By Courtney L. Davenport
A divided U.S. Supreme Court dealt a harsh blow to consumer and employment class actions last week, holding that the Federal Arbitration Act (FAA) preempts California law saying that class action bans in mandatory arbitration clauses are unconscionable. (AT&T Mobility LLC v. Concepcion, 2011 WL 1561956 (U.S. Apr. 27, 2011).)
Consumer advocates say that because many consumer and employment claims are too small for victims to pursue individually, the ruling could inoculate companies against claims for widespread wrongdoing.
“Now, whenever you sign a contract to get a cell phone, open a bank account, or take a job, you may be giving up your right to hold companies accountable for fraud, discrimination, or other illegal practices,” said Deekpak Gupta, the attorney who argued before the Court on behalf of the plaintiffs, in a statement.
AAJ President Gibson Vance issued a similar statement, noting that even companies that don’t currently have class action bans will benefit.
“This decision leaves Americans with practically no recourse to challenge corporate wrongdoing and gives corporations a blueprint to draft forced arbitration clauses to avoid accountability for a wide range of unfair or illegal practices,” he said.
John Vail, vice president and senior litigation counsel at the Center for Constitutional Litigation, which filed an amicus brief for AAJ, said the Court “belied one of its most consistent mantras—arbitration is just a change in forum, not a change in substance—to reach its ruling. In California courts, consumers could realistically seek a remedy; in arbitration, they can’t.”
The ruling reverses findings by a federal district court and the Ninth Circuit that the FAA’s saving clause permits states to declare arbitration provisions unenforceable, as long as the ruling applies to all contracts. The courts struck down AT&T’s class action waiver under California contract law, which says that all class action bans are unconscionable, regardless of whether they are raised in litigation or arbitration. Other federal courts have previously applied the same reasoning to similar suits.
After oral arguments in Concepcion in November, many commentators speculated that the issue of states’ rights might sway some of the justices not known to be plaintiff-friendly. But the Court—in a 5-4 opinion written by Justice Antonin Scalia—did not address federalism head-on, saying only that the saving clause does not apply when the state’s ruling would disfavor arbitration.
“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,” Scalia wrote.
The Court said that the availability of classwide arbitration “interferes with fundamental attributes of arbitration and creates a scheme inconsistent with the FAA.” If class arbitration were allowed, a process that is intended to be informal and quick would be drawn out, and companies would settle more readily to avoid it, the Court said. According to the majority, those effects are contrary to the FAA’s principal purpose to enforce arbitration agreements according to their terms.
In a concurring opinion, Justice Clarence Thomas hinted at federalism concerns, saying that state law is not preempted if a party challenges the making of the agreement, for instance by claiming he or she signed it under fraud or duress. But, he said, “courts cannot refuse to enforce arbitration agreements because of a state public policy against arbitration, even if the policy nominally applies to ‘any contract.’”
Vail noted that Thomas’s previous dissents turned not on whether the FAA was preemptive, but on his belief that it doesn’t apply in state courts. As this case arose in federal court, it is still unclear what Thomas would do in a case that worked its way through the state courts.
The dissent—written by Justice Stephen Breyer and joined by Justices Ruth Bader Ginsburg, Sonia Sotomayor, and Elena Kagan—took issue with the majority’s finding that individual arbitration is a fundamental attribute of arbitration, saying that class arbitration is a long-recognized procedure for seeking redress for injury and is necessary to protect individuals with small-dollar claims that wouldn’t be cost-efficient to bring alone.
The dissent said that California “is free to define unconscionability as it sees fit,” as long as the law is applied generally to all contracts.
“[F]ederalism is as much a question of deeds as words. It often takes the form of a concrete decision by this Court that respects the legitimacy of a state’s action in an individual case,” Breyer wrote. “Here, recognition of that federalist ideal, embodied in specific language in this particular statute, should lead us to uphold California’s law, not strike it down. We do not honor federalist principles in their breach.”
As early as this week, Sen. Al Franken (D.-Minn.) is expected to introduce a new version of the Arbitration Fairness Act, which would ban mandatory arbitration. A previous attempt to pass the legislation failed in both the House and the Senate.