Before the current Supreme Court term began in October, Justice Kennedy said in an interview that this term seemed to have fewer high-dollar civil cases involving big business because the Court's docket is changing—“[a] lot of big civil cases are going to arbitration." http://www.trialinsider.com/?p=639. That result is not by accident—it is the result of a long line of the Court's cases favoring mandatory arbitration. Justice Kennedy also voted with the majority in the Court's decision last term in AT&T Mobility v. Concepcion, 563 U.S. &under;&under;&under;, 131 S.Ct. 1740, 179 L.Ed.2d 742 (2011). The decision dealt another blow to consumers by limiting their ability to fight widespread corporate abuse and fraud through class actions in mandatory arbitration proceedings.
AT&T Mobility involved a class action claim brought by cell phone consumers in a California federal district court alleging that AT&T had engaged in false advertising and fraud by charging them and class members $30.22 in sales tax on the retail value of cell phones provided for free under their service agreements. 132 S.Ct. at 1774. The district court ruled that the arbitration provision in AT&T's service agreements was unconscionable under California law and thus unenforceable because it contained a class action waiver provision. Laster v. T-Mobile USA, Inc., 2008 WL 5216255 (S.D. Cal. Aug. 11, 2008). The Ninth Circuit affirmed sub-nom in Laster v. AT&T Mobility LLC, 584 F.3d 849 (9th Cir. 2009).
Both courts relied on the rule in Discover Bank v. Superior Court, 36 Cal.4th 148, 113 P.3d 1100 (2005), the California Supreme Court’s decision that held a class action waiver unconscionable. The rule applies to some, but not all, class action waivers—specifically those in adhesion consumer contracts where small amounts of damages are imposed by the party with superior bargaining power, and that party has carried out a scheme to deliberately cheat large numbers of consumers out of such small damages. 36 Cal. 4th at 162-163; 113 P.3d at 1110 (internal quotation marks omitted) (the Discover Bank rule).
The Discover Bank rule was itself based on § 2 of the Federal Arbitration Act (FAA) that provides for exceptions to enforcement of arbitration agreements under certain circumstances. Arbitration agreements “shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” 9 U.S.C. § 2. This savings clause permits arbitration agreements to be invalidated by state law contract defenses that apply to all contracts—not just to arbitration agreements—and the Court has described such grounds to include fraud, duress, and unconscionability. Doctor’s Associates, Inc. v. Casarotto, 517 U.S. 681, 687 (1966).
The Court granted certiorari in Laster, and in a 5-4 decision, reversed the Ninth Circuit, holding that because California's law stands as an obstacle to the accomplishment of the purposes and objectives of Congress as set forth in the FAA, California’s law was preempted by the FAA.
Background and Development of Mandatory Arbitration
Arbitration has changed dramatically since enactment of the FAA in 1925, and its last amendment in 1964. The FAA's original purpose "was to make arbitration agreements as enforceable as other contracts, but not more so." Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 404, n. 12 (1967) (emphasis added; “e.a.”). At the Senate Judiciary Subcommittee hearings in 1923 on the proposed bill, the chairman of the ABA committee responsible for drafting it assured the Senators that: "'It is purely an act to give the merchants the right or the privilege of sitting down and agreeing with each other what their damages are, if they want to do it. Now that is all there is in this.'" Gilmer v. Interstate/Johnson Corp., 500 U.S. 20, 39 (Stevens, J., dissenting) (e.a.). Put differently, Congress may well have intended that as-yet-undeveloped arbitration procedures would be used primarily where merchants sought to resolve disputes of fact, not law, under industry customs. Mitsubishi Motors, Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 646 (1984)(Stevens, J., dissenting) (e.a.).
Eighty-six years later, the fact that the FAA was aimed at merchants who want to sit down at arms length and agree what their damages are has been largely ignored as mandatory arbitration has been expanded by the Supreme Court beyond its original purpose. Indeed, "[n]ew possibilities for unfairness arise as arbitration ventures beyond the world of merchant-to-merchant disputes in which it was conceived into the world of consumer transactions," where the assumption that arbitration was freely chosen is "little more than an illusion." Engalla v. Permanente Med. Group, Inc., 938 P.2d 903, 926-27 (Cal. 1997) (Kennard, J., concurring).
