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    The Lawletter Blog

    CONTRACTS AND CONSUMER PROTECTION: Supreme Court Weighs in on Enforceability of Arbitration Clause Prohibiting Classwide Arbitration

    Posted by Gale Burns on Wed, Jun 29, 2011 @ 15:06 PM

    The Lawletter Vol 35, No 10, July 8, 2011

    Paul Ferrer, Senior Attorney, National Legal Research Group

    Discussed in a prior issue of The Lawletter, see Paul Ferrer, Enforceability of Arbitration Clause Prohibiting Classwide Arbitration, 35 Lawletter No. 2 (Jan. 21, 2011), the case of Scott v. Cingular Wireless, 161 P.3d 1000 (Wash. 2007) (en banc), is indicative of the growing trend among state courts to strike down as unconscionable class action waivers in otherwise enforceable arbitration agreements in cases where there are a large number of potentially affected consumers, each of whom has only a small claim.  In Scott, for example, the plaintiffs alleged that Cingular had overcharged its individual customers between $1 and $45 per month by unlawfully adding roaming and other hidden charges to their cellular telephone plans.  In finding the class action waivers in the plaintiffs' arbitration agreements to be unenforceable, the court reasoned that "class actions are a critical piece of the enforcement of consumer protection law," because "[w]ithout class actions, many meritorious claims would never be brought":  It simply would not be cost-effective for individual consumers to proceed on such small claims.  Id. at 1006.  This reasoning was echoed in Discover Bank v. Superior Court, 113 P.3d 1100 (Cal. 2005), in which the California Supreme Court similarly held that under such circumstances, class action waivers in arbitration agreements are unconscionable and, thus, unenforceable:

    [W]hen the waiver is found in a consumer contract of adhesion in a setting in which disputes between the contracting parties predictably involve small amounts of damages, and when it is alleged that the party with the superior bargaining power has carried out a scheme to deliberately cheat large numbers of consumers out of individually small sums of money, then . . . the waiver becomes in practice the exemption of the party from responsibility for [its] own fraud, or willful injury to the person or property of another.

    Id. at 1110 (internal quotation marks omitted).

    The U.S. Supreme Court recently weighed in on this issue in AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011), in which the Court expressly addressed "whether the [Federal Arbitration Act ("FAA"), 9 U.S.C. §§ 1-16,] prohibits States from conditioning the enforceability of certain arbitration agreements on the availability of classwide arbitration procedures."  Id. at 1744.  The Court, speaking through Justice Scalia writing for a 5-4 majority, held that California's Discover Bank rule "classifying most collective-arbitration waivers in consumer contracts as unconscionable," id. at 1746, was preempted by § 2 of the FAA, which permits an arbitration agreement in a contract involving interstate commerce to be declared unenforceable only "'upon such grounds as exist at law or in equity for the revocation of any contract,'" id. (quoting 9 U.S.C. § 2).  The consumers argued in Concepcion that the Discover Bank rule, with its origins in California's unconscionability doctrine and California's policy against exculpation, was a ground that existed at law or in equity in California for the revocation of any contract under § 2 of the FAA.  But the Supreme Court disagreed, finding that the Discover Bank rule treated certain kinds of arbitration agreements differently from other contracts.  As a result, the rule stood as "an obstacle to the accomplishment of the FAA's objectives," namely, "to ensure the enforcement of arbitration agreements according to their terms so as to facilitate streamlined proceedings."  Id. at 1748.  Because the Discover Bank rule requiring the availability of classwide arbitration—a slower, more cumbersome process than individual arbitration—interfered with these fundamental attributes of arbitration, it created "a scheme inconsistent with the FAA," id., and was preempted by federal law, see id. at 1753.  In the wake of the Concepcion decision, individuals who actually read the boilerplate language in the adhesive consumer contracts they sign can certainly expect to see many more arbitration provisions including class action waivers.

    Topics: legal research, contracts, consumer protection, Paul Ferrer, enforceability, The Lawletter Vol 35 No 10, AT&T Mobility LLC v. Concepcion. FAA, arbitration agreement, class actions, unconscionability doctrine

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