Justice Breyer authored a dissenting opinion, joined by Justices Ginsburg, Sotomayor and Kagan, finding that the Discover Bank rule does not frustrate the purpose of the FAA, that the rule coincides with the purpose of the FAA, and as such the rule should not be preempted.38 Examining the history of the Discover Bank rule, the dissent opined that the rule "does not create a 'blanket policy in California against class action waivers in the consumer context'",39 and that the rule represents "application of a more general [unconscionability] principle".40 The dissent also opined that the Discover Bank rule is "consistent with the federal Act's language" because the rule "applies equally to class action litigation waivers in contracts" with and without arbitration agreements,41 and the rule is "consistent with the basic 'purpose behind' the Act"; 42 specifically, securing the enforcement of agreements to arbitrate, not procedural advantages of arbitration as believed by the majority.43
Finally, the dissent took issue with the majority's view that the Discover Bank rule increases the complexity of arbitrations and discourages parties from entering into such agreements.44 The dissent questioned the majority's opinion that individual, versus class, arbitration is a fundamental characteristic of arbitrations, and criticized the majority's view that the complexity of class arbitration should be compared with the simplicity of bilateral arbitration, stating that the better comparison would be class arbitration against traditional judicial class actions.45 Finally, the dissent discussed its view of the advantages of class arbitrations, particularly protecting the rights of claimants with small claims that would otherwise not be pursued, and concluded that arbitration contracts should be treated equally as other contracts.46
B. Appraisal of the AT&T Mobility, LLC v. Concepcion Decision
The Supreme Court's ruling in AT&T Mobility, LLC v. Concepcion was a highly anticipated decision that is considered by many to be another representation of the majority's conservative, pro-business mentality which favors businesses over consumers.47 In its desire to support the business interests that the Justices in the majority favor, however, the Court's majority incorrectly expanded the scope of the FAA beyond the original intent of Congress when the statute was enacted and later amended. This expansion of the scope of the FAA will allow corporations like AT&T to effectively bar class action lawsuits by their customers and force individual arbitrations of small claims, resulting in fewer such claims being brought and allowing corporations to escape liability for their wrongdoings.48 As Breyer indicated in his dissent:
What rational lawyer would have signed on to represent the Concepcions in litigation for the possibility of fees stemming from a $30.22 claim? . . .' The realistic alternative to a class action is not 17 million individual suits, but zero individual suits, as only a lunatic or a fanatic sues for $30.49
It is for precisely this reason that class action litigation procedures were created, to provide redress for large numbers of injured individuals with relatively small claims that they would not otherwise pursue.50 Based on the majority's unprecedented interpretation of the FAA, by simply inserting individual arbitration agreement clauses into the language of its' contracts, corporations are essentially able to avoid most types of litigation of small or modest claims, whether such claims are in court or required to be arbitrated, because it is not worth the time and costs to pursue such claims on an individual basis in either type of forum.51
The majority's 5-4 decision is also flawed because it does not provide a clear resolution or method of analysis for lower courts to apply to future claims concerning arbitration agreements in consumer contracts of adhesion. The majority's simplistic analysis that led to its' conclusion that the FAA preempts the Discover Bank rule gives little guidance to lower courts that will likely struggle with future claims that the FAA preempts other arbitration agreements in contracts of adhesion.
The majority's decision appears also to have failed to consider the likely effects of its Concepcion decision. In that regard, one of the probable outcomes of the case will be that corporations and employers will include AT&T type arbitration agreements in their contracts with consumers, in an attempt to bar class action litigation even by consumers who allege that the corporation engaged in fraudulent activities. In response to such likely business tactics, consumers will inevitably seek to limit or overturn Concepcion through future legislation and in the courts. As noted by Timothy Blood, nationally known class action attorney:
[I]t's only a matter of time before corporate America takes the gift given them by the Supreme Court and abuses it to the detriment of consumers, swinging the pendulum too far the other direction. Then courts and legislatures will begin to chip away at AT&T Mobility and restore important rights to the consumer. The pendulum always behaves this way in consumer affairs. Because this negatively affects so many citizens (consumers, workers), we are likely to see fallout rather quickly.52
Finally, the Concepcion majority's hostile attitude toward class actions and class arbitrations suggests that the majority was predisposed to rule in favor of the defense rather than the consumer, and developed a thin rationale to support its view. This predisposition is evident in the majority's incorrect conclusion that the FAA preempts state laws that prohibit contracts from disallowing class action proceedings, such as the Discover Bank rule.53 The majority incorrectly applied and greatly distorted the meaning of the FAA, which was originally intended to apply to disputes between commercial entities of generally similar sophistication and bargaining power.54 However, based on the Supreme Court's decision, the FAA now extends to consumer and employment disputes.55 The proper ruling of the Supreme Court would have been that the FAA does not preempt the Discover Bank rule because the FAA was not intended to apply to consumer contracts, such as the contract between AT&T and the Concepcions, and that enforcing the arbitration agreement is unconscionable because it essentially leaves the Concepcions and similarly situated consumers with no redress for their injuries and allows corporations such as AT&T to engage in fraudulent activities with little or no consequence.