The AT&T Mobility Majority Opinion
Justice Scalia wrote the opinion for the Court, joined by Justices Roberts, Kennedy and Alito. Justice Thomas concurred in a separate opinion. Justice Breyer wrote a dissenting opinion that was joined by Justices Ginsburg, Sotomayor and Kagan.
Justice Scalia starts by first quoting § 2 of the FAA and stating that it reflects a "liberal federal policy favoring arbitration." 131 S.Ct. at 1745. Why a "policy" rather than the actual language of Section 2 and of the contract at issue, and Congress' intent as shown by the legislative history, must carry so much weight in the Court’s cases, is not readily apparent. See EEOC v. Waffle House, Inc., 534 U.S. 279, 122 S.Ct. 754, 764 (2002) ("[W]e look first to whether the parties agreed to arbitrate a dispute, not to general policy goals[,] . . . [W]e do not . . .reach a result . . . simply because the policy favoring arbitration is implicated. Arbitration under the [FAA] is a matter of consent, not coercion.")(citations and internal quotation marks omitted) (e.a.).
The majority opinion states that the “principle purpose” of the FAA is to “ensur[e] that private arbitration agreements are enforced according to their terms. . . This purpose is readily apparent from the FAA’s text.” 131 S.Ct. at 1748 (quoting Volt Information Sciences, Inc. v. Bd. of Trustees of Leland Stanford Junior Univ., 489 U.S. 468, 478 (1989), and §§ 2-4 of the FAA). But the opinion also states that the purpose of the FAA is to permit streamlined proceedings, and concludes that classwide arbitration is inconsistent with that purpose:
The overarching purpose of the FAA, evident in the text of §§ 2, 3, and 4, is to insure the enforcement of arbitration agreements according to their terms so as to facilitate streamlined proceedings. Requiring the availability of classwide arbitration interferes with fundamental attributes of arbitration, and thus creates a scheme inconsistent with the FAA.
Id. (e.a.). The opinion fails, however, to cite or quote any such “terms” from the text of the FAA that state that its purpose was to facilitate “streamlined proceedings.” Moreover, as the dissent points out, the Court has previously rejected the notion that the primary purpose of the Act was to guarantee procedural advantages to litigation:
[T]he primary objective was to secure “enforcement” of agreements to a arbitrate. . . . [We] “reject the suggestion that the overriding goal of the [FAA] was to promote the expeditious resolution of claims. . . . [T]he intent of Congress” requires us to apply the terms of the Act without regard to whether the result would be “possibly inefficient.”
131 S.Ct. at 1758 (Breyer, J., dissenting) (citing and quoting from Dean Witter Reynolds, Inc. v. Byrd, 470 U.S. 213 (1985)).
Next, the majority opinion takes on the Discover Bank rule that the lower courts relied on. It scoffs at the limitation of the rule to adhesion contracts, stating that “the times in which consumer contracts were anything other than adhesive are long past.” 131 S. Ct. at 1750. But does the fact that most if not all arbitration agreements today are in adhesion contracts make them any less unconscionable? Similarly, it derides the rule’s limitation to cases involving small damages as “toothless and malleable,” and the limitation to schemes to cheat consumers as having no limiting effect since all that is required is an allegation. Id. But trial courts, especially in Florida, would no doubt require more than a mere allegation of a such a scheme before denying motions to compel arbitration.
While noting that the Discover Bank rule does permit consumers to bring individual claims, the opinion states that there is little incentive for lawyers to represent individuals when they can represent a class “and reap far higher fees in the process.” Id. It is ironic to this writer that the FAA was enacted because of the hostility of English common law courts to enforcement of arbitration agreements and today there is plainly a judicial hostility to class actions in litigation and in arbitration because lawyers stand to “reap” high fees. Such judicial hostility overlooks the valuable purpose of class actions as a viable way—if not the only way—for large numbers of consumers with small damages to band together to hold corporations accountable for fraud that would otherwise go unchecked and permit such corporations to “reap” exorbitant profits that make class action attorney’s fees look like pocket change.
