• Arbitration after Concepcion: Should Businesses Run to Arbitration
  • December 14, 2011 | Author: Darren K. McCartney
  • Law Firm: Rumberger, Kirk & Caldwell Professional Association - Orlando Office
  • Over the past decade, businesses seemed to be drifting away from the inclusion of arbitration clauses in their agreements. Many thought that arbitration was a great option for businesses to control their litigation expenses and perhaps avoid expensive class actions. These beliefs were losing some of their appeal as the hoped for savings in expenses often did not materialize and it became obvious that undesirable or wrong decisions were equally possible in an arbitration, which is almost non-reviewable, as they are in a court action. Parties began to realize that almost no recourse existed for the losing party to appeal an arbitration decision, regardless of any legal or factual errors which might exist. Even the hope that class-action litigation could be avoided by arbitration was being eroded by courts across the country, including Florida. The California Supreme Court simply found arbitration clauses unconscionable and unenforceable, based on the reasoning that the waiver of the right to bring a class action claim in the consumer context essentially operated as an exculpatory clause for a company’s own fraud or wrongdoing in violation of public policy. See Discover Bank v. Superior Court, 113 P.3d 1100 (Cal. 2005).

    In Discover Bank, the California Supreme Court held that a class-action waiver clause within an arbitration provision contained in a pre-printed form credit card agreement, was unconscionable and unenforceable. Discover Bank, 113 P.3d at 1110. The court noted that class actions provide “several salutary by-products, including a therapeutic effect upon those sellers who indulge in fraudulent practices, . . . .”  Id. at 1105. Although the Discover Bank court did not hold that all class-action waiver provisions were unconscionable, the court held that when these waivers are placed in consumer contracts of adhesion, in which disputes between the consumers and the company are likely to involve relatively small amounts of damages, the waivers operate as exculpatory clauses exempting the company “from responsibility for [its] own fraud, or willful injury to the person or property of another” in violation of California law. Id. at 1110. As a result, the Discover Bank court held that these provisions are unconscionable and unenforceable. Id. The court rejected the argument that Section two of the FAA, 9 U.S.C.A. § 2, preempted such a rule, because “the principle that class action waivers, are under certain circumstances, unconscionable as unlawfully exculpatory is a principle of California law that does not specifically apply to arbitration agreements, but to contracts generally.” Id. at 1112.

    In April of this year, the United States Supreme Court released its opinion in AT&T Mobility LLC v. Concepcion, 131 S.Ct. 1740 (2011), and rejected the Discover Bank court’s judicially created rule that class-action waivers were unconscionable in certain circumstances, and held that any such rule was preempted by The Federal Arbitration Act (FAA), 9 U.S.C. § 1-15. The Supreme Court reversed the Ninth Circuit Court of Appeals opinion, which affirmed a district court order denying AT&T’s motion to compel arbitration. The district court and the Ninth Circuit denied the motion, because the arbitration clause in question contained a class-action waiver provision, which the district court found to be unconscionable pursuant to the California Supreme Court’s decision in Discover Bank. 

    In Concepcion, the United States Supreme Court specifically decided the issue of “whether the FAA prohibits States from conditioning the enforceability of certain arbitration agreements on the availability of class-wide arbitration procedures.” Concepcion, 131 S.Ct. at 1744. The Concepcions filed suit in the United States District Court for the Southern District of California, and claimed AT&T engaged in false advertising because it charged them sales tax on a phone AT&T represented as free to the customer. Concepcion, 131 S.Ct. at 1744. The action was consolidated with a putative class action based on similar claims. Id. AT&T moved to compel arbitration based on the terms of the contract, which contained an arbitration provision. Id. at 1744-45. The provision required that any “claims be brought in the parties’ ‘individual capacity, and not as a plaintiff or class member in any purported class or representative proceeding.’” Id. Although characterizing the provision as favorable to consumers and likely to provide a better outcome to the consumer than a class action, the district court denied to the motion to compel arbitration and found the provision unconscionable under the California Supreme Court’s decision in Discover Bank, because AT&T failed to show “that bilateral arbitration adequately substituted for the deterrent effects of class actions.” Id. at 1745 The Ninth Circuit affirmed, also finding the provision unconscionable under Discovery Bank. Id.

