AT&T V. CONCEPCION: THE END OF THE MODERN CONSUMER CLASS ACTION Marc J. Mandich

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1 AT&T V. CONCEPCION: THE END OF THE MODERN CONSUMER CLASS ACTION Marc J. Mandich I. INTRODUCTION In AT&T v. Concepcion (hereinafter Concepcion), the U.S. Supreme Court held that Vincent and Liza Concepcion could not represent the rights of a class of citizens alleging that AT&T had engaged in false advertising and fraud. 1 Instead, the Court found that AT&T had a superior interest in enforcing hidden, contractual pre-dispute arbitration clauses against its consumers on a one-on-one basis. 2 AT&T had surreptitiously bundled a class action waiver agreement and a mandatory, pre-dispute arbitration clause into its standard cell-phone contract. 3 Such a waiver prohibits consumers from pursuing class-wide relief for claims arising from the sales contract. 4 In fact, AT&T had extensively researched potential consumer reactions to a prior version of the agreement, signed by the Concepcions, and ultimately administered the details of that agreement in a letter specifically intended to make customers less alert to the details of the arbitration and class waiver provisions. 5 Nonetheless, the Court enforced AT&T s standard sales agreement with the class action waiver binding the Concepcions to one-on-one arbitration See AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740, 1744, 1751 (2011) (holding that California s Discover Bank rule, which safeguarded citizens from inadvertently waiving the right to form a class in arbitration, was preempted by the Federal Arbitration Act because the rule stood as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress ). 2. Id. at Id. at Id. 5. See Ting v. AT&T, 319 F.3d 1126, (9th Cir. 2003) (finding that AT&T s business practices were deceptive and prevented any real consent on the part of the consumer to the waiver because AT&T s own research concluded that only 25 percent of its customers were likely to open the separate mailing, approximately 10 percent would not even look at it, and only 30 percent would actually read the entire contract ). 6. Concepcion, 131 S. Ct. at

2 206 Loyola Journal of Public Interest Law [Vol. XX Additionally, the Court held that a valid arbitration agreement alone precludes class action procedure as a matter of federal law. 7 In doing so, the Court bolstered its policy of placing pre-dispute arbitration agreements in a class of contracts above all others a branch of private law that can trump Constitutional rights of individuals, like the Concepcions, without their realizing that such an agreement even exists. 8 Since [v]irtually all class actions today occur between parties who are in transactional relationships with one another: shareholders and corporations, consumers and merchants, employees and employers, this decision likely represents the death knell to the modern consumer class action lawsuit. 9 Many people legitimately criticize class action litigation as a lawyer-driven field and a major force behind the modern tort reform movement. 10 The Supreme Court s endorsement of the class action waiver in Concepcion represents an extension of the tort reform initiative into the contractual realm, as corporations realize most class actions arise out of pre-existing transactional relationships (even if the claim sounds in tort). However, extinguishing class action litigation in the consumer context through private arbitration takes the reform initiative too far. The deterrent and protective effects of class action litigation Id. (holding that valid agreements to arbitrate under the Federal Arbitration Act preclude class procedure because such agreements stand as an obstacle to the intent of Congress). 8. See id. at 1761 (Breyer, J., dissenting) ( And we have recognized that [t]o immunize an arbitration agreement from judicial challenge on grounds applicable to all other contracts would be to elevate it over other forms of contract. [quoting Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 404 (1967)]). 9. Ashby Jones, After AT&T Ruling, Should We Say Goodbye to Consumer Class Actions?, WALL ST. J. L. BLOG (Apr. 27, 2011, 12:36 PM), (quoting Vanderbilt Law Professor, Brian Fitzpatrick). 10. Myriam Gilles, Opting Out of Liability: The Forthcoming, Near-Total Demise of the Modern Class Action, 104 MICH. L. REV. 373, 373, 386 (2005) (discussing the trend to decertify mass classes under FED. R. CIV. PRO. 23 as federal judges became averse to the technique). Many judges saw it as a method to aggregate weak tort claims with strong ones in an effort to not only strengthen the weak claims, but also create intense pressure on the defendant(s) to settle (unflatteringly referred to as judicial blackmail ). Id. at 386. Many view this attitude toward mass classes as an extension of the modern tort reform movement an effort to protect corporate economic interests from greedy, predatory plaintiffs lawyers. Id. at Baron & Budd, The Importance of Class Actions, PROTECTING WHAT S RIGHT. BARON AND BUDD (Oct. 12, 2011), ( A recent study by the finance and

