AT&T Mobility, LLC v. Concepcion, 131 S. Ct. 1740 (2011). From the same people who brought us the outrageous 5-4 decision in Ledbetter v. Goodyear Tire & Rubber Co., 550 U.S. 618 (2007), comes another 5-4 ruling that similarly permits corporate wrongdoers to block recoveries by victims. This decision forces consumers to submit to the will of corporate defendants who do not wish to face class actions for their fraudulent conduct. Instead, corporate fraudsters have exposure only to individuals, whose losses are so small that they will not bother to sue or, if they do sue, can be “picked off” for nothing more than the amount the defendant gained by its wrongful conduct in the first place. The vast majority of victims, who do not figure out that they have been defrauded, will be stuck with their loss, and the perpetrators will keep their ill-gotten gains.
Concepcion involved a claim for $30.22. The claim arose because AT&T advertised that the cellular telephone service that the Concepcions bought included free phones. The Concepcions were charged $30.22 in sales tax based on the retail value of the phones. The Concepcions sued, and their case was later consolidated with another case, which had been filed as a putative class action.
AT&T’s standard form contract provided for arbitration of all disputes between the parties, but mandated that any claims be brought in the parties’ “individual capacity, and not as a plaintiff or class member in any purported class or representative proceeding.” AT&T moved to compel arbitration. Both the district court and the Ninth Circuit Court of Appeals found that the arbitration clause was unconscionable under the Supreme Court of California’s decision in Discover Bank v. Superior Court, 113 P.3d 1100 (Cal. 2005).
Discover Bank established a limited set of circumstances under which arbitration agreements could be found unconscionable. Only cases involving “a consumer contract of adhesion in a setting in which disputes between the 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” qualified under that test.
Both the district court and the Ninth Circuit rejected AT&T’s argument that the Discover Bank rule was preempted by the Federal Arbitration Act (“FAA”), 9 U.S.C. §2. That statute makes agreements to arbitrate “valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” Unconscionability is, of course, a ground for the revocation of any contract, not just agreements to arbitrate, and Discover Bank expressly made clear that its holding likewise “applies equally to class action litigation waivers in contracts without arbitration agreements as it does to class arbitration waivers in contracts with such agreements.”
The Supreme Court of the United States granted certiorari and reversed the lower courts by a 5-4 vote. In an opinion by Justice Scalia, in which Chief Justice Roberts and Justices Kennedy, Thomas and Alito joined, the majority held that the FAA preempts the Discover Bank rule. Justice Breyer wrote a dissenting opinion that Justices Ginsburg, Sotomayor and Kagan joined. While “reluctantly” joining the majority, Justice Thomas also wrote a separate concurring opinion, discussed further below.
Justice Scalia conceded that section 2 of the FAA “permits agreements to arbitrate to be invalidated by ‘generally applicable contract defenses, such as fraud, duress, or unconscionability.’” In order to get around that concession, which should have made the case an easy affirmance, the majority focused its argument on hypotheticals having nothing to do with class action waivers.
Thus, Justice Scalia posited hypotheticals in which a case found unconscionable or against public policy arbitration agreements that fail “to provide for judicially monitored discovery,” or “to abide by the Federal Rules of Evidence,” or “that disallow an ultimate disposition by a jury.” He proceeded to pummel these straw men as “procedures inconsistent with arbitration … that cannot be reconciled with [the FAA].” The majority then summarily found that class arbitration likewise “interferes with fundamental attributes of arbitration and thus creates a scheme inconsistent with the FAA.”
What “fundamental attributes” of arbitration are inevitably inconsistent with class arbitration, one might reasonably ask, especially since the American Arbitration Association (“AAA”) has in fact been conducting class arbitrations for years? The majority found that speed and “informality” are those fundamental attributes. Since class arbitration “necessitates additional and different procedures,” and “requires procedural formality” (emphasis by Justice Scalia), because it “involves higher stakes,” class arbitration contravenes the FAA.
That rationale was virtually authority-free. Justice Breyer, putting it kindly, said “I am not surprised that the majority can find no meaningful precedent supporting its decision.” In fact, as Justice Breyer’s dissent devastatingly showed, each aspect of the majority’s rationale flew in the face of precedent and lacked any rational basis.