V. Conclusion
The decision of AT&T Mobility, LLC v. Concepcion greatly hinders the availability of class action proceedings under Federal Rule of Civil Procedure 23, as well as class action arbitrations, and represents a major victory for corporations. The majority's opinion, holding that the Federal Arbitration Act preempts California's state rule regarding the unconscionability of class arbitration waivers in consumer contracts, greatly expanded the scope and applicability of the FAA to include consumer contracts of adhesion, thus representing a new precedent for finding that corporations may force their customers to agree to individual arbitration and forego any right to pursue class actions. The Supreme Court gave no rational basis for expanding the application of the FAA other than the desire for efficient, streamlined proceedings56 which is unconvincing. This ruling is particularly unsettling because consumers with small claims, who many times are unaware that they agreed to waive any interest in class proceedings, essentially lose their opportunity to pursue most claims against the corporation, and are therefore left without any redress for their damages. The Supreme Court wrongly decided this case and it should have ruled in favor of the Concepcions, and ultimately for the American consumer, rather than corporations like AT&T, which now appear free to take advantage of their customers without consequence or deterrent effects. The Court, although sharply divided on this issue, will likely continue to reflect the opinions of its conservative, pro-business majority. And, absent legislation to counter the majority's decision, or a change in the Court's membership, the Court's restrictive views of the availability of class action proceedings will likely continue.
1. See John Bronsteen & Owen Fiss, Article, The Class Action Rule, 78 Notre Dame L. Rev. 1419, 1423-1427 (2003) (discussing the four basic requirements of "numerosity", "commonality", "typicality" and "adequacy" under FRCP 23(a), and the further requirements of "predominance" and "superiority" for actions under FRCP 23(b)(3)).
2. Amchem Products, Inc., et al v. Windsor, et al, 521 US 591, 117 S. Ct. 2231, 138 L. Ed. 2d 689 (1997) ([M]ajority quoted Mace v. Van Ru Credit Corp., 109 Fed. 3d 338, 344 (1997), stating that "the policy at the very core of the class action mechanism is to overcome the problem that small recoveries do not provide the incentive for any individual to bring a solo action prosecuting his or her rights. A class action solves this problem by aggregating the relatively paltry potential recoveries into something worth someone's (usually an attorney's) labor.").
3. See e.g., Marta Cenini & Barbara Luppi & Francesco Parisi, Incentive Effects of Class Actions and Punitive Damages Under Alternative Procedural Regimes, University of Minnesota Law School Legal Studies Research Paper Series, Research Paper No. 10-50, Sept. 10, 2011, at 1-2.
4. Stephen Burbank, Article, The Class Action Fairness Act of 2005 in Historical Context: A Preliminary View, 156 U. Penn. L. Rev. 1439, 1441 (2008) (noting that this recent class action reform statute "resulted from years of intense lobbying 'on both sides of the aisle by interest groups associated with both plaintiffs and defendants', partisan wrangling, and, following two successful filibusters, fragile compromises").
5. See Green Tree Financial Corp., v. Bazzle, 539 US 444 (2003) (plurality opinion that found an arbitrator's decision to order class arbitration appropriate where arbitration agreement was silent on the subject), and Stolt-Nielsen S.A. v. AnimalFeeds International Corp., 130 S. Ct. 1758 (2010) (majority finding that parties to an arbitration agreement cannot be required to participate in class action arbitration unless they agreed, and silence on the subject cannot be considered an implied consent to class arbitration).
6. AT&T Mobility, LLC v. Concepcion, 131 S. Ct. 1740, 79 U.S.L.W. 4279 (2011).
7. Concepcion, 131 S. Ct. at 1744.
8. Id. at note 2. Agreement authorized AT&T to make unilateral amendments to the arbitration agreement, which it did on several occasions. The version at issue in this case reflects revisions made in December 2006, which the parties agreed were controlling. The contract also stated that the arbitrator may not consolidate multiple claims "and may not otherwise preside over any form of a representative or a class proceeding".
9. Id. at 1744.
10. Id. at 1744-1745.
11. Id. at 1745.
12. Id.
13. Id.
14. Id. (citing Laster v. T-Mobile USA, Inc., 2008 WL 5216255, at *1-2).
15. Laster v. AT&T Mobility, LLC, 584 F.3d 849, 853-854 (9th Cir. 2009).
16. Concepcion, 131 S. Ct. at 1745.
17. See Hall Street Associates, L.L.C. v. Mattel, Inc., 552 U.S. 576, 581 (2008).
18. 9 U.S.C. § 2.
19. Doctor's Associates, Inc. v. Casarotto, 517 U.S. 681, 687 (1996).
20. Cal. Civ. Code Ann. § 1670.5(a) (West 1985).
21. Laster v. AT&T Mobility, LLC, 584 F.3d at 854.
22. Concepcion, 131 S. Ct. at 1746.
23. Id. at 1749 (quoting Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440, 443 (2006)).
24. Id. (quoting Moses H. Cone Memorial Hospital v. Mercury Constr. Corp., 460 U.S. 1, 24 (1983)); supra Hall Street Associates, 552 U.S., at 581.
