JURIST Guest Columnist Robert Marcelis, University of California, Davis School of Law Class of 2013, is a staff member of the Business Law Journal. He explains the holding AT&T v. Concepcion, discusses its implications on future cases and reviews Congress’ response to the case…

Pre-dispute arbitration agreements are commonplace for consumers and employees. These agreements require consumers and employees to forego litigation when a dispute arises. Often, consumers and employees must adhere to the contract or completely reject it. Given this unequal bargaining power, can businesses and employers include language in their arbitration contracts that prevent consumers and employees from pursuing class action lawsuits? In AT&T v. Concepcion, the US Supreme Court held that federal law preempts California’s common law rule, conditioning the enforceability of an arbitration agreement so long as it allowed class action arbitration. The Court’s decision has created more questions than answers on the enforceability of arbitration agreements. For example, when practitioners receive their next complaint, should they motion to compel arbitration? How will this affect cases pending appellate review? Will state courts find other ways to invalidate arbitration agreements based on state common law rules and statutes and, if so, how will the US Supreme Court respond? Fortunately, the Court provided some of these answers when it granted certiorari, and vacated and remanded four cases with instructions for reconsideration in light of Concepcion.

In Concepcion, plaintiffs Vincent and Liza Concepcion entered into a sales agreement with AT&T Mobility for the sale and servicing of a cellular phone. The agreement contained an arbitration agreement and class action waiver that required the Concepcions to bring their claims in an “individual capacity, and not as a plaintiff or class member in any purported class or representative proceeding.” Although AT&T advertised the phone as free, plaintiffs paid $30.22 in sales tax based on the retail value of the phone. The Concepcions filed a complaint in district court that was later consolidated with a putative class, alleging false advertising and fraud by charging sales tax on phones advertised as free. AT&T filed a motion to compel arbitration pursuant to the terms of its agreements. Arguing that the arbitration agreement was unconscionable under California law because it barred class action arbitration, the Concepcions opposed the motion. The trial court denied AT&T’s motion and AT&T appealed. The US Court of Appeals for the Ninth Circuit affirmed based on the California Supreme Court’s decision in Discover Bank v. Superior Court.

The court in Discover Bank held that arbitration agreements with class action waivers are unconscionable when a corporation or business with (1) superior bargaining power (2) engages in a scheme to defraud customers and (3) when the contract involves small amounts of damages. The US Court of Appeals for the Ninth Circuit held that the Federal Arbitration Act (FAA) did not preempt the Discover Bank rule because the FAA contains a saving provision allowing state courts to invalidate an agreement based on general contract principles including fraud, duress and unconscionability.

The US Supreme Court disagreed. Justice Scalia, writing for the majority, first explained the framework the Court uses to determine whether federal law displaces state law:

When state law prohibits outright the arbitration of a particular type of claim, the analysis is straightforward: The conflicting rule is displaced by the FAA. But the inquiry becomes more complex when a doctrine normally thought to be generally applicable, such as duress or, as relevant here, unconscionability, is alleged to have been applied in a fashion that disfavors arbitration.

Later in Justice Scalia’s opinion, he explained why the majority held that the FAA preempted the Discover Bank rule:

Although § 2’s saving clause preserves generally applicable contract defenses, nothing in it suggests an intent to preserve state-law rules that stand as an obstacle to the accomplishment of the FAA’s objectives … 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. Requiring the availability of classwide arbitration interferes with fundamental attributes of arbitration and thus creates a scheme inconsistent with the FAA.

In their brief submitted to the US Supreme Court, attorneys for AT&T explained that conditioning enforcement of arbitration agreements by mandating class action procedures would frustrate the purpose of the FAA. The purpose of individual arbitration is to allow “parties [to] forgo the procedural rigor and appellate review of the courts in order to realize the benefits of private dispute resolution: lower costs, greater efficiency and speed.” AT&T argued that class wide arbitration is equally burdensome, time consuming and expensive compared to class action lawsuits. From this position, AT&T argued that if states can condition the enforceability of arbitration agreements on any number of procedures, arbitration “would be converted into litigation” and businesses would stop using arbitration altogether.

In addition, AT&T argued that California’s Discover Bank rule was not a refinement of the state’s common law doctrine of unconscionability. California’s traditional unconscionability analysis requires a party seeking invalidation to show both procedural and substantive unconscionability. AT&T argued that within this framework, rather than the Discover Bank framework, AT&T’s arbitration agreement was substantively fair to consumers. These provisions provide that AT&T will pay for the cost of arbitration unless the arbitrator finds the claim frivolous, that arbitration will take place in the county of the consumer’s billing address and that consumer’s may file in a small claims court instead of pursuing arbitration, among others.