3 201x] Desktop Publishing Example 207 and the procedural benefit of handling a multitude of cases at once docket control for the court, cost spreading for the plaintiff class, and expedient and final resolution of related issues for the defendant 12 require that class actions remain a viable option for litigants. Perhaps the most convincing illustration of the need to deter corporate misconduct is a recent case in Manhattan, in which a federal judge allowed consumers conspiracy and antitrust claims to proceed in a class format against Citigroup, Discover Bank, American Express and Wells Fargo. 13 The consumers alleged that the credit providers met at a private law firm and conspired to craft arbitration clauses with class action waivers that would skirt judicial scrutiny. 14 But this Comment seeks not to debate the relative merits and demerits of class action litigation, but to explore the impropriety of allowing private arbitration agreements to waive, per se, consumers ability to use this important procedural device. Importantly, arbitration does have its benefits, and these benefits accrue to both the corporate defendant and its consumers. 15 In short, arbitration is quicker and cheaper than traditional litigation for all of the involved parties. 16 Furthermore, corporations often promise to cover all legal expenses for the consumer, and the informal nature of the process can sometimes eliminate the need for consumers to hire outside counsel. 17 Finally, the benefits accrue to those consumers who do accounting departments of the business schools at Rutgers University and Emory University found that class action lawsuits are a very effective way to do what many Americans are focused on right now: make corporations play fair. ) (emphasis added). See also Jean R. Sternlight, Should an Arbitration Provision Trump the Class Action? No: Permitting Companies to Skirt Class Actions Through Mandatory Arbitration Would be Dangerous and Unwise, 8 DISP. RESOL. MAG. 13, 19 (2002) (discussing the importance of protection from corporate misconduct and the class action waiver amounting to immunity from the small dollar claim). 12. Gilles, supra note 10, at Professor Gilles notes that although many judges argue that class litigation creates uncertainty for the defendant rising to the level of judicial blackmail, defendants often prefer the device because the final resolution of related issues in the case allows them to better forecast losses created by litigation. Id. at 382, Nate Raymond, Citi, Discover Can t Shake Credit Card Antitrust Suit Over Arbitration, AM. LAWYER MAG., Feb. 13, 2012, available at 2012 LEXIS Id. 15. See Steven C. Bennett & Dean A. Calloway, A Closer Look at the Raging Consumer Arbitration Debate, 65 DISP. RESOL. J., 28, 31 (May-Oct. 2010). 16. Id. 17. Id.

4 208 Loyola Journal of Public Interest Law [Vol. XX not have claims against the seller-corporation as well as the general public lower litigation costs translate into lower prices of goods (arguably keeping expensive devices, such as the Apple iphone, affordable), and arbitration has helped to lessen the burden on an already over-taxed judicial system. 18 However, these benefits should not overshadow the important premise upon which the judicial system allows arbitration to exist. The premise is that parties can agree to deal with each other however they see fit through freedom of contract. As this Comment will show, judicial concerns regarding lower costs and efficiency provided by arbitration should not justify the presumption of consumer consent to contracts that waive important protections, such as the class action device. For reasons expounded in this Comment, the Court s decision in Concepcion represents an unconscionable interpretation of the Federal Arbitration Act ( FAA ) and should be legislatively overruled because it 1) runs counter to the savings provision of the FAA, 19 2) inappropriately removes a procedural matter from the scope of the arbitrator s discretion, and 3) unconstitutionally allows for an implicit waiver of one s rights unprecedented in consumer contracts. To understand the devastating effect that Concepcion could have on the due process rights of the class action 20 plaintiff in America, one must first grasp the United States Supreme Court s historically aggressive interpretation of the FAA. 21 Thus, Part I of this Comment will briefly describe the FAA s history to show how the Supreme Court s policy initiative has turned the Act into a creature its drafters never intended. Part II of this Comment will explain the holding of Concepcion and place it within the grand scheme of FAA case law described in Part I. Part III will discuss the force and impropriety of the holding in Concepcion as a matter of law and policy. Finally, Part IV proposes that 18. Id. 19. See 9 U.S.C. 2 (2006). The final clause of 9 U.S.C. 2 is commonly referred to as the savings provision because it saved what grounds exist at law or in equity for the revocation of any contract as defenses to mandatory, pre-dispute arbitration provisions in contracts, which the preceding clause of 9 U.S.C. 2 made valid, irrevocable and enforceable. 20. FED. R. CIV. PRO. 23. A procedural device through which a person, or group of persons, may represent the rights of all those sharing the same claim against a particular defendant U.S.C 1-16 (2006).

5 201x] Desktop Publishing Example 209 Congress legislatively overrule Concepcion and authoritatively decide either to immunize the properly formed consumer-class from the scope of pre-dispute arbitration agreement coverage, or to adopt class arbitration procedures similar to those set forth in the American Arbitration Association Supplementary Rules for Class Arbitration. II. THE FEDERAL ARBITRATION ACT: HISTORICAL BACKGROUND According to the majority in Concepcion, Supreme Court case law places beyond dispute that the FAA was designed to promote arbitration 22 an accurate and simple assessment, but one that has been too liberally interpreted by the Court. 23 To illustrate this point, this section will discuss the origins of the FAA, where it stands today, and its future in light of Concepcion. A. The Early History: Pre-FAA Conceptually, modern arbitration 24 was born in nineteenth century Europe, and later adopted by early twentieth century America. 25 As one author observed, arbitration in nineteenthcentury Europe and later in the United States was... viewed as a process that functioned in derogation of legality. It was a bastard remedy, incapable of being integrated into the selfrespecting family of adjudication. 26 Under English law, arbitrators had no authority to hand down legal rulings. 27 In the United States, arbitration lacked binding effect until the moment 22. AT&T Mobility LLC. v. Concepcion, 131 S. Ct. 1740, 1749 (2011) ( [Supreme Court case law] has repeatedly described the Act as embod[ying] [a] national policy favoring arbitration,... and a liberal federal policy favoring arbitration agreements, notwithstanding any state substantive or procedural policies to the contrary. (citations omitted)). 23. Thomas E. Carbonneau, Arbitral Justice: The Demise of Due Process in American Law, 70 TUL. L. REV. 1945, 1946 (1996) ( Owing largely to the holdings of the U.S. Supreme Court, arbitration law and procedure have emerged from the obscurity of specialized practice and entered the adjudicatory mainstream. ). 24. Absent from the Federal Arbitration Act is a definition of the term arbitration. See 9 U.S.C. 1-16, , (2006). However, the term refers quite informally (and as a matter of common application) to a method of private dispute resolution under which the parties agree to submit an argument to an impartial third party who can render either a binding or non-binding decision based on the parties choice of applicable law and relevant concerns. 25. Carbonneau, supra note 23, at Id. 27. Id. at 1948.

