How the Supreme Court thwarted the purpose of the federal Arbitration Act.

• Author: Wilson, Jodi

CONTENTS INTRODUCTION I. ARBITRATION AND THE JUDICIARY: FROM HOSTILITY TO FAVORITISM A. The FAA: A Remedy for Judicial Hostility B. The FAA: From Judicial Hostility to Favoritism II. AT&T MOBILITY LLC v. CONCEPCION A. The Conflict: The Policy Favoring Arbitration Versus the Unconscionability Doctrine and the Discover Bank Rule B. The Conflict Continues: AT&T Mobility LLC v. Concepcion in the Lower Courts C. Resolution: The Court's Policy of Favoring Arbitration Compels the Preemption of the Discover Bank Rule III. A CRITIQUE OF THE COURT'S ANALYSIS A. The Court Relied on an Incorrect "Overarching Purpose" 1. The Court's streamlined proceedings purpose discounts the equal footing policy reflected in the text of the FAA and expressed in the legislative history of the FAA 2. The Court's streamlined proceedings purpose places undue weight on the judicially created policy favoring arbitration 3. The Court's streamlined proceedings purpose incorporates a vision of arbitration that is not reflected in the FAA B. The Discover Bank Rule Does Not Stand as an Obstacle to the Purpose of the FAA CONCLUSION "A greater power than we can contradict Hath thwarted our intents. "

--William Shakespeare *

INTRODUCTION

Arbitration is omnipresent. (1) If you have a bank account, a credit card, or a cell phone, you have an arbitration agreement. American businesses have incorporated mandatory arbitration agreements into all types of contracts. (2) And, as a general rule, courts will enforce these arbitration agreements like any other contractual agreement. (3)

But this was not always the case. There was a time when the judiciary was hostile to arbitration and refused to enforce arbitration agreements. (4) In 1925, Congress responded to this judicial hostility by enacting the United States Arbitration Act, now known as the Federal Arbitration Act ("FAA"). (5) Section 2 is the heart of the FAA. (6) Section 2 is comprised of two discrete parts, which together strike a careful balance between federal regulation of arbitration agreements specifically and state regulation of contracts generally. The first part of section 2--the enforcement clause--provides that arbitration provisions in written agreements affecting interstate commerce are "valid, irrevocable, and enforceable." (7) The second part of section 2 the savings clause--clarifies that arbitration agreements are still subject to "such grounds as exist at law or in equity for the revocation of any contract." (8) As reflected in both the House Report and the Senate Report, the purpose of the FAA was to place arbitration agreements on the "same footing as other contracts" and thereby overcome judicial hostility to arbitration. (9)

The FAA proved to be a turning point for arbitration, as it overcame judicial hostility such that arbitration agreements are now routinely enforced. (10) Consistent with the savings clause in section 2, however, courts have struck down arbitration agreements that violated generally applicable state contract law. (11) Thus, at first blush, section 2 of the FAA seems to be accomplishing Congress's purpose. Judicial hostility has been quelled, and arbitration agreements occupy the same footing as other contracts.

But upon closer review, it becomes evident that the United States Supreme Court has thwarted the equal footing policy established in the FAA and replaced it with a judicial policy favoring arbitration. (12) Almost thirty years ago, the Court announced that the FAA evidenced a policy favoring arbitration, despite the apparent conflict such a policy has with Congress's stated intent to place arbitration agreements on the same footing as other contracts. (13) Since first announcing this favoritism policy, the Court has often repeated the policy as a basis for its decisions, to the detriment of the stated congressional policy of equal footing. (14)

This policy of favoritism was the cornerstone of the Court's decision in AT&T Mobility LLC v. Concepcion, (15) which extended the preemptive effect of the FAA to apply to a generally applicable state contract doctrine, thereby striking a blow to the savings clause of section 2. (16) In Concepcion, the issue was whether the FAA preempted the application of the state-law doctrine of unconscionability to class action waivers contained in contracts with arbitration agreements. (17) Although the Court acknowledged that it should "place arbitration agreements oil an equal footing with other contracts," (18) the Court emphasized that the FAA reflects a "liberal federal policy favoring arbitration." (19) After acknowledging these two conflicting principles, the Court concluded that the "overarching purpose of the FAA" was to "ensure the enforcement of arbitration agreements according to their terms so as to facilitate streamlined [arbitration] proceedings." (20) Applying an obstacle preemption analysis, (21) the Court then held that the rule at issue in Concepcion stood as an obstacle to this purpose and was, therefore, preempted. (22) The "overarching purpose" identified by the Court is premised on the judicially created policy favoring arbitration and places insufficient, if any, weight on the stated congressional policy of equal footing. Based on this flawed purpose, the Court expanded the preemptive effect of the FAA to include a generally applicable state-law doctrine that should have been protected by the savings clause of section 2. (23)

