Whether a California law that conditions the enforceability of arbitration agreements on the availability of class action dispute resolution is non-discriminatory under the Federal Arbitration Act and not subject to conflict preemption.
Vincent and Liza Concepcion ("the Concepcions") signed a two-year service contract with AT&T Mobility for wireless phone service and received free cell phones from AT&T as a part of their contract. AT&T charged the Concepcions a sales tax on their phones, and the Concepcions subsequently sued AT&T alleging that the company had fraudulently advertised the phones as free. The District Court for the Southern District of California consolidated the Concepcions' claim with a class action suit pending in the District Court on the same issue. The service contract that the Concepcions signed contained a clause requiring that they arbitrate disputes with AT&T directly, thus prohibiting the Concepcions from participating in class action suits. After AT&T moved to compel arbitration, the District Court denied AT&T's motion, and AT&T appealed to the Ninth Circuit Court of Appeals arguing that the Federal Arbitration Act ("FAA") expressly and impliedly preempted state law requiring the enforcement of the arbitration clause. The Ninth Circuit ruled against AT&T on the grounds that the arbitration provision represented an unconscionable exculpatory clause and could not be enforced. The United States Supreme Court will now determine whether the FAA preempts state law requiring the enforcement of the arbitration clause. This decision may affect consumers' ability to participate in class action suits and the extent to which they may arbitrate small claims.
Questions as Framed for the Court by the Parties
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.
In 2002, Vincent and Liza Concepcion ("the Concepcions") signed a two-year service contract with AT&T Mobility for wireless phone service. The service contract contained a clause that required the Concepcions to arbitrate any disputes with AT&T directly, thus prohibiting them from participating in class action suits against AT&T. Additionally, the contract contained a clause providing that a customer would automatically receive $7,500 if an arbitrator found for a customer in an amount higher than AT&T's last written settlement offer. In return for signing the two-year service contract, AT&T provided the Concepcions with new cell phones for free. AT&T subsequently charged the Concepcions a sales tax of $30.22 on the phones.
The Concepcions sued AT&T in the U.S. District Court for the Southern District of California claiming that AT&T had committed fraud in charging a sales tax on their cell phones that the company had advertised as free. The District Court consolidated the Concepcions’ case with a class action pending in the court addressing the same issue. AT&T subsequently moved to compel arbitration under the terms of the service contract, and to prevent the Concepcions from participating in the class action suit. The District Court denied AT&T's motion, stating that the arbitration clause was unconscionable under California Civil Code § 1670.5 and that the Federal Arbitration Act ("FAA") did not preempt California law to require the enforcement of the arbitration clause.
AT&T appealed the decision to the United States Court of Appeals for the Ninth Circuit. The Ninth Circuit agreed with the District Court, holding that the service contract was unconscionable and that the FAA did not expressly or impliedly preempt California law. The Supreme Court granted AT&T's petition for certiorari to determine whether the FAA preempts state law conditioning the enforceability of arbitration agreements on the availability of certain procedures, such as the ability to proceed as a class action.
AT&T Mobility argues that the Federal Arbitration Act ("FAA") preempts California Civil Code § 1670.5, which invalidates arbitration agreements that do not authorize class action dispute resolution, because the California law discriminates against arbitrations. Moreover, AT&T claims that California’s rule is preempted by Section 2 of the FAA because it is not a ground at law or in equity for the revocation of any contract. However, Vincent and Liza Concepcion ("the Concepcions") state that class action waivers embedded in arbitration agreements function as unfair exculpatory clauses. Accordingly, they argue that these waivers are unenforceable under California's general unconscionability contract law without regard to whether they are found in an arbitration agreement. Thus, the Concepcions argue that California’s rule is not discriminatory and that it falls within general state grounds for the revocation of any contract.
The Federal Arbitration Act
AT&T argues that Section 2 of the FAA expresses Congress’s support of arbitration agreements. Accordingly, AT&T asserts that courts may not refuse to enforce arbitration agreements merely because they disagree with the procedures that the parties to arbitration have selected. However, the Concepcions maintain that the FAA does not reflect a congressional intent to occupy the entire field of arbitration.
In response however, AT&T argues that the FAA places only two limitations on the enforceability of arbitration provisions: first, they must be part of a written maritime contract or a contract evidencing a transaction involving commerce; and second, such clauses may be revoked on grounds that exist at law or in equity for the revocation of any contract.
The FAA’s Section 2 Savings Clause and Unconscionability Doctrine
AT&T asserts that the Supreme Court has identified unconscionability as a general ground that exists at law for the revocation of any contract. Accordingly, AT&T argues that a state's application of its unconscionability doctrine to limit the enforceability of arbitration provisions may fall within FAA Section 2’s Savings Clause. Yet, AT&T argues that an application of a state's unconscionability doctrine is not always sufficient to ensure that the state law rule is valid under the Savings Clause. Specifically, AT&T contends that state courts are not permitted to employ any ground that exists at law for the revocation of any contract in ways that subject arbitration to special scrutiny.
