Andrew McBride and Thomas McCarthy, Wiley Rein LLP*
The Supreme Court’s Wednesday ruling in AT&T v. Concepcion is a resounding win for freedom of contract principles. It is also a great victory for both businesses and consumers.
The Court reaffirmed that arbitration is a matter of consent and held that “class arbitration, to the extent that it is manufactured by [state law] rather than consensual,” is preempted by the Federal Arbitration Act (FAA). The Court thus ensures that private agreements to arbitrate will be enforced according to their terms. The Court’s ruling is quite broad; under the majority’s reasoning, it does not matter how a state might attempt to strike at class-arbitration waivers (through statute, regulation, or common law ) or on what rationale (e.g., unconscionability doctrine or amorphous concepts of public policy). Any state law “[r]equiring the availability of class wide arbitration interferes with fundamental attributes of arbitration and thus creates a scheme inconsistent with the FAA.”
This important ruling will preserve the benefits of arbitration for the thousands of businesses that include them in standardized retail contracts for goods and services. The benefits of bilateral arbitration stem from its informal procedures, which “reduc[e] the cost and increase the speed of dispute resolution.” Businesses that resolve consumer disputes through bilateral arbitration improve their bottom lines not only through the direct savings of money and resources that would otherwise have been spent on class action litigation but also by redeploying these saved funds and resources to operations or passing them on to consumers.
What about consumers? Bilateral (i.e., non-class) arbitration is pro-consumer for the same reason it is pro-business—its relaxed procedures enable cheaper and easier dispute resolution. In addition, market competition ensures that costs savings achieved by businesses are passed along to consumers in the form of cheaper goods and services. On top of all that, there is considerable evidence that consumers actually fare better in arbitration than in litigation, with regard to both their prospects for success and the size of awards. Some have suggested that consumers are harmed by the unavailability of class actions because class actions facilitate the pursuit of low-value claims that consumers would other lack the incentive to pursue. But other enforcement mechanisms obviously exist to police business practices (FTC, State AG’s) and most consumers would prefer a cheaper good or service over the potential to be part of a class action down the road that seeks a remedy for a low-value claim.
If businesses and consumers are both winners, who is the loser here? The answer: the plaintiffs’ bar. The Court’s decision will prevent plaintiffs’ attorneys from using various state-law arguments to nullify bilateral arbitration agreements in favor of judicial class actions or class arbitration. The huge settlements and verdicts that have made many class action lawyers multimillionaires (such as Peter Angelos, John Edwards) are likely at an end. This is certainly the most important preemption case of this Supreme Court Term and with the Wal-Mart case could completely change the legal playing field for class actions.
*Mr. McBride is a partner, and Mr. McCarthy is of counsel, with the Washington, D.C. law firm Wiley Rein LLP. They authored an amicus brief for a group of law professors in Concepcion in support of the Petitioners.