On April 27, 2011, the U.S. Supreme Court decided AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011). Concepcion held, 5-4, that the Federal Arbitration Act (“FAA”) preempts California’s “Discover Bank rule,” which, according to the Court, would invalidate a class action ban in an arbitration clause whenever the term is imposed in a consumer contract of adhesion; the plaintiffs’ claims involve predictably individually small damages; and the defendant has allegedly engaged in a scheme to cheat consumers (The preempted rule was adopted by the California Supreme Court inDiscover Bank v. Superior Court (Boehr), 113 P.3d 1100 (Cal. 2005).) The Court reasoned that theDiscover Bank rule would effectively prohibit arbitration of a broad category of claims and would impose classwide arbitration against the parties’ consent, and thus that the rule was inconsistent with—and preempted by—the FAA.
Public Justice was counsel in Discover Bank, and has won many victories over the years where courts have struck down contract terms banning class actions that were unfair, including major precedents in the U.S. Courts of Appeal for the Third and Ninth Circuits and six state supreme courts. In the wake of Concepcion, many courts have been and will be asked to reexamine their prior decisions invalidating class action bans, and many companies are arguing that Concepcionrequires the enforcement of any contract term banning class actions no matter what the evidence in the case would show or what state law is at issue. As a result, it is certain that some consumers and employees will be unable to pursue class-wide relief even though their claims are legally valid. But we do not believe that Concepcion wipes away all of the protections that consumers and employees have against unfair contract terms that would ban class actions. On the contrary, there are several ways in which courts can and should limit Concepcion’s holding. Here are the most promising limitations.*
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1. Concepcion does not require enforcement of a class action ban where the evidence shows that the plaintiffs could not effectively vindicate their statutory rights in individual arbitration. The U.S. Supreme Court has consistently held that statutory claims can be arbitrated, but only so long as the arbitration clause permits the parties to effectively vindicate their statutory rights. Concepcion did not overrule that precedent. Indeed, the Court noted that the plaintiffs’ claims inConcepcion were “most unlikely to go unresolved,” and there was no factual record showing otherwise. The problem, according to the Court, was that California’s Discover Bank rule was so “toothless and malleable” that it would nonetheless invalidate AT&T Mobility’s class action ban—even though the plaintiffs could vindicate their rights in individual arbitration. That reasoning does not apply where the plaintiffs have developed an evidentiary record establishing that a class action ban would, as a factual matter, prevent consumers from having a meaningful chance to pursue their particular legal claims. See, e.g., Scott v. Cingular Wireless, 161 P.3d 1000 (Wash. 2006).
2. Concepcion does not require enforcement of a class action ban that would conflict with federal law. Because Concepcion involved the preemption of state law, it does not affect cases involving purely federal law. Two federal courts of appeal have struck down class action bans in cases where the evidence showed that the class action bans would undermine the enforcement of the federal antitrust laws, for example, and there is a strong argument those decisions are not undermined by Concepcion. See In re American Express Merchants Litig., 634, F.3d 187 (2d Cir. 2011) (an agreement which in practice acts as a waiver of future liability under the federal antitrust statues is void as a matter of public policy); Kristian v. Comcast, 446 F.3d 25 (1st Cir. 2006) (the term “essentially shielded [the defendant] from private consumer antitrust enforcement liability, even in cases where it has violated the law.”)
In addition, some federal statutes expressly prohibit arbitration of claims arising under the statute. See, e.g., 15 USCA § 1639c(e)(1) (barring arbitration clauses in residential mortgage loans); 18 U.S.C. § 1514A(e) (pre-dispute contracts requiring arbitration of whistleblower claims under the Sarbanes-Oxley Act not enforceable); 10 U.S.C. §§ 987(e)(3), 987(f)(4) (voiding arbitration clauses in payday loan contracts with members of the military or their families); 15 U.S.C. § 1226 (automobile manufacturers prohibited from imposing pre-dispute arbitration clauses in their franchise agreements with dealers). Other statutes may arguably provide an unwaivable right to bring a class action. See, e.g., 29 U.S.C. § 216(b) (Fair Labor Standards Act provides that “[a]n action . . . may be maintained against any employer (including a public agency) in any Federal or State court of competent jurisdiction by any one or more employees for and [on] behalf of himself and other employees similarly situated”); 29 U.S.C. § 157 (National Labor Relations Act provides employees the right “to engage in . . . concerted activities for the purposes of . . . mutual aid and protection”). If courts agree that these statutes do not permit corporations to impose class action bans in certain circumstances, nothing in Concepcion would change that conclusion.
