In AT&T Mobility v. Concepcion, the Supreme Court struck California's so-called "Discover Bank rule"--a judge-made rule providing that arbitration agreements attended by class action waivers are unenforceable if those agreements are contained in standard form consumer contracts. (1) The Discover Bank rule had been informed by a judicial suspicion that class waivers in adhesion contracts often prevent putative claimants from being able to vindicate their rights. But over time, the rule was applied more broadly and ceased to be limited to cases where the ability to vindicate rights was frustrated. The fact that the Discover Bank rule might save many claimants from forfeiting the ability to vindicate their rights--from seeing their claims "slip through the legal system"--presented no justification, in the view of the Scalia-led majority, for a prophylactic state rule that would label "unconscionable" all arbitration agreements in standard-form consumer contracts. Even if such an ex ante rule were "desirable for unrelated reasons," the Court held, "States cannot require a procedure that is inconsistent with the FAA." (2)
As I and others have argued, Concepcion leaves open and unresolved the viability of a state law challenge to a bilateral arbitration clause which is shown, in a particular case, to impose a forfeiture of the claimant's ability to vindicate his state law rights. (3) Reasonable people can dispute the implications that Concepcion holds for such challenges, whether they are couched in terms of a generally applicable state law doctrine against exculpatory contracts, (4) or the vaguer and broader concept of "unconscionability." But the Concepion majority certainly did not foreclose such challenges in any explicit fashion--indeed, the Concepcion Court expressly granted certiorari to consider whether states may condition the enforceability of an arbitration agreement on the availability of class-wide procedures "when those procedures are not necessary to ensure that the parties to the arbitration agreement are able to vindicate their claims." (5)
Meanwhile, in the context of federal claims, the Second Circuit in Amex III (6) reaffirmed, in light of Concepcion, its earlier holdings that a class action waiver contained in an arbitration agreement is unenforceable if it is proven in the individual case that the arbitration clause at issue would force the claimant to shoulder such costs as would prevent the claimant from effectively vindicating its federal statutory rights. (7) On both the state and federal levels, then, cost-based vindication of rights challenges remain a significant concern to corporate defendants looking to exculpate themselves from exposure to aggregate litigation.
All of this begs a question: will the robust recognition of cost-based, evidence-backed vindication of rights challenges swallow up the basic ruling of Concepcion, rendering unenforceable arbitration agreements and class action waivers that the Supreme Court has held are otherwise to be enforced?
Recently, in Amex IV, (8) a divided Second Circuit refused to rehear Amex III en banc. In dissenting from the court's decision, Chief Judge Jacobs flagged this very issue, complaining that the vindication of rights doctrine "can be used to challenge virtually every consumer arbitration agreement that contains a class action waiver" (9) given the generally low per-plaintiff damages and significant expense of litigating most federal class actions. (10) Such an expansive interpretation would, in Chief Judge Jacobs's view, imply that class action waivers in cases asserting rights arising under most federal statutes are per se unenforceable, "permit[ting] plaintiffs to evade enforcement of class action ... waivers simply by manufacturing an affidavit or choosing pricey attorneys." (11) In the end, "every class counsel and every class representative who suffers small damages [could] avoid arbitration by hiring a consultant (of which there is no shortage) to opine that expert costs would outweigh a plaintiffs individual loss." (12)
As this article goses to print, the Supreme Court has granted certiorari to review the Amex case. (13) Nonetheless, Chief Judge Jacobs's instrumentalist admonition that the vindication-of-rights "exception" will swallow the Concepcion "rule" is a useful launching-off point: I see three basic responses, to each of which I have applied labels that I will use throughout this article. First, a "liberal pragmatist" would say to Chief Judge Jacobs, "So what? If an arbitration agreement prevents the vindication of rights, it should fall. It makes no difference if the vindication of rights exception applies to save 5% of class filings or 90%." (That said, one's view on whether 5% or 90% is more likely will turn on how one treats attorneys' fees and other recoupable cost items, as discussed below in Part II). What matters to the liberal pragmatist is whether claimants are deterred from vindicating their rights.
