The future of class-action waivers in consumer contract arbitration agreements after DIRECTV, Inc. v. Imburgia.

• Author: Moore, Kristina

Contents Introduction I. Arbitration and Class Actions A. The Federal Arbitration Act ("FAA") and Consumer Contracts B. The Emergence of Class Actions in Arbitration II. The Disappearance of Class-Arbitration III. The Possible Reemergence of Class Arbitration after DIRECTV Conclusion INTRODUCTION

James Pendergast wanted to contest $20 worth of roaming fees that Sprint had charged him, as these charges were incurred from calls in his own home. (1) Pendergast filed a class action on behalf of Sprint customers who had noticed the same issue only to learn, when his suit was thrown out of a Miami court, that Sprint included an arbitration clause in its form. (2) Pendergast was like many consumers who have no idea they agreed to arbitrate all disputes, as well as waive a right to join any actions, when entering into these types of "take it or leave it" contracts. (3) In this situation, Pendergast's lawyer advised him that winning would require expensive expert analysis, which Pendergast could not risk in arbitration, absent joining a class. (4) Consequently, Pendergast declined to pursue any action to recover the $20, and Sprint was not held to account for its inconsistent roaming charges in the Miami market. (5)

Consumer advocates have long argued that the ability to bring class actions in arbitration is essential to guarding against such corporate malfeasance. (6) Thus, some have noted, with undisguised horror, that with the DIRECTV, Inc. v. Imburgia (7) decision, the Supreme Court has seemingly put the final nail in the class-arbitration coffin, first constructed with the Court's Stolt-Nielsen S.A. v. AnimalFeeds International Corp. (8) holding in 2010. (9) A close examination of the DIRECTV opinion, however, suggests that the Court was more concerned with the California court's blatant disregard of the AT&T Mobility v. Conception (10) holding than in broadening an anti-class arbitration policy. (11) Indeed, in looking closely at the Concepcion line of cases, the DIRECTV holding is far more narrow than most commentary would suggest.

Furthermore, the Consumer Financial Protection Board ("CFPB"), acting under the Congressional mandate provided by section 1028(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act, proposed a set of rules that would prohibit financial service providers from putting class action waivers in certain consumer agreements. (12) Some corporate lawyers are reacting with horror at the promulgation of these rules, and multiple legal challenges are likely. (13) Although it is uncertain what a new Court might rule after the 2016 election and subsequent appointment of a 9th justice, the current iteration of the Court is more closely aligned in favor of allowing class-arbitrations than the lopsided DIRECTV majority would otherwise suggest. That balance is unlikely to shift, even if the Senate confirms a candidate in the mold of the late Justice Scalia, as seems likely at the time of publication. (14) This Comment, therefore, posits that the Court could uphold the new CFPB rules against class action waivers, despite the 6 3 DIRECTV decision. (15)

In making that determination. Part I of this Comment will briefly examine the history of arbitration agreements and class-action waivers in consumer adhesion contracts. Part II will discuss how the Stolz-Nielson line of cases, culminating in DIRECTV, have led to an apparent inability of consumers to circumvent class action waivers. Finally, Part III will briefly consider the likely future of such waivers in adhesion contracts, in light of the CFPB rules limiting class action waivers and arbitration clauses in certain financial services contracts.

1. ARBITRATION AND CLASS ACTIONS

   1. The Federal Arbitration Act ("FAA") and Consumer Contracts

      In 1925, Congress enacted the precursor to what is now known as the FAA, in order to enforce commercial arbitral agreements in front of a hostile judiciary. (16) As codified into law, the enforcement scope of the FAA is limited to "[a] written provision in any maritime transaction or a contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction." (17) This [section] 2 enforcement clause is the "heart of the FAA" which served to overcome judicial hostility to arbitration. (18) It, did so by putting arbitration clauses on equal footing with other contract law, as Congress intended when it enacted the statute. (19) In the 1980s, however, the Court shifted from an "equal footing" to a "pro-arbitration" stance, when it stated that "[i]n enacting [section] 2 of the federal Act, Congress declared a national policy favoring arbitration." (20) This judicial shift towards "pro-arbitration" in opposition to Congress' explicit intention to create "equal footing" (21)--marked the beginning of a series of cases where the Court misapplied the FAA when addressing the issue of class arbitration. (22)

