Class Action Defense Review : Antitrust, Employment Discrimination, Securities Fraud and Unfair Competition Lawyer & Attorneys: Cozen O'Conner Law Firm: Philadelphia

The 2012-13 Supreme Court term has been a hotbed of class action activity, with the justices set to decide at least half a dozen cases that will directly affect class action litigation. Although none of this term’s decisions is likely to have the impact of the Court’s recent decisions in Wal-Mart Stores v. Dukes or AT&T Mobility v. Concepcion, the sheer number of opinions expected this spring promises significant clarifications of some murky areas. These include:
 

  • Whether a plaintiff may defeat removal under CAFA by stipulating that he or she will not seek more than the $5 million jurisdictional threshold on behalf of the class. In Standard Fire Insurance v. Knowles, the Eighth Circuit denied permission to appeal a district court’s determination that such a stipulation was sufficient, after affirming the validity of a jurisdictional stipulation in a similar case. Is the Eighth Circuit correct, or does such a stipulation improperly bind members of a class that the named plaintiff does not yet represent?

• The extent to which the Supreme Court’s 2011 decision in Wal-Mart requires courts to delve into the merits of a lawsuit when considering class certification motions. In Comcast v. Behrend, the Third Circuit affirmed the grant of class certification in an antitrust action, despite the district court’s decision not to resolve disputes about the relevant market and the existence of classwide impact at the class certification stage. Instead, the Third Circuit held that it was sufficient for the court to determine that the class could establish the relevant market through common proof, that the element of antitrust impact was capable of proof through evidence common to the class, and that the plaintiffs had presented a common methodology to determine damages on a classwide basis. Does Wal-Mart, which included a footnote implying that merits inquiries are appropriate in applying Rule 23(b), require more?

• The extent to which the plaintiff in a securities fraud class action must establish that the alleged misrepresentation was material in order to obtain class certification based on a “fraud on the market” presumption. In Amgen v. Connecticut Retirement Plans and Trust Funds, the Ninth Circuit held that a plaintiff need only plausibly allege materiality at the class certification stage. Did the Ninth Circuit get it right, or does failure to establish materiality at the class certification stage preclude a finding that classwide issues predominate?

• Whether a defendant renders a class action moot by offering full relief to the named plaintiff prior to class certification. In Genesis HealthCare v. Symczyk, the Third Circuit held that in a collective action brought under the Fair Labor Standards Act—which, unlike a Rule 23 class action, requires “class” members to affirmatively consent to participation in the class—an offer of judgment to the named plaintiff, though made before any other plaintiffs had “opted in,” did not moot the lawsuit as to the “class.” Can a defendant thwart a class action pre-certification by settling with the putative class representative, or must the Article III “case or controversy” requirement be read more broadly in class actions? And is the answer different for FLSA actions than for Rule 23 class actions?

• Whether a class arbitration waiver can be held invalid if it prevents plaintiffs from enforcing their federal statutory rights. In In re American Express Merchants’ Litigation, the Second Circuit struck down a class arbitration waiver on the ground that the waiver had the practical effect of precluding potential class members from enforcing their Sherman Act claims. Does the Supreme Court’s 2011 opinion in AT&T Mobility, which held that the Federal Arbitration Act’s general protection of arbitration clauses preempted a state common law unconscionability doctrine, apply more broadly, or is there an exception where the waiver might interfere with enforcement of another federal statute?

• How specific an arbitration clause must be in order to support a finding that the parties consented to class arbitration. In Oxford Health Plans v. Sutter, the Third Circuit affirmed an arbitrator’s finding that the parties had agreed to class arbitration based on a contractual provision mandating simply that “all” disputes be submitted to arbitration. Is such language sufficient for an arbitrator to find consent, or must an arbitrator infer that the parties did not contemplate class proceedings absent an explicit reference to class arbitration?

With all of these cases pending before the Court, as well as several controversial issues percolating in the lower federal courts, the first half of 2013 could be a high-water mark for class action developments. Stay tuned.

