On April 27, 2011, the U.S. Supreme Court issued its much-anticipated decision in AT&T Mobility LLC v. Concepcion, 563 U.S. __ (2011), in which the Court held that § 2 of the Federal Arbitration Act (“FAA”) preempts a certain California judicial rule (the so-called Discover Bank rule) relating to collective-action waivers in arbitration agreements. Justice Scalia authored the 5-4 majority opinion, and – not surprisingly – was joined by Justices Kennedy, Thomas, Alito, and Chief Justice Roberts. Although AT&T Mobility in some ways is a victory for big business and a potential setback for consumers, the decision is by no means the death knell for consumer class actions. Nor does the decision signify the end to consumer challenges to pre-dispute arbitration provisions, including on the grounds of unconscionability.
The Discover Bank rule, articulated by the California Supreme Court in Discover Bank v. Superior Court, 36 Cal.4th 148 (2005), provided:
When [a class action] 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 to the extent the obligation at issue is governed by California law, 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.” (Civ. Code, § 1668.) Under these circumstances, such waivers are unconscionable under California law and should not be enforced.
Discover Bank, 36 Cal.4th at 162-63. The majority in AT&T Mobility held that § 2 of the FAA impliedly preempts this rule. AT&T Mobility, slip op. at 18.
The potential scope of AT&T Mobility is not entirely clear, in part because neither the broader holding of AT&T Mobility (if there is any), nor the rationale behind any such holding, are readily apparent. The framing of the opinion itself is confusing. The majority begins its opinion setting forth the question presented: “[W]hether the FAA prohibits States from conditioning the enforceability of certain arbitration agreements on the availability of class-wide arbitration procedures.” AT&T Mobility, slip op. at 1. In a rather disconnected fashion, the majority ends its opinion with an answer to a seemingly different question: “Because it ‘stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress,’ Hines v. Davidowitz, 312 U.S. 52, 67 (1941), California’s Discover Bank rule is preempted by the FAA.” AT&T Mobility, slip op. at 18.
It is interesting that the majority should focus on the Discover Bank rule, since the California Supreme Court’s holding in Discover Bank was confined to the issue of whether the class action waiver in the arbitration agreement prevented the plaintiff from arbitrating class claims, not whether the plaintiff could avoid the arbitration agreement altogether and proceed with a class action in state court. The Court in Discover Bank noted that Discover Bank had successfully compelled the plaintiff to arbitrate his claims. The plaintiff did not challenge the arbitration agreement in its entirety, but sought to compel the defendants to litigate on a classwide basis. Discover Bank, 36 Cal.4th at 152, 155. In contrast, in AT&T Mobility the Ninth Circuit affirmed the trial court’s denial of AT&T’s motion to compel arbitration based on the unconscionability of the class action waiver contained in the arbitration agreement. Laster v. AT&T Mobility LLC, 584 F.3d 849, 853, 858 (9th Cir. 2009). The plaintiffs in AT&T Mobility never sought to compel class arbitration.
Despite the procedural distinction between Discover Bank and AT&T Mobility, the majority was determined to address the situation – exemplified by Discover Bank – in which a defendant is compelled to engage in class arbitration. The majority concluded early on its opinion: “Requiring the availability of classwide arbitration interferes with fundamental attributes of arbitration and thus creates a scheme inconsistent with the FAA.” AT&T Mobility, slip op. at 9. Later, the Court acknowledged that the Discover Bank rule “does not require classwide arbitration,” but insisted that it nonetheless “allows any party to a consumer contract to demand it ex post.” Id. at 12. In other words, the Discover Bank rule, according to the Court, “manufactures” class arbitration in a manner inconsistent with the FAA. Id. at 13.
AT&T Mobility may be viewed as clarifying last year’s decision in Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp., 559 U.S. __, 130 S.Ct. 1758 (2010). In Stolt-Nielsen, despite the parties’ stipulation that their arbitration agreement was silent on the issue of class arbitration, the plaintiffs successfully persuaded a panel of arbitrators that the agreement allowed for class arbitration of their antitrust claims. Reversing the Seventh Circuit’s reversal of the district court’s order vacating the arbitration award, the Supreme Court held: “where the parties stipulated that there was ‘no agreement’ on this question, it follows that the parties cannot be compelled to submit their dispute to class arbitration.” Stolt-Nielsen, 130 S.Ct. at 1776. The majority in AT&T Mobility apparently viewed the Discover Bank rule as a potential loophole which allowed courts to compel class arbitration – even in the face of an express prohibition on such collective actions – by finding a class action waiver unconscionable. Thus, a court may find that the net result of Stolt-Nielsen and AT&T Mobility is that parties to an arbitration agreement may not be compelled, under any circumstances, to engage in class arbitration unless the agreement expressly provides for it.
