The Supremes Hold the Federal Arbitration Act Preempts State Decision Requiring Class Arbitration
The Supreme Court issued an interesting decision today holding that the Federal Arbitration Act ("FAA") preempts any state law that would require consumer contracts including arbitration provisions to make class arbitration available. The Court's analysis of the FAA's Savings Clause -- which broadly interpreted Congress's purposes and objectives in passing the FAA -- just goes to show that the Court continues to be all over the lot when it comes to preemption analysis. Perhaps what is most interesting about the opinion is what it portends for Wal-Mart v. Dukes, which should be decided later this term.
In AT&T Mobility LLC v. Concepcion, No. 09-893 (U.S. Apr. 27, 2011), the plaintiff claimed AT&T should not have charged him sales tax on a phone it marketed as "free." The mobile phone contract between the parties precluded class arbitration, providing instead that the plaintiff could proceed in arbitration only on an individual basis (or in small claims court). It also required AT&T to make an initial settlement offer, pay the costs of all nonfrivolous claims submitted to arbitration, forego attorneys fees for itself, and pay a $7,500 minimum recovery and two times the plaintiff's attorneys fees if the plaintiff received an arbitration award that was more than AT&T's last settlement offer.
California's Supreme Court previously had held that including class action waivers in consumer arbitration contracts was unconscionable as a matter of California law.
Section 2 of the FAA, however, provides that agreements to arbitrate are "valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract." 9 U.S.C. sec. 2 (emphasis added). In a 5-justice majority opinion (Roberts, Scalia, Kennedy, Thomas, and Alito) written by Justice Scalia, the court held that California's common law rule was preempted by the FAA because California's rule "'stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress.'" Slip op. at 18 (citation omitted). Specifically, "[r]equiring the availability of classwide arbitration interferes with the fundamental attributes of arbitration and thus creates a scheme inconsistent with the FAA." Slip op. at 9.
As Justice Scalia explained, "The point of affording parties discretion in designing arbitration processes is to allow for efficient, streamlined procedures tailored to the type of dispute." Slip op. at 10. But the California rule -- which would operate in consumer disputes where there is a "contract of adhesion" -- operated directly contrary to the goal of streamlining the resolution of disputes. Indeed, by creating a mandatory right to class arbitration, that rule provided a disincentive to product suppliers to provide for arbitration at all. Slip op. at 13.
The majority had some interesting things to say about the difference between individual and class proceedings -- things that may portend a reversal in Wal-Mart v. Dukes. Most notable is that the majority recognized that when a class is involved, more formal structural protections are necessary to preserve the due process rights of absent class members and defendants:
This is obvious as a structural matter: Classwide arbitration includes absent parties, necessitating additional and different procedures and involving higher stakes. Confidentiality becomes more difficult. And . . . arbitrators are not generally knowledgeable in the often-dominant procedural aspects of certification, such as the protection of absent parties. The conclusion follows that class arbitration, to the extent it is manufactured by [the California rule] rather than consensual, is inconsistent with the FAA.
First, the switch from bilateral to class arbitration sacrifices the principal advantage of arbitration -- its informality -- and makes the process slower, more costly, and more likely to generate procedural morass than final judgment. . . . [B]efore an arbitrator may decide the merits of a claim in classwide procedures, he must first decide, for example, whether the named parties are sufficiently representative and typical, and how discovery for the class should be conducted. . . .
Second, class arbitration requires formality. If procedures are too informal, absent class members would not be bound by the arbitration. For a class-action money judgment to bind absentees in litigation, class representatives must at all times adequately represent class members, and absent members must be afforded notice, an opportunity to be heard, and a right to opt out of the class. . . .
Third, class arbitration greatly increases the risk to defendants. . . . Defendants are willing to accept the costs of . . . errors in arbitration, since their impact is limited to the size of individual disputes, and presumably outweighed by savings from avoiding the courts. . . . We find it hard to believe that defendants would bet the company with no effective means of review, and even harder to believe that Congress would have intended to allow state courts to force such a decision.
Slip op. at 13-17.
None of these statements are particularly groundbreaking. And yet, as I've noted at Point of Law, these are issues -- adequacy of representation, opt-out rights where money damages are involved, predominance and the due process rights of defendants -- that are front and center in the Wal-Mart v. Dukes case that is expected to be decided later this year. The opinion in Concepcion suggests that there are at least five Justices who may be willing to take some of these issues head-on in the Dukes opinion.
Excellent writeup, Russell. Unfortunately for me, I couldn't have said it better myself ...