Guest Commentary

Charles Moore, White & Case LLP

Tomorrow the U.S. Supreme Court will hear oral argument in an arbitration case with implications for federal preemption, AT&T Mobility v. Concepcion.  In addition to this Guest Commentary, WLF has published a paper in its newest release format, “On the Merits” on the Concepcion case, available here.

The Supreme Court of the United States has the opportunity in AT&T Mobility LLC v. Concepcion, No. 09-893, to continue its encouraging recent trend of protecting arbitrating parties’ freedom of contract.  Several states — California in particular — have determined that traditional, bilateral arbitration should be modified in the consumer context, requiring parties to follow courtroom-style class action procedures even where they bargained those rights away.  This dispute raises a question regarding the availability of class arbitration.  Specifically, the matter presents the following question for the Court’s resolution:

Whether a state may condition enforcement of an arbitration agreement on the availability of certain procedures—here, class-wide arbitration—where those procedures are not necessary to ensure that the parties to the arbitration agreement are able to vindicate their claims and were never agreed to by the parties.

AT&T Mobility’s standard consumer arbitration agreement is part of its service contract.  The arbitration agreement grants customers several rights related to arbitrating any dispute and recovering any amounts in controversy, including but not limited to the following:

  • Arbitration venued in the county where the customer is billed;
  • AT&T Mobility pays the costs of the arbitration — including filing fees and arbitrator fees — unless the arbitrator finds that the customer’s claim is frivolous;
  • The customer can opt for small claims court instead of arbitration, or can opt for truncated arbitral procedures — e.g., telephonic hearings, arbitral awards based on paper records,
  • AT&T Mobility will not seek attorney’s fees; and
  • AT&T Mobility will pay the consumer double the consumer’s attorney’s fees, plus reasonable expenses, if the arbitrator’s award exceeds AT&T Mobility’s last written settlement offer.

In exchange for these rights and others, AT&T Mobility’s customers agree to pursue only their own individual claims.  The courts below found that the Concepcions could have been made whole under the terms of the arbitration agreement. N1 This finding is supported by the comments of another federal court, which found in an earlier case that the same arbitration agreement was “perhaps the most fair and consumer friendly” arbitration agreement that the court had reviewed.  N2

AT&T Mobility sought to compel arbitration of a dispute between it and the Concepcions.  Despite finding that the Concepcions could obtain all of the relief to which they were entitled, the courts below both held that the arbitration agreement was unconscionable under California state law as set forth in Discover Bank v. Superior Court, 113 P.3d 1100 (Cal. 2005).  The district court and the Ninth Circuit both stated that the Ninth Circuit previously had interpreted the California Supreme Court’s decision in Discover Bank to have set forth a three-part test for determining unconscionability in the arbitration context: (a) the arbitration agreement is part of a consumer contract of adhesion; (b) the dispute arises under circumstances that typically would involve small amounts of money; and (c) there is an allegation that the party with superior bargaining power has attempted to “cheat large numbers of consumers out of individually small sums of money.”  N3

Following this test, the district court found that the agreement was unconscionable, and the Ninth Circuit affirmed.  N4  Application of the Discover Bank test effectively required the lower courts to ignore their findings that:  (i) the arbitration agreement “prompts [AT&T Mobility] to accept liability” for small consumer claims; (ii) AT&T Mobility’s potential resolution of a claim “through prompt payment” because of the attorney’s fee premium provision means that the “customer will have been made whole, or at least satisfied, with minimal effort”; and (iii) individual claimants would fare better than claimants who choose to participate in a class action.  N5 

The Court was unable to reach this preemption question in its only earlier opportunity to do so in Southland Corporation v. Keating, 465 U.S. 1 (1984).  First principles of FAA arbitration demand reversal of the Ninth Circuit’s ruling in Concepcion.  As the Court repeatedly has confirmed, arbitration is a consensual process.  “Arbitration under the [Federal Arbitration] Act is a matter of consent, not coercion.”  N6  Thus, Congress’ goal in creating federal arbitration law was “to ensure that private agreements to arbitrate are enforced according to their terms.”  N7  The rulings below violate these first principles and contravene the FAA, because California law coerces parties to consumer arbitration agreements to permit class arbitration regardless of their expressed intent in the arbitration agreement or the arbitration agreement’s provision for meaningful relief for individual claimants.

Moreover, the FAA was enacted to ensure that arbitration agreements would be enforced to the same extent as other contracts.  N8  California law, through Discover Bank, articulates one standard for unconscionability for arbitration agreements that do not provide for class arbitration, and articulates a more general test for unconscionability — requiring both “procedural” and substantive unconscionability, on a sliding scale basis — for other contracts.  California’s elevation of its policy favoring class actions not only contravenes the FAA’s plan for equal treatment of arbitration agreements, but also the freedom that the FAA grants parties to determine their own arbitral procedures.  The Supreme Court made clear in Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc. N9 that parties often “trad[e] the procedures and opportunity for review of the courtroom for the simplicity, informality, and expedition of arbitration.”  N10  Thus, as the Court later stated in cases, “[t]here is no federal policy favoring arbitration under a certain set of procedural rules.”  N11  State law cannot derail the FAA’s core aims.

 Finally, millions of parties enter into arbitration agreements annually, and those parties expect courts to honor those agreements.  The FAA was designed to protect that freedom of contract.  The rulings below put this freedom of contract at risk.  The Court recently reaffirmed the primacy of consent in Stolt-Nielsen S.A. v. AnimalFeeds International Corporation N12 by precluding class arbitration where there is no evidence that the parties agreed to class arbitration, and in Rent-A-Center, West, Inc. v. Jackson, No. 09-497 (U.S. Jun. 21, 2010), by reaffirming that the parties may assign to the arbitrator the task of determining the enforceability of the contract.  The justices are called upon to require adherence to the parties’ intent again here, and they should hold that State law cannot, through unequal application of its contract law principles, condition the enforceability of arbitration agreements on the availability of procedures that the parties clearly indicate that they wish to forgo.

NOTES

1. See, e.g., Laster v. AT&T Mobility LLC, 584 F.3d 849, 856 n.9 (noting that settlement offer provision “essentially guarantees” that Concepcions would be made whole). 

2. Makarowski v. AT&T Mobility LLC, 2009 WL 1765661, at *3 (C.D. Cal. June 18, 2009). 

3. Laster, 584 F.3d at 854. 

4. Id. at 855. 

5. Laster v. T-Mobile USA, Inc., 2008 WL 5216255, at *11 (C.D. Cal. Aug. 11, 2008). 

6. Volt. Info. Scis., Inc. v. Bd. of Trs. of Leland Stanford Junior Univ., 489 U.S. 468, 479 (1989). 

7. Mastrobuono v. Shearson Lehman Hutton, Inc., 514 U.S. 52, 53-54 (1995) (internal quotation marks omitted). 

8. Id. 

9. Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614 (1985).

 10. Id. at 628.

 11. Volt, 489 U.S. at 479.  

12. Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp., 130 S. Ct. 1758 (2010).  The author of this article is counsel to Stolt-Nielsen.