There are obvious limits to scope of AT&T Mobility, as even the majority and Justice Thomas, in his concurring opinion, concede. Justice Thomas would have had the Court overturn Doctor’s Associates, Inc. v. Casarotto, 517 U.S. 681 (1996), which held that “generally applicable contract defenses, such as fraud, duress, and unconscionability, may be applied to invalidate arbitration agreements without contravening § 2.” Doctor’s Associates, 517 U.S. at 687. According to Justice Thomas, challenges to arbitration agreements should be limited to defenses “concerning the formation of the agreement to arbitrate, such as fraud, duress, or mutual mistake.” AT&T Mobility, slip op. at 4 (Thomas, J., concurring). The majority did not adopt such a limitation, and reaffirmed the holding in Doctor’s Associates that unconscionability (among others) is a proper defense to the enforceability of an arbitration agreement. AT&T Mobility, slip op. at 9 (“§ 2’s saving clause preserves generally applicable contract defenses”).
Arguably, invalidating an arbitration agreement in its entirety based on an unconscionable class action waiver is meaningfully distinct from enforcing the agreement’s choice of an arbitral forum but requiring the defendant to engage in class arbitration. AT&T Mobility addresses the latter situation, but does not expressly prohibit a State rule from invalidating an arbitration agreement – whether for fraud, duress, mistake, or even for procedural or substantive unconscionability – in order to allow a plaintiff to litigate his or her claims in court on a classwide basis.
A court may disagree, and construe AT&T Mobility to stand for the broad proposition that an arbitration agreement cannot be invalidated simply because the application of the three-part Discover Bank rule (contract of adhesion, small damages, and allegation of deliberate scheme to cheat large numbers of consumers out of small sums of money) renders a class action waiver unconscionable. However, that says nothing about other means of invalidating an arbitration agreement. Furthermore, with respect to class action waivers themselves the Ninth Circuit recognized that “there are most certainly circumstances in which a class action waiver is unconscionable under California law despite the fact that all three parts of the Discover Bank test are not satisfied.” Laster, 584 F.3d at 854, quoting Shroyer v. New Cingular Wireless Servcs, Inc., 498 F.3d 976, 983 (9th Cir. 2007). What those other circumstances are has yet to be decided, although they may include what the majority described as “steps addressing the concerns that attend contracts of adhesion – for example, requiring class-action waiver provisions in adhesion arbitration agreements to be highlighted.” AT&T Mobility, slip op. at 12, n. 6.
The lack of clarity in the majority’s opinion in AT&T Mobility no doubt results from the fact that it is less grounded in legal principles than in political hostility toward class actions and the lawyers who bring them. AT&T Mobility, slip op. at 13 (implying that lawyers’ willingness to represent consumer classes, as opposed to individual consumers, is motivated only by the desire to “reap far higher fees”); id. at 16 (asserting that in a class action, “[f]aced with even a small chance of a devastating loss, defendants will be pressured into settling questionable claims.”).
Of course, the ideological underpinnings of the majority’s opinion may be irrelevant. Until the opinion is reigned in – or completely undone – through subsequent judicial decisions or legislation, AT&T Mobility poses another obstacle in the path of consumers who seek to hold big companies accountable for the wrongs they commit on a mass scale. But that is no reason to give up the fight. As the Supreme Court once understood and appreciated, “[t]he aggregation of individual claims in the context of a classwide suit is an evolutionary response to the existence of injuries unremedied by the regulatory action of government. Where it is not economically feasible to obtain relief within the traditional framework of a multiplicity of small individual suits for damages, aggrieved persons may be without any effective redress unless they may employ the class-action device.” Deposit Guaranty Nat. Bank, Jackson, Miss. v. Roper, 445 U.S. 326, 339 (1980). This is important work, and it must continue.