In April, the Supreme Court struck down a common law rule in California that declared most consumer arbitration agreements void if they prohibit classwide arbitration of claims, holding that it was preempted by the Federal Arbitration Act. AT&T Mobility, LLC v. Concepcion, 131S. Ct. 1740 ( 2011). In the last few weeks, two federal circuit courts have followed suit and declared similar common law rules in New Jersey and Florida are also preempted.
The Concepcion Holding
Concepcion is a 5-4 decision written by Justice Scalia, in which the Supreme Court continued its recent trend of fighting back state court attempts to use their common law to void arbitration clauses . The putative class action in Concepcion alleged false advertising claims in cell phone promotions. The lawsuit was in court because each class member’s contract with AT&T prohibited class-wide arbitration. The district court denied AT&T’s motion to compel individual arbitrations. It ruled that the AT&T arbitration provisions were unconscionable under a 2005 decision from the California Supreme Court called Discover Bank, which applied California law to conclude that most “collective-arbitration waivers” in consumer arbitration provisions are unconscionable. The Ninth Circuit affirmed.
The Supreme Court concluded that Discover Bank applied California’s unconscionability doctrine in a way that impermissibly “interferes” with arbitration and was therefore preempted. The Court went on to explain that allowing consumers to demand classwide arbitration, when the parties did not consent to arbitrating on a classwide basis, is inconsistent with the FAA because it would make arbitration more formal, more expensive, slower to reach a decision on the merits, and involves increased risk to defendants (because the potential judgments can be large and there is little opportunity to appeal). The majority wrote “we find it hard to believe that defendants would bet the company with no effective means of review.”
The Concepcion decision, with its strenuous dissent arguing that the Discover Bank rule was applicable to all contracts, shows increasing concern by the Court about 1) how state courts are interpreting their “general” contract doctrines in ways that may be unique to arbitration, and 2) whether the strict enforcement of arbitration agreements is in keeping with the purpose of the FAA and the nation’s overall system of justice.
Eleventh and Third Circuits Follow Suit
In early August, the Eleventh Circuit applied Concepcion to compel individual arbitration of actions against a wireless service provider. In Cruz v. Cingular Wireless, LLC, 2011 WL 3505016 (11th Cir. Aug 11, 2011), the class of plaintiffs argued that the prohibition on class actions in their arbitration agreements violated Florida public policy and was therefore unenforceable. Plaintiffs argued that the class action prohibition effectively defeated the remedial purpose of Florida’s unfair trade practices act (because many claims would be too small to merit litigating individually) . The Eleventh Circuit held that even if that interpretation of Florida law were correct, it would be preempted by FAA under Concepcion.
In late August, the Third Circuit issued a similar decision. In Litman v. Cellco Partnership, 2011 WL 3689015 (3d Cir. Aug. 24, 2011), the Third Circuit held that New Jersey common law, which found a class arbitration waiver unconscionable, was preempted by the FAA. (Of course, the court didn’t have much choice, given that the U.S. Supreme Court had vacated the Third Circuit’s earlier opinion to the contrary and remanded the case for reconsideration in light of Concepcion…)
Look for this trend to continue over the next year, with more and more courts finding the FAA preempts particular state common law decisions that found class arbitration waivers unenforceable under state law principles.