AT&T Mobility LLC v. Concepcion, 2011 WL 1561956 (April 27, 2011) could end up being one of the most important pro-business cases of the last several years — even more important than Citizens United.
The case involved the application of Section 2 of the Federal Arbitration Act (9 U.S.C. §2), which makes agreements to arbitrate “valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” Justice Scalia’s majority opinion held that this preempts California’s unconscionability rule applied in Discover Bank v. Sup.Ct., 36 Cal.4th 148, 30 Cal.Rptr.3d 76, 113 P.3d 1100 (2005) conditioning enforceability of arbitration on the availability of class arbitration.
The Court reasoned that
[t]he overarching purpose of the FAA, evident in the text of §§ 2, 3, and 4, is to ensure the enforcement of arbitration agreements according to their terms so as to facilitate streamlined proceedings. Requiring the availability of classwide arbitration interferes with fundamental attributes of arbitration and thus creates a scheme inconsistent with the FAA.* * *
[T]he switch from bilateral to class arbitration sacrifices the principal advantage of arbitration—its informality—and makes the process slower, more costly, and more likely to generate procedural morass than final judgment. * * *
[C]lass arbitration greatly increases risks to defendants. Informal procedures do of course have a cost: The absence of multilayered review makes it more likely that errors will go uncorrected.
Arbitration is a matter of contract, and the FAA requires courts to honor parties’ expectations.* * *
Justice Thomas, concurring, relied on a textual argument that “the FAA requires that an agreement to arbitrate be enforced unless a party successfully challenges the formation of the arbitration agreement, such as by proving fraud or duress.” The California rule is preempted under this approach because the Discover Bank rule “does not relate to defects in the making of an agreement.”
I joined several other academics (Randy E. Barnett, Omri Ben-Shahar, Henry N. Butler, Richard A. Epstein, Michael I. Krauss, Gregory E. Maggs, Geoffrey A. Manne, Robert H. Mnookin, Michael P. Moreland, Nathan B. Oman, Stephen B. Presser and co-TOTMs Geoff Manne and Josh Wright) in an amicus brief that not only argued for the winning side, but supplied specific reasoning supporting Justice Thomas’s concurrence. See the brief at 31-32, n. 7, arguing that “the reference in the savings clause to ‘revocation’ applies only to defects in the formation of contracts (procedural defects affecting offer and acceptance) rather than substantive ‘public policy'”.
The AT&T dissent reasoned that the California rule was not preempted because it merely applied the general contract principle of unconscionability, applied to all class action waivers whether or not in arbitration, and comported with the FAA’s purpose of “ensur[ing] judicial enforcement” of arbitration agreements.”
Thus, the issue joined between the majority and dissent was whether a rule that was not arbitration-specific, and therefore arguably fit within FAA §2’s “revocation of any contract,” nevertheless was preempted because it did not permit “enforcement of arbitration agreements according to their terms so as to facilitate streamlined proceedings” and “interferes with fundamental attributes of arbitration.”
Although I agree with the Court’s result, the conclusion is not facially obvious. The case also leaves several questions, including what other state limits on arbitration will be preempted even if they apply to all contracts (suggesting an advantage of Justice Thomas’s relatively clear rule upholding only state rules dealing with formation of arbitration agreements), and the extent to which the principles in this case apply to other preemption issues.
These questions cry out for an articulation of federalism concerns that underlie preemption generally and should apply to preemption by the FAA. The majority opinion fails to do this at all. The dissent at least addresses this point:
By using the words “save upon such grounds as exist at law or in equity for the revocation of any contract,” * * * Congress reiterated a basic federal idea that has long informed the nature of this Nation’s laws. * * * Here, recognition of that federalist ideal, embodied in specific language in this particular statute, should lead us to uphold California’s law, not to strike it down. We do not honor federalist principles in their breach.
I disagree, for reasons that Erin O’Hara O’Connor and I are developing in a work in progress currently titled “Preemption and Regulatory Coordination.” Our basic idea (subject to work that is ongoing as I write) is expressed in a summary of a talk we gave last fall.
Our analysis begins, as it must, with Congressional intent. But the intended scope of preemption is often murky. The courts therefore need some principle to help fill the Congressional intent gap.
We would look to the principle of regulatory coordination. This principle requires recognition that regulation by many states entails both costs and benefits. The benefits include the opportunity for experimentation, greater individual autonomy, and different rules to suit different needs. On the cost side, empowering each state to regulate national or international firms can significantly impede growth and innovation. Contrary to the AT&T dissent’s unqualified celebration of state sovereignty, preemption must take account of the need for coordination.
More specifically, here’s a quick take on how we would approach coordination from the above summary of our talk:
Even if Congress has neither expressed nor implied a particular preemptive preference, courts are entitled to assume that Congress intended the statute to advance the purpose of the Constitutional provision that provides its authority. For example, when Congress chooses to enact a statute pursuant to the Commerce Clause, it makes a collective judgment that the need for federal economic coordination outweighs the need for state sovereignty, and courts should broadly effectuate this intent where coordination is appropriate. Accordingly, to the extent a statute is ambiguous and coordination is unnecessary, the court should presume against preemption. * * *
We then apply this principle to arbitration:
The Federal Arbitration Act makes unenforceable state laws aimed at restricting arbitration clauses. The coordination principle developed here leads [the authors] to conclude that ambiguity concerning the FAA’s application to class action waivers should be resolved in favor of state coordination, which, in the case of the FAA, favors broad enforcement of parties’ contractual dispute resolution devices.
There is ample evidence that the FAA was in fact intended to promote regulatory coordination in order to enhance the US’s position in international competition. See The Law Market, Chapter 5, and a shorter summary in our recent paper, Exit and the American Illness.
Notably, the rule the Supreme Court applied in AT&T comports with our “broad enforcement” approach. Our analysis squares this rule with general policies underlying preemption. We hope that our approach will help clarify the general implications of this important case for preemption.
Does this apply to contracts of adhesion? One might argue that these type of contracts are not contracts of adhesion, one would be wrong.
I have no problem with contracts I can actually negotiate. Cellphone contracts do not fall in this category.
Soon, every consumer contract will have a non-negotiable arbitration clause precluding class-actions (assuming that is not already the case).
I do not think this is a good thing. It certainly benefits large corporations.
Not necessarily. That depends under our analysis on whether “coordination is appropriate” as stated in our post. Our article will clarify the factors relevant to this inquiry. Unfortunately, however, our analysis can’t completely eliminate the problems created by a Congress that stretches its significant Commerce Clause power to the breaking point, as arguably happened with health care.
So if Congress enacted a statute regulating health insurance “pursuant to the Commerce Clause,” would that reflect a “collective judgment that the need for federal economic coordination outweighs the need for state sovereignty” so that “courts should broadly effecuate this intent”?