November 9, 2010
Jean Sternlight from the Boyd School of Law at UNLV (and longtime Indisputably friend) offers her thoughts on today’s Supreme Court arguments in AT&T v. Concepcion.
The Supreme Court heard oral argument today in AT&T Mobility v. Concepcion, No. 09-893. As most of you know, the case has the possibility of being momentous in the world of “mandatory” arbitration. The district court and 9th Circuit held that AT&T Mobilitity’s arbitration clause was unconscionable because it prohibited consumers’ use of class action in litigation or arbitration. AT&T argues that the unconscionability finding is preempted by the FAA. If AT&T were to win, the decision would potentially allow companies to use arbitration to insulate themselves from the threat of consumer class actions, and thus evade a great deal of regulation . Such a decision might also create a great deal of confusion and inefficiency in the lower courts, as all lower court findings that arbitration clauses were unconscionable or otherwise impermissible as a matter of general contract law would be opened up to attack under a preemption argument.
I make no claims to being a sage, and certainly would not try to predict how the Supreme Court will come out in AT&T Mobility v. Concepcion. However, having just read through the transcript of today’s argument I do have a few thoughts.
I was very impressed by the quality of the argument. Eight Justices (Thomas was silent) asked multiple questions and seemed to have good familiarity with the issues and good preparation. The advocates were very good as well.
The argument focused substantially on the extent to which it is appropriate for the Supreme Court, as Justice Scalia put it, to “sit in judgment” on a ruling of state law by lower courts. Justice Sotomayor similarly asked whether the Court must review state law, and Justice Kagan wondered whether or when it is appropriate for the Supreme Court to say a state has incorrectly applied its unconscionability analysis. Respondents are likely quite pleased with Justice Scalia’s and the others’ focus on this “states’ rights” concern, and hopeful that Justice Thomas may also share this worry.
The argument turned on two sets of analogies, and both sides’ attempts to use the analogies to their advantage. Everyone seemed to accept that some provisions of arbitration clauses could be unconscionable, and that the FAA Section 2 empowers courts to void such provisions. Thus, one question was whether or when the Court could find a lower court had erred in making an unconscionability decision. Should the Court look to objective or subjective indicators that such a decision is inappropriately singling out arbitration for adverse treatment. Respondent urged deference to the states’ own interpretation of its law, and that such interpretations should only be voided in cases of “obvious subterfuge.” Petitioner advocated a more searching review, but was not specific as to the test that should be applied.
On the flip side, Petitioner argued that it would clearly be impermissible for a state to require that all dispute resolution procedures use formal rules of evidence, juries, judges, or full discovery rules. Petitioner further argued that prohibiting the elimination of class actions is akin to mandating the use of formal rules of evidence etc. In response, Respondent agreed that mandating the use of formal rules of evidence etc. would be impermissible, but disagreed that prohibiting elimination of class actions is similar. Instead, Respondent urged that while it would clearly be subterfuge for a state to insist that formal rules of evidence or juries are necessary to avoid unconscionable results, it can be appropriate to hold a class action prohibition unconscionable.
In short, the legal heart of the argument was the question of what state laws or interpretations of common law are preempted by the FAA. There generally seemed to be consensus (although precise phrasing might differ) that state laws or interpretations of common law are preempted if they either (1) discriminate between arbitration and litigation to the disadvantage of arbitration or (2) effectively eviscerate arbitration. However, the Justices and advocates had differences regarding how to apply these principles.
With respect to the discrimination principle, the Petitioner argued that the lower courts had applied unconscionability law differently to arbitration (ruling the class action prohibition unconscionable) than they had done or would have done in a litigation context. Their advocate urged that the courts improperly (1) expressed concern for the rights of third parties and not just the Concepciones; (2) looked at claimants’ concerns at the time of the dispute and not ex ante; and (3) used a “deterrence” rather than a “shocks the conscience” unconscionability analysis. Justices Alito and Roberts expressed support particularly for the third party argument. In response Respondent argued that the Discover Bank analysis had originally been used in a litigation case (Justice Kagan made the same point), and Justice Ginsburg noted that Petitioner had presented no evidence that California used a different unconscionability test in litigation than it did in arbitration. With respect to ex ante and ex post analysis the Concepciones’ attorney argued that the class action prohibition was unconscionability using an ex ante analysis. He explained that ex ante they would not have known if they would have been among the small minority of consumers who would realize they had been defrauded and able to secure counsel to bring such a claim, or whether instead they would need the protection of a class action to prevent unfair treatment. Thus, Respondent urged that there is no clear distinction between the Concepciones and third parties using an ex ante analysis. In support of the idea that the lower courts did not discriminate Justice Breyer pointed out that since classwide arbitration can exist, a doctrine limiting class action waivers is not targeted against arbitration.
With regard to the evisceration idea, Petitioner urged that preventing companies from requiring waiver of class actions would lead them not to use arbitration at all. Justice Alito seemed particularly sympathetic to this point, stating that the Court would need to make a “value judgment” as to whether class action fits with arbitration. Justice Breyer and Kennedy also seemed concerned that Respondent’s position would reduce the amount of arbitration. However, Justice Ginsburg suggested that class actions could be preserved in court, and Respondent’s attorney pointed out that while companies might also prefer arbitration that eliminated punitive damages or shortened class actions the FAA does not allow them to impose unconscionable provisions simply in order to maximize the amount of arbitration. Given a chance to distinguish Stolt Nielsen, by Justice Ginsburg, Respondent explained that the company does not under his analysis need to opt for classwide arbitration. Rather, in situations in which access to classwide relief is essential a company could allow such claims to be brought in court, rather than in arbitration.
In sum, I think Respondents have to be pleased with how the argument went. A significant number of Justices seemed to recognize that some arbitration provisions are unconscionable, and that second-guessing lower courts’ unconscionability rulings can raise some difficult federalism and administrative issues. Petitioner’s attorney did not offer a test that would allow courts to clearly distinguish between permissible and impermissible uses of the unconscionability doctrine, and that seemed troubling for quite a few Justices. Also, the argument did not focus on the specific terms of the AT&T Mobility unusual arbitration clause, which Petitioner had urged was very favorable to the Concepciones. (The clause provides a bonus to persons who individually challenge an aspect of the AT&T Mobility clause in arbitration and are offered a settlement that is worse than the result they receive in arbitration. AT&T urged that this ensures fair access. Respondent claimed the provision did not help most consumers – because they would not even be aware their rights had been violated and might not be able to obtain an attorney. But, the specifics of the clause were not discussed during the argument).
Jean R. Sternlight
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