6 210 Loyola Journal of Public Interest Law [Vol. XX the arbitrator handed down an award thus allowing a party to remove himself from an arbitration proceeding at any time if he disliked the anticipated outcome. 28 Both legal systems distrusted this mechanism because it operated under limited, if any, judicial scrutiny. 29 Modern consumers possess a similar distrust for the mechanism. B. The Onset of the Federal Arbitration Act: The Tides Change Anticipating the needs of an emerging international business community, 30 the United States passed the Arbitration Act of 1925, the precursor of the modern FAA. 31 The controversy that is the subject of this Comment stems from the Court s construction of 2 of the modern FAA (also found in the original act of 1925), which reads in pertinent part: A written provision in any maritime transaction or a contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract... shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract. 32 The Court has narrowly construed the final phrase (referred to as the savings provision ) to combat what it considers state court hostility to arbitration. 33 But, as the discussion below illustrates, the Court s policy has caused both the invalidation of this provision, and the erosion of other important federal and constitutional law concepts. Arguably, the FAA was problematic from its inception. But the first questionable Supreme Court interpretation of the FAA pertinent to this discussion occurred in In Prima Paint Corporation v. Flood & Conklin Manufacturing Company (hereinafter Prima Paint), 35 the Court, sitting in diversity, held 28. Id. at Id. 30. Id. at Act of Feb. 12, 1925, ch. 213, 43 Stat. 883 (current version at 9 U.S.C (2006)) U.S.C. 2 (2006). 33. See Carbonneau, supra note 23, at Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395 (1967). 35. Id.

7 201x] Desktop Publishing Example 211 not only that the FAA represented a piece of federal legislation that had the authority to command that the federal courts rule in a particular way on certain issues, but also that [the FAA] governed a purely procedural matter. 36 In doing so, the Court avoided the Erie problem of applying federal substantive law to a state law matter. 37 In Moses H. Cone Memorial Hospital v. Mercury Construction Corporation, the Court announced that the federal policy favoring arbitration required any doubts concerning the scope of arbitrable issues [to be] resolved in favor of arbitration, whether the problem at hand is the construction of the contract language itself or an allegation of waiver, delay, or a like defense to arbitrability. 38 Then, on the basis of expanding federal power to regulate interstate commerce, 39 the Court also forced this initiative on state courts hearing state law challenges to arbitration agreements under the savings provision in Southland Corporation v. Keating. 40 Thus, the Court implied that agreements to arbitrate under the FAA constituted a federal substantive law matter impervious to state law challenges. Reading Prima Paint and Southland together, the FAA was 36. Carbonneau, supra note 23, at 1952 ( [B]ecause substantive rights were not involved, there could be no constitutional conflict between state and federal authority to legislate. Despite the evasive, somewhat tortuous reasoning, the Court s message was clear: The federal courts were to apply the federal law on arbitration whenever they entertained an arbitration question, regardless of Erie and claims for safeguarding states authority to legislate in the area. ). 37. Erie R.R. Co. v. Tompkins, 304 U.S. 64 (1938) (holding that federal courts may apply their own procedural rules, but must apply state substantive law to matters in federal court based only on diversity of citizenship jurisdiction). 38. Moses H. Cone Mem l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, (1983). 39. Carbonneau, supra note 23, at See Southland Corp. v. Keating, 465 U.S. 1, 12 (1984) (holding that the FAA applies in state as well as federal court, and that it preempts conflicting state statutes); Mitsubishi Motors Corp v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 626 (1985) ( [While] the parties intentions control... those intentions are generously construed as to issues of arbitrability. ); Shearson/American Express, Inc. v. McMahon, 482 U.S. 220, 227 (1987) (discussing arbitrability of securities fraud and RICO claims) ( The burden is on the party opposing arbitration... to show that Congress intended to preclude a waiver of judicial remedies for the statutory rights at issue. ); Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20, 26 (1991) (citing federal policy favoring arbitration in holding that claims brought under the Age Discrimination in Employment Act can be forced into arbitration); Allied-Bruce Terminix Cos. v. Dobson, 513 U.S. 265, 281 (1995) (holding that the FAA applies to the full extent of Congress permitted regulation under the Commerce Clause); Doctor s Ass n., Inc. v. Casarotto, 517 U.S. 681, (1996) (reversing the Montana Supreme Court and holding that Montana s statutory notice requirement regarding waiver of rights was preempted by the FAA).

