Contract after Concepcion: some lessons from the state courts.

Author:Dawson, James
 
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In AT&T Mobility LLC v. Concepcion, the United States Supreme Court held that the Federal Arbitration Act (FAA) preempts the use of unconscionability doctrine to invalidate arbitration clauses that foreclose classwide remedies. (1) The Court found that requiring the availability of classwide arbitration raises costs and prolongs disputes, thereby interfering with the "fundamental attributes of arbitration" at the core of the FAA. (2) The majority construed the FAA to allow for the invalidation of arbitration clauses "by 'generally applicable contract defenses, such as fraud, duress, or unconscionability,' but not by defenses that apply only to arbitration or that derive their meaning from the fact that an agreement to arbitrate is at issue." (3)

The five-to-four decision in Concepcion was quickly lambasted as brazenly conservative (4) and anti-consumer. (5) More recently, some scholars have raised a different concern: that Concepcion signals the federal colonization of state contract law. (6) Casting aside Justice Brandeis's observation that "a single courageous state" must sometimes be permitted to "serve as a laboratory," (7) the Supreme Court has instead insisted that the presence of an arbitration clause prevents state-court judges from applying contract defenses on which they had previously relied for decades. (8)

How much of state contract law remains after Concepcion? During the past several years, state courts have been engaged in a tug-of-war with the Supreme Court over the answer to this question. In 2012 and 2013, several state courts developed theories under which Concepcion could be cabined or read narrowly. The Supreme Court then invalidated the most promising of those theories in American Express Co. v. Italian Colors Restaurant. In that case, the Court held that class-arbitration waivers cannot be invalidated as unconscionable even when the cost of individually arbitrating a statutory claim vastly exceeds the potential recovery. (9) After Italian Colors, state judges tugged back yet again, deploying new readings of Concepcion that left room for state courts to refuse to enforce at least some forced-arbitration clauses. (10)

This Comment explores the vitality of state contract law after Concepcion. In the three years since the case was decided, state courts have developed a number of innovative, narrow readings of Concepcion. These readings, taken together with other opinions that have sought to limit the scope of FAA preemption, show that state-court judges are eager to protect their traditional role as the final arbiter of contracts.

Part I catalogues recent state-court approaches to forced-arbitration clauses, focusing in particular on four arguments: (1) Concepcion forecloses the use of unconscionability doctrine only when the application of that doctrine would interfere with the "fundamental attributes of arbitration"; (2) Concepcion applies to categorical but not case-by-case unconscionability analysis; (3) Concepcion does not prevent state courts from interrogating the conscionability of the formation of the entire contract; and (4) "arbitration" might be defined narrowly so as to limit the scope of FAA preemption. Building on these theories, Part II suggests a more ambitious avenue for innovation within the space left open by Concepcion. By applying duress doctrine to certain contracts containing forced-arbitration clauses, state courts and arbitrators (11) may be able to protect lay claimants while still remaining faithful to Supreme Court precedent.

  1. NARROW READINGS OF CONCEPCION

    Many state courts have read Concepcion broadly, concluding that it requires judges to enforce nearly all arbitration agreements. (12) Others have applied Concepcion, but have done so while casting doubts on its wisdom. (13) Still other courts--particularly those of California, Massachusetts, Missouri, and Washington--have read Concepcion narrowly. These readings of Concepcion can be grouped into four broad categories.

    1. Unconscionability Analysis Survives Concepcion

      In 2005, the California Supreme Court held in Discover Bank v. Superior Court that it was categorically unconscionable to enforce a class-arbitration waiver in a case involving a forced-arbitration clause in a consumer contract and a predictably small amount of damages. (14) In Concepcion, the Supreme Court indicated that the Discover Bank rule was preempted because it "interfere [d] with the fundamental attributes of arbitration and thus create [d] a scheme inconsistent with the FAA." (15) As examples of rules interfering with the fundamental attributes of arbitration, the Court listed contract defenses that conditioned the enforcement of an arbitration clause on the use of a jury, the use of the Federal Rules of Evidence, or the use of court-monitored discovery. (16)

