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AT&T Mobility LLC v. Concepcion: Time to Consider a Motion to Compel Arbitration?

On April 27, 2011, the Supreme Court issued its (now widely-reviewed and critiqued) decision in AT&T Mobility LLC v. Concepcion, 563 U.S. __ (2011), holding that the Federal Arbitration Act (the FAA) preempted a California state-law rule that invalidated most class-action waivers in consumer contracts on grounds of unconscionability. Concepcion affects cases not only in the Ninth Circuit and California where it was pending, but also in any jurisdiction that has singled out class-action waivers for special treatment. In addition to confirming the general enforceability of arbitration provisions containing class-action waivers, Concepcion compels even the most reluctant jurisdiction to recognize the enforceability of arbitration provisions that are very likely to be found in the consumer finance contract at issue in your client's active case (or cases).

Although pre-dispute agreements to arbitrate are commonplace in consumer contracts, courts in many jurisdictions have shown hesitation, if not outright unwillingness, to enforce arbitration clauses in consumer contracts. Typically, arbitration clauses have been invalidated in the context of the savings clause of section 2 of the FAA, which permits courts to invalidate arbitration agreements only upon "generally applicable contract defenses, such as fraud, duress, or unconscionability." Concepcion, however, is a game-changer, and with it the question becomes not whether a state rule can be contextualized as a generally applicable defense but, instead, whether the rule's effect is to obstruct the accomplishment of the FAA's objectives. No matter the jurisdiction, courts are now taking a fresh a look at arbitration provisions in consumer contracts of all types, thus affording your client the potential opportunity to enforce its arbitration provision.

The Concepcion Case

Concepcion involved a dispute between consumers (the Concepcions) and AT&T Mobility (AT&T) over sales taxes charged to the Concepcions by AT&T for a cellular phone advertised as free. The parties' agreement contained an arbitration provision requiring all claims to be brought in the parties' individual capacity and not as a class action. Despite the arbitration provision, the Concepcions sued AT&T in federal court. AT&T moved to compel arbitration. The federal district court in California denied AT&T's motion, relying upon California Supreme Court's decision in Discover Bank v. Superior Court, 36 Cal. 4th 148 (2005) to find that the arbitration provision was unconscionable. In Discover Bank, the California Supreme Court held that class waivers in consumer arbitration agreements are unconscionable if the agreement is in an adhesion contract, disputes between the parties are likely to involve small amounts of damages, and the party with inferior bargaining power alleges a deliberate scheme to defraud (the so-called "Discover Bank Rule"). The Ninth Circuit affirmed the denial of AT&T's motion to compel arbitration, finding that the Discover Bank Rule was not preempted by the FAA.

The United States Supreme Court reversed, holding that the Discover Bank Rule was preempted by the FAA. The Supreme Court stressed that the principal purpose of the FAA is to ensure that private arbitration agreements are enforced according to their terms. It stated that "[t]he point of affording parties discretion in designing arbitration processes is to allow for efficient, streamlined procedures tailored to the type of dispute." The Court found that the Discover Bank Rule interfered with FAA and was, therefore, preempted. Specifically, the Supreme Court held that the Discover Bank Rule was preempted because it "stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress." The Supreme Court further noted that "parties may agree to limit the issues subject to arbitration . . . and to limit with whom a party will arbitrate its disputes . . . ." Under Concepcion, "states cannot require a procedure that is inconsistent with the FAA, even if it is desirable for an unrelated reason." The Supreme Court held that the FAA preempts state laws that run counter its goals, stating, "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."

Concepcion Applied to Enforce Arbitration Provisions

Concepcion verifies that prior holdings that invalidate arbitration agreements because they contain class-action waivers under state law doctrines, such as unconscionability, are preempted by the FAA. Now, Concepcion may be deployed as a tool to avoid problematic jurisdictions not just in recently filed cases but also in cases that are already pending. And there can be little doubt that the Supreme Court did not view its decision in Concepcion as an immediate paradigm shift, as the court granted certiorari, vacated, and then remanded several cases "for further consideration in light of AT&T Mobility LLC v. Concepcion . . . ." Litman v. Cellco P'ship, 131 S. Ct. 2873 (U.S. 2011);Mo. Title Loans, Inc. v. Brewer, 131 S. Ct. 2875 (U.S. 2011); Sonic Auto., Inc. v. Watts, 131 S. Ct. 2872 (U.S. 2011). Litman, Brewer, and Watts had invalidated arbitration agreements with class action waivers as being unconscionable.

On remand, only the Litman court has issued an opinion. In its decision, the Third Circuit held: "Because the United States Supreme Court's decision in Concepcion holds that state law . . . requiring the availability of classwide arbitration . . . is inconsistent with the FAA[,] we now endorse the District Court's decision to reject New Jersey law holding that waivers of class arbitration are unconscionable, and we will affirm the District Court's order compelling individual arbitration of the appellants' claims." Litman v. Cellco P'ship, 2011 U.S. App. LEXIS 17649 (3d Cir. N.J. Aug. 24, 2011). The Litman court's decision adopted a "broad and clear" understanding of Concepcion: "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." Litman, 2011 U.S. App. LEXIS 17649, 2011 WL 3689015, at *5 (quotations omitted).