8 212 Loyola Journal of Public Interest Law [Vol. XX apparently procedural law in federal court, but substantive law in state court. 41 The Court seemed willing to bend the law to find a basis on which to further the national policy of enforcing arbitration over the objections of a growing number of states hostile to the FAA. 42 On the heels of these decisions, courts enforced arbitration agreements in consumer and employee contracts regardless of the nature of the claim, the parties relative bargaining power, or the adhesionary nature of the alleged agreement. 43 Moreover, by viewing state law challenges as calculated attacks on arbitration agreements rather than generally applicable contract defenses, the federal courts managed to circumvent the savings provision of the Act. 44 At this juncture, one must note that the current Congress recently acknowledged two important facts about the FAA s history: (1) The Federal Arbitration Act (now enacted as chapter 1 of title 9 of the United States Code) was intended to apply to disputes between commercial entities of generally similar sophistication and bargaining power. (2) A series of decisions by the Supreme Court of the United States have changed the meaning of the Act so that it now extends to consumer disputes and employment disputes. 45 The Senate proposed these findings on May 12, 2011 in an effort to pass a bill [t]o amend title 9 of the United States Code with respect to arbitration. 46 Importantly, Congress acknowledged the impropriety of consumer and employee arbitration prior to the passage of the Act of 1925 and assured concerned members of Congress that the Act merely guaranteed enforcement of freely entered arbitration agreements between 41. See supra notes 34, 40 and accompanying text. 42. Carbonneau, supra note 23, at 1955 ( In effect, the right to arbitrate had become a substantive federal right protected by the Supremacy Clause of the federal Constitution. The protection of that right would extend wherever the concept of interstate commerce could be made to reach. Indeed, one might speculate that the exercise of the right itself created substantive, federal question jurisdiction. ). 43. Id. at U.S.C. 2 (2006). 45. Arbitration Fairness Act of 2011, S. 987, 112th Cong. (2011). 46. Id.

9 201x] Desktop Publishing Example 213 parties of equal bargaining power. 47 Furthermore, Senate Hearings of 1923 also confirm that the Act specifically meant to exempt take-it-or-leave-it (or adhesionary ) consumer and employee contracts from arbitration. 48 Thus, the proposed Arbitration Fairness Act of 2011 quoted above represents the widely felt sentiment that the totality of Supreme Court case law regarding consumer and employee arbitration runs contrary to the FAA s language and purpose. C. The Federal Arbitration Act and the Class Action In Southland Corporation v. Keating, the first imposition by the federal judiciary of arbitration policy on the state court system, the Supreme Court first considered whether arbitration under the Federal Act is impaired when a class action structure is imposed on the process by the state courts. 49 The Court found that the FAA, as substantive federal law, supplanted state law in matters of interstate commerce thus forcing the franchisees into one-on-one arbitration with the franchisor, Southland Corporation. 50 Under applicable state law, the defendant s franchisors had the ability to bring a class action against him, since California deemed all contractual arrangements that impede a franchisor s vindication of his rights (such as the right to proceed as a member of a class) unenforceable. 51 Nonetheless, the U.S. Supreme Court granted certiorari and invalidated California law insofar as it impeded the parties right to compel arbitration under the FAA. 52 The decision was remarkable for two reasons. First, the Court held that the FAA s 2 created substantive rights that state courts must enforce, 53 contrary to the Court s prior holding in Prima Paint that categorized the FAA as federal procedural law. 54 Second, the Court held that California state law calling for class action procedure proved incompatible with the spirit and purpose of the FAA and, therefore, inapplicable under the Supremacy Clause and not 47. See R. REP. NO (1924). See also S. REP. No , at 3 (1924). 48. See Hearing on S and S Before the Subcomm. of the S. Comm. on the Judiciary, 67th Cong (1923). 49. Southland Corp. v. Keating, 465 U.S. 1, 3 (1984). 50. Id. at Id. at Id. at Id. at Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395 (1967).

10 214 Loyola Journal of Public Interest Law [Vol. XX preserved by the savings provision. 55 Thus, amidst the potentially fraudulent conduct on the part of the franchisee, the Court validated a pre-dispute agreement, which the parties did not even realize would affect the potential for a class proceeding, and bound the individual franchisors to settle the matter in private, one-on-one arbitration with Southland. 56 Putting aside constitutional concerns, Justice O Connor noted in her dissent that the majority s reading was wrong as a matter of statutory construction and that Congress intended the FAA to apply as a procedural matter in federal courts. 57 Both of Justice O Connor s concerns arise in Concepcion. Part III of this Comment more fully explores the statutory construction problem, the issue of class arbitrability, and the unconstitutionality of waiver agreements. Justice O Connor s concerns went unchecked, and, as predicted, the mandatory binding arbitration clause became a key weapon in the corporate push to cut litigation costs by eliminating the threat of a class action. 58 Right on cue, the Court handed down another decision bolstering the position of corporate America. In Green Tree Financial Corporation v. Randolph, the Court held that plaintiffs seeking to avoid arbitration on the basis of the right to form a class (or seeking to institute class arbitration proceedings for that matter) bear the burden of proving that individual arbitration posed a prohibitively expensive bar to the vindication of rights. 59 Furthermore, in an effort to further expand the realm of issues within the arbitrator s power to decide, 60 the Supreme Court in Howsam v. Dean Witter Reynolds (hereinafter Howsam) differentiated between gateway matters that a court must decide, regarding the validity of an arbitration clause, and procedural matters of arbitrability 55. Southland Corp. v. Keating, 465 U.S. 1, 16 (1984). 56. See generally id. 57. Id. at 22-25, Jean R. Sternlight, As Mandatory Binding Arbitration Meets the Class Action, Will The Class Action Survive?, 42 WM. & MARY L. REV. 1, 5 (2000). 59. Green Tree Fin. Corp. v. Randolph, 531 U.S. 79, 92 (2000) ( We have held that the party seeking to avoid arbitration bears the burden of establishing that Congress intended to preclude arbitration of the statutory claims at issue. Similarly, we believe that where, as here, a party seeks to invalidate an arbitration agreement on the ground that arbitration would be prohibitively expensive, that party bears the burden of showing the likelihood of incurring such costs. (citation omitted)). 60. See Gilles, supra note 10, at 394.

