CLASS DISMISSED: CONCEPCION AND THE END OF CLASS ARBITRATION

1.        I.            Introduction

Arbitration agreements have become common place in employment and commercial contracts. Since the 1920’s arbitration has gained popularity as a means of settling commercial or employment disputes. Until AT&T v. Concepcion, however, the issue of class action arbitration had not been addressed by the Supreme Court. Class arbitration had been a divisive issue among the states and federal circuits. Now, with its ruling in Concepcion the Supreme Court has moved to restrict consumers and employees from banding together in class arbitration, allowing “class waivers” to be employed in arbitration agreements.

1.     II.            Facts and Holding

In February 2002, Vincent and Liza Concepcion entered into a contractual agreement with AT&T Mobility for two cell phones and a usage plan.[1] The Concepcions purchased the cell phone service from AT&T under a promotional advertisement which was to give the couple free cell phones.[2] In return for the Concepcions signing a cell phone contract with AT&T Mobility, AT&T did not charge them for the phone. Instead the Concepcion’s were charged $30.22 in sales tax based upon the cell phones’ retail value.[3]  The Concepcions’ contract provided for arbitration of all disputes between the parties, but required that claims be brought in the parties’ “individual capacity, and not as a plaintiff or class member in any purported class or representative proceeding.”[4]

In March 2006, the Concepcions filed a complaint against AT&T in the United States District Court for the Southern District of California.[5]  The complaint alleged that AT&T had engaged in fraud and false advertising by charging the couple sales tax on the purported free phones.[6]  Despite the contract language barring class actions, the Concepcion’s action was later consolidated with a putative class action alleging the same.[7]

The contract language in question was the aforementioned arbitration agreement, contained within the contract for service the Concepcion’s had signed with AT&T. The arbitration agreement authorized AT&T to make unilateral amendments which it did on several occasions.[8] The revised agreement provided that customers may initiate dispute proceedings by completing a one-page Notice of Dispute form which was made available to customers through AT&T’s Web site.[9] After completing the Notice of Dispute, AT&T would then offer to settle the claim.[10] If the dispute was not resolved within 30 days, the customer had the right to invoke arbitration by filing a separate Demand for Arbitration, which was also available on AT&T’s Web site.[11]

In March 2008, AT&T moved to compel arbitration under the terms of its contract with the Concepcions.[12] The Concepcions opposed the arbitration motion arguing that the agreement was unconscionable under California Law because it did not allow for class-wide proceedings.[13] AT&T first argued the arbitration agreement contained language that allowed the Concepcions fair and easy access to arbitration at a very minimal cost, but prevented the subsequent putative class action.[14] AT&T also argued that the arbitration agreement, and the class waiver contained therein, was enforceable under the Federal Arbitration Act[15] and the Supreme Court’s decision in Stolt-Nielson v. Animal Feeds[16]. The District Court denied AT&T’s motion to compel, holding that the arbitration provision was unconscionable because AT&T had not shown that bilateral arbitration adequately substituted for the deterrent effects of class actions,[17] namely, how it would allow for customers with small damage amounts to seek restitution.[18]

AT&T appealed to The Ninth Circuit Court of Appeals, who affirmed the District Court, also finding the provision unconscionable under California law.[19] The Ninth Circuit reasoned that the arbitration provision unconscionable under California law because it disallowed class wide proceedings.[20] In addition to its class proceeding ruling, the court held that the Federal Arbitration Act (FAA), which makes arbitration agreements “valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract,” did not preempt its ruling, thus negating AT&T’s argument.[21]

In a 5-4 decision, the Supreme Court affirmed The Ninth Circuit. The Court held that the FAA did in fact preempt California’s rule that class arbitration waivers were unconscionable in consumer contracts.[22] As a result The Supreme Court of the United States held class action arbitration waivers are not unconscionable under the FAA and the FAA preempts state law in this area.[23]

III. Legal History

With the passage of the FAA[24], arbitration was given much favor in American courts that it had not previously received.[25] Until Concepcion, however, the act had not been interpreted by the Supreme Court as it relates to class action arbitration. [26] Most federal courts, as well as many state courts, have long looked favorably upon arbitration, generally enforcing mandatory pre-dispute arbitration clauses.[27] With this history of favoritism, courts have struggled to determine how to address class arbitration waivers.[28]  This struggle has resulted in inconsistent answers, causing a considerable divide among the states and the U.S. District Courts of Appeals.[29]

