Regardless of which side you’re on, there is no dispute that the United States Supreme Court’s much anticipated decision in AT&T Mobility LLC v. Concepcion, 563 U.S. __ (2011) now is the leading authority on the enforceability of class action waivers in consumer arbitration agreements and, depending on where you practice, changed the law. When and how to raise Concepcion in prospective cases is one thing. But don’t pass up the opportunity to raise Concepcion in your existing cases or in matters currently pending in arbitration, even if you did not move to compel arbitration earlier or already lost a prior effort to enforce a class action waiver.
A series of recent cases confirm that you can rely upon Concepcion to change the course of pending litigation, but those cases also highlight the importance of doing so promptly, before it’s too late.
In AT&T Mobility v. Concepcion, the United States Supreme Court held that the Federal Arbitration Act preempted California state law that deemed class action waivers in arbitration agreements unconscionable in consumer disputes involving small amounts of money. The case involved a cell phone contract requiring the arbitration of all disputes individually and “not as a plaintiff or class member in any purported class or representative proceeding.” Both the federal district court and Ninth Circuit Court of Appeals rejected AT&T’s motion to compel arbitration, holding that the class action waiver and arbitration clause were unenforceable under California law. That law — announced in the California Supreme Court’s decision in Discover Bank v. Superior Court, 36 Cal. 4th 148 (2005) — held that arbitration agreements containing class action waivers are unconscionable when (a) the clauses are in contracts of adhesion, (b) the dispute involves a small amount of money, and (c) the clauses are alleged to be part of a scheme to cheat consumers out of small amounts of money. The practical effect of the Discover Bank rule was that arbitration agreements routinely were held unconscionable by California courts.
Because the Discover Bank rule placed certain arbitration agreements on a different footing than other contracts by essentially requiring the availability of classwide arbitration in the consumer context, the United States Supreme Court reversed the ruling of the Ninth Circuit Court of Appeals in Concepcion. It explained that “[r]equiring the availability of classwide arbitration interferes with the fundamental attributes of arbitration and thus creates a scheme inconsistent with the FAA.” In other words, although arbitration agreements in consumer contracts containing class action waivers can be held unenforceable, that result must be based upon legal principles applying to contracts generally (e.g., fraud, duress, unconscionability), not a rule specially tailored to arbitration agreements.
Impact of Concepcion on Pending Cases
Because Concepcion represents a sea change in the law of arbitrability in certain jurisdictions, its impact is not limited to threatened or newly filed lawsuits; it can be applied in cases that have been pending for years. Three recent decisions highlight the impact of Concepcion in such cases. In Estrella v. Freedom Financial, a federal district court in California issued an order compelling arbitration and precluding class arbitration based on Concepcion in a case that had been pending for over two years. 2011 WL 2633643 (N.D. Cal. July 5, 2011). The defendant had participated in fact and expert discovery and approved case management orders without moving to compel arbitration. The court also had certified the case as a class action and the opt-out period had passed. In its recent motion to compel arbitration, filed twenty-seven months after the case was originally filed, the defendant relied upon Concepcion and contended that its motion was timely because such a motion would have been futile prior to Concepcion. The district court agreed and rejected the plaintiffs’ waiver arguments. The court reasoned that an earlier motion to compel would have been futile under California law because the arbitration clause at issue did not permit class arbitration and “prior to Concepcion, California and Ninth Circuit law held that similar arbitration agreements with class action waivers were unconscionable and unenforceable.” Concepcion impacted this litigation significantly — instead of the defendant opposing consumer fraud and negligence claims in federal court on behalf of a certified class, it now faces a series of potential individual disputes on those claims before the American Arbitration Association.1
Similarly, in In re California Title Insurance Antitrust Litigation, the federal district court issued an order compelling arbitration and precluding class arbitration in a case that had been pending for over three years. 2011 WL 2559633 (N.D. Cal. June 27, 2011). The arbitration clause at issue required arbitration before the American Arbitration Association, but was silent on class arbitration. In their motion to compel arbitration, defendants relied upon Concepcion and contended that their motion was timely because such a motion would have been futile prior to that decision. The district court agreed. It reasoned that an earlier motion to compel would have been futile under California law because the arbitration clause did not permit class arbitration (either expressly or impliedly based on the United States Supreme Court’s decision in Stolt-Nielsen)2 and on that basis would have been deemed unconscionable. The district court also rejected plaintiffs’ arguments that they would be prejudiced if compelled to arbitrate, holding that substantive discovery had commenced recently and the trial was not set for well over a year. The case went from being a putative class action in federal court to a series of potential individual disputes before the American Arbitration Association.