The Eleventh Circuit has likewise adopted a "broad and clear" understanding of Concepcion. In Cruz v. Cingular Wireless, LLC, 2011 U.S. App. LEXIS 16811 (11th Cir. Fla. Aug. 11, 2011), the court, citing Concepcion, held that a class action waiver in the plaintiffs' arbitration agreement was enforceable under the FAA. The plaintiffs in Cruz argued on appeal that the class action waiver in the arbitration provision of their wireless service agreement was unenforceable because it "hindered the remedial purposes" of the Florida Deceptive and Unfair Trade Practices Act by insulating the defendant from liability for unlawful business practices, which, the plaintiffs argued, was a "violation of public policy." The Eleventh Circuit dismissed the public policy argument. Relying upon Concepcion, the Cruz court held that the Florida law that the plaintiffs relied upon was preempted by the FAA to the extent it would require class-wide arbitration "simply because the case involves numerous small-dollar claims by consumers against a corporation, many of which will not be brought unless the Plaintiffs proceed as a class."

Most recently, on August 31, 2011, the United States District Court for the Eastern District of Pennsylvania applied Concepcion broadly when it granted a defendant's motion to compel arbitration. In King v. Advance Am., 2011 U.S. Dist. LEXIS 98630 (E.D. Pa. Aug. 31, 2011), the court considered a motion to compel arbitration in two related class-actions seeking damages for high-interest-or-fee "payday loans." The plaintiffs resisted arbitration by asserting that the arbitration clauses were unconscionable under Pennsylvania law. The King court concluded that "the FAA preempts Pennsylvania law," specifically stating that the "defenses can be disposed of with only a brief discussion in light of" Concepcion .

Actions commenced when the Discover Bank Rule or a similar rule would have prevented arbitration raise the question whether the defendant can move to compel arbitration now or is barred from doing so under the doctrine of waiver. In Villegas v. US Bancorp, No. C 10-1762 RS (N.D. Cal. June 20, 2011), the United States District Court for the Northern District of California ordered arbitration and enforced a class action waiver in a case that had been pending for more than a year. The court rejected the plaintiff's argument that the defendant's motion to compel arbitration was untimely, holding that prior to Concepcion, a request to compel arbitration would have been futile. In Villegas, the plaintiff made no claim that the arbitration agreement would generally be unenforceable on any state law ground. The sole issue was whether the defendant bank had waived the right to arbitrate due to its failure to enforce the agreement until approximately 13 months after the complaint was filed. In ordering the parties to arbitration, the Villegas court specifically notes that the "law did not permit defendants to compel arbitration of the class claims until recently," recognizing that but for Concepcion, a previous motion to compel would have been futile.

Not So Fast

Not every court has been so willing to view Concepcion as a mandate requiring the enforceability of arbitration provisions. In the In Re Checking Account Overdraft Litigation pending in the U.S. District Court for the Southern District of Florida, the court held that bank customers with debit cards attached to checking accounts are not compelled to use arbitration rather than class action lawsuits because the subject arbitration agreements are "unconscionable." In the Checking Account Overdraft Litigation matter, Judge James Lawrence King considered renewed motions to compel arbitration in a class-action suit brought on behalf of account holders at a variety of banks claiming damages from excessive overdraft fees. The court denied earlier-filed motions to compel arbitration in May 2010. After the bank defendants appealed, the Eleventh Circuit Court remanded the case for consideration in light of the Concepcion ruling. On remand, the court noted that the parties had each "argued for an extreme interpretation of Concepcion." The plaintiffs argued that Concepcion had no effect; on the other hand, the defendants argued thatConcepcion eliminated unconscionability as a defense to the enforceability of an arbitration agreement. According to the Checking Account Overdraft Litigation court, a "case-by-case analysis of the applicable state law doctrine of unconscionability" may be applied to an arbitration agreement to find that it is unenforceable. Concepcion, the court stated, "has not relieved courts from their obligation to scrutinize arbitration agreements for enforceability on a case-by-case basis where one party resists arbitration . . . Concepcion provides guidance as to what courts may consider when fulfilling that obligation." Ultimately, the Checking Account Overdraft Litigation court conducted a complete and thorough unconscionability analysis to the five arbitration contracts at issue and found that they were each unconscionable for a variety of reasons. Checking Account Overdraft Litigation shows that Concepcion will not be considered a mandate to enforce every arbitration agreement. Rather, state law defenses such as unconscionability will remain available to plaintiffs so long as they do not "stand as an obstacle to the accomplishment of the FAA's objectives."

Now What?

The post-Concepcion cases cited above demonstrate the potentially powerful impact that Concepcion may have on consumer financial cases. When your client is served with a new complaint, should you consider a motion to compel arbitration? If a case has been pending for a while, a previously futile request to the court for an order requiring arbitration may now be viable. For cases on appeal or soon to be appealed, your client now has an additional argument: Under Concepcion, should your case have been compelled to arbitration in the first instance? While there are limits to the scope and applicability of Concepcion, a broad reading of the Supreme Court's decision provides an option to defendants facing challenges by consumers (individually or on a class basis) in financial services litigation. Some commentators have called Concepcion a "devastating blow" to consumers, while others have heralded it as a "rational and fair" approach to the management of class-wide dispute resolution. Regardless of your view, Concepcion presents an opportunity to review its arbitration options.