      Congress certainly intended the FAA to facilitate arbitration between merchants and other parties with equal bargaining power, but did not express such an intention for the FAA to be applicable to adhesion contracts. (23) In fact, the legislative record indicates that Congress was concerned with that very possibility. In a lengthy exchange, members of Congress discussed the danger that employers and corporations could use the FAA to impose mandatory arbitration in contracts where the other party did not have equal bargaining power, and explicitly stated that the FAA would not allow that to occur. (24) Since Congress' enactment of the FAA, however, the judiciary has held that "both employment, and consumer contracts constitute 'commerce' within the meaning of the FAA." (25) Nonetheless, until the 1980s, the Court did not consider arbitration agreements "operative when parties had significantly different bargaining powers." (26) For example, in Wilko v. Swan, (27) the Court unanimously recognized that "the right to select the 'forum' even after the creation of a liability is a 'substantial right' and that, the agreement, restricting that choice, would thwart the express purpose of the [federal] statute." (28) Thus, the Court recognized Congress's concern over the significant, risk to consumers incurred by imposing mandatory arbitration in adhesion contracts.

      In a series of holdings throughout the 1980s, however, the Court gradually abandoned the Wilko Court's concerns over unequal bargaining power between parties to an arbitration agreement and parties' statutory right to legal recourse. In Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth. Inc., (29) the Court allowed for the arbitrability of antitrust claims under the Sherman Act. There, the Court held that there is no "presumption against arbitration of statutory claims ... [nor] any reason to depart from the federal policy favoring arbitration where a party bound by an arbitration agreement raises claims founded on statutory rights." (30) In Shearson/American Express, Inc. v. McMahon, (31) the Court upheld the arbitrability of the Racketeer Influenced and Corrupt Organizations Act (RICO) and Securities Exchange Act claims by finding that the FAA requires the courts to rigorously enforce arbitration agreements and that "the burden is on the party opposing arbitration ... to show that Congress intended to preclude a waiver of judicial remedies for the statutory rights at issue." (32) Finally, in Rodriguez de Quijas v. Shear son/American Express, Inc., (33) the Court ruled that claims under the Securities Act were arbitrable, even absent express consent. (34) Thus, the Court gradually moved away from the notion of express consent, despite it being a central tenet of the practice of arbitration. (35)

   2. The Emergence of Class Actions in Arbitration

      As the Court began enforcing mandatory arbitration in adhesion contracts, arbitration clauses became well-nigh ubiquitous. (36) Corporations now use them in a variety of contexts, ranging from consumer purchases, financial services to nursing home contracts. These form contracts are "provided to the consumer on a take-it-or-leave-it basis," which terms become operable at the point of purchase. (37) Within twenty years of the Court overturning Wilko, arbitration clauses had even become common in employment contracts. A 2007 survey found that 46.8% of 757 responding companies used employment arbitration, up from only 4 out of 107 in 1991. (38) This explosion of mandatory arbitration clauses in contracts between parties with unequal bargaining power thus fulfilled the very misgivings expressed by members of Congress in the legislative record of 1924. (39)

      Section 2 of the FAA clearly requires party consent in order for an arbitration agreement to be binding, and the Court has continually underlined consent as an integral aspect of enforcing arbitration. (40) Courts, however, generally look only to the terms of the agreement in determining whether such consent is present. (41) Even though many consumers may be completely unaware that they have relinquished their rights to jury trials when accepting an adhesion contract, it is highly unlikely that a court would refuse to enforce an arbitration agreement on grounds of unconscionability. (42) In fact, the Supreme Court has not, found, in any case, that "arbitration [is] inadequate, inaccessible, or ineffective to vindicate rights." (43)

      Despite the Court's advocacy, it is not clear whether informed parties necessarily prefer forgoing their rights to litigation in favor of the efficiency of arbitration. A recent comparative study of consumer and nonconsumer contracts used by large public corporations showed that while over seventy-five percent of the consumer contracts included arbitration clauses, only six percent of the corporations' nonemployment, nonconsumer contracts included mandatory arbitration." This data led the authors of the study to surmise, rather plausibly, that "the frequent...