Last year the Supreme Court granted certiorari, and vacated and remanded four cases with instructions for reconsideration in light of Concepcion. Lower courts in three of the cases, Litman v. Cellco Partnership, Missouri Title Loans, Inc. v. Brewer and Sonic Automotive, Inc. v. Watts invalidated arbitration agreements with class action waivers by finding these agreements unconscionable like the California Supreme Court did in Concepcion. More interesting is the Court’s remand of Sonic-Calabasas A, Inc. v. Moreno, a California Supreme Court decision. In that case, the court held that employees could not waive a statutory right to an administrative hearing with the California Labor Commissioner by signing an arbitration agreement. The remand of Sonic signals that lower courts should not limit Concepcion to agreements with class action waivers, but should also consider whether Concepcion preempts state statutory rights. For example, before the US Supreme Court remanded Sonic, the Second District Court of Appeals in Los Angeles decided Brown v. Ralphs Grocery Company, where the court held that employees could not waive their statutory right to bring a class action lawsuit against employers for labor violations under the Labor Code Private Attorneys General Act of 2004. In light of Concepcion, this decision and others may be reconsidered.

Last month, the US Supreme Court again affirmed that lower courts should broadly interpret Concepcion. In Marmet Health Care Center, Inc., v. Brown, the Court rejected the Supreme Court of Appeals of West Virginia’s interpretation that “as a matter of public policy under West Virginia law, an arbitration clause in a nursing home admission agreement adopted prior to an occurrence of negligence that results in a personal injury or wrongful death, shall not be enforced to compel arbitration of a dispute concerning negligence.” The Court concluded that West Virginia’s rule categorically prohibited arbitration and was barred by the FAA.

In the meantime, state courts in California are considering whether defendant(s) waived their right to compel arbitration in actions that were commenced months or even years before the Concepcion decision. Three decisions, Estrella v. Freedom Financial Network, In re California Title Insurance Antitrust Litigation and Villegas v. US Bancorp provide examples of where a federal court in California granted defendant’s motion to compel arbitration even though plaintiff(s) filed a claim prior to Concepcion, and defendant waited until the US Supreme Court issued its decision in Concepcion to file a motion to compel arbitration. In Estrella defendants motioned to compel arbitration 27 months after plaintiff brought the case and nine days after Concepcion. In In re California Title Insurance Antitrust Litigation, defendants motioned to compel arbitration three years after litigation commenced. Finally, in Villegas defendants motioned to compel arbitration 13 months after litigation commenced. The US District Court for the Northern District of California concluded that defendants in all three cases did not waive their right to compel arbitration because doing so prior to Concepcion would have been futile under California’s Discover Bank rule.

In response to Concepcion, Senators Al Franken and Richard Blumenthal and Congressman Hank Johnson introduced the Arbitration Fairness Act of 2011. If passed by Congress and signed into law by President Obama, the act would not only overturn Concepcion, but would go farther and invalidate all pre-dispute arbitration agreements. Therefore, all consumer, employment and civil rights arbitration agreements that are signed before a dispute arises would be invalid. Consumers and employees could still agree to arbitrate their claims after a dispute arises. The act also states that the FAA was “intended to apply to disputes between commercial entities of generally similar sophistication and bargaining power” and, because of a number of Supreme Court decisions, it now applies to “consumer disputes and employment disputes.” Previously in 2009 and 2007, Congressman Johnson introduced bills that contained language similar to the Arbitration Fairness Act. Both efforts failed. In a sign that perhaps this legislation will meet the same fate as its predecessors, Senators Franken and Blumenthal also introduced the Mobile Fairness Act of 2011 that applies only to arbitration agreements that involve wireless devices. The US Chamber of Commerce, an organization that represents three million businesses and their allies, supports the act, while the Public Citizen, an organization that represents 80,000 individuals self-identified as consumers, opposes it.

Robert Marcelis studied Government at California State University, Sacramento. At the University of California, Davis School of Law, he is a member of the Asian Pacific American Law Student Association, La Raza Law Student Association and the Business Law Journal. Tina Wang, University of California, Davis School of Law, Class of 2014, provided thoughtful feedback for this article.

Suggested citation: Robert Marcelis, Arbitration Agreements in the Wake of AT&T Mobility v. Concepcion, JURIST – Dateline, Mar. 10, 2012, http://jurist.org/dateline/2012/03/robert-marcelis-arbitration-agreements.php.