Monday, May 2, 2011

Arbitration: Good for the Goose, but Not the Gander

      For years, business groups have been touting to consumers the supposed advantages of arbitration over litigation to settle disputes. Arbitration is quick, easy, and inexpensive, they say. Those advantages, they say, explain why so many companies now specify in consumer contracts that disputes are to be resolved in arbitration instead of in courts.
      It turns out, however, that arbitration may be good for the consumer goose, but not so good for the business gander — at least not if consumers are allowed to join together to settle the dispute through the same type of classwide proceeding allowed in courts. Business groups were upset when the California Supreme Court ruled in 2005 that companies could not ban classwide arbitration in standard consumer contracts. They urged the U.S. Supreme Court to nullify the rule when the justices took on a case last year challenging it.
      Last week [April 27], the Roberts Court gave business interests another victory by ruling that federal law supersedes the California rule. By a 5-4 vote, the conservative majority set aside principles of strict statutory interpretation and federalism to hold that, under the Federal Arbitration Act, states cannot override on grounds of unconscionability a business-imposed consumer contract that bans classwide arbitration.
      The ruling in AT&T Mobility v. Concepcion stems from a complaint by a California couple, Vincent and Liza Concepcion, that AT&T charged them an undisclosed $30.22 in sales tax for the supposedly “free” cell phone they got as part of a service contract. They filed a suit against AT&T in federal court in San Diego, charging the company with false advertising and fraud. The suit was later consolidated with a class action on behalf of other AT&T customers subject to the same alleged overcharge.
      AT&T invoked the arbitration clause in the cell phone contract — probably just like the clause you never bothered to read when you signed up with your carrier — to take the case out of the courts. The contract specified that claims could be brought only in the parties’ “individual capacity, and not as a plaintiff or class member in any purported class or representative proceeding.”
      California has a general law that prohibits or limits the enforcement of any contract or contract term that was “unconscionable at the time it was made.” In 2005, the California Supreme Court applied that law by a 4-3 vote to nullify a ban on classwide arbitration in Discover Bank’s standard agreement with credit-card holders.
      Under the Discover Bank rule, a ban on classwide arbitration is unconscionable and unenforceable if applied to disputes that predictably involve small amounts of damages and if imposed by the party with “superior bargaining power” as part of a scheme to cheat large numbers of consumers out of small amounts of money. In that circumstance, the California justices ruled, the waiver becomes “in practice” an exemption for the company’s responsibility for its own fraud.
      In the AT&T case, the company argued that California’s rule ran afoul of the Federal Arbitration Act, a law passed in 1925 to overcome judicial hostility toward arbitration. The act specifies that an arbitration clause in a maritime or commercial contract “shall be valid, irrevocable, and enforceable” except “upon such grounds as exist at law or in equity for the revocation of any contract.”
      On its face, California’s Discover Bank rule seems to fit the federal act’s “savings clause” for a generally applicable ground for revocation of contracts. But, in an opinion by Justice Antonin Scalia, the Roberts Court conservatives discovered otherwise. California’s rule would have a disproportionate effect on arbitration agreements, Scalia said, was therefore preempted by the federal law.
      In reaching that conclusion, Scalia conjured up a parade of horribles that would result if companies were forced into arbitration proceedings against a class of consumers instead of the lone disgruntled customer. A classwide arbitration, Scalia said, would not be the “efficient, streamlined” procedure, informal and inexpensive, best suited for these small disputes. Worse, he explained, with limited judicial review, a company would not want to risk “a devastating loss” in a classwide arbitration and would instead be “pressured” into settling questionable claims.
      The limited judicial review in arbitration is precisely why consumer groups feel customers are disadvantaged by standard arbitration clauses in consumer contracts. Admittedly, AT&T’s agreement included consumer-friendly terms, including a provision that the company would pay a fixed amount, $7,500, if an arbitrator’s award was greater than the company’s final offer.
      Still, as Justice Stephen G. Breyer pointed out for the liberal dissenters, AT&T was free to settle the Concepcion’s complaint at any point by ponying up $30.22 — leaving all other customers on their own and the company free to continue the allegedly fraudulent practice. Breyer also argued that Scalia exaggerated the difficulties of classwide arbitration — the American Arbitration Association does prescribe rules for classwide proceedings — and the potential advantages for a company to resolve the issue once and for all.
      As Breyer argued in dissent, the majority invoked policy, not precedent, in a decision that overrode states’ role in interpreting and enforcing arbitration agreements. “We do not honor federalist principles in their breach,” Breyer wrote in a pointed conclusion. For the majority, however, California’s consumer protection stance was merely an “obstacle” to a ruling that — like others from the Roberts Court — gives business interests relief from effectively being called to account for alleged wrongdoing.


  1. Discover Bank was decided in 2005, not 2006.

  2. California’s Discover Bank rule seems to fit the federal act’s savings clause for a generally applicable ground for revocation of contracts. I guess no proof has been issued against this. Any idea?