Will arbitration kill the consumer class action?

By Associate Professor David Horton

For "contract procedure" enthusiasts, few stories in 2011 will rival the U.S. Supreme Court's decision in AT&T v. Concepcion. The Court will decide whether the Federal Arbitration Act (FAA) preempts state courts from striking down class arbitration waivers under the unconscionability doctrine. It's no exaggeration to say that the fate of the consumer class action hangs in the balance.

The seeds of Concepcion go back to the late 1990s and early 2000s, when companies began to see mandatory arbitration clauses as a panacea for class action liability. During that period, most courts held that the FAA flatly precluded plaintiffs from aggregating claims. As a result, mandatory arbitration clauses not only funneled consumers outside of the court system, but forced them to pursue their lawsuits on an individual basis. But in 2003, a highly fractured plurality of the Court suggested in Green Tree v. Bazzle that the FAA didn't bar class arbitration. Thus, to continue to use arbitration as a bulwark against the class action, companies were forced to insert express class action waivers into their agreements.

In Discover Bank v. Superior Court, a landmark 2005 decision, the California Supreme Court held that these class arbitration waivers could be unconscionable when applied to numerous low-value claims. The state high court explained that, in those circumstances, class arbitration waivers amounted to "get out of jail free cards" for corporate liability. For instance, if a business defrauds a million consumers out of $10, no individual consumer will spend the time and money necessary to sue. That lawsuit will either be brought as a class action or not at all.

As Discover Bank quickly became the majority approach, companies responded with a counter-intuitive gambit. If judges were chafing at the fact that class arbitration waivers deterred individual plaintiffs from asserting low-value claims, then drafters would create elaborate rewards for individual plaintiffs to pursue precisely those claims. For instance, AT&T--the defendant in Concepcion--describes its class arbitration waiver as "the most pro-consumer arbitration provision in the country." A plaintiff who arbitrates against AT&T as an individual and recovers more than its last written settlement offer will win $10,000 and twice her attorney's fees--no matter how small her claim is. This arrangement gave AT&T ammunition to argue that its class arbitration waiver actually encourages the prosecution of low-value claims and thus can't be unconscionable.

More importantly, it allowed AT&T to wage war on a second front. The FAA preempts any state law that "discriminates" against arbitration. Congress passed the statute to eradicate the ouster and revocability doctrines: unique anti-arbitration measures that courts once invented because they were suspicious of extrajudicial dispute resolution. Accordingly, under the FAA, courts can only invalidate arbitration clauses (or portions of arbitration clauses) under generally applicable contract defenses, such as fraud, duress, and unconscionability. But courts must apply these rules evenhandedly: they can't use them as cover for the very hostility to arbitration that the FAA sought to abolish. When the lower courts in Concepcion held that AT&T's revamped class arbitration waiver was still unconscionable, AT&T argued that they had crossed that boundary. After all, how could a "pro-consumer" class arbitration waiver be unconscionable? The Court granted cert in Concepcion to resolve that issue.

The case hinges in large part on the intricacies of the unconscionability doctrine. Is a judge who invokes that rule to refuse to enforce AT&T's class arbitration waiver necessarily displaying animus toward arbitration? As I argued in an amicus brief, the answer is no. As a matter of settled law, the unconscionability doctrine, which permits courts to nullify unfair terms, applies to warranty disclaimers and damage limitations--clauses that undermine the sincerity of the drafter's core promises. Similarly, AT&T's class arbitration waiver dramatically reduces AT&T's incentives to conform to the law. No matter what bells and whistles AT&T provides, individual arbitration is not a meaningful check. Few consumers will be tempted to arbitrate a $10 claim by the prospect of recovering more in arbitration than AT&T offers in settlement. Nothing has changed since 2005: because the class arbitration waiver slashes AT&T's liability exposure, it's still a "get out of jail free card."