The US Supreme Court takes on Consumer Arbitration Issue
In February 2002, Vincent and Liza Concepcion entered into a cellphone agreement with AT&T Mobility. They had been attracted by AT&T’s promotion of free cellphones when committing to a two-year contract. Then the Concepcions were presented with a bill for $30.22 in sales tax for the two phones.
I remember how surprised I was when this “free” cellphone resulted in a bill for sales tax. Besides thinking it could be an illegal tie-in, I let it go. Sometimes I think that Apple violates antitrust laws as well by compelling iPhone users to take out an AT&T contract. I know, it has become quite the norm these days, to tie a particular model cellphone to a particular carrier. Shouldn’t that be illegal?
Anyway, after some years had passed, the Concepcions did not take this charge for sales tax lying down, arguing that when you promote a “free” cellphone, it should be free, and not be subject to sales tax for the full price of the phone if bought separately. To do otherwise would be “fraudulent”.
Obviously, bringing an individual suit for $30.22 did not seem like the viable thing to do. So in March 2006 they and three other persons (Jennifer Laster et al.), whose claims were consolidated with theirs, decided to bring a class action against AT&T in the Southern District of California. But, under their adhesion contract with AT&T (“take it or leave it”), the plaintiffs were confronted with an arbitration clause that – you guessed it - included a class action waiver clause.
On a side note, I wonder whether the right to a class action can be waived at all. To my knowledge this question has never been raised in California. The modern class action device was derived from a common law concept called virtual representation, which meant that “a person who was not a party to an action was deemed to have been virtually represented, and thus bound by the judgment, if his or her interests had received adequate representation by a party. See, e.g., Bernhard v. Wall, (1921) 184 Cal. 612, 629.” Arias v. Superior Court, 46 Cal.4th 969, 988-989 (2009). Don’t these origins of the class action sound very much like something parties cannot waive? I found one recent report where a court held that you cannot validly waive the right to bring a class action against a car dealership in South Carolina under its Dealers Act, as it is explicitly against public policy.
Almost five years after the Concepcions had entered into their cellphone contract (but 3 months before they filed suit), AT&T amended the arbitration agreement and added what they called a “premium payment” equal to the maximum claim that may be brought in your county’s small claims court. In California, that maximum claim is $7,500. AT&T would pay this amount if the arbitrator awarded in favor of the consumer an amount greater than AT&T’s last written settlement offer before the arbitrator was selected.
I don’t quite understand how AT&T thought this would change the class action waiver from being substantively unconscionable under California law to one that is substantively “conscionable”. Both the District Court and the Ninth Circuit did not think it changed anything either, when they had to decide on the validity of the clause upon AT&T’s motion to compel arbitration. Laster v. AT&T Mobility LLC, 584 F.3d 849 (9th Cir. 2009).
As the Ninth Circuit explained, AT&T would simply offer to pay the face value of the claim before the arbitrator was selected and thus avoid having to pay the $7,500. “Thus, the maximum gain to a consumer for the hassle of arbitrating a $30.22 dispute is still just $30.22.” Laster, 584 F.3d at 855.
The validity of an arbitration agreement is decided by the court rather than the arbitrator, in accordance with Section 2 of the Federal Arbitration Act (“FAA”). Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U. S. 395 (1967); Buckeye Check Cashing, Inc. v. Cardegna, 546 U. S. 440 (2006); Preston v. Ferrer, 552 U.S. 346 (2008). Only when the validity of the entire contract is challenged, is the arbitrator competent to decide the issue. This distinction stems from the wording of Section 2 (as interpreted in Prima Paint), which provides that arbitration clauses “shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” In order for a court to be able to decide on a motion to compel arbitration pursuant to Section 3, it needs to decide on the validity of the arbitration clause under Section 2.
Following the California Supreme Court’s decision in Discover Bank v. Superior Court, 36 Cal.4th 148 (2005), the Ninth Circuit Court of Appeals analyzed the validity of the class action waiver. Generally, under California law, in order to be valid, an agreement must be able to withstand both a procedural and a substantive “conscionability” test. Adhesion contracts are held to be procedurally unconscionable.
....
Arbitration clauses in adhesion contracts are not automatically held to be substantively unconscionable. Class action waivers are, at least when small amounts of money per consumer are involved. Excluding the class action vehicle deprives plaintiffs of an effective remedy, as it is not worth any plaintiff’s trouble to arbitrate a claim of even a few hundred dollars. “And the class-action device saves the resources of both the courts and the parties by permitting an issue potentially affecting every [person similarly situated] to be litigated in an economical fashion under [Federal] Rule 23.” Califano v. Yamasaki, 442 US 682, 701 (1979). See also Judge Werdegar’s concurring opinion in Arias v. Superior Court, 46 Cal.4th 969, 988 (2009). Excluding class actions affords the company virtual immunity from lawsuits aimed at redressing its misbehavior, thus avoiding the very reason that the class action procedure was developed.
As the California Supreme Court said in Discover,
“Fully aware that few customers will go to the time and trouble of suing in small claims court, Discover has instead sought to create for itself virtual immunity from class or representative actions despite their potential merit, while suffering no similar detriment to its own rights. [¶] ... The clause is not only harsh and unfair to Discover customers who might be owed a relatively small sum of money, but it also serves as a disincentive for Discover to avoid the type of conduct that might lead to class action litigation in the first place. By imposing this clause on its customers, Discover has essentially granted itself a license to push the boundaries of good business practices to their furthest limits, fully aware that relatively few, if any, customers will seek legal remedies, and that any remedies obtained will only pertain to that single customer without collateral estoppel effect.” Discover Bank v. Sup. Ct., 36 Cal.4th at 159-160.
Following the Discover analysis, both the District Court and the Ninth Circuit Court of Appeals found AT&T’s class action waiver to be both procedurally and substantively unconscionable, and denied AT&T’s motion to compel arbitration.
On May 24, 2010, upon AT&T’s petition, the United States Supreme Court granted certiorari. AT&T’s principal argument is that federal law, in the form of the FAA, pre-empts state law that bars agreements to arbitrate on an individual basis. The California courts and the Ninth Circuit have consistently held that the rule declaring class action waivers unconscionable applies not only to arbitration clauses, but also to clauses barring class actions in the courts, and that the unconscionability tests as they apply to class action waivers are merely a “refinement” of a “general sliding scale approach” to unconscionability under general contact law.
In response to that argument, AT&T points to Preston v. Ferrer, 552 U.S. 346 (2008), in which the Supreme Court held that the FAA preempted a California law requiring the exhaustion of an administrative procedure for certain disputes, even though that requirement applied to both judicial and arbitral proceedings. Pet.Cert. at 5. The Ninth Circuit dismissed that argument by distinguishing Preston, as there the validity of the whole contract was challenged rather than just the arbitration clause, while plaintiffs in this case are challenging the arbitration clause.
Given the pro-business leanings of the Court’s majority, this promises to be a very interesting case!
In its Petition for Certiorari, AT&T’s “Question presented” makes an awkward assumption:
“Whether the Federal Arbitration Act preempts States from conditioning the enforcement of an arbitration agreement on the availability of particular procedures--here, class-wide arbitration—when those procedures are not necessary to ensure that the parties to the arbitration agreement are able to vindicate their claims.” Pet.Cert. at i.
As you can see, AT&T assumes that you don’t need class actions or class arbitrations, as individual arbitrations are just as capable of enabling consumers to vindicate their claims!
AT&T goes on to argue that:
“Class-wide arbitration affords none of the benefits of traditional, individual arbitration--it is at least as burdensome, expensive, and time-consuming as litigation--while multiplying the risks enormously because judicial review is so limited. For that reason, hundreds of millions of arbitration agreements require that arbitration proceed on an individual basis.” Pet.Cert. at 2.
AT&T seems to imply that since class arbitration affords none of the benefits of individual arbitration, class actions (whether in court or in arbitration) should be excluded altogether!
AT&T also appears to argue that California law does not declare the exclusion of class arbitration in consumer adhesion contracts unconscionable because the consumer will not bother pursuing a small claim (in this case $30.22 for two phones), but rather:
“not because it precluded the Concepcions from vindicating their own claims, but because it precluded them from serving as the agents for the vindication of claims of third parties.” Pet.Cert. at 3.
In my opinion, it is not entirely unlikely that the Supreme Court will overturn the Ninth Circuit, declaring class action waivers in consumer arbitration agreements to be valid as a matter of federal law. Such a decision would likely give new life to the proposed Arbitration Fairness Act, a bill currently (pending in both a house and a senate version) that appears to be stalled in committee which basically seeks to change arbitrability of consumer contracts.
Stay tuned!
-EvG