11 201x] Desktop Publishing Example 215 within the arbitrator s power to resolve. 61 In Howsam, the Court declared that the question whether parties have submitted a particular dispute to arbitration, i.e., the question of arbitrability, is an issue for judicial determination [u]nless the parties clearly and unmistakably provide otherwise. 62 The question of arbitrability has a limited scope, applicable only to circumstances where the contracting parties would have expected a court to decide the gateway matter. 63 All other matters, and most importantly procedural matters, which grow out of the dispute and bear on its final disposition, 64 and allegation[s] of waiver, delay, or a like defense to arbitrability, are left to the arbitrator to decide. 65 Consequently, a disagreement about whether an arbitration clause in a concededly binding contract applies to a particular type of controversy is for the court[,] while procedural matters, i.e., whether prerequisites such as time limits, notice, laches, estoppel, and other conditions precedent to an obligation to arbitrate have been met, are for the arbitrators to decide. 66 In practice, these strong federal precedents serve only to promote enforcement of arbitration agreements, rather than to provide structured, reasoned rules by which lower courts may judge these agreements under the FAA and general contract law. 67 D. Foreshadowing of Things to Come: Given the Wide Breadth of the FAA, What Does this Case Law Mean for the Modern Day Consumer? The only remaining issue for the Court to resolve was the nature of these waiver agreements in relation to the FAA in the context of consumer contracts contracts where the waiver would likely occur without the knowledge of the consumer or as a 61. Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79, (2002). 62. Id. at 83 (quoting AT&T Techs., Inc. v. Commc ns Workers, 475 U.S. 643, 649 (1986)). 63. Id. at Id. at 84. (quoting John Wiley & Sons, Inc. v. Livingston, 376 U.S. 543, 557 (1964)). 65. Id. at 84 (quoting Moses H. Cone Memorial Hosp. v. Mercury Constr. Corp., 460 U.S. 1, (1983)). 66. Id. at (citing REV. UNIF. ARB. ACT 6(c), comment 2, 7 U.L.A. 13 (2000) (emphasis in original)). 67. See generally Lawrence A. Cunningham, Access to Justice: Investor Suits in the Era of the Robert Court: Rhetoric Versus Reality in Arbitration Jurisprudence: How the Supreme Court Flaunts and Flunks Contracts, 75 L. & CONTEMP. PROBS. 129 (2012).

12 216 Loyola Journal of Public Interest Law [Vol. XX take-it-or-leave-it prerequisite to doing business with the corporation. 68 In this very different context, the same issue whether these waivers impacted the validity of the arbitration agreement under the FAA or merely impacted the manner in which arbitration would proceed remained. Howsam dictated that the courts applying the FAA s saving clause handle matters impacting the validity of an arbitration agreement, but that arbitrators handle other questions affecting arbitration procedure. 69 Nonetheless, Concepcion preempted the resolution of this question by holding that a valid agreement to arbitrate under the FAA precludes consumers ability to form a class whether they do so in an attempt to avoid arbitration or to institute a class arbitration format. 70 In other words, the Court decided that the FAA invalidates class procedure as a matter of law, and neither judges nor arbitrators have the right to hold otherwise. This Comment seeks to critically assess the legal and factual conclusions of Concepcion and to suggest that the real reason for the decision was a liberal federal policy favoring arbitration and a general hostility toward the class action device. III. BREAKING DOWN AT&T MOBILITY, LLC V. CONCEPCION Vincent and Liza Concepcion entered into AT&T s standard agreement for the sale and servicing of a cellular telephone a contract that gives the consumer the option to either buy or not buy a cell-phone, 71 (in other words, a contract under which the terms are non-negotiable or adhesionary ). As scholars predicted, 72 the AT&T standard cell-phone agreement included not only an arbitration clause, but also a class action waiver agreement that consumers could either accept or consider another provider who does not require such an agreement. 73 The Concepcions purchased the service based on AT&T s promise that the agreement included the provision of a free cell-phone, but the company charged them $30.22 in sales tax based on the phone s 68. Carbonneau, supra note 23, at Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79, (2002). 70. AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740, 1753 (2011). 71. Id. at See Gilles, supra note 10, at 396 ( In this fertile environment, corporate lawyers created the collective action waiver and wrapped their newborn in the cloak of an arbitration clause protecting it against attack with the now sacrosanct policies of the FAA. ); see also Sternlight, supra note 58, at Concepcion, 131 S. Ct. at 1744.