25. The Concepcion majority cited significant differences between class and bilateral arbitration, including the need to protect absent parties, the higher stakes typically at issue in class actions, the difficulty of finding arbitrators familiar with class arbitration procedures for certification, the greater formality of class arbitrations versus bilateral arbitrations, the speed and efficiency of bilateral arbitration, the disproportionate risk to defendants in class arbitrations, and the greater need for appellate review of class certification questions involving significant issues of law and facts that is not available under the limited appeal rights available in arbitrations under the FAA. See Concepcion, 131 S. Ct. at 1750-1752, and 9 U.S.C. § 10.
26. Discover Bank, 36 Cal. 4th, at 162, 113 P. 3d, at 1110.
27. See Cohen v. DirecTV, Inc., 142 Cal.App.4th 1442, 1451–1453, 48 Cal.Rptr.3d 813, 819–821 (2006) (prohibition of class litigation against satellite broadcasting company unconscionable and unenforceable); Klussman v. Cross Country Bank, 134 Cal.App.4th 1283, 1297, 36 Cal.Rptr.3d 728, 738–739 (2005) (waiver of class arbitration in consumer contract of adhesion against bank and credit card service found unconscionable and unenforceable, and finding FAA does not preempt invalidation of such waivers under state law); Aral v. EarthLink, Inc., 134 Cal.App.4th 544, 556–557, 36 Cal.Rptr.3d 229, 237–239 (2005) (class action waiver against internet provider unconscionable).
27. Concepcion, 131 S. Ct. at 1746-1747.
28. Id. at 1749-1753.
29. Arellano v. T-Mobile USA, Inc., No. C 10–05663 WHA., 2011 WL 1842712 at 2 (N.D. Ca. May 16, 2011).
30. Concepcion, 131 S. Ct. at 1750.
31. Id. at 1748-1749.
32. Alessandro Presti, AT&T Mobility v. Concepcion: End of Class Action Litigation as We Know It? Or Much Ado about Nothing? (May 9, 2011) (on file with the Columbia Business Law Review).
33. Jobi Halper, Supreme Court Upholds Arbitration Anti-Class Provisions, American Bar Association (May 10, 2011), http://apps.americanbar.org/litigation/committees/adr/news.html.
34. Concepcion, 131 S. Ct. at 1753 (Thomas, J., concurring).
35. Id. at 1754.
36. Id. at 1755-1756. Justice Thomas further described the Discover Bank rule as one focusing on refusal to enforce a contract for public policy reasons and did not concern whether the contract was properly made.
37. Id. at 1756.
38. Id. (Breyer, J., dissenting).
39. Id. at 1757 (Breyer, J., dissenting) (quoting Provencher v. Dell, Inc., 409 F.Supp.2d 1196, 1201 (C.D.Cal.2006)).
40. Id. (quoting Gentry v. Superior Ct., 42 Cal.4th 443, 457, 64 Cal.Rptr.3d 773, 165 P.3d 556, 564 (2007)).
41. Id. (quoting Discover Bank, 36 Cal. 4th at 165-166, 113 P. 3d at 1112).
42. Id. (citing and quoting Dean Witter Reynolds Inc. v. Byrd, 470 U.S. 213, 219, 105 S. Ct. 1238, 84 L.Ed.2d 158 (1985)).
43. Id.
44. Id. at 1758-1759.
45. Id at 1760.
46. Id. at 1761.
47. Erwin Chemerinsky, Supreme Court: Class (Action) Dismissed, L.A. Times, May 10, 2011, http://www.latimes.com/news/opinion/commentary/la-oe-chemerinsky-class-action-20110510,0,866909.story.
48. Concepcion, 131 S. Ct. at 1760-1761.
49. Id. at 1761.
50. Id.
51. Id.
52. Halper, Supra note 32.
53. Kristen Friend, Supreme Court May Ban Class Action Lawsuits, SEO Law Firm (Nov. 10, 2010), http://www.seolawfirm.com/2010/11/supreme-court-may-ban-class-action-lawsuits/.
54. Concepcion, 131 S. Ct. at 1757 (Breyer, J., dissenting) (citing Marine Transit Corp. v. Dreyfus, 284 U.S. 263, 274, n. 2, 52 S. Ct. 166, 76 L. Ed. 282 (1932), quoting 65 Cong. Rec.1931 (1924)). See also Arbitration Fairness Act of 2011, H.R. 1873, 112th Cong. § 2 (2011).
55. Halper, Supra note 32; H.R. 1873. Concepcion ruling has prompted proposed amendments to the FAA to exempt arbitration agreements in contracts concerning employment, consumer, and civil rights disputes from enforceability.
56. Concepcion, 131 S. Ct. at 1746.