1. A.    Are Waivers Unconscionable? A Divide Among the Circuits

Prior to the Supreme Court’s decision in Concepcion, the U.S. Courts of Appeals disagreed as to the validity of class arbitration waivers[30] The First and Ninth Courts of Appeals have both ruled, at one point or another, that class arbitration waivers were unconscionable.[31] However, the division among the circuits lay in whether to compel arbitration or to allow class waivers, with the Third, Fourth, Fifth, Six, Seventh, Eighth and Eleventh Circuits all upholding the validity of compulsory class arbitration waivers.[32]

The majority of circuits upheld the validity of class arbitration waivers. In Snowden v. Checkpoint Check Cashing, several plaintiffs filed a class action against CheckPoint Check Cashing for charging excessive interest and service fees in violation of the Truth in Lending Act (TILA)[33] and the Racketeer Influenced and Corrupt Organization Act (RICO)[34] as well as violation of state consumer protection statutes. ^[35] The language of the mandatory arbitration agreement in Snowden strictly prohibited class arbitration and contained no savings clause.[36]The Fourth Circuit upheld the plaintiff’s waiver of class arbitration. [37] The court noted that the plaintiff’s claim that the arbitration agreement could not be enforced because it was unconscionable.[38] The unconscionability, the court claimed, was due to the class waiver being invalid. [39] Furthermore, the court rejected Snowden’s public-policy argument that forcing consumers to arbitrate consumer protection claims was contrary to the very notion of consumer protection.[40] The court concluded that nothing in the arbitration agreement was “inconsistent with public policy relating to consumer protection.”[41]

Similarly, the Seventh Circuit also refused to invalidate a mandatory arbitration clause which had prohibited class arbitration. [42]   In Livingston v. Assocs. Fin.,[43] a group of borrowers brought a class action against their lender, alleging violations of the TILA[44] The plaintiff’s argument, like the argument in Snowden, was that the costs of arbitrating a single cause of action are “prohibitively high” and that only by allowing class arbitration will they be able to pursue their claims. [45] The 7^th Circuit found the plaintiffs had failed to offer specific evidence of prohibitive costs which would preclude them from vindicating their rights through individual arbitration.[46]

The court reasoned that the plaintiffs could arbitrate individually because the agreement provided for the possibility of the lender paying the plaintiffs’ arbitration filing fee, the possibility of being awarded attorney’s fees, and because the lender offered to pay all of the plaintiffs’ arbitration costs. ^[47] Ultimately, the court concluded the agreement “explicitly [precluded] the plaintiff’s from bringing class claims or pursuing ‘class action arbitration.’”[48]  As a result of the wording of the agreement, the court was obligated to enforce the type of arbitration the parties had initially agreed to, which did not include class arbitration.[49]

In Randolph v. Green Tree Financial Corp.–Alabama,[50] the Eleventh Circuit also refused to invalidate a provision within a mandatory arbitration clause which prevented the plaintiff from utilizing class action procedures in arbitration.[51] In Randolph, the purchaser of mobile home brought a purported class action against a lender which had financed the purchase, asserting claims under TILA and Equal Credit Opportunity Act.[52] The court noted that the two federal courts that have addressed this issue have held that class wide arbitration is available only if that remedy is expressly provided for in the parties’ arbitration agreement.[53]  Relying on their decision in Protective Life Corp v. Lincoln National Life Insurance Corp,[54] the court held that class-wide relief may not be insisted upon in an arbitration proceeding if the agreement is silent on the subject of that type of remedy. [55]

Furthermore the 11^th Circuit held that the contractual provision to arbitrate TILA claims was enforceable even if it precluded plaintiff from utilizing class action procedures in vindicating statutory rights under TILA.[56]  The court further relied on its own decision in Bowen v. First Family Fin. Servs. when it recognizedthat a class action is “an available, important means of remedying violations [of statutes].”[57] However, the court was quick to point out that the plaintiffs’ right to pursue a class action or an individual lawsuit is a waivable right.[58]

Three months prior to Concepcion, The Third Circuit implicitly accepted the validity of class waivers, holding class arbitration was an issue for the arbitrator to decide.[59] In Vilches v. The Travelers Co. Inc., [60] the Third Circuit considered whether a class arbitration waiver in an employment contract was unconscionable under New Jersey law.[61] The plaintiffs had filed a class and collective action against an insurance company under the Fair Labor Standards Act and the New Jersey Wage and Hour Law alleging the company required plaintiffs to work beyond 40 hours per week but failed to compensate them.[62] The Court held that the issue of whether the parties had agreed to the waiver, which the employer had added to the parties’ contract by amendment, was an issue for the arbitrator to determine.