13 201x] Desktop Publishing Example 217 retail value. 74 The Concepcions filed suit in the Southern District of California, and [t]he complaint was later consolidated with a putative class action alleging, among other things, that AT&T had engaged in false advertising and fraud by charging sales tax on phones it advertised as free. 75 When AT&T sought to compel arbitration, the Concepcions opposed the motion, arguing that the arbitration provision of the sales agreement was unconscionable under California s Discover Bank rule. 76 The rule invalidated any pre-dispute agreement purporting to affect a waiver of the right to class procedure. 77 The Southern District held, and the Ninth Circuit affirmed, that the agreement was unconscionable under the Discover Bank rule because AT&T had not shown that bilateral arbitration adequately substituted for the deterrent effects of class actions. 78 Furthermore, the Ninth Circuit rejected AT&T s contention that the Discover Bank rule discriminated against agreements to arbitrate under the FAA, holding that the rule places these agreements on the exact same footing as any contract purporting to preclude one s right to form a class. 79 Nonetheless, the Supreme Court reversed the Ninth Circuit, holding that the FAA preempted California s Discover Bank rule because the rule stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress. 80 The majority 81 relied on precedent, described in Part I, interpreting 2 of the FAA to preclude not only arbitrationspecific state law defenses to arbitration, but also any generally applicable state or common law defense that derives its preclusive effect from the fact that an arbitration clause is at issue. 82 In doing so, the Court made three troubling findings, 74. Id. 75. Id. 76. Id. at Id. at Id. 79. Concepcion, 131 S. Ct. at Id. at 1753 (quoting Hines v. Davidowitz, 312 U.S. 52, 67 (1941)). 81. This case resulted in a hotly contested 5-4 decision. Justice Scalia delivered the majority opinion in which Roberts, C.J., and Kennedy, Thomas, and Alito, JJ., joined. However, Justice Thomas filed separate reasons in a concurring opinion. Justice Breyer filed a dissenting opinion in which Ginsburg, Sotomayor, and Kagan, JJ. joined. Id. at Id. at 1746.

14 218 Loyola Journal of Public Interest Law [Vol. XX discussed generally below and in further detail in Part III. First, in answer to the Concepcions argument that the FAA s savings clause protected California s Discover Bank rule, Justice Scalia, writing for four Justices, 83 claimed that the rule was not a generally applicable contract defense saved by Rather, he claimed the rule was a distortion of the common law defense of unconscionability 85 meant to invalidate agreements to arbitrate, not surprising, since the judicial hostility towards arbitration that prompted the FAA had manifested itself in a great variety of devices and formulas declaring arbitration against public policy. 86 He claimed that the rule s requirements both a predictably small claim and an allegation of a scheme to cheat consumers are toothless and malleable amounting only to an escape device that the courts could apply whenever they feel the need to invalidate an arbitration agreement. 87 Next, and most importantly, Justice Scalia determined that a valid arbitration agreement need not mention the fact that class procedure will not apply because such a notion is implicit in the spirit of arbitration, the primary purpose of which he claims is to allow for efficient, streamlined procedures tailored to the type of dispute. 88 The Court finally declared what Justice Scalia claims Stolt-Nielsen S.A. v. AnimalFeeds International Corp. implied: 89 that the formality, expense, and time associated with class procedure contradict the expediency and informality of arbitration, that the two cannot co-exist, and, that where the two 83. Id. at (Thomas, J., concurring). 84. Id. at 1746, Concepcion, 131 S. Ct. at 1746 ( Under California law,... [a] finding of unconscionability requires a procedural and a substantive element, the former focusing on oppression or surprise due to unequal bargaining power, the latter on overly harsh or one-sided results[] ) (quoting Armendariz v. Found. Health Psychcare Servs., Inc., 6 P.3d 669, 690 (2000)). 86. Id. at 1747 (quoting Robert Lawrence Co. v. Devonshire Fabrics, Inc., 271 F.2d 402, 406 (2d Cir. 1959)). 87. Id. at Id. at Stolt-Nielsen S.A. v. AnimalFeeds Int l Corp., 130 S. Ct. 1758, 1775 (2010) (stating that class procedure under Rule 23 substantively affected the claim at issue because [it] changes the nature of arbitration to such a degree that it cannot be presumed the parties consented to it by simply agreeing to submit their disputes to an arbitrator ).

15 201x] Desktop Publishing Example 219 conflict, the FAA trumps. 90 Finally, relying on the above assessments that California s rule amounts to a per se invalidation of arbitration agreements and that arbitration and class action procedure prove wholly inconsistent, Justice Scalia found that 2 actually counseled against rules like the one proffered in Discover Bank, which seek to discriminate against arbitration. 91 One need look no further than Justice Breyer s dissent to see the problems with Justice Scalia s reading of both California s rule and the FAA s As Justice Breyer points out, the Discover Bank rule does precisely what Congress intended in drafting 2: it places arbitration agreements on the same footing as any contract that would invalidate a form of judicial remedy on its face. 93 In fact, California courts have upheld contracts with waiver agreements that do not meet this threshold of unconscionability, directly refuting any claim that the Discover Bank rule is a blanket policy against waiver agreements. 94 Thus, Justice Scalia reads too expansively both the purpose of arbitration and of the Discover Bank rule; the FAA guarantees enforcement, not efficiency, while California s rule promoted fairness. 95 Nonetheless, the result is a shiny, new precedent stating that take-it-or-leave-it arbitration agreements forced upon consumers or employees under the FAA, regardless of whether they purport to effect a class waiver or not, foreclose any possibility of the plaintiff s utilizing class action procedure to obtain relief, even if the inability to proceed as a class would foreclose the claim altogether. 90. Concepcion, 131 S. Ct. at Id. at 1748 ( As we have said, a federal statute s saving clause cannot in reason be construed as [allowing] a common law right, the continued existence of which would be absolutely inconsistent with the provisions of the act. In other words, the act cannot be held to destroy itself. ) (internal quotations omitted). 92. Id. at Id. at See Provencher v. Dell, Inc., 409 F. Supp. 2d 1196, 1201 (C.D. Cal. 2006); Gentry v. Superior Court, 42 Cal. 4th 443, 457 (2007); Arguelles-Romero v. Superior Court, 184 Cal. App. 4th 825, (2010); Walnut Producers of Cal. v. Diamond Foods, Inc., 187 Cal. App. 4th 634, (2010). 95. Concepcion, 131 S. Ct. at (Justice Breyer cited directly to a House report compiled during the drafting of the FAA in support of his contention that the national policy favoring arbitration is too expansively interpreted by the majority). See also H.R. Rep. No. 96, 68th Cong., 1st Sess., 1 (1924); S. Rep. No. 536, 68th Cong., 1st Sess., 2 (1924).