First, Justice Breyer noted that the Court in Dean Witter Reynolds, Inc. v. Byrd, 470 U.S. 213 (1985), had “reject[ed] the suggestion that the overriding goal of the Arbitration Act was to promote the expeditious resolution of claims.” Instead, Dean Witter stated that the “primary objective” of the FAA was to “secure the ‘enforcement’ of agreements to arbitrate.” The majority labeled Justice Breyer’s reliance on Dean Witter “grossly misleading.” But Justice Scalia was forced to admit that Dean Witter said exactly what Justice Breyer said.
Moreover, as Justice Breyer went on to note, Dean Witter also said that “the intent of Congress requires us to apply the terms of the [FAA] without regard to whether the result would be ‘possibly inefficient.’” The majority did not even try to answer that.
Having demolished the majority’s predicate that speed and informality are the primary attributes of the FAA, Justice Breyer went on to dismantle the unsupported notion that a matter that “involves higher stakes” is inappropriate for arbitration. Justice Breyer cited “numerous counterexamples”— cases in which disputes involving $500 million or more were handled, and handled well (despite any need for “additional and different procedures” or “procedural formality”), in arbitration. The majority’s only response was a lame one: it would need to be shown that “the size of the arbitral dispute [in Justice Breyer’s cited examples] was predictable when the arbitration agreement was entered.” The large size of the disputes was self-evident in advance, since Justice Breyer’s cited examples involved some of the world’s largest corporations, including Kraft, Starbucks, IBM and Fujitsu, suing each other in large and complex commercial cases.
Justice Breyer also observed that the Court had previously “reached results that authorize complex arbitration procedures …. [and] have upheld nondiscriminatory state laws that slow down arbitration proceedings.” Those precedents, and others, would have doomed the majority if precedent were to be their guide. But it was not their guide.
Justice Breyer had yet more ammunition. Citing an amicus brief filed by AAA in Stolt-Nielsen, S.A. v. AnimalFeeds Int’l Corp., 559 U.S. ___ (2010), Justice Breyer noted that the AAA has found class arbitration to be “a fair, balanced, and efficient means of resolving class disputes.” The majority had cherry-picked that same AAA amicus brief for other purposes, but had no response to Justice Breyer’s point that AAA found class arbitration perfectly consistent with the purpose and structure of arbitration. The majority’s inability to respond in that regard was all the more telling given its concession that the Court had “had little occasion to examine classwide arbitration,” while AAA had extensive experience with it. Justice Scalia simply discarded AAA’s informed view in favor of the majority’s admittedly uninformed perception.
To try to justify the unfounded conclusion that California had precluded arbitration in every consumer case instead of only those carefully enunciated by the Supreme Court of California, Justice Scalia rewrote the Discover Bank rule to try to transform it into an obstacle to the FAA. Discover Bank had restricted its unconscionability rule to cases involving contracts of adhesion. The majority breezily stated that “the times in which consumer contracts were anything other than adhesive are long past.” That may certainly be true in the context of the cellphone industry, but many small merchants were probably surprised to hear that they have adhesive power over their customers. Justice Scalia cited no authority for his assertion. Even defendants do not take that statement seriously, and their advocates are already backpedaling from it, saying that “not every company can … make its customers sign an arbitration clause.”
Discover Bank had restricted its rule to cases involving “predictably small” damages. Justice Scalia, substituting adjectives for analysis, labeled that requirement “toothless and malleable,” noting with seeming horror that amounts as high as $4,000 had been considered “sufficiently small.” By way of comparison, the small claims jurisdictional amount in New Jersey is $3,000, and amounts several times higher than that are handled in the Special Civil Part, under streamlined procedures applicable to smaller claims. Thus, even $4,000 is a small damage. The majority, however, pretended that it was a huge sum.
Finally, Discover Bank was limited to cases alleging a scheme to defraud. Justice Scalia dismissed that as having “no limiting effect, as all that is required is an allegation.” However, allegations of fraudulent schemes, like all other allegations, are subject to Rule 11 and cannot simply be asserted willy-nilly. Moreover, the need to plead such schemes with particularity under Federal Rule of Civil Procedure 9(b) and parallel state rules also limits parties’ ability to allege such claims. By no means was this limitation of the Discover Bank rule illusory as the majority asserted.
Though the majority cited no authority for its perception of Discover Bank, Justice Breyer had plenty of citations from California courts saying that Discover Bank does not create a “blanket policy in California against class action waivers in the consumer context,” but instead represents the “application of a more general [unconscionability] principle.” Justice Breyer even cited cases where “[c]ourts applying California law have enforced class-action waivers when they satisfy general unconscionability standards.” The majority had no response to those cases.