However, the Concepcions claim that the FAA preserves an essential role for state common law, making arbitration agreements subject to contract-law defenses otherwise available at law or in equity. Accordingly, the Concepcions state that class action waivers made under arbitration agreements are, under certain circumstances, unconscionable under state law as unlawfully exculpatory. They add that this does not only apply to arbitration agreements but to all contracts.
The FAA and its Nondiscriminatory Principle
AT&T argues that the Ninth Circuit Court of Appeal’s opinion does not fall within the Section 2 Savings Clause because it was decided under a state law that discriminates against arbitration agreements. Thus, AT&T states that California’s rule conditioning the enforcement of arbitration agreements on the inclusion of terms authorizing class-wide dispute resolution conflicts with the Savings Clause’s fundamental nondiscriminatory principle. AT&T also contends that the Ninth Circuit’s interpretation of the Savings Clause will allow states intent on chipping away at the FAA to indirectly devise facially neutral state laws that ultimately impose procedural requirements on arbitration.
Alternatively, the Concepcions argue that AT&T does not believe that arbitration agreements must be placed on an equal footing with other contracts. They object to the notion that courts should treat arbitration agreements as “more equal” than other non-arbitration agreements by seeking to exempt them from defenses applicable to other contracts. The Concepcions also state that if the courts were to conclude that applications of general contract principles were preempted if they could be characterized as applicable only to arbitration agreements, then unlawful terms would be enforceable whenever they contained an arbitration agreement. They add that California's law and the prior California state court decision of Discover Bank easily satisfy the FAA's nondiscriminatory test because the state does not treat arbitration agreements differently from non-arbitration agreements. Accordingly, contrary to AT&T’s suggestion, the Concepcions state that courts should assess the enforceability of class action waivers embedded within arbitration agreements on a case-by-case basis and decline to enforce these agreements only where they would lead to unconscionable results.
Discrimination and the California Discover Bank Test
AT&T notes that the lower court’s use of the Discover Bank test differs from the traditional unconscionability principles applied by California courts outside of the arbitration context. Accordingly, the company argues that this test discriminates against arbitration agreements and that it is invalid under the FAA.
First, AT&T contends that, outside of arbitration agreements, “California equates unconscionability only with terms that shock the conscience and to which no person not acting under delusion would agree.” AT&T argues that Discover Bank does not follow this test and only analyzes whether a reasonable consumer may prefer quick informal resolution to class litigation. The Concepcions, however, contend that AT&T’s definition of unconscionability is under- inclusive compared to modern unconscionability doctrine that evaluates unconscionability in other dimensions.
Second, AT&T notes that California courts normally only consider the fairness of the challenged arbitration provisions in relation to the parties to the agreement that appear before the court. Moreover, AT&T argues that the lower court’s finding of unconscionability rests entirely on concern for the rights of persons that would be included within a hypothetical class action, other than the parties before the court. Consequently, AT&T maintains that this approach has no support in California’s unconscionability law. Alternatively, the Concepcions argue that AT&T’s arbitration agreement allows it to pay only the face value to small claims, ensuring that the premiums and fees it purports to offer consumers will not actually be paid. Moreover, the Concepcions state that there is no issue for the Supreme Court to resolve because the question of whether the agreement is unfair implicates only issues of California law and does not present a genuine question under the FAA.
AT&T also contends that California’s general test for unconscionability looks to the substantive unfairness of the challenged contract provision. AT&T maintains that in the context of arbitration, the analysis turns on California’s stated social policy of favoring class litigation and class arbitration rather than fairness. Alternatively, the Concepcions state that courts should assess a contract term's reasonableness by examining the level of relative bargaining power between the parties rather than following a policy preference. Accordingly, the Concepcions argue that courts should be concerned with the enforceability of contracts that purport to cut off a party's right to bring class-wide proceedings without regard to forum. Thus, the Concepcions maintain that courts should view arbitration agreements as a forum selection clause that is subject to a state's general contract law defenses. They argue that Discover Bank correctly applied California’s general contract law to conclude that at least some class action waivers embedded within arbitration agreements are unconscionable since they may effectively act as exculpatory contract clauses.
Conflict Preemption by the FAA
AT&T states that the FAA’s superseding authority over conflicting state law is well established and has been repeatedly reaffirmed. Specifically, the company maintains that California’s rule on unconscionability conflicts with the FAA in two ways. First, AT&T contends that the California law conflicts with the purpose of the FAA of allowing parties to consensually select their own dispute resolution procedures. AT&T adds that if states were allowed to superimpose class action procedures on a contract arbitration agreement, there would be no end to the other procedures on which they could insist. Second, AT&T argues that California’s rule will frustrate the FAA’s purpose of removing impediments to arbitration and violate FAA’s pro-arbitration policy because businesses will forgo arbitration altogether rather than subject themselves to the risk of arbitration alternatives.