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Last month, the Second Circuit—for the third time, no less—struck down a class arbitration waiver in American Express’ card acceptance agreement with merchants. The latest decision, however, is particularly striking given that it follows, and vigorously distinguishes, the Supreme Court’s opinion last spring in AT&T Mobility v. Concepcion. Will the Supreme Court, whose previous opinions on the subject have twice caused the Second Circuit to revisit its original decision, take this opportunity to weigh in yet again on class arbitration? If not, how do businesses—and courts--navigate the two decisions?

Unlike Concepcion, which involved fraud and false advertising claims under California law, In re American Express Merchants’ Litigation is a federal antitrust case. The plaintiffs allege that American Express’ requirement that merchants honor all American Express cards—both charge cards and credit cards—constitutes a tying arrangement in violation of the Sherman Act. American Express’ card acceptance agreement with the merchants, however, both (i) permits either party to elect arbitration and (ii) prohibits classwide arbitration. Thus, by electing arbitration, American Express can force merchants to adjudicate their claims on an individual basis.

After the Second Circuit first held the arbitration waiver invalid (“Amex I”), the Supreme Court remanded the case for reconsideration in light of the Supreme Court decision in Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp. Stolt-Nielsen involved an arbitration clause that was silent on class arbitration, and the Court held that the Federal Arbitration Act prohibits compelling a party to submit to class arbitration unless there is contractual evidence that the party agreed to do so. On remand, the Second Circuit (“Amex II”) concluded that since the American Express contract was not silent, but expressly banned class arbitration, Stolt-Nielsen did not change the original Amex I analysis. So far, so good.

While the Amex II mandate was on hold, however, Concepcion was decided, and the Second Circuit requested further briefing. Earlier this month (“Amex III”), the Second Circuit held that Concepcion, like Stolt-Nielsen, was inapplicable. The court’s effort to distinguish Concepcion, however, is far more troubling—if not from a legal perspective, then at least from a practical perspective.

In Concepcion, the plaintiffs—consumers challenging a class arbitration waiver in their cellular telephone contract—sought to invoke a California common law rule holding that arbitration clauses containing class waivers are unconscionable in consumer contracts of adhesion, where individual damages are small. The Supreme Court held that this rule was preempted by the FAA’s general protection of arbitration clauses.

In light of this holding, doesn’t the FAA protect the American Express arbitration clause, class waiver or no class waiver? Not according to the Second Circuit. In AmEx III, the court held that the American Express class arbitration waiver could be unenforceable if “the practical effect of enforcement would be to preclude [plaintiffs’] ability to vindicate their federal statutory rights.” The panel went on to hold that the plaintiffs’ economic expert had demonstrated, as a matter of law, that the cost of the plaintiffs’ individually arbitrating their disputes with American Express would be prohibitive, such that the class arbitration waiver had the effect of precluding their rights under the federal antitrust laws. Accordingly, since enforcing the arbitration clause would impermissibly force the plaintiffs into individual arbitrations, the Second Circuit held the arbitration clause unenforceable.

At first glance, the Second Circuit’s opinion, in light of Concepcion, is a head-scratcher. The plaintiffs’ economist opined that the median volume merchant would sustain damages of approximately $5,300 after trebling. While such a small amount surely would render individual arbitration cost-prohibitive, individual arbitration would have been even less feasible in Concepcion, where the named plaintiffs’ damages were a mere $30.22. Moreover, the AmEx plaintiffs were businesses—albeit small ones—while the Concepcion plaintiffs were individual consumers. Why was the Second Circuit concerned with the practical preclusion of the American Express merchants’ ability to enforce their rights, when the Supreme Court in Concepcion allowed a class arbitration waiver to preclude AT&T Mobility customers from enforcing theirs?

The answer, apparently, is that AmEx, unlike Concepcion, was brought under a federal statute. “Concepcion plainly offers a path for analyzing whether a state contract law is preempted by the FAA,” wrote Judge Rosemary S. Pooler, who authored the Second Circuit opinion for a two-judge panel. (Sonia Sotomayor had been the third member prior to her elevation to the Supreme Court.) “Here, however, our holding rests squarely on a vindication of statutory rights analysis, which is part of the federal substantive law of arbitration.” (Emphases added; internal quotations omitted.) In this case, the court held that “[e]radicating the private enforcement component from our antitrust law scheme cannot be what Congress intended when it included strong private enforcement mechanisms and incentives in the antitrust statutes.”