16 220 Loyola Journal of Public Interest Law [Vol. XX IV. CONCEPCION AND THE REALIZATION OF SCHOLARS FEARS A NATURAL EXTENSION OF THE ALREADY INAPPROPRIATE NATIONAL POLICY FAVORING ARBITARTION Putting aside the obvious policy battle between the Ninth Circuit and the U.S. Supreme Court over the merits of both class action procedure and pre-dispute arbitration agreements, the decision in Concepcion is wrong as a matter of construction of the FAA s savings provision found in 2, against the precedent set forth by the Court in Howsam, 96 and inappropriate as a matter of consumers rights. 97 Scholars have long predicted that corporations would recognize and take advantage of the Supreme Court s blind support of arbitration for its own sake, and Concepcion represents one example of what the inequality of bargaining power guarantees corporate America: a pre-dispute arbitration agreement in a consumer contract of adhesion insulates one s business from the small claim altogether as such a claim may only be viable in a class format. 98 The result is an attempt by companies like AT&T to deceptively pass on a part of the cost of doing business to the consumer in blatant violation of the law. 99 In the remainder of this section, this Comment will show how AT&T v. Concepcion was a natural extension of the Supreme Court s already inappropriate policy behind arbitration and represents the impetus for legislative reform. A. What Happened to the Savings Provision of 2? As previously stated, the FAA s 2 makes pre-dispute arbitration agreements in any... contract evidencing a transaction involving commerce... valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract. 100 The Supreme Court has read this provision as putting arbitration agreements on an equal footing with other contracts. 101 But the majority in Concepcion 96. Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79, (2002). 97. Concepcion, 131 S. Ct. at 1756 (Breyer, J., dissenting). 98. See Gilles, supra note 10, at 378. (The title speaks for itself: Opting Out of Liability: The Forthcoming, Near-Total Demise of the Modern Class Action. ). 99. Concepcion, 131 S. Ct at 1744 (Noting Justice Scalia s characterization of the claim that AT&T had engaged in false advertising and fraud by charging sales tax on phones it advertised as free ) U.S.C. 2 (2006) See Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440, 443 (2006).

17 201x] Desktop Publishing Example 221 seems to elevate such agreements to a class of super-contract above any other in an effort to fend off what the Court saw as state discrimination against the federal policy favoring arbitration. 102 In doing so, the Court distorted 2 s savings provision because, as Justice Breyer noted, California s rule does not run counter to the FAA, but to what Justice Scalia claims is the primary purpose behind the Act guaranteeing the expeditious resolution of claims. 103 In short, the Court has invalidated the savings clause of 2 under the guise of safeguarding the immediately preceding clause that ensures the agreement s validity, irrevocability, and enforceability as written. Importantly, 2 does not explicitly guarantee efficiency. The FAA guarantees that a freely and validly made arbitration agreement will be enforced according to its terms; the FAA does not guarantee expeditious, procedurally simple, low cost, one-on-one arbitration. 104 As a matter of fact, the American Arbitration Association ( AAA ) regularly handles class arbitrations, and has set forth Supplementary Rules for Class Arbitration indicating that arbitration and class procedure can coexist. 105 Conceding that class arbitration cannot be handled as 102. Concepcion, 131 S. Ct at Id. at 1758 (Justice Breyer writes we have also cautioned against thinking that Congress primary objective was to guarantee these particular procedural advantages ) (Discussing the majority s notion that the FAA guaranteed expeditious resolution of claims, and was, therefore, irreconcilable with class procedure) Id. at Justice Breyer writes in his dissent, Rather, [the] primary objective was to secure the enforcement of agreements to arbitrate. Dean Witter, 470 U.S. at 221, 105 S. Ct See also id., at 219, 105 S. Ct (we reject the suggestion that the overriding goal of the Arbitration Act was to promote the expeditious resolution of claims ); id., at 219, , 105 S. Ct ( [T]he intent of Congress requires us to apply the terms of the Act without regard to whether the result would be possibly inefficient ); cf. id., at 220, 105 S. Ct (acknowledging that expedited resolution of disputes might lead parties to prefer arbitration) Supplementary Rules for Class Arbitrations (2003), AMERICAN ARBITRATION ASSOCIATION (AAA), =ADRSTG_004129&_afrLoop= &_afrWindowMode=0&_afrWindo wid=19638ziorc_99#%40%3f_afrwindowid%3d19638ziorc_99%26_afrloop%3d %26doc%3DADRSTG_004129%26_afrWindowMode%3D0%26_adf.ctrlstate%3D19638ziorc_147 (also available in Clerk of Court s case file) (last visited Nov. 20, 2012). See also Justice Breyer s dissent in Concepcion, 131 S. Ct at (Discussing the unsuitability of arbitration to high-stakes claims like class actions, Justice Breyer writes that such a notion lacks empirical support. Indeed, the majority provides no convincing reason to believe that parties are unwilling to submit high-stake disputes to arbitration. And there are numerous counterexamples. (internal quotation marks omitted). He goes on to provide