Part I describes the environment of judicial hostility that existed when the FAA was enacted. This Part next summarizes the legislative history establishing that Congress's purpose in enacting the FAA was to eliminate this judicial hostility by mandating that arbitration agreements exist on the same footing as other contracts. Finally, this Part describes the Court's progression from hostility to favoritism.

Part II describes the conflict between the Court's policy favoring arbitration and the application of the savings clause to protect generally applicable state law, focusing specifically on the unconscionability doctrine at issue in Concepcion. This Part then recounts the Court's resolution of the conflict in Concepcion in favor of arbitration.

Part III presents a critique of Concepcion. (24) This Part argues that the Court improperly preempted state law by relying on a flawed purpose focused on enforcing arbitration agreements in order to facilitate streamlined arbitration proceedings. This purpose is fundamentally flawed because it ignores the equal footing policy reflected in the text of the FAA and expressed in the legislative history of the FAA, places undue weight on the judicially created policy favoring arbitration, and incorporates a vision of arbitration that is not reflected in the FAA. By premising its preemption analysis on this flawed purpose, the Court justified its expansion of the preemptive effect of the FAA. The text and legislative history of the FAA reflect that its purpose was simply to overcome judicial hostility by ensuring that arbitration agreements are enforced on equal footing with other contracts. Had the Court premised its analysis on this purpose, it would not have expanded the preemptive effect of the FAA to include a generally applicable state contract doctrine.

1. ARBITRATION AND THE JUDICIARY: FROM HOSTILITY TO FAVORITISM

   The relationship between arbitration and the judiciary has gradually evolved. A century ago, the judiciary was hostile to arbitration agreements. (25) In 1925, Congress enacted the United States Arbitration Act, now known as the Federal Arbitration Act ("FAA"), to counteract that hostility and ensure that arbitration agreements received the same treatment as any other contract. (26) Almost sixty years later, however, the United States Supreme Court shifted the level playing field intended by the FAA and announced a federal policy in favor of arbitration. (27) This announcement ushered in a new era for arbitration. Arbitration agreements were no longer mere equals among contracts; arbitration agreements became super contracts. (28) Since first announcing this federal policy favoring arbitration, the Court's FAA decisions have repeatedly relied upon this policy in support of pro-arbitration decisions. (29)

   1. The FAA: A Remedy for Judicial Hostility

      The FAA was conceived as a remedy for judicial hostility toward arbitration agreements. This judicial hostility dated back to colonial times. (30) It was prevalent in both state (31) and federal courts--reaching even the United States Supreme Court:

      Every citizen is entitled to resort to all the courts of the country, and to invoke the protection which all the laws or all those courts may afford him.... In a civil case he may submit his particular suit by his own consent to an arbitration, or to the decision of a single judge.... He cannot, however, bind himself in advance by an agreement, which may be specifically enforced, thus to forfeit his rights at all times and on all occasions, whenever the case may be presented. (32) If one party to the arbitration agreement decided it no longer wanted to arbitrate, courts refused to compel arbitration, allowing the objecting party to revoke its agreement. This rule, followed by most state and federal courts, was referred to as the "revocability doctrine." (33) Judicial refusal to enforce arbitration agreements was premised primarily on the theory that parties could not "oust" the jurisdiction of the courts. (34) An alternative, but less common, premise asserted that courts could not guarantee fairness in arbitration and, therefore, needed to protect the rights of citizens by granting access to the courts. (35)

      By the early 1900s, however, the business community had begun to rely heavily on arbitration and had grown increasingly distressed that courts refused to enforce arbitration agreements. (36) So the business community lobbied for change. (37) In 1920, the New York legislature passed the New York Arbitration Act of...