Contrary to these circuits, the First and Ninth Circuits have held bans on class arbitration to be invalid.[63] In Kristian v. Comcast Corp,[64] the First Circuit specifically held that a class arbitration waiver was invalid, despite holding that the arbitration agreement was valid and that class prohibition did not conflict with state law or federal antitrust issues in the case.[65] A group of Boston-area Comcast cable-service customers brought suit against the cable-service provider for allegedly charging inflated prices in violation of state and federal antitrust laws.[66] The arbitration provision that governed the cable-service agreement was included with the customers’ monthly bill and contained language prohibiting customers from arbitrating any  claims as a class.[67]

The Kristian court concluded that if the class arbitration waiver were enforced, Comcast could be “essentially shielded from private consumer antitrust enforcement liability, even in cases where it has violated the law.” [68] Additionally, the court found the plaintiffs could not afford to bring a claim on their own.[69] Thus those private consumers who were damages as a result of volitions of antitrust law would have no effective means to recover damages.[70]

The Ninth Circuit has similarly ruled that class arbitration is a valuable right which plaintiffs should retain.[71] In Ting v. AT&T,[72] the Ninth Circuit relied upon California contract law to find a class action waiver unconscionable.[73] Here, AT&T mailed a customer service agreement to 18 million of its residential customers that contained, a mandatory arbitration clause barring class arbitration.[74] Despite the arbitration clause, Ting brought a class action lawsuit against AT&T charging that sections of the contract known as the “Legal Remedies Provisions” violated California consumer protection and contract laws.[75] Ting argued that the ban on class action lawsuits violated the California Consumer Legal Remedies Act (CLRA), which expressly permits class actions. The court dispensed with this argument and agreed that the FAA preempts state laws that “single out arbitration clauses for suspect status.”[76]

However, the court found that California state common law regarding unconscionability was broad enough to strike down the compulsory class waiver. [77] The court agreed with the district court’s finding that the AT&T customer service agreement was procedurally unconscionable because the company had forced the clause upon its customers “without opportunity for negotiation, modification, or waiver.”[78] Additionally, the court found the customer service agreement was substantively unconscionable under California law because the costs imposed on consumers are greater “than those a complainant would bear if [they] would file the same complaint in court.”[79]

Prior to Concepcion, the Supreme Court had not specifically address class waivers. There was no bright line rule for the Courts of Appeals to follow and the result was a divide among circuits. The majority of circuits found waivers to be a perfectly legitimate tool to employ in the arbitration agreement, as did the Supreme Court in Concepcion.[80] However, a few circuits noted the potential problems that could arise with these waivers and held them to be unconscionable.[81]

1. B.     Waivers and Unconscionability: A Divisive State Issue

The split opinion on class arbitration waivers was not a problem exclusive to the Federal Circuits, rather States have been similarly divided. [82] Several state courts have also refused to compel class arbitration, including Delaware, Alabama, New York and Washington.[83]

The Alabama Supreme Court refused to recognize class arbitration as arbitrable stating that “(a)rbitration agreements cannot be forced into the mold of class-action treatment.”[84] The court maintained that to do so would defeat the parties’ contractual rights and negate the very notion of binding arbitration agreements.[85] Additionally, the Alabama Supreme Court refused to recognize class arbitration based on a duty to follow the parties’ arbitration agreement, which did not expressly allow class-arbitration.[86]

Not long after Alabama rejected class arbitration as a whole, a Washington appellate court concurred, finding that a class arbitration clause was enforceable even though it prevented the plaintiff from bringing a class action.[87] The court held that the arbitration clause should be enforced as written because it was silent as to class action.[88] Furthermore, the plaintiff failed to demonstrate a conflict between the agreement and statutory provisions, contract law, or due process requirements.[89]

When weighing the options of bilateral or class arbitration, the state courts of Delaware and New York have retained the view that class actions are incompatible with the nature and purpose of arbitration.[90] In an unpublished opinion, a Delaware Chancery Court barred the plaintiff’s argument for class arbitration, saying that it was unsupported by the evidence and that the “contract provides for arbitration under specific and well-established rules that, insofar as this record shows, do not provide for class arbitration.” [91] Another Delaware, recognizing that their decision would put an end to the class claim, compelled arbitration and held, “the responsibility to arbitrate cannot be evaded by asserting claims through a class.[92] In New York Supreme Court decision, the state court broke up the class action by compelling arbitration of the named-plaintiffs only.[93]