The audacity of the majority in reconfiguring the Discover Bank rule to fit the majority’s mold is breathtaking, particularly for a group of Justices who often cite the virtues of federalism and affording primacy to state law within its traditional spheres, one of which is consumer protection. Justice Breyer highlighted that in his dissent, most notably in his concluding paragraph:
“[F]ederalism is as much a question of deeds as words. It often takes the form of a concrete decision by this Court that respects the legitimacy of a State’s action in an individual case. Here, recognition of that federalist ideal, embodied in specific language in this particular statute, should lead us to uphold California’s law not to strike it down. We do not honor federalist principles in their breach.”
But Justice Scalia was not done yet. He trotted out an old standby—a fallacious attack on plaintiffs’ attorneys.
The majority stated that “[c]onsumers remain free to bring and resolve their disputes on a bilateral basis under Discover Bank, and some may well do so; but there is little incentive for lawyers to arbitrate on behalf of individuals when they may do so for a class and reap far higher fees in the process.” Ah, so now we know why few consumers sue for $30. It’s the greedy lawyers, who refuse to represent them because they would rather represent a class and make big bucks.
Justice Scalia knew better than to believe that. As Judge Richard Posner of the Seventh Circuit, who knows just a little bit about economics, put it years ago, in language quoted by Justice Breyer in his dissent in Concepcion, “[t]he realistic alternative to a class action is not 17 million individual suits, but zero individual suits, as only a lunatic or a fanatic sues for $30”) (emphasis by Judge Posner). That, not the supposed greed of plaintiffs’ lawyers, accounts for the vanishingly tiny number of individual suits for small damages.
The majority continued: “faced with inevitable class arbitration, companies would have less incentive to continue resolving potentially duplicative claims on an individual basis.” What is “inevitable” about class arbitration? Defendants routinely resist class treatment with every conceivable argument (and some inconceivable ones), and they often succeed in defeating class certification.
The majority then cited statistics, plucked from the AAA amicus brief in Stolt-Nielsen, about how much longer than individual arbitration class arbitrations take. Justice Scalia used those statistics to illustrate his otherwise ungrounded claim that class arbitration is “more likely to generate procedural morass.” Doubtless a key reason for the consumption of time in putative class arbitration cases is defendants’ intense opposition to class arbitration. So, defendants delay putative class cases, and their advocates on the bench use that delay to claim that class cases take too long!
The remainder of the “inevitable class arbitration” sentence is equally groundless. “Potentially duplicative claims,” especially relatively small ones, are the paradigmatic case for class treatment. As the Court itself has recognized, see, e.g., Deposit Guaranty Nat’l Bank v. Roper, 445 U.S. 326, 339 (1980), a single class action is more efficient than multiple individual cases (if such cases are even brought), and a class action conserves resources of the parties and the courts. The notion that the potential availability of class arbitration would disincentivize companies from resolving claims on an individual basis is a non sequitur, since few if any individual claims are brought, as discussed above.
From there, the majority moved on to a series of unsupported and unexplained assertions. “Classwide arbitration includes absent parties, necessitating additional and different procedures….” What procedures (besides a class determination stage, as standard AAA rules provide)? What material difference does that make? “Confidentiality becomes more difficult.” How? Who has access to confidences in a class arbitration who does not have such access in a bilateral arbitration? “[A]rbitrators are not generally knowledgeable in the often-dominant procedural aspects of certification, such as the protection of absent parties.” What does this mean? Why are generalist arbitrators any different than generalist judges in this regard? Can’t arbitrators read and apply by analogy the caselaw under Rule 23 or other class action rules? They have been doing so in AAA cases for years. “And it is at the very least odd to think that an arbitrator would be entrusted with ensuring that third parties’ due process rights are satisfied.” Why is that an odd thought? Arbitrators are entrusted with all types of duties, essentially as substitutes for judges. Why not in this regard too?
The majority worried that “class arbitration greatly increases risks to defendants.” That merely concedes what the majority otherwise refused to recognize: most individuals will not sue for small amounts, as discussed above, or do not know that they have been defrauded and so do not even consider individual suits. A class proceeding enables everyone who has been injured to recover, not just Judge Posner’s “lunatics” and “fanatics.”