    The Supreme Court reversed the Ninth Circuit, and held the FAA preempts any condition, such as the one espoused in Discover Bank, because “it ‘stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress . . ..” Id. at 1753. The Court reasoned that “the overarching purpose of the FAA, evident in the text of §§2, 3, and 4, is to ensure the enforcement of arbitration agreements according to their terms so as to facilitate streamlined proceedings.” Id. at 1748. The Court reasoned that requiring implementation of class procedures in an arbitration would eliminate the primary purpose of the FAA and arbitration, which was to produce streamlined resolution of disputes. Id. at 1750-52.

    The Court rejected the Concepcions’ argument, adopted by the lower courts, that the Discover Bank rule was one of general application and therefore allowed under Section 2 of the FAA. The Court noted that it had previously held “a court may not ‘rely on the uniqueness of an agreement to arbitrate as a basis for a state-law holding that enforcement would be unconscionable, for this would enable the court to effect what ... the state legislature cannot.” Id. at 1747 (citing Perry v. Thomas, 482 U.S. 483 (1987)). It further noted its previous recognition “that the FAA’s preemptive effect might extend even to grounds traditionally thought to exist “‘at law or in equity for the revocation of any contract.’” Id. The Court then noted the California had applied the Discover Bank rule in such a way that it was more likely to invalidate arbitration agreements than other contracts based on its class action waiver rule. Id. at 1747. Because the Discover Bank rule conditioning enforcement of an arbitration provision on the availability of class arbitration procedures interferes with the purposes of the FAA, the Court held the rule was preempted. Id. at 1753.

    The Concepcion case has garnered much attention, because of its potential for restricting the scope of and possibly eliminating in large part consumer class actions. Although the principles announced in Concepcion potentially have far reaching effects on all contracts providing for arbitration, the case specifically dealt only with consumer contracts of adhesion and is not a sufficient reason, standing alone, for businesses to impulsively include an arbitration provision with a class-waiver into their contracts. For example, some courts in California have refused to apply the reasoning of Concepcion to California’s representative PAGA (private attorney general action) claims in the employment context, based on the fact that a representative action waiver effectively eliminates the purpose of the PAGA. See Urbino v. Orkin Services of California, 2011 WL 4595249 (C.D. Cal. October 5, 2011); Brown v. Ralphs Grocery Co., 128 Cal. 3d 854 (Cal. 2d DCA 2011). It is not inconceivable that other courts will follow California’s lead and continue to invalidate class-action waiver provisions in arbitration agreements based this similar reasoning. In addition, the arbitration provision in this case was extremely favorable to the consumer, and it remains unclear how strong the consensus would be on the current Court, which was split 5-4 in this case, should they face a different provision. A provision that was particularly onerous on the consumer, might not fair as well.

    Moreover, there are other considerations that must be addressed before deciding that arbitration is an appropriate resolution process for a business. The elimination of potential class-actions by consumers is definitely an important, and perhaps for many consumer based businesses, a paramount consideration, but the streamlined procedures, which potentially reduce costs and hasten resolution, also severely restrict your right to certain process protections inherent in the judicial system. An arbitration award is almost unreviewable, except for a limited number of exceptions outlined in the FAA. In the event the arbitration panel renders an award that is unsupported by the law, there is virtually no relief. Unless the panel expressly states that it is disregarding the law, or the losing party can show fraud, an undisclosed conflict of interest, or a ruling that clearly decides issues outside the scope of disputes the parties agreed to arbitrate, there is no appellate review. A business can just as easily wind up with a legally insupportable arbitration award as it can a legally insupportable trial court ruling or judgment. The difference? A court’s resolutions are reviewable, but an arbitrator’s rulings largely are not.

    In short, the Concepcion opinion was a significant win for businesses, but it remains to be seen how far the effects will ripple across the class-litigation arena. Certainly for any business in which consumer class actions are a serious concern, this case provides some certainty that this threat may be avoided by use of a class action waiver in an arbitration provision. However, a business should engage in a thorough analysis of the likely areas in which it could and has been sued to assess the actual likelihood of facing a class action before impulsively changing its contracts. Further, a business should engage in a thorough analysis of all the potential benefits and costs associated with arbitration, not just those associated with class action claims, before any decision to include an arbitration provision is made.