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.  

What’s Next?

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.