584 F.3d 849 (9th Cir. 2009), cert. granted, 130 S. Ct. 3322 (May 24, 2010) (No. 09-893)
Does the Federal Arbitration Act pre-empt states from conditioning the enforceability of an arbitration agreement on the availability of particular procedures — here, classwide arbitration — when those procedures are not necessary to ensure that the parties to the arbitration agreement are able to vindicate their claims?
The question presented in AT&T v. Concepcion is whether the Federal Arbitration Act of 1925 precludes courts from declining to enforce class action bans when they are embedded in arbitration agreements. Class action bans are contract provisions that purport to deny consumers and workers the right to seek relief as a class. Many courts have deemed these provisions unconscionable under state law where precluding class actions would have the effect of exculpating companies from widespread wrongdoing, particularly where damages would be too small to justify pursuing individual claims. It is also clear from the briefing that AT&T and its amici are seeking a sweeping ruling from the court with the goal of ending all class actions by using contracts of adhesion.
In March 2006 Vincent and Liza Concepcion filed a class action lawsuit against AT&T Mobility (then known as Cingular Wireless), alleging that it violated state consumer protection laws by advertising "free" cell phones with the signing of a service contract while charging purchasers $30.22 for sales tax. AT&T later moved to consolidate the case with that of Laster v. T-MobileUSA, Inc., 252 Fed. Appx. 777 (9th Cir. 2007), a case challenging the same practice of charging sales tax for a "free" phone. The Ninth Circuit had already found the arbitration clause with a class action ban used by T-Mobile and AT&T in Laster to be unenforceable because the class action ban prevents consumers with small dollar value claims from vindicating their rights. T-Mobile appealed to the Supreme Court seeking a ruling that the act pre-empts the state rule of refusing to enforce the arbitration provision absent availability of a class procedure, but certiorari was denied.
After the Ninth Circuit refused to enforce the Laster arbitration clause, and nine months after the Concepcions filed suit, AT&T sent the Concepcions a change in terms of the arbitration provision. The revised terms provided that AT&T would pay double the amount of a California customer's attorneys' fees and $7,500 if the arbitrator issued a consumer an award exceeding AT&T's written settlement offer made before the selection of the arbitrator. In doing so, AT&T attempted to show that the arbitration forum would always provide an incentive for people to seek a remedy, in an attempt to defeat the contention that the class action is necessary to vindicate rights in cases involving small claims.
AT&T then sought to compel arbitration in March 2008, which the District Court denied. The Ninth Circuit affirmed, and AT&T filed an interlocutory appeal of that decision. The Supreme Court granted certiorari.
In affirming denial of the motion to compel arbitration, the Ninth Circuit found that an individual's claim would still be worth only $30.22, despite the appearance of the availability of up to $7,500 through arbitration. The court reasoned that AT&T would always settle such small claims, and arbitration claims would never be filed. Thus, the arbitration procedures did not encourage individuals to file claims in arbitration. The Ninth Circuit observed that a person "will not find it worth the time or the hassle to try to recover such a small amount, even if that person spends no money to hire an attorney or to invoke the arbitration process."
Additionally, the Ninth Circuit reaffirmed that the act does not pre-empt state law holding an arbitration clause is unenforceable where it does not permit class actions in cases involving small dollar value claims. Every federal circuit and state supreme court that has decided the question has held that the act does not preclude courts from striking down particular class action bans as unconscionable pursuant to state law contract interpretation principles generally applicable to all contracts. These courts include the First, Third, Ninth, and 11th circuits, and the highest state courts of Alabama, California, Illinois, Massachusetts, New Jersey, New Mexico, North Carolina, Washington and West Virginia.
The debate over class action bans, regardless of their venue, has been raging in the courts for years. While corporations argue that arbitration is faster and less expensive, consumer advocates point out that arbitration limits access to remedies, privatizes the law and provides corporations with a "get out of jail free card" for their illegal actions. Class action bans, as well as other remedy-stripping provisions imbedded in arbitration clauses, make it difficult, if not impossible, for consumers to vindicate their rights. For the small amounts of money typically involved in such disputes, few would invest the time and effort necessary to recover their money. A small amount of money illegally charged to millions of customers equates to enormous profits, especially if a corporation is never forced to return such charges after they are determined to have been illegally charged. Moreover, there is a deterrent effect from the possibility of the filing of a class action lawsuit.
AARP will argue in its amicus brief, as it has in numerous briefs filed in state and federal courts, that the availability of class actions procedures, either in the courts or the arbitration forum, is essential to vindicate rights, provide an adequate remedy and deter marketplace abuses. The ubiquitous presence of class action bans and other remedy stripping provisions imbedded in arbitration clauses make it difficult, if not impossible, for individuals with small claims effectively to pursue remedies. Moreover, unlawful practices that impact large numbers of people must be subject to class treatment adequately to protect consumers in the marketplace and vindicate statutory and constitutional rights. AARP will also urge the court to hold that the act does not pre-empt the state courts from refusing to enforce an arbitration clause that fails to provide a class action procedure.
If the Supreme Court limits its analysis to the question as presented, this case will not necessarily have a broad impact because a challenge to a particular arbitration clause must be evaluated on its own merits to determine whether it exculpates a corporation from liability. On the other hand, it is also possible that the Supreme Court will not limit itself to the question as presented and will take the opportunity to strike down important state law principles of contract interpretation. Indeed, proponents of arbitration have argued, unsuccessfully to date, that class actions should be pre-empted in all arbitration forums as being inherently inconsistent with the act.