3. Concepcion should not apply where the arbitration clause expressly adopts state law. Even where the FAA would otherwise preempt state law invalidating a class action ban in an arbitration clause under Concepcion, preemption should not apply where the language of the arbitration clause shows that its drafter has voluntarily agreed to be bound by state law. For example, the contract may provide that, if the class action ban is unenforceable under state law, the entire arbitration clause cannot be enforced. By its own terms, such a contract term – drafted by the company itself – directly accepts that if a class action ban violates state law, it will not be enforceable. Such a promise in a contract is not preempted by federal law. See American Airlines, Inc. v. Wolens, 513 U.S. 219, 228 (1995) (federal law does not preempt a party’s voluntarily assumed contractual obligations because such promises are “self-imposed undertakings”).
4. Concepcion does not change the law prohibiting a corporation from imposing a class action ban on consumers or employees after litigation has commenced. In an effort to take advantage of Concepcion, some companies may attempt to add an arbitration clause and class action ban to their consumer or employment contracts while a class action is already pending. This is an improper communication with the class, and any contract term imposed in this way should be unenforceable. See, e.g., In re Currency Conversion Fee Antitrust Litig., 361 F. Supp. 2d 237 (S.D.N.Y. 2005) (refusing to enforce class action bans mailed by creditor to members of putative class); Long v. Fidelity Water Sys., Inc., 2000 WL 989914, at *3 (N.D. Cal. 2000) (declining to enforce arbitration clause added to credit card contracts nearly one year after class action was filed, because defendants “gave no notice to [the plaintiff] that if he opted for the arbitration provision, he could not participate in the pending class action”); Carnegie v. H&R Block, Inc., 687 N.Y.S.2d 528, 532 (N.Y. Sup. Ct. 1999) (refusing to enforce arbitration clause added to defendant’s loan agreement that prohibited class-wide relief as to existing claims, because those who signed the agreement “were completely unaware of this litigation and that by signing the [loan agreement] form, they were waiving their right to participate in this class action”); Bilbrey v. Cingular Wireless, LLC, 164 P.3d 131, 134 (Okla. 2007) (arbitration clause unconscionable where it was imposed on class members after class action complaint had been filed); H&R Block, Inc. v. Haese, 82 S.W.3d 331, 333, 336 (Tex. App. 2002) (class action ban incorporated into lender’s standard agreement after class action was filed “constituted an unauthorized, impermissible, knowing and intentional communication with members of the plaintiff class” that “was calculated to reduce class participation and to obstruct the trial court in the discharge of its duty to protect the absent class”).
5. Concepcion does not require enforcement of arbitration clauses specifying only the National Arbitration Forum. A large number of arbitration clauses specifically name the National Arbitration Forum (“NAF”) as the sole arbitrator. But the NAF was forced to abandon consumer arbitrations by a law enforcement action. While corporations routinely ask courts to re-write the arbitration clauses to select another arbitration company, several courts have thrown out NAF-only arbitration clauses on grounds that the language of a contract demonstrated that the defendant’s selection of NAF was an integral term of the clause. See, e.g., Ranzy v. Tijerna, 393 Fed. Appx. 174 (5th Cir. Aug. 25, 2010); Carideo v. Dell, Inc., 2009 WL 3485933 (W.D. Wash. Oct. 26, 2009) (same); Carr v. Gateway, 944 N.E.2d 327 (Ill. 2011) (same); Stewart v. GGNSC-Canonsburg, L.P., 9 A.3d 215 (Pa. Super. Ct. 2010) (same).
6. Concepcion does not apply to claims against certain creditors. Four major credit card companies are currently constrained from requiring arbitration, notwithstanding Concepcion, by the terms of a settlement approved last year. On July 26, 2010, a federal court in New York approved a settlement in Ross, et al. v. Bank of America, N.A, No. 05-cv-7116, MDL No. 1409 (S.D.N.Y.), which precludes the settling defendants from enforcing their arbitration clauses and class action bans against cardholders. Pursuant to the settlement, Bank of America, Capital One, Chase, and HSBC have agreed (1) to remove any arbitration clauses and class action bans from U.S. cardholder contracts; (2) not to restore or otherwise insert any arbitration clause or class action ban into its U.S. cardholder contracts within three and one half (3.5) years following May 1, 2010; and (3) not to seek to enforce their current or former arbitration clauses or class action bans against any members of the settlement class.