18 222 Loyola Journal of Public Interest Law [Vol. XX quickly as bilateral arbitration, the former must be imposed if forcing the consumer into bilateral arbitration will practically invalidate individual claims, thereby insulating the corporation from liability for wrongdoing. 106 Furthermore, lawyers who participate in class arbitrations describe them as more efficient than class action litigation. 107 Consequently, the majority s holding in Concepcion is flawed as a matter of law. California s rule does not run counter to the spirit of arbitration; rather, it runs counter to what the Court believes arbitration should be. As a matter of policy, in a battle for tort reform in which corporate America is decidedly winning, 108 Concepcion should not stand. Although corporations were already familiar with the power of arbitration to insulate them from liability for small dollar amount violations of the law, 109 they now possess an atom bomb in terms of negotiating power in the form of the adhesive arbitration clauses in consumer and employment contracts. 110 Essentially, with the gloss of Concepcion, the FAA now implies a waiver of the right to class procedure as a matter of statutory construction. Regardless of what one believes are the merits or demerits of class procedure, the Supreme Court seems intent on placing its fate within the hands of private corporations. This goal is not an appropriate one for the Court, since Congress protected the device in the Federal Rules of Civil Procedure 111 examples of multimillion dollar judgments handled in arbitration. He also discusses AAA statistics regarding the efficiency of class arbitration procedure indicating that the AAA has substantial experience with this type of proceeding.) Sternlight, supra note 58, at Id. at Gilles, supra note 10, at 375 (discussing the virtual extinction of the mass tort class action, and the forthcoming demise of the consumer/employee class action through contractual class action waivers); and cf. at 377 ( Once the waivers gain broader acceptance and recognition, it will become malpractice for corporate counsel not to include such clauses in consumer and other class-action-prone contracts. ) See id. at 397. This movement accelerated in 1999, when the National Arbitration Forum ( NAF ), a for-profit arbitral body designated in the arbitration provisions of many large companies, disseminated marketing materials cautioning corporate attorneys that the only way to insulate their clients from class action liability in general and Y2K computer class action liability in particular was to implement arbitration provisions containing terms that expressly waive the right to class treatment. Companies were responsive to this pitch. See also Ross v. Bank of Am., No. 05 Civ (WHP), 2006 U.S. Dist. LEXIS 208, at (S.D.N.Y. 2006) Gilles, supra note 10 at 375 (Discussing the threat of class action extinction at the hands of the FAA) Fed. R. Civ. P. 23.

19 201x] Desktop Publishing Example 223 and the threat of class action liability plays a vital role in deterring corporate wrongdoing. 112 Furthermore, assuming arguendo that class arbitration is an oxymoron, the Discover Bank rule, as written, does not violate 2, as written. 113 First, the Discover Bank rule applies to any contractual waiver of the ability to form and proceed as a class, by declaring any such agreement unconscionable as a violation of public policy. 114 Although California currently stands as the only state to do so, its courts have consistently struck down standardform agreements including class action waivers as unconscionable, not just those that also include arbitration provisions. 115 As such, the rule serves as a generally applicable contract defense, a mere variation on the widely accepted notion that unconscionability is a defense to arbitration as it is to any other contract provision. 116 The conditions of the Discover Bank rule are not toothless and malleable as Justice Scalia describes them, but real conditions that seek to invalidate contracts (including a subset of arbitration agreements) deemed against the public policy of California. 117 In the climate that the Supreme Court has 112. Gilles, supra note 10, at 378. She continues: [a]nd while one might argue as many scholars do that class actions in contemporary practice may tend to overdeter, or that agency costs hamper the effectiveness of the class action device, I am aware of no serious argument that we should ditch class actions in their entirety. Everyone seems to agree that sound public policy requires collective litigation be available for small-claim plaintiffs who would not have the incentive or resources to remedy harms or deter wrongdoing in one-on-one proceedings AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740, 1760 (2011) (Breyer, J., dissenting) (noting that California is free to define unconscionability as it sees fit, and its common law is of no federal concern so long as the State does not adopt a special rule that disfavors arbitration ). See also Doctors Assocs., Inc. v. Casarotto, 517 U.S. 681, 687 (1996) Id. at See, e.g., Am. Online, Inc. v. Superior Court, 108 Cal. Rptr. 2d 699 (Cal. Ct. App. 2001); Szetela v. Discover Bank, 118 Cal. Rptr. 2d 862 (Cal. Ct. App. 2002); Comb v. Paypal, Inc., 218 F. Supp. 2d 1165, 1173 (N.D. Cal. 2002); ACORN v. Household Int l, Inc., 211 F. Supp. 2d 1160, 1174 (N.D. Cal. 2002); Ting v. AT&T, 319 F.3d 1126 (9th Cir. 2003); Ingle v. Circuit City Stores, Inc., 328 F.3d 1165 (9th Cir. 2003); Circuit City Stores, Inc. v. Mantor, 335 F.3d 1101 (9th Cir. 2003); Aral v. EarthLink, Inc., 134 Cal. App. 4th 544, (2005); Klussman v. Cross Country Bank, 134 Cal. App. 4th 1283, 1297 (2005); Cohen v. DirecTV, Inc., 142 Cal. App. 4th 1442, (2006) Concepcion, 131 S. Ct at Id. at The pertinent part of the Discover Bank rule reads: