In a straightforward application of controlling precedent, the U.S. Court of Appeals for the Third Circuit on August 24, 2011 held in Littman v. Cellco Partnership (No. 08-4103) that the U.S. Supreme Court’s decision in AT&T Mobility LLC v. Concepcion1 required it to invalidate the New Jersey Supreme Court decision in Muhammad v. County Bank of Rehoboth Beach, Delaware.2 The Muhammad decision recognized unconscionability as a grounds for invalidating a class action waiver in an arbitration clause, and it forced the parties to arbitrate on a class basis. The Third Circuit’s Littman decision eliminates New Jersey unconscionability law as a ground for challenging a class action waiver in an arbitration clause. It also underscores the importance of Concepcion, which broadly and clearly eliminates state law unconscionability challenges to class action waivers in arbitration contracts.

The Concepcion Decision

Concepcion is one of the most important decisions in class action jurisprudence in years. Prior to Concepcion, a number of courts invalidated class action waivers in arbitration contracts under state law unconscionability doctrine, which these courts held was a defense applicable to arbitration contracts under section 2 of the Federal Arbitration Act (FAA). Enacted in 1925, the FAA was intended to do away with judicial hostility to arbitration by placing arbitration contracts on the same footing as all other contracts. Under section 2, an arbitration contract may only be invalidated “upon such grounds as exist at law or in equity for the revocation of any contract” and may not be singled out for special hostile treatment.

The issue of class action waivers in arbitration contracts rose to prominence over the past decade as companies began to use arbitration clauses to defeat class actions. Faced with a class action complaint, a company that had an arbitration clause in its contract with the plaintiff would simply move to compel arbitration and stay or dismiss the class action lawsuit. Some plaintiffs responded by seeking to conduct arbitration proceedings on a class basis, and some courts and arbitrators accepted the argument and permitted arbitrations to go forward on a class action basis, even if the arbitration contract was silent on the subject of class arbitration. In response, many companies inserted class action waiver provisions in their arbitration contracts. And then, in a series of state and federal decisions, courts began to address the argument that these class action waivers were unconscionable, an argument they claimed was available as a ground that exists under state law for the revocation of any contract under section 2 of the FAA.

In Concepcion, the Supreme Court considered whether the FAA preempts California’s unconscionability doctrine as applied to class action waivers in arbitration contracts. Specifically, the Court considered the California Supreme Court’s rule in Discover Bank v. Superior Court, 113 P.3rd 1100 (Cal. 2005), which invalidated class action waivers in arbitration clauses found in contracts of adhesion when the dispute involved a small amount of damages, effectively requiring class arbitration. Concepcion held that the FAA preempts the rule in Discover Bank. The Court reasoned that class arbitration is so fundamentally different from traditional non-class arbitration that to force it on parties who agreed to non-class arbitration would violate the FAA’s purpose of ensuring enforcement of arbitration contracts as written.

Background of Littman

Littman concerned putative class action claims brought by wireless telephone customers of Cellco Partnership d/b/a/ Verizon Wireless (Verizon) for alleged breach of contract, unjust enrichment, and violation of the New Jersey Consumer Fraud Act based on certain allegedly unauthorized wireless telephone charges imposed by Verizon. Verizon moved to compel arbitration based on language in its customer agreement that called for arbitration on a non-class basis. The plaintiffs opposed the motion to compel arbitration based on the New Jersey Supreme Court’s Muhammad decision. In Muhammad, the court invalidated a provision in a consumer loan contract waiving any right to class arbitration as unconscionable under New Jersey law because the plaintiff would have been effectively prevented from enforcing her statutory rights in the absence of a class action due to the low value of her claim. The district court in Littman granted the motion to compel arbitration based on the Third Circuit’s decision in Gay v. CreditInform, 511 F.3d 369 (3d Cir. 2007), which held that Pennsylvania court decisions declaring class-wide arbitration waivers unconscionable were preempted by the FAA. After the Littman appeal was filed, the Third Circuit in Homa v. American Express Co., 558 F.3d 225 (3d Cir. 2009), specifically considered and rejected the argument that the New Jersey Supreme Court Muhammad decision was preempted by the FAA. The court in Homa reasoned that because the Muhammad court “was, we thought, at pains to say that a waiver of class-wide dispute resolution would be improper in the context of either litigation or arbitration” the class action waiver at issue did not impermissibly discriminate against arbitration and therefore was not preempted by the FAA. On that basis, the Third Circuit in Littman reversed the district court, but stayed its mandate pending the filing of a petition for a writ of certiorari. The Supreme Court granted the petition, vacated the Third Circuit’s decision, and remanded for review by the Third Circuit in light of Concepcion.

Decision in Littman

It as against this backdrop that the Third Circuit handed down its decision this week in Littman on remand from the U.S. Supreme Court. The Third Circuit’s Littman decision is best summarized by the following quote from the Third Circuit’s opinion:

We understand the holding of Concepcion to be both broad and clear: a state law that seeks to impose class arbitration despite a contractual agreement for individualized arbitration is inconsistent with, and therefore preempted by, the FAA, irrespective of whether class arbitration ‘is desirable for unrelated reasons.’ Therefore, we must hold that, contrary to our earlier decisions in Homa and in this case, the rule established by the New Jersey Supreme Court in Muhammad is preempted by the FAA. It follows that the arbitration clause at issue here must be enforced according to its terms, which requires individual arbitration and forecloses class arbitration.

Littman proves that the Supreme Court’s Concepcion decision is every bit as powerful as it seemed without the benefit of the Third Circuit's view on the subject. State law unconscionability challenges to class action waivers in arbitration clauses are dead on arrival.