However, the Concepcions argue that AT&T has gone beyond Section 2’s text. They maintain that the FAA expressly preserves state contract law defenses that do not discriminate against arbitration. Moreover, the Concepcions argue that the application of state unconscionability law to strike down arbitration agreements that act as exculpatory clauses furthers two of the FAA’s key purposes, specifically, that arbitration be consensual, and that it provides adequate remedies for wrongdoing.
The crux of this case turns on what the Supreme Court determines to be the proper interpretation of California contract law. AT&T Mobility asserts that the Federal Arbitration Act ("FAA") expressly preempts a California state law that forbids class-wide dispute resolution. However, Vincent and Liza Concepcion ("the Concepcions") argue that the United States Court of Appeals for the Ninth Circuit appropriately applied the standards governing unconscionability in contracts as a whole and found the arbitration agreement to represent an unenforceable exculpatory clause. Additionally, AT&T contends that the FAA impliedly preempts state law because allowing states to specify specific procedures in arbitration would undermine FAA's goal of enforcing arbitration clauses according to their terms. Alternatively, the Concepcions contend that the FAA does not preempt state law in cases where state law does not seek to ban arbitration.
The New England Legal Foundation ("NELF") argues that a ruling for the Concepcions could eliminate the use of arbitration proceedings in consumer claims. NELF asserts that the Ninth Circuit's ruling establishes a higher standard for the enforcement of arbitration clauses and essentially invalidates all arbitration clauses that do not provide for the use of class actions. NELF claims that businesses will abandon the use of individual arbitration altogether if they cannot create clauses that prevent the use of costly and inefficient class-wide arbitration and litigation. The Chamber of Commerce of the United States ("Chamber") contends that abandoning arbitration could negatively impact consumers who could lose the most efficient and least expensive means of addressing their claims. The Chamber further argues that many consumers will not have the ability to pursue litigation because of prohibitive costs. Additionally, the Chamber claims that this forced transition from arbitration to class action litigation will force businesses to settle cases unnecessarily because of the threat of extremely large class action judgments.
Furthermore, the Chamber asserts that class actions do not deter businesses from wrongdoing. The Chamber argues that state governments are already able to enforce the law against businesses through civil penalties and injunctions. Additionally, the Chamber argues that regulatory agencies such as the Federal Trade Commission and the Federal Communications Commission sufficiently protect consumers from unfair business practices. Finally, the Center for Class Action Fairness claims that class actions are ineffective because they often have large transaction costs and only provide consumers with small amounts of money.
Although amici have expressed concern about the potential effects of eliminating arbitration in consumer claims, other amici, such as the American Association for Justice, state that a ruling for AT&T might allow businesses to ban the use of class actions completely and avoid liability by including arbitration clauses in all of their contracts with customers. The American Antitrust Institute ("AAI") asserts that no consumer would ever trade the right to proceed in a class action. The AAI argues that most consumers would not chose to arbitrate small claims if they are unable to receive more than the value of these claims because arbitration requires consumer to pay fees and file complex documents. Additionally, the AAI asserts that a ban on class actions would prevent consumers from adequately investigating potential claims because of their inability to obtain substantial attorney fees in arbitration actions.
The NAACP emphasizes the importance of class actions in defending civil rights and preventing discrimination.The NAACP states that class actions are especially important where individuals lack the means to pursue individual litigation or arbitration, where individuals are unaware of their potential claims, or where individuals fear bringing their claims before the court. In the NAACP's view, government regulations provide a weak alternative to class action relief because of the limited resources the government possesses to address individuals' claims. Additionally, the NAACP argues that limitations on the availability of class actions would be especially harmful to minority groups because of their role in deterring systemic discrimination in the fields of employment, insurance, and consumer lending.
This case will determine whether the Federal Arbitration Act ("FAA") preempts a state law conditioning the enforceability of arbitration agreements on whether they contain class action waivers. AT&T Mobility contends that the FAA preempts states from conditioning the enforceability of an arbitration agreement on the availability of particular procedures, such as class actions, when those procedures are not necessary to ensure that the parties to the arbitration agreement are able to vindicate their claims. Alternatively, Vincent and Liza Concepcion argue that class action waivers have been held unenforceable under general contract law without regard to whether they are found in arbitration agreements. A decision for AT&T will reduce consumers' ability to bring class action suits. Alternatively, a decision for the Concepcions will likely decrease the availability of arbitration to consumers.