By Kimberly Atkins
The Daily Record Newswire
BOSTON, MA — In a case that could limit the ability of states to invalidate arbitration agreements, the justices of the U.S. Supreme Court seemed to have trouble nailing down a test to determine when the Federal Arbitration Act trumps state rules.
The case, AT&T Mobility v. Concepcion, stems from an offer by AT&T to give customers a “free” cell phone if they signed up for wireless service.
The company charged sales tax on the retail value of the phone, and the customer service agreement contained an arbitration clause that required customers to agree not to bring class action claims.
Vincent and Liza Concepcion later filed a class action against the company, alleging that the “free” phone offer was fraudulent. A U.S. District Court found that the class action waiver was unconscionable under state law and therefore unenforceable, and that the Federal Arbitration Act did not preempt state law.
The 9th Circuit affirmed, and the U.S. Supreme Court agreed to hear the case.
Briefs filed by amici note that the ruling could have an impact far beyond consumer cases.
Workplace groups assert that it could have affect on employment cases, particularly matters involving large companies whose employees may not have the means to file individual discrimination suits.
And civil rights groups argue that class actions have historically been used as a vehicle in wide variety of discrimination cases.
Conversely, business groups argue that requiring class arbitrations would be unduly burdensome for businesses, and would essentially ring the death knell for arbitration agreements.
Companies would be more likely to avoid arbitration altogether than to agree to class arbitration, they argue, and therefore an expedient, cost-effective means of dispute resolution would be lost.
At oral arguments last week, Andrew Pincus, a partner in the Washington office of Mayer Brown, argued for AT&T that allowing states to invalidate arbitration agreements for failing to allow class action claims would essentially “require arbitration to be a carbon copy of litigation, precisely what the [Federal Arbitration] Act was designed to prevent.”
But Justice Antonin Scalia and other justices sought to find a rule to determine just how far states can go.
“You say [an agreement] has to shock the conscience,” Scalia said. “But if a state wants to apply a lesser standard of unconscionability, can we strike that down?”
“Absolutely, you can,” Pincus said.
When Pincus argued that requiring class actions discriminates against arbitration and therefore violates the FAA, Justice Stephen Breyer wondered why.
“Class arbitration exists,” Breyer noted. “It’s not like having a jury trial. You could have it in arbitration. You can have it in litigation....Where is the discrimination?”
Although the FAA has a “savings clause” that allows state courts to invalidate arbitration agreements on “grounds as exist at law or in equity for the revocation of any contract,” Pincus said the case at issue did not fall into that exception.
“They have made up a special rule that is targeted on a special kind of contract,” he said.
Deepak Gupta, a staff attorney at Public Citizen Litigation Group in Washington, argued on the consumers’ behalf that, despite the FAA, contracts can be invalidated if provisions run afoul of public policy under general contract principles.
When the Conceptions entered into the contract, they didn’t realize how unfair it was, he said.
“They don’t know whether they will detect this fraud and be able to come forward. And so the question is: is that unconscionable as to them?” Gupta said.
“Why are they better off with a class adjudication?” Justice Samuel Alito asked.
“A class action incentivizes lawyers and others to detect for this fraud,” Gupta replied. “It makes it economically justifiable to come forward with these kinds of claims.”
By the end of the hour, Justice Sonia Sotomayor — like Justice Kennedy and others on the court — was still looking for a standard to apply.
“Counsel, I’ve asked your adversary this question and I’m not sure yet what his answer is, so I’m asking you,” Sotomayor said. “What’s the test you would use?”
“You would see whether the state court is telling the truth,” Gupta said. “Is this law really being applied in the same way in the arbitration context and outside of the arbitration context?”
A ruling from the Court is expected later this term.
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