A second response, which I will call "practical formalism," would observe that the vindication of rights exception is narrower than meets the eye. Following Concepcion, bilateral arbitration clauses themselves are evolving to permit vindication of rights, by providing that companies will absorb otherwise non-recoupable costs and fees, and by posting "bounties," premiums and other features discussed below in Part II.A. Justice Scalia's majority opinion has ushered in a sort of "race to the top"--a development that should be cheered. The correct legal approach is a case-by-case evidentiary test as to whether the particular clause permits vindication in the particular case.
A third response, which I will call "FAA absolutism," holds that there is no vindication of rights exception. Even where the enforcement of a bilateral arbitration clause can be shown to exculpate the defendant from wrongdoing or prevent the effective vindication of rights in a particular case, the clause is per se enforceable under the FAA. On this view, it is no defense to an arbitration clause that it snuffs out substantive claims. The FAA saving clause recognizes only defenses to the making of an arbitration agreement; any defense relating to the ability to vindicate rights is, on this view, a non-cognizable public policy-rooted defense.
And then, of course, there is the "conservative instrumentalist" approach that drives Judge Jacobs's dissent. This view (as I see it) does not dispute the basic rule that arbitration agreements are enforceable only so long as they permit the effective vindication of federal rights. But this instrumentalism is driven by the concern a vindication "exception" will swallow the Concepcion "rule."
The "liberal pragmatist" view is exemplified by my own prior writings and the First Circuit's decision in Kristian v. Comcast, which focused on the real world effects that class action waivers have on lawyers and litigants. (14) The "FAA absolutist" view finds its most perfect expression, I think, in Justice Thomas's concurring opinion in Concepcion, which is quite explicit in its bases for rejecting the vindication of rights doctrine. (15)
But the view that I perceive as becoming dominant in the post-Concepcion world is "practical formalism," under which most claimants seeking to make the vindication of rights showing are likely to fail, as consumer-friendly arbitration clauses proliferate across the corporate landscape. (16) Justice Scalia in Concepcion offered up the observation that the claimants in that case could have vindicated their rights under the bilateral arbitration clause at issue, principally because "the arbitration agreement provides that AT & T will pay claimants a minimum of $7,500 and twice their attorney's fees if they obtain an arbitration award greater than AT&T's last settlement offer." (17) Since that time, numerous lower courts have rejected challenges to arbitration clauses and class action waivers based upon the observation that the clause at issue would in fact allow the vindication of rights--at least, when measured against the yardstick of Concepcion. (18)
The goal of this Article is to provide a snapshot of this particular moment in the development of federal arbitration jurisprudence, focusing on cost-based challenges to the explicit or implicit anti-aggregation feature of arbitration provisions in the post-Concepcion era. Part I charts the doctrinal bases for these challenges, which are cast in terms of either vindication-of-rights or substantive unconscionability. Part II seeks to verify my hunch that corporate transactional attorneys have taken a cue from the case law, developing bilateral arbitration agreements that appear designed to give judges comfort that the claimant will be able to vindicate its rights, thereby enabling courts to enforce those agreements as written, in conformity with the FAA. Here, I examine thirty-seven current arbitration clauses, confirming that many large and well-known consumer-oriented companies have over time incorporated "friendly" provisions to their arbitration clauses, such as offering to pay filing fees, providing for attorney and expert fee-shifting, and promising "bounty" or premium payments to claimants who achieve a better outcome in arbitration than the company's last-best offer. This Part, in particular, is in freeze-frame, as I expect that companies will continue to make modifications to their arbitration clauses in response to litigation outcomes. Finally, Part III discusses the four basic post-Concepcion approaches to cost-based challenges: FAA absolutism, practical formalism, liberal pragmatism and conservative instrumentalism. As courts around the country take stock of consumer friendly arbitration clauses to determine the extent to which they permit the effective vindication of rights, it is hard to deny that practical formalism has become the dominant strain in the law.
COST-BASED CHALLENGES TO INDIVIDUAL...