However, in stark contrast, Pennsylvania, California and Georgia, have treated class arbitration favorably.[94]  These states have all found class arbitration to be acceptable and a viable way for plaintiffs to recover damages. In Dickler v. Shearson Lehman Hutton, Inc.,[95] the Pennsylvania Superior Court allowed class-wide arbitration in an action under the FAA, finding that contract language covering “any controversy” was consistent with the state’s public policy favoring arbitration.[96] Although they haven’t addressed the issue in decades, the Georgia courts have found class arbitration to be acceptable. In two separate suits in the 1970s, the Georgia Supreme Court certified taxpayer classes that proceeded in arbitration.[97] Here both Georgia decisions relied on the fact that taxpayers had adequate remedy under Georgia statutory procedure to proceed to class arbitration.[98]

In California, the courts have taken an undeniably pro-class-action stance. In Discover Bank v. Superior Court,[99] the California Superior Court held that a class arbitration waiver in a consumer contract of adhesion was unconscionable under certain circumstances and should not be enforced.[100] The court further held that prohibition of class action waivers in arbitration agreements is not preempted by the Federal Arbitration Act (FAA). [101] In so holding, the court created the Discover Bank Rule.[102] Under the Discover Bank Rule, a class proceeding waiver will be unconscionable if three criteria are met:  (1) it is in a contract of adhesion; (2) it governs disputes over small amounts of money; and (3) it is alleged to be part of a scheme to deliberately cheat consumers out of individually small amounts of money. [103] The court was explicit in its holding that the FAA did not preempt California Law.[104] They reasoned “the law in California is well settled… that class action waivers in consumer contracts of adhesion are unenforceable.”[105] Additionally these waivers were unenforceable regardless of whether the consumer consented to waive the right to class action litigation or the right to class arbitration. [106]

1. C.    The Supreme Court and Class Action Waivers

Prior to the Concepcion decision, the Supreme Court had never settled the jurisdictional divide regarding class arbitration waivers.[107] The U.S. Supreme Court’s closest previous encounter with class arbitration was in Green Tree Financial Corp. v. Bazzle.[108] There, the court failed to specifically address the validity of class arbitration.[109]

Green Tree Financial Corp. v. Bazzle involved two South Carolina state court lawsuits brought by home-loan borrowers against Green Tree Financial Corp.[110] In both suits, Green Tree successfully moved to compel arbitration on the basis of an arbitration clause in the loan agreements, but found itself defending against a class action in arbitration.[111] The Supreme Court of South Carolina affirmed two arbitral awards against Green Tree, holding that the arbitration provisions in the loan agreements were “silent regarding class-wide arbitration.”[112] They also noted that under South Carolina law, class-wide arbitration was permitted.[113]

The U.S. Supreme Court vacated the South Carolina court’s decision and remanded the cases to the arbitrator to decide whether the applicable arbitration provisions permitted class arbitration. ^[114] In vacating the South Carolina decision, the U.S. Supreme Court did not specifically or implicitly validate class arbitration, nor did it address the legal validity of class-wide proceedings.[115] The Court was only concerned with whether the parties had agreed to binding class arbitration, which they had.[116]

While the Court, prior to Concepcion, had not specifically addressed whether class arbitration was permissible, they had addressed the permissibility of consolidation of arbitration in Episcopal Housing Corp. v. Federal Ins. Co. [117] There the Court found that  arbitration was a  “creature of contract” but that consolidation would not serve to deny the appellant its “contracted-for right to arbitration.”[118] Instead the court said consolidation would be a logical and expeditious method to enforce contract rights.[119] Most importantly the court examined potential prejudices which could result from consolidation and found that the parties would not be prejudiced. [120]

For the nearly twenty years prior to Concepcion, California courts had consistently invalidated arbitration clauses that waived class actions or explicitly allowed class actions in arbitration, regardless of class action waivers or silent arbitration clauses.[121] Most important to the decision at hand was the California Superior Court’s decision in Discover Bank. The Ninth Circuit held that the class action waivers in Concepcion violated the Discover Bank Rule. [122] It was not until Concepcion that the Supreme Court specifically addressed the issue of class waivers, holding them to be valid.[123]