Finally, in Villegas v. US Bancorp, the federal district court issued an order compelling arbitration and enforcing a class action waiver in a case that had been pending for over a year. No. C 10-1762 RS (N.D. Cal. June 20, 2011). The court noted that the “majority of the parties’ resources expended to date involved . . . class action issues.” The defendant had not previously moved to compel arbitration. In ordering arbitration, the district court rejected the plaintiff’s argument that the defendant’s motion to compel arbitration was untimely, holding that prior to Concepcion, the defendant had no right to compel arbitration, and therefore, no right to waive. Prior to Concepcion, defendant had every reason to believe that any efforts to enforce the arbitration agreement and class action waiver would be futile under California law. Significantly, the federal court’s ruling granting defendant’s motion to compel arbitration turned a potential class action into a bilateral arbitration involving only an individual claim.
Estrella, California Title Insurance, and Villegas demonstrate the game-changing impact Concepcion may have on pending cases. While none of these cases attempts to set forth any bright-line rules regarding when Concepcion must be raised in pending cases, the decisions are instructive in two ways. First, they provide additional authority for parties to use when defending against claims of waiver and delay. Such arguments inevitably will be part of the attack against a motion to compel arbitration in cases that have been pending for months or years. See Estella, 2011 WL 2633643 (citing Fisher v. A.G. Becker Paribas, Inc., 791 F.2d 691 (9th Cir. 1981) (holding that a three and a half year delay in filing a motion to compel arbitration did not constitute a waiver because an earlier motion to compel would have been futile). Second, both cases make clear that the clock for asserting Concepcion already started ticking and that, in contested cases, it may be the moving party’s burden to explain any delay in raising Concepcion. Thus, parties should consider filing these motions as soon as possible in appropriate cases.
Of course, the impact of Concepcion is not necessarily limited to pending federal court cases. Parties also should consider raising Concepcion in pending state court proceedings, in cases pending in arbitration, and even on appeal.
- For parties already in arbitration, perhaps as a result of a motion to compel arbitration that was granted but without enforcing a class action waiver (see Cooper v. QC Fin. Servs., Inc., 503 F. Supp. 2d 1266 (D. Ariz. 2007)), Concepcion can be raised on a renewed motion before the district court that previously ordered arbitration or as a motion to stay arbitration proceedings.
- For parties in state court, Concepcion applies if the FAA applies. Southland Corp. v. Keating, 465 U.S. 1 (1984). In those cases where only state law applies, parties should argue that Concepcion is at least persuasive authority. Many courts, including those in California, have long held that their respective State Arbitration Acts are modeled after and should be construed consistently with the FAA and applicable federal authorities. Armendariz v. Found. Health Psychcare Servs., Inc., 24 Cal. 4th 83 (2000) (Section 1281 of the California Arbitration Act and Section 2 of the Federal Arbitration Act contain “identical” terms; “under California law, as under federal law, an arbitration agreement may only be invalidated for the same reasons as other contracts”); Mossman v. City of Oakdale, 170 Cal. App. 4th 83 (2009) (“ . . . it is appropriate to rely on federal authorities construing a federal statute similar in purpose. The California statutory scheme for enforcement of private arbitration agreements is similar to the federal scheme.”); Rexnord Indus. v. RHI Holdings, 389 Ill. App. 3d 393 (2009) (“Since the Uniform [Arbitration] Act’s terms and origins parallel those of the Federal Arbitration Act . . . federal court interpretations of the federal statute are persuasive aids in construction of the Uniform Act’s provisions.”).
- For cases on appeal or soon to be appealed, parties should consider raising Concepcion as a basis for challenging any class award. A class arbitration award that should not have been issued based on the parties’ arbitration agreement and an enforceable class action waiver can be used to challenge the award on the grounds that the trial court should never have compelled class arbitration in the first place and/or that the arbitrator exceeded his/her authority or as a manifest error of law. Changes in law during the pendency of an appeal are generally given effect. United States v. Fitzgerald, 545 F.2d 578 (7th Cir. 1976) (“It is well established that when a lower court relies on a legal principle which is changed by a treaty, statute, or decision prior to direct review, an appellate court must apply the current law rather than the law as it existed at the time the lower court acted. ‘Intervening and conflicting decisions will thus cause the reversal of judgments which were correct when entered.’”).3
Concepcion is not simply a tool to use in prospective or new cases. It serves as a powerful force and gamechanger in appropriate pending cases. Recent cases confirm this, but underscore the importance of taking prompt action. Be sure to consider whether Concepcion may be applied to your pending cases and take advantage of this new development before it’s too late.