7. Concepcion may not apply to cases in state court. The Concepcion case originated in federal court. Justice Thomas—who provided the crucial fifth vote for the Concepcion majority—has consistently maintained that the FAA does not apply to cases in state court. Had the issue inConcepcion reached the U.S. Supreme Court from a state court, there presumably would not have been five votes for preemption. At least one federal court has already recognized this implicit limit toConcepcion’s preemption holding. Arellano v. T-Mobile USA, Inc., 2011 WL 1842712 (N.D. Cal. May 16, 2011) (repeatedly noting that Concepcion’s preemption holding is the rule “at least for actions in federal court”). Thus, there is a strong argument that Concepcion’s preemption holding does not apply to cases in state court.
8. Concepcion will not interfere with state laws that limit class action bans or arbitration clauses in insurance cases. A large number of federal and state appellate courts have held that the FAA does not apply to state laws that ban or limit the use of arbitration clauses by insurance companies. About 20 states have barred insurance companies from using mandatory arbitration clauses, and nothing in Concepcion will interfere with those state laws.
9. Concepcion does not entitle a defendant to compel arbitration if it has already waived its right to arbitrate. It is black-letter law that even where a valid arbitration agreement exists, a party may waive its right to avail itself of the right to arbitrate. See, e.g., Lewallen v. Green Tree Serv., L.L.C., 487 F.3d 1085, 1090 (8th Cir. 2007). Courts look at a variety of factors, for example: how many months or years the parties have engaged in litigation prior to the party moving to compel arbitration; whether significant motion practice and/or discovery has taken place; whether the party sought a judicial ruling on the merits; and whether the party invoked its arbitration clause only after receiving an unwelcome ruling from a court. Only where a party can demonstrate that there was a change in the governing law that was so significant that it would have been futile to seek arbitration any earlier will a court find that a change in the law excuses waiver of the right to arbitrate.
10. Concepcion should not apply to cases where state law does not require nonconsensual class arbitration. Justice Scalia’s majority opinion in Concepcion devotes several paragraphs to explaining why “class arbitration, to the extent it is manufactured by Discover Bank rather than consensual, is inconsistent with the FAA.” 131 S. Ct. at 1750–52. The Court was clearly concerned that courts applying the Discover Bank rule could order parties to arbitrate on a class-wide basis against their will. It stands to reason, then, that where state law does not present that conflict, it should not be preempted by the FAA under Concepcion. A state supreme court could clarify, for example, that under its state law, if a class action ban is invalidated (for instance, because it would prevent the plaintiffs from effectively vindicating their statutory rights), the drafter of the contract is given a choice between arbitration and litigation in court. In that instance, a court could decline to enforce the class action ban without running afoul of Concepcion.
11. Concepcion does not impact cases in which no contract—or no arbitration clause—is involved. It might sound obvious, but Concepcion will not affect class actions where the parties are not bound by a contractual agreement. For example, when a defective product is sold over-the-counter at a pharmacy, there generally is just a receipt but no arbitration clause or written contract. Class actions can certainly proceed in that kind of circumstance, notwithstanding Concepcion.
12. Concepcion does not limit the impact of federal legislation and/or regulations barring companies from imposing arbitration clauses. The Arbitration Fairness Act of 2011, sponsored by Senator Al Franken, would ban all predispute mandatory arbitration clauses in consumer and employment contracts. In addition, the new Bureau of Consumer Financial Protection, created in 2010 by the Dodd-Frank Wall Street Reform and Consumer Protection Act, has the authority to ban or regulate arbitration clauses in consumer financial products and services contracts. The Bureau will soon be conducting a study to determine whether prohibiting or limiting arbitration clauses would be in the public interest and protect of consumers.
*In addition to the arguments set out here, there are many strong arguments for why courts should refuse to enforce arbitration clauses in a variety of circumstances unrelated to Concepcion. These arguments and the cases supporting them are collected and analyzed in our treatise, Consumer Arbitration Agreements: Enforceability and Other Issues, which the Public Justice Foundation publishes annually with the National Consumer Law Center. To purchase the treatise, click here.
Re-printed with the permission of Public Justice