The majority opinion then lists reasons that make classwide arbitration inconsistent with the FAA: (a) absent parties require different procedures “involving higher stakes;” (b) confidentiality is more difficult; and (c) arbitrators are not knowledgeable in the “dominant” procedures of class certification. Id. It then states, remarkably, that “[t]he conclusion follows that class arbitration to the extent it is manufactured by Discover Bank rather than consensual, is inconsistent with the FAA.” Id. at 1750-1751. (e.a.).
The Court’s opinion then discusses policy reasons for its preemption conclusion, none of which are persuasive: classwide arbitration (1) sacrifices informality, makes the process slower, more costly, and more likely to result in “procedural morass than final judgment;” (2) requires procedural formality because the AAA’s rules for class arbitration mimic the Federal Rules of Civil Procedure, and “it is odd to think that an arbitrator would be entrusted with ensuring that [absent class members’] due process rights are satisfied;” and (3) “greatly increases risks to defendants” because of the limitations of judicial review of arbitral awards. Id. at 1751-1752. The limits of judicial review, of course, work both ways and also greatly increase the risk to plaintiffs that they will not prevail in mandatory arbitration.
In addition to the higher risks to defendants, the majority also stresses that the “chance of devastating loss” will pressure defendants “into settling questionable claims.” Id. at 1752. Based on these policy-driven reasons by a majority that is clearly more concerned about the “higher risks” to wrongdoing corporations than about justice for defrauded consumers, the Court held that the Discover Bank rule is preempted by the FAA. Id. at 1753.
In his dissent, Justice Breyer explains in great detail why the policy reasons relied on by the majority are both incorrect and insufficient to support the Court’s decision, listing many examples and empirical data. The heart of his dissent, however, is the argument that the Discover Bank rule is consistent with the FAA’s actual language and basic purpose because it applies equally to class action waivers in contracts with and without arbitration agreements. Id. at 1757. Thus, the rule falls directly into the Act’s exception in § 2 that permits courts to refuse to enforce arbitration agreements on grounds that exist “for the revocation of any contract.” Id. (emphasis in original). The dissent cautions that in implementing Congress’ intent, the Court “should think more than twice before invalidating a state law that does just what § 2 requires, namely, puts agreements to arbitrate and agreements to litigate “upon the same footing.” Id.
Noting that the majority highlighted what it sees as disadvantages of class arbitration, Justice Breyer also discusses how class arbitration has countervailing advantages. He states that arbitration agreements “that forbid the consolidation of claims can lead small-dollar claimants to abandon their claims rather than to litigate.” Id. at 1760. This is in fact what is happening. F. Paul Bland, Jr. of Public Justice is the leading expert on mandatory arbitration on the consumers’ side and the co-author of the treatise Consumer Arbitration Agreements published by the National Consumer Law Center. He told this author that while big-dollar civil cases may be going to arbitration as Justice Kenney said, the small-dollar cases “are largely just going away. The total number of consumer cases arbitrated in the AAA last year was 1,300—a tiny number.” By contrast, he was involved in class actions last year where 300,000 clients received checks. He said that “my 300,000 clients would never have arbitrated their claims. Arbitration suppresses claims, it doesn’t lead to litigation of thousands of them.” (e.a.).
Moreover, as Justice Breyer states, “[w]hat 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 $30.00.” Id. at 1761 (citation and internal quotation marks omitted) (emphasis in original).
