The U.S. Supreme Court held oral argument yesterday in AT&T Mobility v. Concepcion, the outcome of which could largely determine the future viability of consumer and employment arbitration. The Court will determine the extent to which the Federal Arbitration Act (FAA) preempts a state law that invalidates class action waivers in consumer arbitration agreements. A class action waiver is language in an arbitration agreement that precludes the parties from participating in a class action in court or in arbitration.

Under Section 2 of the FAA, an arbitration agreement can be invalidated only on state law grounds that apply to "any contract," not just an arbitration contract. The Ninth Circuit Court of Appeals held in Concepcion that the FAA did not preempt the test employed by the California Supreme Court in determining the validity of class action waivers in arbitration agreements because the same test was employed by that Court in determining the validity of class action waivers outside arbitration agreements. Under that test, articulated by the California Supreme Court in Discover Bank v. Superior Court of Los Angeles, 36 Cal. 4th 148 (2005), a class action waiver is unconscionable if:

• The agreement is a consumer contract of adhesion drafted by a party with superior bargaining power,

• The agreement occurs in a setting in which disputes between the contracting parties predictably involve small damages, and

• It is alleged that the party with the superior bargaining power has carried out a scheme deliberately to cheat large numbers of consumers out of individually small sums of money.

AT&T's counsel argued that the "Discover Bank test" is preempted by Section 2 of the FAA since it is a special rule of unconscionability that applies just to dispute resolution contracts and not to other types of contracts. Under California law, another type of contract is found unconscionable only if it "shocks the conscience" or is one that "a person would have to be under a delusion to accept."

AT&T's counsel further argued that AT&T's arbitration provision—which included a special feature requiring the arbitrator to award $7,500 plus double reasonable counsel fees if the arbitrator finds in favor of the consumer and awards more than AT&T's pre-arbitration settlement offer—could not be considered unconscionable under the unconscionability test that applies to contracts in California, other than dispute resolution contracts, since many consumers may reasonably prefer that type of dispute resolution over participating in a class action. According to AT&T's counsel, the principal flaw in the Discover Bank test is that it determined unconscionability based largely on the extent of its effect on non-parties to the dispute and its deterrence of class actions.

While it is always hazardous to predict the outcome of a case based on questions and comments of Justices, most of them seemed to be highly skeptical of Concepcion counsel’s position because of its potential to destroy arbitration. Under that position, states would be free to adopt laws that, while facially neutral in their application to all dispute resolution contracts, would convert arbitration into litigation. For example, a state would be allowed to enact a statute requiring that court rules of civil procedure and evidence must also apply in arbitration. A transcript of the oral argument is here.

Ballard Spahr submitted an amicus brief in the case on behalf of the American Bankers Association, Financial Services Roundtable, Consumer Bankers Association, and American Financial Services Association. Click here to read an earlier Ballard Spahr legal alert on the recent events involving this case. Click here to listen to Alan S. Kaplinsky’s recent interview on American Public Media’s Marketplace.

Ballard Spahr’s Consumer Financial Services Group is nationally recognized for its skill in litigation defense and avoidance (including pioneering work in pre-dispute arbitration programs), its guidance in structuring and documenting new consumer financial services products, and its experience with the full range of federal and state consumer credit laws throughout the country. For further information, please contact Alan S. Kaplinsky, Group Chair, at 215.864.8544 or kaplinsky@ballardspahr.com; or Mark J. Levin, 215.864.8235 or levinm@ballardspahr.com.


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