Arbitration, class waivers, and statutory rights.

• Author: Spencer, Jacob

Congress passed the Federal Arbitration Act (FAA) in 1925 to counter widespread judicial refusal to enforce arbitration agreements. (1) The courts were not necessarily hostile to arbitration of driven by ideology. Often, they considered themselves bound by longstanding anti-arbitration precedent, which would need to be overturned legislatively. (2) Last year, in AT&T Mobility LLC v. Concepcion, the Supreme Court held that the FAA prohibited states from refusing to enforce arbitration agreements merely because they did not allow class arbitration procedures. (3) In the past year, dozens of courts have enforced arbitration agreements containing class waivers. (4) Nonetheless, an administrative body and a growing handful of courts have struck down arbitration agreements, finding them unenforceable where they contained a waiver purporting to prevent the signatory from bringing class proceedings either in arbitration of in court. In particular, many of these courts have reasoned that arbitration agreements with class waivers are unenforceable where they would effectively prevent plaintiffs from vindicating their statutory rights.

These lower courts have refused to enforce arbitration agreements based on their reading of Supreme Court precedent. In several cases, the Court held that federal statutory claims were subject to arbitration so long as federal substantive remedies were available in the arbitral forum. (5) In another case, the Court held that the plaintiff had the burden of proving that prohibitively expensive arbitration-specific costs would prevent her from vindicating her federal statutory rights. (6) But the Court has never struck down an agreement for interfering with a plaintiff's statutory rights, nor has it clarified what sort of arbitration agreement would meet that standard. This Note describes when, if ever, class waivers render otherwise valid arbitration agreements unenforceable because they would prevent plaintiffs from effectively vindicating their statutory rights.

Part I describes the doctrinal framework established by the Court in Concepcion, Green Tree, and Mitsubishi Motors. Part II argues that claims that class action waivers nullify state statutory rights cannot invalidate arbitration agreements after Concepcion. Part III considers several different arguments that class waivers undermine federal statutory rights in certain contexts. It argues that, although most such arguments should fail after Concepcion, there are two that might succeed. First, some federal statutes might establish a substantive right to class proceedings. Second, there is a difficult issue of whether proof that class proceedings are the only economically feasible means of vindicating statutory rights should invalidate an arbitration agreement. Even here, any exception to Concepcion is narrow and likely to become narrower still. Finally, this Note concludes that a very narrow subset, at most, of arbitration agreements undermine statutory rights merely by waiving class proceedings.

1. DOCTRINAL FRAMEWORK

   The FAA mandates that arbitration agreements "shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract." (7) The Act embodies a "liberal federal policy favoring arbitration," (8) and requires courts to "place arbitration agreements on an equal footing with other contracts...." (9) The Act's saving clause instructs courts to invalidate arbitration agreements for the same reasons--fraud, duress, or unconscionability--as they would any other contract but forbids them to invalidate arbitration agreements based on reasons "that apply only to arbitration or that derive their meaning from the fact that an agreement to arbitrate is at issue." (10) In Concepcion, the Supreme Court held that the FAA preempted California's Discover Bank rule, which conditioned the enforceability of most arbitration agreements on the availability of class procedures. Although California prohibited class litigation waivers as well as class arbitration waivers, (11) its preference for class actions placed arbitration agreements, in practice, on a worse footing than other contracts. (12)

   1. Concepcion and Discover Bank

      The arbitration agreement at issue in Concepcion was carefully drafted to avoid lower court rulings striking down other arbitration agreements. (13) AT&T's agreement required the parties to arbitrate all claims in an individual capacity; made dispute resolution, initiating arbitration, and the arbitration process itself consumer friendly; stipulated that AT&T would pay arbitration costs of all non-frivolous claims; and awarded a bonus of $7500 and double attorney's fees in the event that the arbitrator awarded more than AT&T's last settlement offer. (14)

