April 27, 2011

Supreme Court Allows Companies to Opt Out of Class Actions

By Paul Kirgis

Today the Supreme Court handed down its decision in AT&T v. Concepcion, and it went the way I think most observers predicted. Concepcion involved a dispute over the charges in a cell phone contract. The contract included an arbitration agreement that expressly waived the right to proceed as part of a class. In addition, in what was clearly an attempt to avoid any limitations that might apply as a result of Green Tree v. Randolph‘s language about costs, the arbitration agreement provided for procedures that kept costs very low and even guaranteed claimants a minimum $7,500 award if the arbitration award was greater than AT&T’s last written settlement offer. The Ninth Circuit had held that the arbitration agreement was unconcionable under California law because AT&T had not shown that bilateral arbitration adequately substituted for the deterrent effects of class actions. Writing for the predictable 5-Justice majority, Justice Scalia found that California’s common law of unconcionability is preempted by the FAA when applied to prohibit enforcement of an arbitration agreement containing a class action waiver.

Coupled with Stolt-Nielsen, which held that an arbitrator may not interpret silence in an arbitration agreement as allowing for class arbitration, Concepcion means companies no longer have to subject themselves to class actions by consumers (or employees, suppliers, or anyone else with whom they contract). As long as it is sufficiently favorable on cost to the consumer, any arbitration agreement that does not expressly allow for class treatment (and of course, none of them do expressly allow for class treatment) now has the effect of prohibiting class relief. I would submit that any attorney who does not now advise her business clients to put arbitration agreements in all consumer contracts risks a finding of legal malpractice.

There are at least two points about the decision that deserve mention (undoubtedly, there are many more). First, the decision does not appear to be limited to arbitration provisions prohibiting class treatment. It arguably says that doctrines of unconscionability, regardless of how deeply ingrained in a state’s law, can never be used to render any part of an arbitration agreement unenforceable if the agreement would otherwise be enforceable under the FAA. In that way, it could dramatically limit the effect of the language in FAA §2 providing that arbitration agreements are enforceable “except on such grounds as exist at law or in equity for the revocation of any contract.”

Second, the opinion seems to extend the logic of Stolt-Nielsen. Section III(B) suggests that class arbitration is inconsistent with the FAA, regardless of the parties’ intentions. Scalia goes through an extended discussion of how class treatment is contrary to the goals of arbitration as embodied in the FAA. This was probably unnecessary, but it certainly puts the final nail in the coffin of class arbitration. (I note that this is another example of the clash between the rhetoric of freedom of contract and the reality of the Court’s policy favoring a certain type of arbitration that Lawrence Cunningham exposes in the article I discuss here.)

So the Supreme Court has decided we don’t need consumer class actions. How will Congress react?

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