From Jean Sternlight:
Yesterday the Supreme Court granted certiorari in what could be an extremely important case addressing the intersection of mandatory arbitration and class actions. AT & T Mobility v. Concepcion, 2010 WL 303962, Docked 09-893 (May 24, 2010) poses the following question: “Whether the Federal Arbitration Act preempts States from conditioning the enforcement of an arbitration agreement on the availability of particular procedures — here, class-wide arbitration — when those procedures are not necessary to ensure that the parties to the arbitration agreement are able to vindicate their claims.”
The lawsuit, brought in the 9th Circuit, is a consumer class action contending that AT&T Mobility acted fraudulently when it offered a “free” phone to all who signed up for service, but then charged substantial sales tax ($30.22 for two phones to the named plaintiff) to each consumer. When plaintiff sought to litigate the claim as a class action the defendant demanded individual arbitration, citing an arbitration clause that prohibited class actions. Relying on California unconscionability law, specifically Discover Bank v. Superior Court, 113 P.3d 1100 (Cal. 2005) the District Court, 2008 WL 5216255, and Ninth Circuit, 584 F.3d 849 (9th Cir. 2009) both courts found the class action prohibition unconscionable.
AT&T Mobility’s cert petition recognizes that provisions in arbitration agreements can sometimes be held unconscionable, but argues that the decisions below are preempted because California courts are purportedly interpreting unconscionability law differently (and more strictly) when they review arbitral class action prohibitions than when they review other kinds of contracts. In particular, the California Supreme Court’s Discover Bank decision states:
“when the [class] waiver is found in a consumer contract of adhesion in a setting in which 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 sums of money, then, at least, . . . the waiver becomes in practice the exemption of the party from responsibility for its own fraud, or willful injury to the person or property of another. Under these circumstances, such waivers are unconscionable under California law and should not be enforced.”
The Ninth Circuit states that this specific test is not a new rule applicable only to arbitration agreements but rather merely a “refinement” of the “general sliding-scale approach to unconscionability in the specific context of class action waivers.”
The arbitration clause at issue in Concepcion is highly unusual, because it includes a provision stating that if the arbitrator awards the customer an amount greater than the phone company’s last written settlement offer made before selection of an arbitrator then the consumer is entitled to a premium payment of $7,500. The company argues that this “premium” provision is sufficiently generous that a class action is not necessary to allow individual claimants to enforce their rights, and that it was wrong in this context to hold a class action prohibition unconscionable. The plaintiffs respond (and the Ninth Circuit found) that “the premium payment does not transform a $30.22 case into a predictable $7,500 case.” Instead, finds the Ninth Circuit, “predictably AT&T will simply pay the face value of the claim before the selection of an arbitrator to avoid potentially paying $7,500. Thus, the maximum gain to a customer for the hassle of arbitrating a $30.22 dispute is still just $30.22.” Normally, finds the Ninth Circuit, a person “will not find it worth the time or the hassle to try to recover such a small amount, even if that person spends no money to hire an attorney or to invoke the arbitration process.”
It seems that the Concepcion case will require the Court to walk a difficult line. If the majority of the Court want to find that California’s approach to unconscionability in this context is preempted it will have to find a way to do that without purporting to wade too far into state law. While it may be easy for the Court to say that unconscionability law can’t be applied more strictly to arbitration agreements than to other kinds of contracts, it may be hard for the Supreme Court or lower courts to apply that test in particular situations.
The case will also be interesting because it raises the issue of the purpose of class actions and litigation more generally. Is the accepted purpose of plaintiffs’ class action only to reimburse plaintiff for the cost of the phone or is an accepted purpose also to help other similarly situated consumers or to deter the defendant or other companies from engaging in such fraudulent behavior in the future? Is it appropriate to find a class action prohibition unconscionable because it harms persons other than the named plaintiffs or prevents deterrence, and not merely because it prevents the particular named plaintiffs from recovering their loss? Note that class actions serve a notice function — helping present claims of persons who did not even know they had claims. Is it appropriate (not preempted by the FAA) to find that eliminating that aspect of class actions is unconscionable?
The case will be watched extremely closely by both sides of the class action/arbitration debate. Probably no one believes that all class action prohibitions are per se unconscionable. Equally, while some companies might want to eliminate unconscionability arguments altogether in all likelihood Section 2 of the FAA ensures that some types of arbitration clauses can be unconscionable. Thus, the question the Court will try to answer is are class action waivers contained in arbitration clauses somehow immune from unconscionability challenges and, assuming they are not, how should courts decide whether such waivers are unconscionable. A broad decision in favor of AT&T Mobility could potentially allow companies in a variety of contexts to insulate themselves from class action exposure by including class action waivers in their arbitration clauses. This would be a huge deal in the world of consumer litigation, as many consumer challenges are only brought through class actions. Such a ruling could also affect employment cases, particularly wage and hour claims, which are typically presented in class actions. This type of ruling could spark legislative action on the proposed Arbitration Fairness Act (which would prohibit mandatory arbitration in the consumer and employment settings). Alternatively a narrower decision in favor of AT&T could open a floodgate of future litigation to determine whether a lower court had issued a permissible or impermissble decision holding that a particular class action waiver was unconscionable. A ruling in favor of the plaintiffs would reinforce existing law in many jurisdictions which provides that arbitral class action prohibitions are at risk of being held unconscionable.
Stay tuned for another exciting arbitration decision from the Supreme Court!