      Both the district court and the Ninth Circuit Court of Appeals conceded that AT&T's arbitration provision was consumer friendly. The district court called it "'quick, easy to use' and likely to 'promp[t] full or ... even excess payment to the customer without the need to arbitrate or litigate'" (15) and noted that aggrieved consumers would generally be better off in individual arbitration than in a class action, which would take a long time for little reward. (16) The Ninth Circuit "admitted that aggrieved customers who filed claims would be 'essentially guarantee[d]' to be made whole." (17)

      Nevertheless, the district court denied AT&T's motion to compel arbitration, holding that the arbitration agreement was invalid under California's Discover Bank rule. (18) The Ninth Circuit affirmed and "held that the Discover Bank rule was not preempted by the FAA because that rule was simply 'a refinement of the unconscionability analysis applicable to contracts generally in California.'" (19)

      Under the Discover Bank rule:

      [W]hen [a class action waiver] is found in a consumer contract of adhesion in a setting in which disputes between the contracting parties predictably involve small amounts of damages, and when it is alleged that the party with the superior bargaining power has carried out a scheme to deliberately cheat large numbers of consumers out of individually small sums of money, then ... the waiver becomes in practice the exemption of the party from responsibility for [its] own fraud, or willful injury to the person or property of another. Under these circumstances, such waivers are unconscionable under California law and should not be enforced. (20) When a California court found a class waiver in an arbitration agreement unconscionable under California law, the court was to strike the waiver and compel class arbitration. (21) In the event that the court compelled class arbitration, a party would still be free to "waive the arbitration agreement and have the matter brought in court." (22)

      The Supreme Court reversed. (23) Class arbitration, it held, is an unwieldy procedure incompatible with the purposes of the FAA, at least where it is not the specific choice of the parties to a contract. (24) Therefore, state rules that condition the enforceability of arbitration agreements on the availability of class proceedings ate preempted, even when they purport to be applying general unconscionability rules. (25) This is because the specific application of those rules would disproportionally affect arbitration agreements and thus would violate the primary purpose of the FAA, which is to place arbitration agreements on an equal footing with any other contract. (26)

      Concepcion was broadly written. To understand just how broad the Court's reasoning was, it is useful to consider a narrower approach the Court might have taken.

      In his article on litigation, arbitration, and class action written before Concepcion was decided, the late Professor Richard Nagareda argued that the Court should enforce AT&T's arbitration agreement. (27) His argument rested on two major points: First, the agreement was designed to prompt AT&T to quickly pay claims, even those of dubious merit, in full. (28) The lower courts' refused to enforce the agreement, not because it was exculpatory, but because its class waiver prevented optimal deterrence, violating California's public policy. (29) Second, in light of Shady Grove Orthopedic Associates. v. Allstate Insurance Co., (30) state public policy concerning class-wide deterrence, whether in favor or against, could not overcome federal law. (31) Therefore, the lower courts should not have struck down AT&T's agreement because of California's policy on class actions. (32)

      Instead, he argued, courts considering the enforceability of arbitration agreements should conduct a "nuanced, circumstantial analysis" of whether a particular arbitration agreement would be exculpatory. (33) The court should decide whether the provisions of the agreement would, functionally, make arbitration prohibitively expensive. (34) He expressed particular skepticism about second generation class waivers in arbitration agreements, which provided nothing like AT&T's "bonus." (35)

      The Court in Concepcion did not hint that lower courts in the future should perform a functional, case-by-case analysis to determine whether a particular class waiver would render an arbitration agreement exculpatory. Nor did its decision turn on the consumer-friendly nature of AT&T's arbitration agreement. Responding to the dissent's argument "that class proceedings are necessary to prosecute small-dollar claims that might otherwise slip through the legal system," the Court emphatically held that "States cannot require a procedure that is inconsistent with the FAA, even if it is desirable for unrelated reasons." (36)

      The Court's reasoning about class proceedings and the purposes of the FAA was broad indeed.

   2. Effective Vindication of Statutory Rights

      Since Concepcion, a number of courts have refused to enforce class-waiving arbitration agreements, holding that they would effectively bar plaintiffs from vindicating their statutory rights...