Hospitality companies rely on their employees to deliver on a “brand promise” in servicing their customers. Disputes with customers or employees can seriously undermine the integrity of that promise. Fortunately, the U.S. Supreme Court’s decision in AT&T Mobility LLC v. Concepcionappears to enhance the value of arbitration as a means of efficiently and cost-effectively bringing such disputes to resolution.
Brief Overview of Decision
The Concepcions, customers of AT&T Mobility LLC, brought suit after they were charged sales tax on a phone that had been advertised as “free” with the purchase of an AT&T service plan. The service contract included an arbitration agreement requiring that claims be brought in the parties’ “individual capacity, and not as a plaintiff or class member in any purported class or representative proceeding.” When AT&T moved to compel arbitration, the Concepcions successfully had the class waiver provision declared invalid under the “Discover Bank Rule,” a California rule holding that class action waiver provisions were unconscionable and in violation of the state’s public policy against exculpation. AT&T appealed, and the Ninth Circuit affirmed.
In a 5-4 decision, the Supreme Court reversed. Justice Scalia, writing for the majority, held that the Discover Bank Rule conflicted with, and therefore was preempted by, the Federal Arbitration Act (“FAA”). The FAA states that an agreement to settle disputes through arbitration “shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” Because it is a “fundamental principle that arbitration is a matter of contract,” then “courts must place arbitration agreements on an equal footing with other contracts, and enforce them according to their terms.” The Discover Bank Rule “interferes with fundamental attributes of arbitration and thus creates a scheme inconsistent with the FAA.”
Those interested in a more complete discussion of the facts of this case should see the Client Alert published by Baker Hostetler’s Employment Team.
Concepcion is one of those decisions that is certain to cause legal reverberations for months if not years. As reported at the Employment Class Action Blog, Senator Al Franken (D-Minn) has already re-introduced the “Arbitration Fairness Act of 2011”, which would forbid pre-dispute mandatory arbitration agreements in employment, consumer and civil rights disputes. In addition, the Consumer Financial Protection Bureau (CFPB) has the authority to impose limitations on the use of mandatory arbitration agreements and prohibit the use of certain types of provisions entirely if it finds that it is “in the public interest and for the protection of consumers” to do so.
State and federal courts will also have ample opportunity to shape the impact of Concepcion. In fact, the Supreme Court has already granted certiorari in Compucredit Corp. v. Greenwood, in which the Ninth Circuit held that an arbitration agreement could not be enforced because plaintiffs' right to sue in court could not be waived under the federal Credit Repair Organization Act. In fleshing out the contours of Concepcion, we would not be surprised if courts consider one or more of the following:
- As pointed out by my partner Paul Karlsgodt at the Class Action Blawg, Justice Scalia’s majority opinion goes beyond the question originally presented for review, which was whether the FAA pre-empts state law “when [class action] procedures are not necessary to ensure that the parties to the arbitration agreement are able to vindicate their claims.”
- In casting what turned out to be the deciding vote, Justice Thomas wrote in his concurrence that he “reluctantly join[ed] the Court’s opinion,” because his reading of the FAA would require that “an agreement to arbitrate be enforced unless a party successfully challenges the formation of the arbitration agreement, such as by proving fraud or duress.”
- Justice Breyer’s dissenting opinion asserted that the Court’s decision violated principles of federalism. Specifically, California law set forth certain circumstances under which class action waivers in any contract, not just arbitration agreements, were unenforceable. As a consequence, Justice Breyer argued that California’s policy against class action waivers was expressly permitted by the FAA.
What To Do Now?
Arbitration can benefit hospitality companies because consumer/employee disputes typically are heard more quickly, involve less discovery, and are more likely to provide privacy and confidentiality. However, real world experience clearly demonstrates that arbitration is not a risk-free proposition. Class arbitration in particular eliminates many of the advantages that are supposed to be inherent in arbitration.
As the holding in Concepcion significantly alters the playing field, hospitality companies should reevaluate their arbitration provisions or, as applicable, their reasons for not incorporating arbitration provisions in both their customer and employee agreements. Before adopting any change, however, hospitality companies should understand that the Supreme Court’s decision rested to some degree on its finding that the AT&T arbitration contract was extremely fair to the consumer. Among other terms cited by the Supreme Court:
- AT&T was required to pay all costs for non-frivolous claims;
- The arbitration was to take place in the county in which the customer is billed;
- For claims of $10,000 or less, the customer was allowed to choose whether the arbitration proceeded in person or by telephone, or was based only on submissions;
- Either party was permitted to bring a claim in small claims court in lieu of arbitration;
- The arbitrator was permitted to award any form of individual relief, including injunctions and presumably punitive damages;
- AT&T could not recover any attorney’s fees; and
- If the customer received an award greater than AT&T’s last written settlement offer, AT&T would be required to pay a $7,500 minimum recovery and twice the amount of the customer’s attorney’s fees.