If you thought the waiver of class actions in your arbitration provision was as good as gold after the U.S. Supreme Court’s ruling in AT&T v. Concepcion, think again. Decisions in several lower courts since the decision was issued April 27, 2011, illustrate that the effectiveness of a class arbitration waiver still depends on its express language and the state law being used to attack it.
Lower courts in both federal and state court systems are finding a number of ways to distinguish Concepcion, which held that the Federal Arbitration Act preempts state contract law principles that target class-action waivers and other provisions in arbitration agreements as unconscionable.
Class-action defendants and their attorneys rejoiced when the Concepcion ruling came out. The tone of the ruling seemed to call into question whether any class-action waiver provision could be invalidated using state law unconscionability principles. As it is turning out in the lower courts, Concepcion is strong ammunition for enforcing certain kinds of arbitration agreements, but there are still windows of opportunity for class-action plaintiffs. Following is a discussion of some recent decisions that have interpreted and applied Concepcion and the lessons they teach.
At Minimum, Arbitration Agreements Cannot Be Invalidated Under State Law Simply Because They Prevent Adjudication of Claims on a Class-Wide Basis
First, the good news for defendants. Some courts are applying Concepcion broadly in enforcing arbitration agreements without considering any deeper unconscionability analysis under state law. But these decisions generally involve either arbitration agreements or state laws that are quite similar if not identical to those at issue in Concepcion.
In Litman v. Cellco Partnership, -- F.3d -- , 2011 WL 3689015, No. 08-4103, August 24, 2001, the Third Circuit Court of Appeals on remand from the Supreme Court applied Concepcion in a relatively straightforward way. The New Jersey law at issue was similar to the Discover Bank rule from California and the cell phone sales contract involved similar class-action and class-arbitration waivers to those at issue in Concepcion. The Third Circuit stated:
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 … the rule published by the New Jersey Supreme Court in Muhammad [v. County Bank of Rehoboth Beach, Delaware] 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.
The court’s analysis makes no mention of whether the arbitration clause at issue contained the sorts of consumer-friendly procedural protections that were contained in the AT&T Mobility agreement.
The Eleventh Circuit came to a similar conclusion in Cruz v. Cingular Wireless LLC, No. 08-16080, August 11, 2011, in which the arbitration agreement was identical to the one in Concepcion. It preempted a Florida public policy at issue.
One-Sided or Draconian Arbitration Provisions are Still Vulnerable to Attack on a Variety of Grounds, Notwithstanding Concepcion
In In re: Checking Account Overdraft Litigation, Case No. 09-MD-02036-JLK, the U.S. District Court for the Southern District of Florida found arbitration agreements with class-action waivers to be unenforceable on substantive unconscionability grounds despite Concepcion. The defendant in this alleged excessive overdraft fee class-action suit renewed their motions to compel arbitration after the Eleventh Circuit Court of Appeals remanded the matter for consideration in light of the Concepcion ruling. The trial court had earlier held the class-action waivers contained in the banks’ arbitration agreements with consumers to be unconscionable under various state laws.
In its order on remand issued September 1, 2011, the Southern District of Florida provided a sentient summary of the wake left by Concepcion:
The Parties now before the Court have each argued for an extreme interpretation of Concepcion. Plaintiffs ask the Court to find that Concepcion has changed nothing, and that the class action waivers in the arbitration agreements may still be the basis for finding them unconscionable. Defendants, on the other hand, argue that Concepcion has changed everything, and that unconscionability is no longer a defense to the enforceability of an arbitration agreement. In a sense, both views are correct. Concepcion has changed everything, in that class action waivers have historically been a major factor in the unconscionability analysis under state law, and now, they can no longer be considered. And yet, Concepcion has changed nothing in that a thorough, case-by-case analysis of the applicable state law doctrine of unconscionability, applied to the specific terms of an arbitration agreement, is still required. In sum, Concepcion has not relieved courts from their obligation to scrutinize arbitration agreements for enforceability on a case-by-case basis where one party resists arbitration; rather, Concepcion provides guidance as to what courts may consider when fulfilling that obligation.
Order at 9-10. The court then analyzed each of the five agreements at issue under each agreement’s controlling state law. It found four of the five to be substantively unconscionable when applying each state’s general common law on unconscionability to the agreements as a whole. The court denied the motion to compel relating to the fifth agreement on separate grounds.
The court honed in on each agreement’s fee-shifting provisions, which allowed the banks to automatically recover its costs and attorneys’ fees if they prevailed - and further allowed the banks to simply take the fees and costs directly from a plaintiff’s bank account if the plaintiff lost in arbitration. The court found these provisions to be overly oppressive and one-sided in favor of the banks. It was clear from the order that the arbitration agreements the banks used did not contain the kind of consumer-friendly provisions that were lauded by the Supreme Court in Concepcion, such as paying for all costs for nonfrivolous claims by its customers, holding arbitrations in the county were the customer was billed, allowing the parties to opt to bring a claim in small claims court in lieu of arbitration, allowing arbitration by telephone or based on submissions for claims under $10,000, and allowing arbitrators to award any form of individual relief, such as an injunction or punitive damages.
In another similar ruling, New Jersey’s highest court invalidated an arbitration agreement on the grounds that it was too confusing, too vague, and too inconsistent to be enforced. NAACP of Camden County East v. Foulke Management Corp., -- A.3d -- , 2011 WL 3273896, August 2, 2011, Superior Court of New Jersey. The court came to this conclusion despite stating that the agreement’s class-action waiver itself could not be invalidated in light of Concepcion. Nevertheless, the New Jersey Superior Court turned to Justice Thomas’s concurring opinion in Concepcion, in which he stated that the majority opinion in Concepcion did not leave litigants bereft of other contract defenses, including the procedural conscionability question of contract formation or contract interpretation principles.
The Supreme Court of New Mexico also invalidated an arbitration provision in an auto dealership sales contract that it found could not be enforced because the named arbitration service was no longer available to conduct the arbitrations. Despite the technical reason for reversing the lower court’s order compelling arbitration, the court found the arbitration to be unfairly one-sided and substantively unconscionable irrespective of Concepcion. Rivera v. American General Financial Service, Inc., -- P.3d -- , 2011 WL 3687624, New Mexico Supreme Court, July 27, 2011.
The lesson here is to avoid terms that are oppressive to the consumer. When drafting an arbitration agreement with a class-action waiver, include easily understandable, balanced provisions or even consumer-friendly provisions so that the agreement is not overly one-sided and unfair to the consumer. Ensuring that the consumer has a forum in which to fairly air a grievance will help the provisions surpass the unconscionability test and other contract defenses.