Thus, under AmEx III, a class arbitration waiver will be invalid if it precludes plaintiffs from bringing a federal statutory claim, but not if it merely precludes them from bringing a state law claim. Will this distinction merit, and survive, Supreme Court review? Justice Scalia’s majority opinion in Concepcion had some choice words for class arbitration as a concept, calling arbitration “poorly suited to the higher stakes of class litigation.” Would the Concepcion majority uphold the invalidation of a company’s arbitration clause merely because it requires those who do business with the company to waive this “poorly suited” mechanism in a federal statutory suit?

Perhaps it will, given that the FAA’s preemption of state laws does not apply to other federal statutes. But reconciling Concepcion and AmEx III could lead to some strange results. Class counsel, who frequently find themselves fighting removal under CAFA on diversity grounds, would now have an incentive to invoke a federal question when litigating under contracts with class arbitration waivers. Meanwhile, dismissing federal claims prior to class certification could become critical for defendants. And if they are unable to do so, will courts, when asked to enforce class arbitration waivers on motions to compel arbitration, be required to evaluate the true federal nature of the claim in order to determine whether the waiver is valid?

Finally, the question remains as to how businesses can rely on class arbitration waivers with any certainty if the validity of the waiver will depend on the nature of the plaintiff’s claim. In AmEx III, the remedy imposed by the Second Circuit was not to order class arbitration, since to order American Express to submit to this procedure would have violated Stolt-Nielsen. Instead, the Second Circuit struck down the entire arbitration clause and permitted the plaintiffs to litigate the matter as a judicial class action. Thus, businesses who incorporate class arbitration waivers into their contracts may immunize themselves against class proceedings based in state law, but risk forfeiting arbitration altogether if the claim is brought under federal law.

Companies need not be in a hurry to amend their class arbitration waivers. If a class action is filed under state law, Concepcion will ensure the likely preemption of any state law limiting enforceability, and the waiver will be upheld. If a class action is filed under federal law, the defendant will be forced to litigate the class action, just as it would if there had been no class arbitration waiver. Nevertheless, the questionable enforceability of the waiver, and its potential impact on both sides’ litigation strategy, might lead some to wonder whether Concepcion and AmEx III, read together, create an optimal rule—let alone one that is likely to endure.

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Last year, in AT&T Mobility v. Concepcion, the Supreme Court upheld a class arbitration waiver in a consumer contract. Now, however, the National Labor Relations Board has struck down a similar waiver in the employment context, holding that requiring employees to submit all employment-related disputes to individual arbitration is an unfair labor practice.

In D.R. Horton, Inc. and Michael Cuda, an employer mandated that all employees sign a Mutual Arbitration Agreement (“MAA”). The MAA provided that employees would submit all employment-related disputes to final and binding arbitration, that the arbitrator could hear only individual claims, and that employees waived the right to resolve employment-related disputes in civil proceedings. In other words, the MAA prohibited employees from pursuing employment-related claims collectively.

Michael Cuda, a superintendent for homebuilder D.R. Horton, asserted that D.R. Horton had misclassified him as exempt under the Fair Labor Standards Act. He notified D.R. Horton that he intended to initiate arbitration on behalf of a nationwide class of similarly situated superintendents. D.R. Horton responded that the notice of intent to arbitrate was defective because the MAA prohibited collective arbitration. Cuda filed an unfair labor practice claim with the NLRB, alleging that prohibiting collective arbitration violated the employees’ right to engage in concerted activity under the National Labor Relations Act.

The NLRB agreed. The Board stated, “Section 7 of the NLRA vests employees with a substantive right to engage in specified forms of associational activity.” This protected activity includes joining together to address workplace grievances through collective arbitration or class action litigation. The MAA, the Board ruled, interfered with this substantive right by prohibiting employees from bringing collective claims in any forum, judicial or arbitral. As a result, requiring employees to sign the MAA as a condition of employment was a prohibited unfair labor practice.

