"I realise that some of my criticisms may be mistaken; but to refuse to criticize judgements for fear of being mistaken is to abandon criticism altogether... If any of my criticisms are found to be correct, the cause is served; and if any are found to be incorrect the very process of finding out my mistakes must lead to the discovery of the right reasons, or better reasons than I have been able to give, and the cause is served just as well." -Mr. HM Seervai, Preface to the 1st ed., Constitutional Law of India.

Wednesday, July 6, 2011

AT & T v. Concepcion: A Descriptive Comment

In a post in Lex Arbitri blog, one of us had noted that there has been significant number of dissents in many of the landmark cases decided by the US Supreme Court on arbitration. Even in AT & T v. Concepcion, the subject of analysis, the USSC held in favour of AT & T with a wafer-thin majority of five judges (with four dissenting). In this post, we summarize a portion of the majority judgement.

Case:                          AT & T Mobility LLC v. Concepcion
Court:                         US Supreme Court
Judgement Date:       27.04.2011

Majority:                    Scalia, J., Roberts, CJ., Kennedy,  Thomas, & Alito, JJ. (Thomas, J. concurring)
Dissent:                     Breyer, Ginsburg, Sotomayor & Kagan, JJ.

For facts, see this post.

Whether State Laws invalidating arbitration agreements prohibiting class arbitration procedures are unenforceable as per the Federal Arbitration Act?

The majority opinion is summarized below:
  1. Section 2 of the Federal Arbitration Act provides that “a written provision in a contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction... shall be void, irrevocable and enforceable, save upon such grounds as exist at law, or in equity for the revocation of any contract.” This provision reflects the liberal federal policy favouring arbitration and the fundamental principle that arbitration is a matter of contract. The reason why the FAA allows parties to structure their arbitration agreement is to allow efficient, streamlined procedures, tailored for a particular dispute.
  2.  The latter part of Section 2 also provides that an arbitration agreement could be invalidated on grounds such as fraud, duress and unconscionability but not by defences that apply to arbitration. In other words, an arbitration agreement could be declared invalid on grounds by which contracts could be declared invalid.
  3. California Law provides that courts may refuse enforcement of a contract that is unconscionable at the time of its making or the courts may, instead, limit the applicability of such unconscionable clause.
  4. Californian Law classifies most class action waivers in consumer contracts as unconscionable (“Discover Bank Rule”). In the Discover Bank case, the Californian Supreme Court held that a class action waiver in a consumer contract is unconscionable:
    • If the waiver is found in a consumer contract of adhesion where disputes between contracting parties involve small amounts of damages, and
    • If there is an allegation that the party with the superior bargaining power has made out a scheme to deliberately cheat large number of consumers.
  5. The Discover Bank Rule seems to target a party with superior bargaining power from its own fraud or wilful injury to the person or property of another.
  6. Under Section 2, a rule that generally relies on the uniqueness of arbitration as the basis of holding the arbitration agreement invalid. Section 2 would even pre-empt a state law that has a disproportionate effect on arbitration even if it does not rely on the uniqueness of arbitration for invalidating the arbitration clause.
  7. The Discover Bank Rule interferes with arbitration- it allows a party to demand class arbitration ex-post, that is, after the dispute has arisen. Although the rule applies only when the contract is adhesive, the time is long past when consumer contracts are anything but adhesive.
  8. The “small damages” ingredient of the Discovery Bank Rule is “toothless and malleable”. “small” damages cannot be defined. The “Scheme-to-Cheat allegation” ingredient does not have a limiting effect- all it requires is an allegation.
  9. In Stolt-Nelson, the Supreme Court had examined whether in the absence of express agreement for class arbitration, the arbitral tribunal could allow such a course of action. The court held that it could not for the reason that it resulted in a fundamental change in the character of the arbitration from being merely a bilateral one. Classwide arbitration is a different species altogether- it involves different procedures and higher stakes. The procedures for selection of the arbitrator are different etc. Since Discover Bank Rule manufactures class arbitration in an otherwise arbitration agreement providing for bilateral arbitration is inconsistent with the Federal Arbitration Act.
 In the next post, we would summarize the remaining portion of the majority judgement.


Sumit Rai said...

We had the opportunity of listening to Prof. William Park on these issues in one of our courses. Class arbitration, he commented, was an extremely sensitive political issue in the USSC right now. There are 4 right wing and four left wing judges. J Thomas is the only neutral and therefore deciding vote. On this issue he has sided with the right wing that holds against class arbitration presumptions.

His take is that the only solution to class arbitration is a specific legislation dealing with it. But since it is politically sensitive, no one wants to attempt it. Also, he says there is strong view in America that the FAA is outdated and needs comprehensive amendments to align with transnational standards, but it is not being done because any amendment to FAA now requires tackling class arbitration, which no one has the courage to do.

If share this as I found the political background interesting and important to understand the dynamics behind these decisions.

Badrinath Srinivasan said...

Sumit, Thanks for sharing the political dimensions of the case with us. Right wing or left wing, isn't injustice universal (as Amartya Sen would say)? If a seller with superior bargaining power makes a scheme to cheat several customers, isn't allowing him to do so injustice?

Sumit Rai said...

I absolutely agree with you. It makes no sense to make law a matter of political ideology. My take on the issue of class arbitration is - if it is permissible under the domestic law to go to court with such action , then an arbitration clause cannot be used to work around it. We must be careful with what the arbitration process becomes - a back door escape route or a fair and strong adjudication system. This absolutely needs legislative intervention.