1. D.    The Legislature and Courts Act in Light of Concepcion

The courts have examined employment contracts in light of the Supreme Court’s decision in Concepcion, but the scope of their examination has been limited. In Brown v. Ralph Grocery[124]¸ plaintiff sought class arbitration under California’s Private Attorney General Act[125], alleging violations of the California Labor Code[126]. The California Supreme Court held that the FAA did not preempt state law regarding unenforceability of contractual waiver of employee’s right to pursue representative action under the Private Attorney General Act of 2004.[127] They noted that the United States Supreme Court’s authority, including Concepcion, does not address statues like the PAGA.[128] They noted that even if a PAGA claim would be subject to arbitration, “it would not have the attributes of a class action that the [Concepcion ] case said conflicted with arbitration , such as class certification, notices, and opt-outs.”[129] They concluded by saying that until the United States Supreme Court rules otherwise, California will  continue to follow state law

Similarly, Nevada courts addressed the issue of class arbitration and employment contracts. In Chen-Oster v. Goldman Sachs &Co.,[130] Female employees of investment banking and securities firm whose employment had been terminated filed a putative class action against their employer alleging it had engaged in pattern or practice of gender discrimination against its female professional employees in violation of Title VII and New York City Human Rights Law.[131] Employer moved to stay the action with respect to one representative plaintiff, and to compel arbitration of her claim.[132] The court held that there was no evidence that parties clearly consented to submit class-based actions to arbitration; but class action claim for pattern and practice gender discrimination could not be effectively vindicated in arbitral forum.[133] The Concepcion decision to allow class waivers  runs contrary to the Supreme Court’s previous opinion that the class action is a vehicle for vindicating statutory rights, especially when the damages due to any single individual are too small to justify bringing an individual action.[134]

Additionally, the legislature has acted to change the impact the Concepcion decision could have on employment and consumer contracts. Congress has attempted twice to enact legislation that would exempt employment and consumer contracts, but have had little success in passing said legislation.

IV. INSTANT DECISION

In Concepcion the Supreme Court dealt with the FAA’s saving clause and class arbitration waivers.[135] The FAA expressly codified the enforceability of arbitration agreements within contracts, “save upon such grounds as exist at law or in equity for the revocation of any contract.”^[136]  It is this “saving clause” that provided the most formidable logical obstacle to the AT&T v. Concepcion majority’s creation of a plausible rationale for its holding.[137]

In contrast, California had applied the doctrine of unconscionability to contracts, giving the judiciary authority to declare contracts invalid because they were deemed to be unconscionable, either by statutory law or common law application of the doctrine.^[138]

The majority opinion, delivered by Justice Scalia, focused on the FAA preempting California’s unconscionability doctrine, holding that class waivers were acceptable under the FAA.[139]  The majority focused their opinion on the Discover Bank Rule as a procedural rule of arbitration.[140] For the majority, procedural rules like the Discover Bank rule can compromise the informality of arbitration and in effect prevent disputes from being arbitrated. [141]

Applying this reasoning to class arbitration, the court was struck down California’s Discover Bank rule as inconsistent with the primary purpose of arbitration.[142] The court reasoned that while the rule does not require class arbitration, it does allow any party to a consumer contract to “demand class arbitration after the fact.”[143]  The Court’s reasoning was that Discover Bank should be abrogated because it unduly interfered with arbitration by requiring the availability of class proceedings in arbitration. The Court decided that class arbitration was not arbitration at all, but rather a form of class litigation.[144] 

Scalia explained that, “requiring the availability of class arbitration interferes with fundamental attributes of arbitration and thus creates a scheme inconsistent with the FAA.”[145] The majority reasoned that the principle purpose of the FAA was to ensure that private arbitration was carried out according to the terms of the agreement.[146]  Building on the decision in Stolt-Neilson[147] the Court held that arbitrators are not qualified, generally, to certify class proceedings and that the rule of Discover Bank is inconsistent with the FAA.[148] The Court was particularly concerned that traditional arbitration was ill-equipped to handle class proceedings. They note that the high cost and lack of traditional appellate review, compounded with arbitrator’s lack of class certification expertise were too big of a risk for traditional arbitration.[149]

Enlarging on the fundamental differences between bilateral and class-wide arbitration, which formed the basis for the decision in Stolt-Nielsen[150], the majority in AT&T Mobility emphasized that “the switch from bilateral to class arbitration sacrifices the principal advantages of arbitration – and makes the process slower, more costly and more likely to generate a procedural morass than final judgment.”[151]  Scalia, in his majority opinion, writes, “requiring consumer disputes to be arbitrated on a class wide basis will have a substantial deterrent effect on incentives to arbitrate.”

In his dissent, Justice Breyer, joined by Justices Ginsburg, Kagan and Sotomayor, argued that the principles of federalism should apply to arbitration and that class arbitration was consistent with the use of arbitration.[152] Breyer argued that high stakes disputes are frequently settled in arbitration, and while class arbitration would be more complex than bilateral arbitration, it would still be more efficient and simpler than class litigation.[153] Additionally he points out that the American Arbitration Association looks favorably upon class arbitration, calling it a “fair, balanced and efficient means of resolving class deputes.”[154]

Breyer’s major concern is that without the ability to band together as a class, minor frauds would never be remedied.[155] He expressed concern for the principles of Federalism, arguing that California should be afforded the right to determine when a consumer can waive the right to class proceedings.[156]He writes, “class arbitration is consistent with the use of arbitration. It is a form of arbitration that is well known in California and followed elsewhere.”[157]

            The Court, overruling the rule in Discover Bank and reversing the Ninth Circuit held that the Federal Arbitration Act preempted California state contract law.[158] They held Under the Federal Arbitration Act, California must enforce arbitration agreements even if the agreement requires that consumer complaints be arbitrated individually instead of on a class-action basis.[159]

V. COMMENT

Class action litigation and arbitration is not generally been considered to be in the best interest of business, but the Supreme Court’s decision in Concepcion certainly has the potential to be.[160] Concepcion has become quite controversial among scholars and pundants. Many scholars agree that because of Concepcion there will be a general increase in class waivers employed in arbitration agreements.[161] The decision, allowing corporations to utilize class waivers in arbitration agreements could be viewed as an “end around” for class relief. Scalia, in his majority opinion, writes, “requiring consumer disputes to be arbitrated on a class wide basis will have a substantial deterrent effect on incentives to arbitrate.”[162]  The ABA Division of Litigation takes a contrary view, nothing that the decision is a blow to class-action suits that involve small claims that could affect millions of people.[163] The decision could be used by corporations to use class waivers to “block dissatisfied consumers or disgruntled employees from joining together.”[164] Class arbitration is primarily used in large-scale consumer and employment disputes.[165] While this decision will not be the death knell to class actions that some scholars and writers predict, it certainly will act to curtail corporate liability in class actions in the consumer and employment contract realm. As Lori A. Sochin, co-chair of the Section of Litigation’s ADR Committee[166] puts it, given the “more…pro-business decision [of Concepcion]” what businesses “wouldn’t put a class action waiver clause in the contract now?” [167]

1. Class Waivers in Consumer Contracts Could Become the Norm

Arbitration has already become widely accepted as a substitute for costly litigation in consumer contracts, from credit card agreements to – as in this case – cell phone contracts.[168] Class arbitration has been in existence for thirty years and has been reviewed several times by the U.S. Supreme Court.[169] Prior to the Concepcion decision, the overwhelming majority of consumer contracts already provided for mandatory arbitration and barred class actions.[170]The concern among consumer advocate groups, writers and scholars is that the Concepcion ruling would virtually eliminate consumers’ ability to band together as a class when a company has wronged them in a consumer contract.[171] Courts had previously found waivers of class actions unconscionable.[172] In doing so, courts frequently relied on the apparent inability of consumers to bring individual claims because they are economically infeasible.[173] However, with Concepcion, businesses have been afforded a sort of quasi-immunity from class actions.[174]

The problems facing consumers in light of the Concepcion ruling could be significant.  First, losses suffered by individual consumers are often small and thus they are less likely to be recognized by consumers affected. [175] Even if the consumers realize they have been “cheated” they may not be aware of a legal right and are less likely to seek relief from the unlawful business practices.[176] Consumer advocates point out that the result of the Concepcion ruling is not that each individual harmed by the corporate action will file suit, but instead there will be few if any law suits at all.[177]

Second, as Justice Breyer, in his dissent, attempts to articulate to the majority, there is an apparent need for class arbitration in consumer contacts.[178] He points out the economic infeasibility of bilateral arbitration of consumer claims noting that the Concepcion’s claim was a mere $30.22, a small enough figure that most lawyers would tell a claimant to just eat the cost and move on with their lives.[179] The problem is that this has the tendency to rob the consumer of his day in court.[180] Breyer argues that requiring bilateral arbitration of small claims, like the Concepcion’s, will have the “effect of depriving claimants of their claims”^[181]

The glaring concern with class waivers, as Justice Breyer articulates in his dissent, is that without the ability to band together as a class, minor frauds would never be remedied.[182] He notes that class arbitration is common and accepted in California, as well as other jurisdictions. [183] In fact, the Supreme Court has implicitly approved class action waivers by never questioning or curtailing the use of representative relief in arbitration.[184] As a result it is too late to “revisit the propriety of resolving the rights of unnamed members of a class in arbitration as a general matter.”[185]

This decision has gotten the attention of businesses using consumer contracts. Businesses employing class waivers are aware of these impacts, and because businesses are allowed to waive the class arbitration in consumer contacts, consumers seemingly have little incentive to arbitrate smaller claims.[186] With consumers choosing not to arbitrate smaller claims due to the high cost of hiring an attorney or participating in the arbitration process, businesses are shielded from a series of smaller costs which eventually add up to a mountain of savings.[187] Andrew Cohen, writer for the Atlantic Monthly notes, “This AT&T Mobility decision marks another shoe dropped on the heads of individuals who have sought fair redress against corporate interests this Term.”[188] Justice Breyer makes the case that when damages are too small to justify bringing an individual action,[189] arbitration fails in its purpose to vindicate statutory rights[190] writing “What rational lawyer would have signed on to represent the Concepcion’s in litigation for the possibility of fees stemming from a $30.22 claim?”[191] Given the notion that class actions serve to help consumers remedy small wrongs and have their day in court, the Court should not allow companies to avoid class action arbitration by binding the consumer to the arbitration agreements and then waiving their rights.[192]

It is too early to say whether the Concepcion ruling will have the sweeping impact that Justice Breyer and consumer advocacy groups are concerned about. The breadth and depth at which consumer and other class actions will be affected is uncertain, and the majority of class action suits aimed at remedying corporate wrongs do not involve consumer contracts such as the Concepcion’s.[193] Regardless of this uncertainty, it is quite clear that companies have every incentive to employ class arbitration waivers in consumer contracts, and there is little that consumers can do to avoid them.[194]

2. Waivers Could Be Included in Employment Contracts.

Although the Concepcion decision involved a consumer contract and not an employment agreement, the Supreme Court’s reasoning, allowing class waivers, could be extended to cases where employers seek to enforce employment agreements that would prohibit workplace class actions and require the individual arbitration of employment-related claims.[195] Employment attorneys in California have already suggested that employers should revise arbitration agreements in employment contracts to include class waivers.[196] Much like Concepcion’s class action waiver in the consumer contract, employers are using this ruling as a green light to waive their employee’s rights.[197] Many employers are not including the same kind of fine print for new hires, blocking class-action suits for employees with discrimination or wage complaints.[198]

Arbitration has the ability to encompass public laws that are overlaid on the contractual relationship in employee agreements.[199] As such, the arbitration agreement may envelope claims under different areas of employment law within the context of an employment contract.[200]

Although Concepcion concerns consumer arbitration and not employee arbitration cases, it still may have a major impact on employee arbitration. Concepcion overturned the Discover Bank Rule, which the California Supreme Court had extended in Gentry v. Superior Court, to waivers in employee arbitration agreement.[201] In Discover Bank, the court ruled that waivers in employment agreements were unconscionable and thus unenforceable. Concepcion, however, validated the use of class arbitration waivers generally.[202]  Using the reasoning of Concepcion, state courts might decide they can no longer invalidate class-action waivers in arbitration contracts because the FAA preempts state contract laws.

The Concepcion decision put the California Supreme Court’s 4-3 decision in Sonic-Calabasas v. Moreno[203] into question.  Decided just two months before Concepcion, Sonic-Calabasas held that under section 2 of the FAA[204] that California courts may refuse to enforce an arbitration agreement based on generally applicable contract defenses, such as unconscionability.[205] If the reasoning of Concepcion extends to the arbitration of employment claims, it would seem to overrule a vast body of well-settled California law, and would impact other states’ employment agreements.[206] In their reluctance to enforce employment arbitration agreements, California courts have long relied on public-policy grounds that arbitration would best serve the interests of consumers by ensuring confidentiality and keeping costs low.[207]  To date, however, the Concepcion decision has not been tested in the arena of employment arbitration contracts and how employers could employ class action waivers.[208]

The decision does not completely limit the employee’s redress; however there are significant hurdles to bringing class claims as opposed to bilateral claims. Workers face retaliation from employers for bringing claims, but could also face industry wide retaliation, labeling them as “whistle blowers” or exposing a company to liability.[209] Workers, especially low wage workers, face the same problems consumers face in that they do not have the money to arbitrate individual claims.[210] Class arbitration offers employees the opportunity to redress grievances they would otherwise not be able to afford, ensures corporate compliance, and, through confidentiality of awards and parties, shields the workers from future employment discrimination.[211] The decision in Concepcion¸ on its face, has acted to disarm America’s workers from protecting themselves in the workplace.

