The United States Court of Appeals for the Ninth Circuit had to decide the validity of an arbitration agreement found in a Wireless Service Agreement. The facts:
Feb 2002: Vincent and Liza Concepcion entered into an agreement called the Wireline Service Agreement (WSA) with the predecessor of AT&T. The WSA governed the relationship between the Concepcions and AT&T pertaining to cell phone service and purchase of new phones.
AT&T had advertised that the cell phones were free but had charged sales tax at 7.75% of the phone's value in the retail market. The Concepcions sued AT&T alleging fraud. The WSA provided that any dispute in the agreement should be submitted to arbitration. The arbitration clause also contained a class action waiver clause. A class action suit is filed by one person or several persons on behalf many others. As per WSA, Concepcion was deemed to have his right to sue AT&T only under his individual capacity and not through any class action.
Jan 2006: The Concepcions sued AT&T for charging sales tax when the phone was advertised as free. A class action suit was filed by Laster.
Sep 2006: The District Court had consolidated the claims of Conceptions with that of the Laster class action.
Dec 2006: AT&T amended the arbitration clause by providing, in effect, that:
If Arbitration Award > AT&T’s last written settlement offer, then the customer would be paid USD 7,500.
Mar 2008: AT&T applied to the court to compel the Concepcions and Laster to arbitrate the dispute in their individual capacities under the new arbitration agreements.
The District Court denied the motion of AT&T holding, inter alia, that the class action waiver provision in the arbitration agreement was unconscionable as per California law and that the Federal Arbitration Agreement did not pre-empt the California unconscionability law.
Against this decision, AT&T appealed to the US Court of Appeals. The decision of the Court of Appeals is summarized:
- Under the FAA (Federal Arbitration Act) arbitration agreements are valid and enforceable “save upon such grounds as exist at law or in equity for the revocation of any contract” (Section 2 of the FAA).
- The Federal Arbitration Act did not, either expressly or impliedly, pre-empt the California Unconscionability Law. The objective of the FAA was to remove hostility towards arbitration and treat an arbitration clause like a contract. Assuming that there is a contract with a class action waiver, the class action waiver clause would nevertheless fall foul of the California Law.
- Further, S 2 clearly recognizes that arbitration agreements should be denied if they are invalid due to grounds such as unconscionability.
- Declaration of class action waiver clauses as invalid, if it satisfies the criteria laid down in past decisions, does not reduce the efficiency of arbitration.
- In previously decided cases, courts have held that since class actions “serve the important policy function of deterring and redressing wrongdoing, particularly where a company defrauds large numbers of consumers out of individually small sums of money”, class action waivers are unconscionable if certain conditions are satisfied:
- The class action waiver is found in a “consumer contract of adhesion”;
- Disputes between parties involve small sums of money as damages;
- The allegation is that complaint is that the party with superior bargaining power has cheated a large number of consumers for a small amount of money;
- The purported waiver has resulted in exempting the wrongful party from its own fraud or wrongful injury to another.
- Since the WSA was a contract of adhesion (because the Concepcions were given no opportunity to negotiate), since the damages involved here were a small amount of USD 30.22 and since the allegation against AT&T is that they have cheated a large number of customers by advertising the phones as free when they knew they would charge sales tax on the phone, the class action waiver provision in the arbitration agreement was unconscionable as per California Law
The US SC is hearing arguments in the case of AT&T v. Concepcion. Touted as one of the most important cases in the recent times, the AT&T case seemingly involves complex questions pertaining to class action, consumer rights, federalism and arbitration. More on the Supreme Court proceedings in a future post. But before closing off we make two points:
- In First Options of Chicago v. Kaplan 514 US 938 (1995), the US Supreme Court held:
"When deciding whether the parties agreed to arbitrate a certain matter (including arbitrability), courts generally (though with a qualification we discuss below) should apply ordinary state law principles that govern the formation of contracts... The relevant state law here, for example, would require the court to see whether the parties objectively revealed an intent to submit the arbitrability issue to arbitration."
- Thank god India does not have this state law – central law problem in arbitration that USA suffers from!