The Board stated that its decision did not conflict with the Federal Arbitration Act. The Board reasoned that the FAA places private arbitration agreements only on the same footing as other contracts, and no private employment contract, including an arbitration agreement, can conflict with federal labor law. The Board pointed to the prohibition of “yellow dog” contracts – contracts forbidding employees from joining unions – as an example of this limitation on employment contracts. The analysis does not change simply because the contractual provision at issue deals with arbitration. As a result, an arbitration agreement – like any other contractual provision – must fail when it is contrary to federal labor law.

The Board stated that its decision is not inconsistent with the Supreme Court’s decision in Concepcion. In that case, the Supreme Court upheld a class action waiver in a consumer arbitration agreement, ruling that the FAA preempted state law that considered such waivers unconscionable. The Board distinguished Concepcion as involving a conflict between federal and state law, thereby invoking the Supremacy Clause. D.R. Horton, on the other hand, involved a possible conflict between two federal laws. Furthermore, the Board said, Concepcion involved consumer arbitration agreements, not federally protected employment and labor rights. Finally, the Board held that employers can restrict arbitration to individual claims as long as they do not similarly restrict civil litigation claims, easing the efficiency and fairness concerns raised in Concepcion.

The Board emphasized that its ruling applies only to NLRA-defined “employees” who are not already exempted from the FAA, and thus is not a sweeping invalidation of all arbitration agreements in employment contracts. Nevertheless, the NLRB decision will not be the last word on the issue, as D.R. Horton has filed a notice of appeal in the Fifth Circuit. Stay tuned to find out if the Fifth Circuit comes to a similar reconciliation between the FAA and federal labor law.

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In a broad ruling that is likely to have a significant adverse impact on consumer class actions, the Supreme Court today upheld the use of class arbitration waivers in consumer contracts, striking down a California common law rule declaring such waivers unconscionable.

In AT&T Mobility v. Concepcion, the Court held that the Federal Arbitration Act preempts California’s so-called Discover Bank rule, in which the California Supreme Court held that class arbitration waivers are unconscionable in contracts of adhesion where minimal dollar amounts are in dispute and the plaintiff alleges a scheme to defraud. The majority opinion, written by Justice Scalia, held that although the FAA permits challenges to arbitration agreements based on generally applicable contract defenses, “nothing in it suggests an intent to preserve state-law rules that stand as an obstacle to the accomplishment of the FAA’s objectives.” The Discover Bank rule is such a rule, Justice Scalia wrote, because “[r]equiring the availability of classwide arbitration interferes with fundamental attributes of arbitration and thus creates a scheme inconsistent with the FAA.”

The reach of the Court’s reasoning is surprising, since Justice Scalia had expressed concern during oral argument about interfering with a state court’s interpretation of state law by “tell[ing] the State of California what it has to consider unconscionable.” Indeed, much of AT&T’s argument in defense of the waiver had focused on its claim that the California court had misapplied California’s unconscionability doctrine in a manner that discriminated against arbitration agreements. The majority opinion effectively sidestepped this issue, however, by focusing on the Discover Bank rule’s effect rather than the California court’s intent. Because the Discover Bank rule conflicts with the FAA, the Court reasoned, it is immaterial whether the rule resulted from a discriminatory application of California law.

In essence, Justice Scalia’s opinion held that classwide litigation is so fundamentally incompatible with arbitration that to require businesses to allow class arbitration would be tantamount to allowing the consumer to opt out of the arbitration agreement altogether. This incompatibility, Justice Scalia wrote, is “obvious as a structural matter,” because “[c]lasswide arbitration includes absent parties, necessitating additional and different procedures and involving higher stakes.” Justice Scalia also cited “more difficult” confidentiality issues and a dearth of arbitrators knowledgeable about procedural aspects of class certification.

The 5-4 ruling, which split along the Court’s traditional political/ideological lines, reversed the Ninth Circuit’s ruling that the unconscionability of the waiver under California law excepted the waiver from the FAA’s requirement favoring arbitration agreements. The Ninth Circuit’s ruling came despite its own acknowledgment that the AT&T waiver, which provides the consumer with cost-free arbitration and $7,500 plus double attorney’s fees if the arbitrator’s award exceeds AT&T’s final settlement offer, creates incentives for consumers to pursue even the small dollar claims likely to arise out of a wireless contract. The basis for the Ninth Circuit’s decision was that the waiver acts as an exculpatory clause by denying relief to consumers who are unaware that their rights are being violated, and who depend on the class notification system to obtain relief.

