Will Concepcion Allow Arbitration Agreements to Squash Consumer Class Actions?

Not entirely—at least that’s the conclusion according to this article in the most recent ABA Infrastructure issue.The key holding of the Supreme Court decision in AT&T Mobility LLC v. Concepcion–that the Federal Arbitration Act (FAA) preempts any state rule invalidating class-action waivers (such as the Discover Bank v. Super. Ct. rule in California prohibiting non-class arbitration clauses)–significantly bolsters the already superior bargaining power of defendants in class-action suits and undermines the ability ofconsumers to even undertake these suits. (There is already some evidence that banks have increased adoption of arbitration clauses as a result of the decision)

The authors (John Pierce and Mark Darrell) of the ABA article, however, argue that the scope of the Concepcion holding is not entirely sweeping and is limited by the opinion’s reliance on a key fact that the plaintiff (i.e., consumer) in the case would have likely fared better under arbitration than through a class-action suit.Under the Concepcion majority decision, therefore, class-action waivers would be permissible in arbitration clauses if the plaintiff is more likely to receive a settlement offer through arbitration than through class actions.And since the majority did not explicitly disagree with the dissenting opinion’s argument that arbitration agreements shielding sellers from liability are unenforceable, it is likely that class action suits are not entirely barred by arbitration agreements.

So is it now simply the case that class-action waivers are only enforceable when arbitration is a more likely means for a consumer to reach a settlement?According to the Pierce and Darrell article, class-action waivers could still be ruled unenforceable (as they have been by some lower state and federal courts) by deeming the arbitration agreements “unconscionable.”They note that “unconscionability and similar common-law doctrines have been invoked to defeat arbitration clauses on grounds such as:

  • The arbitration agreement is nonmutual or can be modified unilaterally
  • The allocation of costs in the arbitration agreement is unfair
  • The arbitration or its results must be kept confidential
  • The arbitration clause unfairly limits a claimant’s remedies
  • The arbitration agreement specifies an inconvenient forum
  • The arbitration clause unfairly deprives the plaintiff of a class-action remedy”

To add a further wrinkle to the uncertainty surrounding the enforceability of class-action waivers in arbitration agreements, Alan Kaplinsky discusses whether the Consumer Financial Protection Bureau may step in to overrule the Concepcion decision by issuing a rule per §1028 of Title X.Section 1028 requires that the CFPB conduct a study of mandatory arbitration clauses in consumer contracts.It also provides the CFPB with authority to restrict or ban pre-dispute mandatory arbitration if it finds that doing so would be “in the public interest and for the protection of consumers.”

As lower state and federal courts begin to apply the limited holding in Concepcion and the CFPB considers how to exercise its authority, some significant uncertainty will continue to loom over how long and to what extent pre-dispute arbitration requirements in consumer contracts will remain valid and enforceable.

***UPDATE: see a more recent post on how lower court decisions have ruled that unconscionability and Magnuson-Moss Act claims can render class-action waivers unenforceable.

James Nguyen, Have Arbitration Agreements Squashed Consumer Class Actions?,Berkeley Bus. L.J. Network (September 13, 2011), http://thenetwork.berkeleylawblogs.org/2011/09/13/will-concepcion-allow-arbitration-agreements-to-squash-consumer-class-actions/.