The dissent also criticizes the majority opinion because it cannot find meaningful support for its views in the Court’s precedents. Id. The FAA, in force for nearly a century, has been construed in dozens of the Court’s decisions. Id. Justice Breyer cites eight of the Court’s precedents that have all referred to the FAA’s basic objective as ensuring that courts treat agreements to arbitrate the same as all other contracts. Id. In particular, he notes that the Court has recognized that “[t]o immunize an arbitration agreement from judicial challenge on grounds applicable to all other contracts would be to elevate it over other forms of contract.” Id. (citing and quoting Prima Paint Corp., 388 U.S. at 404, n. 12) (internal quotation marks omitted). Because the case concerns equal treatment of arbitration and other contracts, Justice Breyer states that he “is not surprised the majority can find no meaningful precedent supporting its decision.” Id. at 1762.
The dissent’s sharpest criticism of the majority opinion is this: The savings clause of § 2 of the FAA “reiterated a basic federal idea that has long informed the nature of our Nation’s laws”—that “States are independent sovereigns in our federal system and the Court has “long presumed that Congress does not cavalierly pre-empt state-law causes of action.” Id. (citation and internal quotation marks omitted).
But federalism is as much a question of deeds as words. It often takes the form of a concrete decision by this Court that respects the legitimacy of a State’s action in an individual case. Here, recognition of that federalist ideal, embodied in specific language in this particular statute should lead us to uphold California’s law, not to strike it down. We do not honor federalist principles in their breach.
The Effect of AT&T Mobility on Florida Law
While AT&T Mobility will adversely affect Florida cases attacking class action waivers in arbitration agreements, there is nevertheless reason to be hopeful that its applicability may be narrowed. Two and a half months before AT&T Mobility was decided, the Fourth District Court of Appeals issued its decision in McKenzie v. Betts, 55 So. 3d 615 (Fla. 4th DCA 2011). In that class action case, the complaint alleged that appellants McKenzie Check Advance of Florida, LLC and its principals (“MCA”) operated an illegal lending business in violation of several Florida Statutes: Florida’s Lending Practices Act, Chapter 687; Florida’s Consumer Finance Act, Chapter 516; Florida’s Deceptive and Unfair Trade Practices Act, Chapter 501; and Florida’s Civil Remedies for Criminal Practices Act, Chapter 722. MCA moved to compel arbitration. After a two-day evidentiary hearing, during which extensive evidence was presented, the trial court held that the class action waiver in MCA’s arbitration clauses was substantively—but not procedurally unconscionable. Id. at 620. But the court ruled that the waiver violated Florida’s public policy, and was thus unenforceable, because it defeated the remedial purposes of the plaintiffs’ statutory claims. Id.
The Fourth District affirmed in an excellent opinion written by Chief Judge Gross and certified the case to the Florida Supreme Court as presenting a question of great public importance. Our Supreme Court accepted jurisdiction and the case is currently in the briefing stage on the merits.
While this article can not discuss the case in detail, the merits brief of the plaintiffs/respondents argues persuasively that AT&T Mobility does not require enforcement of the class action ban in McKenzie because (1) an extensive factual record demonstrated that enforcing the ban would prevent plaintiffs from vindicating their statutory rights; (2) AT&T Mobility did not involve statutory claims; (3) neither did it disturb a line of U.S. Supreme Court precedent that statutory claims are arbitrable only if litigants can effectively vindicate their statutory claims in arbitration; and (4) Florida law is entirely consistent with such precedent.
A final reason argued by respondents in McKenzie for the non-applicability of AT&T Mobility is novel but practical and effective. Because AT&T Mobility was a 5-4 decision that included Justice Thomas’ concurrence, the decision is limited to cases that arise in federal—not state courts. Had the case reached the Court from a state court, there would not have been five votes for preemption because Justice Thomas—who provided the crucial fifth vote—has consistently maintained that the FAA does not apply to cases in state courts.
We shall await the Florida Supreme Court’s decision in McKenzie and hope that the respondents and their attorneys obtain an affirmance. In that vein, those attorneys who have done such an excellent job at all levels in the case, deserve praise and appreciation from FJA members and Florida consumers. For a complete list of the attorneys, see Respondents’ Answer Brief on the Merits. www.floridasupremecourt.org/clerk/briefs/2011/401-600/11-514&under;Ans.pdf.