Justice Breyer’s dissenting opinion took issue with Justice Scalia’s characterization of class arbitration, calling it “well known in California and followed elsewhere” and citing the American Arbitration Association’s endorsement of the procedure in an amicus curiae brief in an earlier case. Justice Breyer asked: “Where does the majority get its contrary idea—that individual, rather than class, arbitration is a ‘fundamental attribut[e]’ of arbitration? The majority does not explain.”

With its sweeping statements about class arbitration and its inherent conflicts with the FAA, the Court’s opinion leaves little room for class plaintiffs to challenge class arbitration waivers under the FAA. In effect, the Court appears to have held that any state statute or common law rule limiting class arbitration waivers will be preempted by the FAA. As a result, business can be expected to rely with confidence on class waivers in consumer contracts, requiring individual arbitration—and turning the consumer class action into an endangered species.

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The Second Circuit this week, on remand from the U.S. Supreme Court, upheld its earlier decision that a class arbitration waiver in a contract between American Express and participating merchants is unenforceable under the Federal Arbitration Act. The case had been remanded for reconsideration in light of the Supreme Court’s opinion in Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp.

In In re American Express Merchants' Litigation, the plaintiffs allege that American Express’ requirement that merchants honor all American Express cards—both charge cards and credit cards—constitutes a tying arrangement in violation of the federal antitrust laws. American Express’ card acceptance agreement with the merchants, however, both (i) permits either party to elect arbitration and (ii) prohibits classwide arbitration. Thus, the agreement effectively precludes the merchant from seeking classwide relief. The agreement at issue applies only to merchants whose annual charge volume is expected to $10 million or less.

The district court granted American Express’ motion to compel arbitration, holding that the arbitration clause was clearly enforceable, and therefore the enforceability of the class waiver was for the arbitrator, not the court, to resolve. The Second Circuit reversed, holding that the issue was indeed the court’s to resolve, and that the class waiver was unenforceable under the FAA.
Section 2 of the FAA provides that arbitration agreements are valid and enforceable “save upon such grounds as exist at law or in equity for the revocation of any contract.” The Second Circuit found valid grounds for the revocation of the class waiver. Specifically, the court determined, based on part on an affidavit from the plaintiffs’ economic expert detailing the “fiscal impracticality of pursuing individual claims,” that the plaintiffs’ claims could not reasonably be pursued as individual actions. As a result, the class waiver could not be enforced “because to do so would grant Amex de facto immunity from antitrust liability by removing the plaintiffs’ only reasonably feasible means of recovery.”

Stolt-Nielsen involved an arbitration clause that was silent on class arbitration. There, the Supreme Court held that neither party could be forced to submit to class arbitration absent evidence that it agreed to do so. In American Express, the defendants argued that this holding “cannot be reconciled with appellants’ contention that courts can invalidate the parties’ agreement . . . based on the absence of class procedures.”

On remand, however, the Second Circuit found no inconsistency between its initial opinion and Stolt-Nielsen:

Stolt-Nielsen states that parties cannot be forced to engage in class arbitration absent a contractual agreement to do so. It does not follow . . . that a contractual clause barring class arbitration is per se enforceable.

Unlike in Stolt-Nielsen, which focused on whether the parties had agreed to class arbitration, it was undisputed in American Express that the card acceptance agreement banned class arbitration. The issue in American Express, as the Second Circuit pointed out in this week's opinion, is “whether the class action waiver is enforceable when it would effectively strip plaintiffs of their ability to prosecute alleged antitrust violations.” In holding that it is not, the Second Circuit cited “the [Supreme] Court’s recognition that the class action device is the only economically rational alternative when a large group of individuals or entities has suffered an alleged wrong, but the damages due to any single individual or entity are too small to justify bringing an individual action.”
In American Express, the plaintiffs’ economist opined that the named plaintiff with the highest charge volume might expect less than $40,000 in damages, after trebling under the antitrust laws, over a four-year damage period; the median volume plaintiff would expect slightly more than $5,000. Neither figure, the court concluded, would economically justify a plaintiff’s pursuit of individual arbitration or litigation.

