An important time for the future of class action waivers and the power struggle between businesses and consumers.

AuthorDowning, Jack
PositionNOTE
  1. INTRODUCTION

    For nearly a century, arbitration in the United States has been used and enforced as a mechanism to facilitate quick and inexpensive resolutions to disputes. Contracts with arbitration clauses allow the signatories to quickly arbitrate disputes from the outset of their agreement. Binding arbitration will result in a decision, to which each of the parties must adhere. (1) Arbitrated disputes, in their purest form, can bring about fair and unbiased decisions not only more quickly, but also at a fraction of the cost of taking the same dispute through the litigation process. (2)

    The Federal Arbitration Act ("FAA" or "Act") was enacted in 1925 in response to courts' unfavorable treatment of arbitration agreements. (3) Among many provisions protecting the enforceability of such agreements, [section] 2 of the FAA provides that "an agreement in writing to submit to arbitration... shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract." (4) Over the years, this provision has been the subject of debate in numerous courts throughout the United States, including, on many occasions, the Supreme Court of the United States. (5)

    Specifically, this Note examines the modern application of this section of the FAA and how recent developments regarding agreements to arbitrate have impacted the overall fairness of arbitration proceedings. In the consumer setting, courts have not heavily weighed the bargaining power imbalance that often accompanies these agreements. (6) Instead, the Supreme Court has sought to protect individuals' rights and their ability to contract freely, (7) but in doing so, the Court has ignored detrimental public policy implications. Perhaps most notably, the Supreme Court has recently declared that the FAA will preempt any state law finding that class action waiver clauses in contractual agreements are invalid. (8) Pursuant to these types of clauses, the bargaining parties agree to forego any ability to bring a class action claim arising out of the contract. (9) This means each claim must be resolved "bilaterally." (10) The implications of such a waiver are extraordinary.

    Now has come an important time for the future of class action waivers. Recently, legislation was proposed in Congress to protect consumers from entering into class action waiver agreements unfavorable to them, (11) but with a lack of bipartisan support, it may be difficult to enact such legislation. A remedy more likely to protect consumers will come from various regulatory agencies. Many of these agencies have the power to prohibit class action waivers in contracts where one party has superior bargaining power. (12) Agencies such as the Consumer Finance Protection Bureau ("CFPB") have already begun proposing rules that would limit the use of these waivers. (13)

    This Note discusses the inherent problems that come with arbitration clauses in contracts of adhesion. Further, this Note will address the likelihood of a potential change--through future Supreme Court interpretations of the FAA or new legislation. Something must be done to protect those with inferior bargaining power from being forced, through contracts of adhesion, to give up their right to bring class action lawsuits. If Congress, the Supreme Court, and regulatory agencies maintain the status quo, companies will retain the ability to improperly strip consumers of their rights and their due compensation nationwide.

  2. LEGAL BACKGROUND

    As mentioned in the Introduction, the FAA was enacted to overcome judicial hostility toward arbitration agreements. (14) On many occasions prior to the FAA's enactment in 1925, courts refused to order specific performance of arbitration agreements. (15) By enacting the FAA, Congress indicated its belief that arbitration was a viable alternative to litigation as a legitimate means of dispute resolution. (16) With the Act, Congress wanted to ensure that arbitration agreements would be enforced like other contracts. (17) In interpreting Congress's intent, the Supreme Court has recognized "the desirability of arbitration as an alternative to the complications of litigation." (18) Additionally, the Court has cited efficiency and expediency as benefits resulting from arbitration proceedings. (19) Section 2, a provision that protects arbitration clauses and puts them on equal ground with other contractual agreements, states:

    [A] contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction, or the refusal to perform the whole or any part thereof, or an agreement in writing to submit to arbitration an existing controversy arising out of such a contract, transaction, or refusal, shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract. (20) This section is considered a "liberal federal policy favoring arbitration agreements, notwithstanding any state substantive or procedural policies to the contrary." (21) However, this section, and its application to class action waiver clauses, is a subject of major dispute between the state and federal courts.

    1. History of Class Arbitration Before Concepcion

      Issues regarding class arbitration are relatively new, with the first decision of the Supreme Court of the United States regarding the matter coming in 2003 with Green Tree Financial Corp. v. Bazzle. (22) There, the Court was presented with the issue of whether the FAA prohibits companies from attaching class arbitration waivers to their contracts. (23) Before deciding that issue, the Supreme Court had to determine the preliminary issue of whether the contract in question forbid class arbitration. (24) To this point, the Court held: "The question--whether the agreement forbids class arbitration--is for the arbitrator to decide." (25) The next logical question was what would the Supreme Court decide on appeal when an arbitrator does make a ruling on the issue. (26)

      In 2010, the Supreme Court addressed this question in Stolt-Nielsen S.A. v. AnimalFeeds International Corp. (27) In Stolt-Nielsen, the panel of arbitrators based its decision on "post-Bazzle arbitral decisions" that allowed for class arbitration in a wide variety of settings--in this instance, antitrust. (28) The arbitrators believed, since the contract was silent on the issue of class arbitration, there existed "[a]n implicit agreement to authorize class-action arbitration." (29) The Court, however, disagreed, holding that "class-action arbitration 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." (30) It discussed the "consensual" nature of arbitration and found that if the parties did not expressly agree to permit class proceedings, there was no implicit agreement. (31) In essence, this meant that the default rule, in every contract silent on the issue of class arbitration, was that a party may not bring a class arbitration proceeding--only a bilateral arbitration. (32) Following Stolt-Nielsen, one question remained: what happens when a contract calls for an express waiver of class arbitration proceedings?

    2. AT&T Mobility LLC v. Concepcion and the Enforcement of Class Arbitration Waiver Agreements

      Regarding express waivers of class arbitration proceedings, the Supreme Court handed down a landmark decision in 2011, AT&T Mobility LLC v. Concepcion. (33) The facts of the case are relatively simple: the Concepcions brought the case as a putative class action to recover the amount of the sales tax paid on AT&T phones that had been advertised as free. (34) The Court granted certiorari after the Supreme Court of California held that the class arbitration waiver provision was "unconscionable because it disallowed classwide proceedings." (35) The Supreme Court of California applied its Discover Bank rule, which declared a class action waiver provision unconscionable when: (1) the waiver is "found in a consumer contract of adhesion," (2) the class action would involve a "predictably" small amount of money, and (3) it is alleged that the party with "superior bargaining power has carried out a scheme to deliberately cheat large numbers of consumers out of individually small sums of money." (36)

      Writing for the majority, Justice Scalia invalidated each of these three elements of the Discover Bank rule and dismissed them as non-legitimate requirements to find unconscionability in the contract. (37) According to the Supreme Court, "When state law prohibits outright the arbitration of a particular type of claim, the analysis is straightforward: The conflicting rule is displaced by the FAA." (38) Moreover, when state law "stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress," federal law will preempt it. (39) Pursuant to this rule, a five-four Supreme Court majority held that the FAA preempted California's Discover Bank rule. (40) In support of this conclusion, the Court offered a variety of different reasons for why class arbitration was impractical and contrary to Congress's intent when creating the FAA. (41)

      First, the majority determined that "the 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." (42) The court offered several statistics to prove this point. (43) According to the opinion, the median time from the filing of a class arbitration dispute to its settlement was 583 days--much longer than the median time for bilateral arbitrations. (44)

      Second, the majority discussed the notion that class arbitration required "procedural formality." (45) The majority pointed out that the American Arbitration Association's...

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