      These three examples do little to resolve the question of which attributes of arbitration are "fundamental." Some commentators have adopted a broad definition of "fundamental attributes of arbitration," concluding that the FAA preempts the imposition of any contract defense that makes arbitration "more formal, costlier, or less efficient." (17) Others have concluded that the "fundamental attributes of arbitration" may be narrower, and that only contract defenses that are closely analogous to the Court's examples should be struck down. (18) The California Supreme Court recently weighed in on this question in Sonic-Calabasas A, Inc. v. Moreno (Sonic II). Justice Goodwin Liu's opinion for the majority persuasively argued that the Concepcion Court intended the "fundamental attributes of arbitration" to include low costs, efficiency, speed of dispute resolution, and expert adjudicators. (19)

      Significantly, Concepcion does not entirely foreclose the use of unconscionability doctrine to invalidate forced-arbitration clauses. (20) On the contrary, state-court judges can use unconscionability rules to police arbitration clauses so long as such rules do not interfere with the "fundamental attributes of arbitration." (21) For example, California courts have found that arbitration clauses are unconscionable if they include an unreasonable limitation on damages, (22) if they impose a "threshold" amount in controversy before claimants can arbitrate, (23) or if they allow a prevailing employer to recoup attorneys' fees without making the same provision for a prevailing claimant. (24) These decisions concerned contract terms that had nothing to do with the cost, speed, or efficiency of the arbitration proceeding. Therefore, the courts concluded that there was no basis for the FAA to preempt the state's determination that these provisions were unconscionable.

    2. The FAA Preempts Only Categorical Unconscionability Rules

      Other courts have concluded that the FAA has preemptive force only when states have adopted across-the-board rules requiring some feature of an arbitration agreement to be held categorically unconscionable. On this view, the problem with the Discover Bank rule was its breadth; it required the invalidation of class-arbitration waivers even when they existed within decidedly pro-consumer contracts "that might ... otherwise [have been] conscionable under [state] law." (25) In the wake of Concepcion, some courts have concluded that as long as judges determine unconscionability through a context-based, case-by-case approach, (26) the FAA will not necessarily preempt a judicial determination of unconscionability.

      The Washington Supreme Court pioneered this approach. In Gandee v. LDL Freedom Enterprises, Inc., that court considered three terms contained within the arbitration clause of a debt-adjustment contract: a "loser pays" provision, a venue provision, and a provision requiring arbitration within thirty days of the emergence of the dispute. (27) The court also considered the validity of the contract's severability clause. (28) After separately considering each of the four clauses "based on the specific facts at issue in the current case," (29) the Gandee court concluded that the three provisions of the arbitration clause were substantively unconscionable and that the arbitration clause could not be severed from the contract. To date, the Supreme Court of Missouri (30) and the lower courts in California (31) have embraced the Gandee approach.

    3. The FAA Permits Courts to Interrogate the Conscionability of the Formation of the Entire Contract

      In his seminal article Contract as Thing, Arthur Leff argued that contracts of adhesion are not actually contracts at all; rather, they are "unilaterally manufactured commodities" and "products of non-bargaining." (32) In Leffs view, the agreement at issue in Concepcion would best be described not as a contract but as a. product--a "thing" that could be bought and sold, but whose terms could not be negotiated. (33) On this theory, applying unconscionability analysis to arbitration clauses misstates the problem by committing a classification error. The significant issue is not whether the arbitration clause is unconscionable, but rather whether the "contracty thing[]" (34) containing the arbitration clause can even be classified as a contract.

      Some states, while stopping short of classifying contracts as products, have used similar arguments as a kind of background principle that counsels for aggressive interrogation of a contract's formation. For example, the Missouri Supreme Court held in Brewer v. Missouri Title Loans (Brewer IF) that the conscionability of a class-arbitration waiver should be determined by applying contract law to determine whether the formation of the agreement as a whole was conscionable. (35) In that case, the court held that a gross imbalance in bargaining power rendered a consumer arbitration clause unconscionable. The evidence in that case "demonstrated that no consumer ever successfully had renegotiated the terms of the title company's arbitration contract." (36) Eager to regain some...

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