The majority then asserted that defendants would face “in terrorem” effects of “bet the company” litigation and therefore be “pressured into settling questionable claims.” As Justice Alito famously mouthed in another context, “not true.” Few if any consumer cases are large enough that defendants even list them as “material” in their securities filings. These are not “bet the company” cases, as the majority well knew. Justice Scalia cited the fact that the ability to appeal an arbitrator’s decision to certify a class is limited, but that works both ways, with plaintiffs likewise restricted in their ability to appeal a denial of class treatment.
Finally, out came the red herring. Justice Scalia attacked the dissent’s claim “that class proceedings are necessary to prosecute small-dollar claims that might otherwise slip through the legal system.” He then stated that “the claim here was most unlikely to go unresolved.” This was supposedly because AT&T’s arbitration agreement provided that AT&T would pay claimants “a minimum of $7,500 and twice their attorney’s fees if they obtain an arbitration award greater than AT&T’s last settlement offer.” The majority then quoted the Ninth Circuit, which had said that aggrieved customers who filed claims would be “essentially guarantee[d] to be made whole.” Justice Scalia failed to note that this was because the Ninth Circuit rightly anticipated that AT&T would “buy off” anyone who sued rather than face the chance of having to pay a $7,500 minimum plus double the attorneys’ fees (not to mention AT&T’s own attorneys’ fees).
None of the Justices recognized that allowing defendants to “pick off” the few consumers who dared to sue was in tension with the Court’s own decision in Deposit Guaranty, 445 U.S. at 339. There, the Court noted the undesirability of allowing a defendant to “pick off” plaintiffs in this fashion.
Justice Scalia’s focus on the terms of the AT&T agreement ignored Justice Breyer’s point. Consumer fraud is often not able to be detected easily. Few people will perceive the wrongdoing, and of those who do perceive it, still fewer will bring claims for small sums, as discussed above. All that is so no matter what terms a corporation’s arbitration agreement offers. Thus, the majority’s emphasis on the fact that the Concepcions had sued dodges the issue raised by Justice Breyer: without class proceedings, most affected persons will never have a chance to be made whole. The Ninth Circuit recognized this, twice, including in the sentence that follows immediately after the one quoted by Justice Scalia, saying that despite AT&T’s terms, “not every aggrieved customer will file a claim.”
Finally, the majority’s focus on the supposedly generous terms of AT&T’s arbitration agreement was itself a consumer fraud. The basis of the decision was FAA preemption. The terms of the AT&T agreement had nothing to do with that holding. Soon enough, AT&T will take away the minimum payment and the attorneys’ fees. Instead of the seemingly fat worm on the hook, consumers who bite at companies’ arbitration offers will get only the hook.
In a particularly cruel touch, the majority noted in a footnote that states “remain free to take steps addressing the concerns that attend contracts of adhesion— for example, requiring class-action-waiver provisions in adhesive arbitration agreements to be highlighted.” Thus, a state can require oligopolistic companies to say “IF WE GIVE YOU THE SHAFT, YOU WILL HAVE NO REALISTIC REMEDY UNLESS YOU PERSONALLY FIGURE OUT WHAT WE’VE DONE TO YOU AND SUE US FOR THE SMALL SUM THAT WE STOLE (ASSUMING YOU CAN FIND A LAWYER WHO WOULD TAKE YOUR CASE).” How helpful!
In his concurring opinion, Justice Thomas signed on “reluctantly” to the majority opinion in order “to give lower courts guidance from a majority of the Court.” He took a different view of FAA preemption, one that is no more defensible than the majority opinion.
Justice Thomas began by finding it “absurd” for section 2 of the FAA to preserve defenses to arbitration that are available to “any contract,” even though those are the very words that appear in that section. He would have held instead that “the FAA requires that an agreement to arbitrate be enforced unless a party successfully challenges the formation of the arbitration agreement, such as by proving fraud or duress,” based on an analysis that tortures the language not only of section 2 of the FAA but also of section 4. Justice Thomas conceded that his view “has not been fully developed by any party … and could benefit from briefing and argument in an appropriate case.” Regardless, he stated that his view and that of the majority would “often lead to the same outcome,’ and he found that to be so in Concepcion.
Concepcion is wrong on the law, poorly reasoned, abusive of precedent, and outright bad public policy. Some Congressional Democrats, including Senator Richard Blumenthal (D-CT), a former Connecticut Attorney General with a long and distinguished track record in consumer protection, seek to overturn Concepcion through legislation, just as Congress overruled Ledbetter. We shall see.