The economic impact of the class waiver raises issues similar to AT&T Mobility v. Concepcion, which is currently pending before the Supreme Court, and Vilches v. The Travelers Companies, recently decided by the Third Circuit. Assuming American Express seeks further review by the Supreme Court, might the Second Circuit be asked to review this case yet again—this time in light of the coming decision in AT&T Mobility? Either way, the courts’ continued struggle with class waivers demonstrates (i) the dangers to both sides of an arbitration clause that is silent on class relief and (ii) the potential for a protracted dispute over even the clearest of class waivers in consumer actions and other small-damage cases.

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The Third Circuit recently weighed in on class arbitration waivers in employment contracts, holding in the same opinion that (i) whether the parties agreed to the insertion of a class arbitration waiver into an existing arbitration policy is an issue for the arbitrator, not the courts, and (ii) such a waiver would not be unconscionable under New Jersey law. In reaching the latter conclusion, the court distinguished class arbitration waivers in the employment context from those in consumer litigation.

In Vilches v. The Travelers Companies, the plaintiff employees had agreed upon commencing employment to a provision making arbitration the exclusive forum for resolving employment disputes. The agreement was silent with respect to class or collective arbitration, but during the course of the plaintiffs’ employment, Travelers had published a revised policy containing a class arbitration waiver. In their suit for unpaid wages and overtime, the plaintiffs alleged that they had never agreed to the class arbitration waiver, and that even if they had, the waiver would be unconscionable. The district court granted Travelers’ motion for summary judgment, finding that the plaintiffs had agreed to the class arbitration waiver and that the waiver contained “no adhesion.”

The Third Circuit criticized the first aspect of the district court’s ruling. The court held that the district court should not have addressed the existence of an agreement, because it was not a “question of arbitrabillity”—i.e., whether the parties had agreed to submit the dispute for arbitration. Because the plaintiffs conceded that they were required to arbitrate, and the only issue was whether they could do so as representatives of a class, the question involved only “the type of procedural arbitration mechanism applicable to this dispute.” Such a question, the court held, is for the arbitrator to decide.

The court then agreed with the district court that the waiver was not unconscionable, addressing the issue in depth “for the sake of judicial efficiency” in the event that the arbitrator finds the waiver binding. Rejecting the plaintiffs’ argument that “the timing, language, and format of the class action waiver renders it unconscionable,” the Third Circuit noted that the New Jersey Supreme Court cited the public interest at stake in consumers’ ability to pursue their statutory rights under consumer protection laws as the primary justification for holding a class arbitration waiver unconscionable. The New Jersey court had also stated that such waivers are suspect in a “consumer contract of adhesion” in a setting where disputes “predictably” involve small amounts of damages. Because the waiver in Vilches concerned an employment contract, not a consumer contract, and the damages were not predictably small, the Third Circuit found no basis to conclude that the waiver was unconscionable.

The unconscionability of class action waivers—as opposed to class arbitration waivers--is at issue in AT&T Mobility v. Concepcion, which was argued before the Supreme Court earlier this term and is awaiting decision. In Concepcion, the Ninth Circuit held that a class action waiver in a consumer wireless contract was unconscionable under California law because it operated as an exculpatory clause by denying recovery to consumers who were unaware that their rights were being violated, and who thus depend on the class action notification process to obtain relief. A Supreme Court affirmance in Concepcion would further support the distinction made in Vilches between consumer and employment contracts for purposes of evaluating the unconscionability of waivers of class-based relief.
 

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The U.S. Supreme Court recently heard arguments in a dispute that could have far-reaching implications for the future of consumer fraud class actions. While one possible outcome threatens, in the words of one of the litigants, to become the “death knell for consumer arbitration in California,” another could have a similar impact on consumer class actions nationwide.