While employers may be able to limit class action litigation by way of arbitration agreements and waivers, this doesn’t mean they could prevent employees from completely seeking redress.[212] Even with the implementation of class waivers, employers would not necessarily preclude employees from filing administrative charges, or bar autonomous agencies from asserting their statutory rights.[213] Arbitration may concern employers because there is no genuine ability to appeal award decisions. Despite the finality of arbitration decisions, class arbitration waivers would still be an attractive option for employers to include in all employment contracts in an effort to avoid class action litigation of employment disputes.[214]

Despite these concerns, some scholars and practitioners see arbitration clauses becoming more prevalent in employment agreements, as well as class arbitration waivers, based solely upon the Concepcion decision.[215] If employers proceed in this direction, the ability of employees to band together in the face of employment discrimination, wage and fee disputes, or other compensation claims would be curtailed. This would force employees to arbitrate each claim individually, at great cost to themselves. This scenario calls to mind Justice Breyer’s initial concern with the Concepcion decision: that no lawyer would take these types of cases and no claimant would spend the time and money arbitrating them.

Lastly, it is important to note that employers should be cautioned that, while their attorneys may advise that the employment contract include arbitration agreements and waivers.[216]  Concepcion does not hold that all unconscionability standards relating to arbitration agreements are preempted by the FAA.[217] Thus, while employers seek to avoid class action litigation and arbitration, only time will tell if the Courts address the potential unconscionability of class arbitration waivers in employment agreements.

3. The Legislature’s Response

One of the principle consequences of the Concepcion ruling is that the preemption of state law could pressure the legislature to amend the FAA.  Historically the central argument against class waivers had been that they operated as “exculpatory clauses by repealing, in practical effect, a private right of action contained in existing law.”[218] Waivers cannot act as exculpatory clauses in private contracts, as this is the province of public legislation. [219]

Recognizing this, the 111^th Congress considered broad based legislation aimed at invalidating all mandatory pre-dispute agreements to arbitrate in franchise disputes, employment contracts and consumer contracts.[220] This bill, dubbed the “Arbitration Fairness Act” failed to reach a floor vote and was voted down in committee.[221] However, with the Court’s ruling in Concepcion, in May 2011, The United States House of Representatives and the United States Senate simultaneously re-introduced identical bills to revise the Federal Arbitration Act, again called the Arbitration Fairness Act.[222] This new Arbitration Fairness Act would amend the Federal Arbitration Act  to declare invalid any pre-dispute arbitration agreement if it requires arbitration of an employment, consumer, or civil rights dispute.[223]  Senator Al Franken (D – MN), a sponsor of the bill, opined about the Concepcion ruling, “[t]his ruling is another example of the Supreme Court favoring corporations over consumers.” [224] While Senator Franken’s opinion is certainly up for debate, what cannot be debated is the sweeping impact the Concepcion decision could have on class arbitration in consumer and employment contracts and the lengths this legislation is willing to go to curtail those effects.

The bill, which has yet to gain much traction, should be popular with consumers and thus force congress to either pass the bill or run the risk of angering constituents and being voted out of office. [225] Despite this reality, the bill seems unlikely to be passed in the near future.[226] Nevertheless consumers and employees may find some relief in thee Dodd-Frank Act[227] and through the Securities and Exchange Commission. Both the Dodd-Frank Act and the SEC are authorized to prohibit or impose condition on pre-dispute arbitration agreements if doing so would be in the public interest and for the protection of consumer and investors.[228] Time will tell if either the AFA passes, or the Dodd-Frank Act and the Securities and Exchange Commission have any impact on the potential broad class action limitations of the Concepcion decision.

VI. CONCLUSION

Time will tell what the true effect of the Concepcion decision will be for consumers, employees and businesses. The Court’s holding that class waivers are not unconscionable because the FAA preempts state law could have sweeping effects that would restrict class action arbitration in adhesion contracts. The decision could potentially pave the way for businesses to expand the use of mandatory arbitration clauses well beyond the consumer context.[229]  The effect of the ruling could be handcuffing consumers to unconscionable terms that are still enforceable under the FAA through increased use of contracts of adhesion.[230] Whatever the long term effects of Concepcion, it is certain that we will see an increased use of waivers in arbitration agreements going forward and can anticipate battles over the issue of class waivers in the future.