A year-and-a-half ago, the United States Supreme Court handed down its ruling in AT&T Mobility LLC v. Concepcion, 131 S.Ct. 1740 (2011), which enforced a contractual waiver of class arbitration in an arbitration clause under the Federal Arbitration Act (FAA) in the face of an unconscionability challenge based on state law. Since then, the lower federal courts have digested the ruling's impact in several cases. The arbitration clause in Concepcion had several "consumer-friendly" provisions, prompting some commentators to question whether the Court's ruling was limited to clauses containing such provisions. The consensus in the lower courts is that the answer is no, at least with respect to claims under state law. However, a circuit split has emerged regarding the impact of Concepcion when the plaintiff's claim is based on federal statutory law, and the Supreme Court is poised to resolve this split.
The Supreme Court's Decision in Concepcion
In Concepcion, the plaintiffs brought claims under state law against AT&T, alleging that AT&T charged them sales tax for the purchase of phones that AT&T had advertised as free of charge. The contract that the Concepcions entered into with AT&T provided for arbitration of all disputes between the parties and required that all claims be brought in an "individual capacity, and not as a plaintiff or class member in any purported class or representative proceeding." The arbitration clause included several consumer-friendly provisions, including provisions that required AT&T to pay for the costs of all non-frivolous claims that proceeded to arbitration and to pay a minimum amount of $7,500.00 plus twice the amount of the claimant's attorney's fees in the event that the claimant were to win an award larger than AT&T's final written settlement offer.
AT&T moved to compel arbitration, but the district court denied AT&T's motion, relying on the California Supreme Court's decision in Discover Bank v. Superior Court, 113 P.3d 1100 (Cal. 2005), to refuse to enforce the class arbitration waiver in the AT&T contract. The so-called Discover Bank rule invalidates such waivers in consumer contracts where the defendant is alleged to have cheated large numbers of consumers out of small amounts of money. The Ninth Circuit Court of Appeals affirmed.
The United States Supreme Court reversed, holding that the Discover Bank rule is pre-empted by the Federal Arbitration Act (FAA). The Supreme Court stated that the FAA requires courts to enforce agreements to arbitrate except where the agreement to arbitrate is subject to "generally applicable contract defenses, such as fraud, duress, or unconscionability." 131 S. Ct. at 1746. The Supreme Court noted that this exception was not intended "to preserve state-law rules that stand as an obstacle to the accomplishment of the FAA's objectives." Id. at 1748. The Supreme Court concluded that California's Discover Bank rule was such a rule because it sacrificed enforcement of individual arbitration for the sake of class procedures the Court deemed "inconsistent with the FAA." Id. Thus, the Court concluded, the Discover Bank rule is preempted by the FAA.
At the end of the opinion, the Supreme Court noted that the "dissent claims that class proceedings are necessary to prosecute small-dollar claims that might otherwise slip through the legal system." Id. at 1753. The majority responded that "States cannot require a procedure that is inconsistent with the FAA, even if it is desirable for unrelated reasons" and that "the claim here was most unlikely to go unresolved" because of the numerous provisions in the arbitration clause that favored consumer-claimants. Id. This remark has prompted some commentators to query whether the Supreme Court's willingness to enforce class action waivers would be limited to arbitration clauses containing consumer-friendly provisions like those in Concepcion.
The Scope of Concepcion in the Lower Courts: The Third and Eleventh Circuits
The United States Court of Appeals for the Eleventh Circuit was the first Circuit Court of Appeals to address the scope of Concepcion. In Cruz v. Cingular Wireless, LLC, 648 F.3d 1205 (11th Cir. 2011), which involved claims under the Florida Deceptive and Unfair Trade Practices Act based on the defendant's charging of $2.99 per month for a "Roadside Assistance Plan" allegedly without the plaintiffs' consent, the Eleventh Circuit suggested that Concepcion was not limited to consumer-friendly arbitration clauses. However, the Eleventh Circuit ultimately concluded that it "need not reach the question of whether Concepcion leaves open the possibility that in some cases, an arbitration agreement may be invalidated on public policy grounds where it effectively prevents the claimant from vindicating her statutory cause of action," because the arbitration clause in Cruz was identical to the clause in Concepcion. Id. at 1215.
On August 20, 2012, however, the Eleventh Circuit revisited this issue in Pendergast v. Sprint Nextel Corp., No. 09-10612, 2012 U.S. App. LEXIS 17512 (11th Cir. Aug. 20, 2012). The plaintiff brought claims under state law on behalf of a class of Sprint customers, alleging that Sprint charged customers roaming fees while they were physically present in Sprint's coverage area, and thus were not, in fact, roaming. Sprint moved to compel arbitration pursuant to an arbitration clause that prohibited class arbitration. The plaintiff attempted to distinguish Concepcion on the basis that the arbitration agreement at issue did not contain the consumer-friendly provisions that were present in the contract at issue in Concepcion. The district court granted Sprint's motion and dismissed the case.
On appeal, the Eleventh Circuit determined that resolution of the case required "only a straightforward application of Concepcion and Cruz." Id. The Eleventh Circuit concluded that "[t]he Supreme Court in Concepcion expressly rejected the notion that the state law should not be preempted" even when the arbitration clause at issue allegedly "would effectively shield the defendant from liability." Id. Thus, the Eleventh Circuit affirmed the district court's dismissal of the case.
Two days later, on August 22, 2012, the Third Circuit reached the same conclusion in an unpublished decision in Homa v. American Express Co., No. 11-3600, 2012 U.S. App. LEXIS 17763 (3d Cir. Aug. 22, 2012). The plaintiff brought claims under state law on behalf of a class of American Express customers against American Express, alleging "bait-and-switch" solicitation, marketing, and advertising as part of American Express's promotion of cash rebates related to its Blue Cash credit card. American Express moved to compel individual arbitration pursuant to an arbitration clause that prohibited class arbitration. The district court granted American Express's motion and dismissed the case. In a previous appeal in this case, prior to the U.S. Supreme Court's decision in Concepcion, the Third Circuit had reversed and remanded for creation of a record on the issue of unconscionability. On remand, the plaintiff created an extensive record to support his claim that he would be essentially deprived of any right to recovery if forced to arbitrate on an individual basis. After the Supreme Court's decision in Concepcion, however, the district court reinstated its original opinion and Homa appealed.
The Third Circuit panel concluded that "[e]ven if Homa cannot effectively prosecute his claim in an individual arbitration that procedure is his only remedy, illusory or not." Id. The Third Circuit panel acknowledged that some might view this result as unfair, and accepted the plaintiff's argument that enforcing the class arbitration waiver would effectively eliminate any potential for recovery on his claims, but noted that if it adopted the plaintiff's position, "millions of arbitration provisions in consumer contracts would be rendered unenforceable inasmuch as the arbitration provisions in such contracts typically preclude class-arbitration proceedings." Id.
The Second Circuit Reaches a Different Conclusion for Federal Claims
The United States Court of Appeals for the Second Circuit reached a different result in In re American Express Merchants' Litigation, 554 F.3d 300 (2d Cir. 2009), 634 F.3d 187 (2d Cir. 2011), 667 F.3d 204 (2d Cir. 2012), which involved a class arbitration waiver in an arbitration agreement which did not contain Concepcion-style consumer-friendly provisions. Several merchants filed claims against American Express alleging that American Express's "Honor All Cards" provision, which was contained in its contracts with the merchants and required them to accept American Express charge cards and credit cards was an illegal "tying arrangement" in violation of the Sherman Antitrust Act. The Second Circuit held that although the class arbitration waiver would be enforceable if the claims were brought under state law, Concepcion does not require courts to find class arbitration waivers enforceable "if the plaintiffs are able to demonstrate that the practical effect of enforcement would be to preclude their ability to vindicate their federal statutory rights." 667 F.3d at 212. The Second Circuit reasoned that because the U.S. Supreme Court's decision in Stolt-Nielsen S.A. v. AnimalFeeds International Corp., 130 S.Ct. 1758 (2010), prohibits courts from ordering parties to participate in class arbitration without a contractual agreement to do so, a decision to strike down a class arbitration waiver requires striking down the entire arbitration agreement so that plaintiffs can pursue class actions in court, if the plaintiffs can only effectively pursue their federal statutory claims through a class proceeding.
Lower courts in the Second Circuit have emphasized this differential treatment of state and federal claims under the American Express ruling. For example, on August 21, 2012, just a day after the Eleventh Circuit's ruling in Pendergast, the United States District Court for the District of Connecticut struck down an arbitration agreement containing a class arbitration waiver because enforcing it would effectively deprive the plaintiff of any real chance of recovery. Fromer v. Comcast Corp., No. 3:09cv2076, 2012 U.S. Dist. LEXIS 117807 (D. Conn. Aug. 21, 2012). The plaintiff filed suit on behalf of a class of Comcast customers against Comcast, alleging that Comcast had violated the Sherman Antitrust Act and the Connecticut Unfair Trade Practices Act by unlawfully bundling its Direct Voice service with an embedded media terminal adapter. Comcast moved to compel arbitration pursuant to an arbitration clause that prohibited class arbitration.
The district court considered evidence that pursuing antitrust claims on an individual basis would be prohibitively expensive because it would require professional services that cost between $500,000 and $750,000, while the potential recovery would be less than $500. The district court concluded that, pursuant to the Second Circuit's decision in American Express, "because the class action waiver in this case effectively precludes Fromer from pursuing federal statutory remedies, the class arbitration waiver is void." Id. The district court noted that the reasoning in American Express "does not apply to [the Plaintiff's Connecticut Unfair Trade Practices Act] claim, and the inability to vindicate that statutory right does not provide a basis for [finding] the arbitration agreement unenforceable with regard to that claim." Still, the district court found that the entire arbitration agreement was unenforceable because it contained a provision which stated that "[i]f the class action waiver is found to be illegal or unenforceable, the entire Arbitration Provision will be unenforceable, and the dispute will be decided by a court."
A Circuit Split Emerges
The Second Circuit's ruling that Concepcion does not apply to federal claims is in direct conflict with the Ninth Circuit's decision in Coneff v. AT&T Corp., 673 F.3d 1155 (9th Cir. 2012). In Coneff, plaintiffs filed a putative class action against AT&T alleging unjust enrichment, breach of contract, and violation of various state consumer-protection statutes under state law, and violation of the Federal Communications Act. AT&T moved to compel individual arbitration pursuant to an arbitration clause that prohibited class arbitration. The district court denied AT&T's motion to compel, finding the class-action waiver unconscionable under state law. The Ninth Circuit reversed, holding that "Concepcion is broadly written" and that it requires enforcement of class arbitration waivers, even if the effect of enforcement is to effectively preclude individual plaintiffs from pursuing their claims. Id. at 1158. The Ninth Circuit's analysis did not recognize any meaningful distinction between federal and state law claims.
On November 9, 2012, the Supreme Court granted American Express's petition for a writ of certiorari to resolve the split between the Second and Ninth Circuits. American Express has asked the Supreme Court to eliminate any distinction between state and federal claims for purposes of enforcing class action waivers in arbitration clauses, and to reiterate that such clauses should be enforced in all cases, even when doing so would effectively eliminate any real chance of recovery for individual plaintiffs.
Conclusion
In sum, the decisions by the Circuits in the year following the Supreme Court's ruling in Concepcion make clear that class action waivers in arbitration clauses will be enforced as to state law claims, even if enforcement effectively eliminates any real prospect of recovery for individual plaintiffs. However, the Second and Ninth Circuits disagree as to whether Concepcion has the same effect where the plaintiff brings at least one claim based on federal law.
If the Supreme Court ultimately accepts the Second Circuit's approach to class action waivers in the context of federal claims, the impact could be dramatic and wide-sweeping: many arbitration clauses could be stricken in their entirety, because many, if not most, arbitration clauses are like the one at issue in Fromer, and expressly require that the entire clause be struck down if the class action waiver is found to be unenforceable. This would threaten a massive increase in consumer class actions based on federal statutory violations. While potential defendants could mitigate this outcome to some extent by including a Concepcion-style consumer-friendly arbitration clause in every consumer contract, thus blunting any argument that consumers would be deprived of an opportunity to effectively pursue their claims individually, such a result still would likely increase litigation costs and interfere with efforts to streamline private dispute resolution in a way that the FAA was specifically intended to avoid.
Previously published in the International Association of Defense Counsel's (IADC) Business Litigation Committee Newsletter, November 2012.
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