At issue is a class action waiver in AT&T Mobility LLC’s consumer arbitration agreement. Both the U.S. District Court for the Southern District of California and the Ninth Circuit held the provision unconscionable under California law. AT&T contends that the lower court decisions are at odds with the Federal Arbitration Act and, if allowed to stand, would undermine the FAA’s sweeping protections of contractual arbitration clauses. A reversal, by contrast, may lead to even more widespread use of class action waivers in consumer contracts, resulting in substantially fewer consumer class actions.

The case, AT&T Mobility v. Concepcion, was originally filed in 2006 as a putative class action by a couple alleging that AT&T had violated California’s consumer protection laws by advertising wireless phones as “free” without disclosing a $30.22 fee that appeared on their bill. When AT&T moved to compel individual arbitration pursuant to the contract’s arbitration clause, which prohibited class-wide arbitration, the federal district court denied the motion. Laster v. T-Mobile USA, Inc., 2008 WL 5216255 (S.D. Cal. 2008). The court followed the California Supreme Court’s decision in Discover Bank v. Superior Court of Los Angeles, which held that some class action bans are unconscionable. Here, the lower court concluded that the AT&T waiver effectively operates as an exculpatory clause by denying recovery to consumers who are unaware that their rights are being violated, and who thus depend on the class action notification process to obtain relief.  The Ninth Circuit affirmed.

Ironically, both the district court and the Ninth Circuit found that the AT&T arbitration clause creates incentives to consumers to pursue even the “small dollar” claims likely to arise out of a wireless contract. The AT&T clause provides the consumer with cost-free arbitration and a minimum award of $7,500, plus double attorney’s fees, if the arbitrator’s award exceeds AT&T’s final settlement offer before arbitration. Another federal district court, in a subsequent case, described AT&T’s arbitration clause as containing “perhaps the most fair and consumer-friendly provisions this Court has ever seen.” Makarowski v. AT&T Mobility, LLC, 2009 WL 1765661 (C.D. Cal. June 18, 2009). However, the Ninth Circuit also held that the $7,500 minimum award does not negate the unconscionability of the class action waiver, because the premium payment is available only if AT&T does not make a settlement offer to the aggrieved customer in a sum at least equal to the eventual arbitration award. If a customer files for arbitration of a small dollar claim against AT&T, AT&T can simply pay the value of the claim before the selection of an arbitrator to avoid paying $7,500. Thus, the Ninth Circuit concluded, “the maximum gain to a customer for the hassle of arbitrating a $30.22 dispute is still just $30.22.”

AT&T argued to the Supreme Court that the Ninth Circuit’s decision is inconsistent with the FAA, which provides that contractual arbitration provisions are enforceable except “upon such grounds as may exist at law or in equity for the revocation of any contract.” 9 U.S.C. § 2. AT&T contends that California’s unconscionability doctrine, as articulated in Discover Bank, discriminates against arbitration clauses and therefore does not constitute grounds for “revocation of any contract,” only for revocation of dispute resolution agreements. 

This argument met with aggressive questioning from a majority of the justices, many of whom expressed hesitation to interfere with a California court’s application of its own unconscionability doctrine. The plaintiffs’ counsel, however, also faced difficult questions from justices concerned that California may be applying different unconscionability rules to arbitration clauses than to other contractual provisions. Several justices also seemed troubled by AT&T’s argument that the waiver was not unconscionable with respect to the named plaintiffs, who are essentially guaranteed to recover the $30.22 they dispute simply by filing the case.

The Court’s ruling is expected early in 2011. While it is unlikely that the Court, even if it overturns the Ninth Circuit’s decision, would rule so broadly as to hold that the FAA prohibits states from ever invalidating class action waivers, even a narrow ruling in AT&T’s favor could be expected to lead to more confident and widespread use by businesses of such waivers in consumer agreements. Conversely, if the Ninth Circuit’s decision is upheld, companies nationwide may be reluctant to rely on class action waivers. The plaintiffs’ brief asserts that “courts applying the general contract law of at least twenty States have held that provisions purporting to bar consumers or employees from pursuing classwide relief in any forum may be unenforceable.” Thus, the Supreme Court’s decision—regardless of the outcome—is likely to have implications on consumer class actions both in and outside California.

 

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