AT&T Mobility and the end of consumer class action through Commerce Clause jurisprudence: Not so fast

The following contribution to our arbitration symposium is written by Terry F. Moritz, a senior partner at Goldberg Kohn Ltd. in Chicago, Illinois.  Mr. Moritz founded and chaired the firm’s litigation practice for over twenty-five years.  He is also an adjunct professor at Loyola University Chicago, School of Law, focusing on alternative dispute resolution.  For further background, see “The Future of Consumer Arbitration in Light of Stolt-Nielsen, Terry F. Moritz & Brandon J. Fitch, 23 Loy. Consumer L. Rev., Vol. 23:3 (2011), pp. 265-293.

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Introduction

Arbitration matters have garnered a significant portion of the Supreme Court’s attention over the past several years.  During the October 2009 Term, the United States Supreme Court decided a total of ninety-two cases on the merits (statistics available here), four of which addressed arbitration-related questions.  During the 2010 Term, the United States Supreme Court decided another significant Federal Arbitration Act (“FAA”) case, AT&T Mobility LLC v. Concepcion (2011), and as the Court enters the 2011 Term it is scheduled to hear at least two more FAA cases, CompuCredit Corp. v. Greenwood and Stok & Associates, PA v. Citibank, NA.

Two of these decisions, Stolt-Nielsen S.A. v. AnimalFeeds International Corp. (2010) and AT&T Mobility, taken together were initially thought to have significantly affected the ability of plaintiffs to mount class action claims in an arbitration setting.  Stolt-Nielsen held that where it was determined that an arbitration agreement was “silent” with respect to the ability of a party to bring a class action in arbitration, one could not be inferred.  The AT&T Mobility decision struck down barriers to waivers of class action based on state law grounds and was particularly controversial in that it arose in a consumer law context.  Indeed, the day following the release of the AT&T Mobility decision, Senators Al Franken and Richard Blumenthal announced plans to alter the impact of the decision on consumer claims by reintroducing the Arbitration Fairness Act in the 112th Congress.  However, the Senators’ concerns may be premature, for some lower courts are reading AT&T Mobility very narrowly.

What AT&T Mobility determined.

In AT&T Mobility, the Supreme Court was to decide whether a California judicially crafted rule that serves to invalidate an arbitration class-action waiver as unconscionable is in conflict with the FAA and therefore ineffective.  AT&T Mobility deals with what are uniquely American phenomena — the use of pre-dispute arbitration agreements in consumer contracts and class action processes in arbitrations.  The Ninth Circuit, relying on a decision by the California Supreme Court in Discover Bank v. Superior Court (2008) struck down, as unconscionable, a waiver of the right to bring a class action in a consumer contract that otherwise required arbitration.  Discover Bank established a fairly rigid rule that class arbitration waivers were unconscionable and could not be enforced (thus permitting class actions even where the parties had agreed to only individual arbitrations).  Simply put, the issue as it came to the Supreme Court was whether a rule that struck down a consumer arbitration agreement’s waiver of a right to commence a class arbitration contradicted the federal policy of promoting arbitration.

In its five-to-four opinion written by Justice Scalia, the United States Supreme Court concluded that because it “stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress,” California’s Discover Bank rule is preempted by the Federal Arbitration Act.  The judgment of the Ninth Circuit was reversed and the case was remanded for further proceedings.

Is the unconscionability test of a class action waiver on the precedential ash pile?

Lower court decisions applying the holding of Stolt-Nielsen and AT&T Mobility do not suggest any singular pattern.  Certainly some courts have followed the decisions fairly rigidly — see, e.g.:  D’Antuono v. Service Road Corp. (D. Conn. 2011) (arbitration class claims dismissed); Boyer v. AT & T Mobility Services, LLC (S.D. Cal. 2011) (arbitration class action dismissed); Daugherty v. Encana Oil & Gas (USA), Inc. (D. Colo. 2011), (AT&T Mobility followed and arbitration class claims dismissed); DelRio v. Creditanswers LLC (S.D. Cal. 2011) (AT&T Mobility followed); Murphy v. Directv, Inc. (C.D. Cal. 2011) (AT&T Mobility followed); Wallace v. Ganley Auto Group (AT&T Mobility followed).

In Wolf v. Nissan Motor Acceptance Corporation (D. N.J. 2011), an arbitration clause containing a class action waiver was deemed not to be unconscionable.  However, the court also determined that a fee-shifting mechanism within the arbitration provision did have the potential to be deemed unconscionable.  Because those provisions were severable, the court ultimately concluded:

“In accordance with the principles enunciated in Delta Funding, the cost-shifting provision and the provision pertaining to the costs of appeals are unconscionable and unenforceable to the extent they may be construed and applied to require Wolf to shoulder the entire financial burden of the arbitration and, irrespective of the outcome, the appeal of his claims.  However, that narrow, unconscionable interpretation and application of those provisions do not invalidate the entire arbitration agreement.  Rather based on the agreement’s severability provision, the unconscionable portions of the arbitration agreement — should they be effectuated in an unconscionable manner — may be severed and stricken, as necessary, from the remainder of the parties agreement.”

Chen-Oster v. Goldman, Sachs & Co. (S.D.N.Y. 2011), was a putative class action in which the plaintiffs allege that their employer, Goldman, Sachs, has engaged in a pattern of gender discrimination against its female professional employees in violation of Title VII of the Civil Rights Act of 1964 and the New York City Human Rights Law. Goldman Sachs moved to stay the action with respect to a representative plaintiff and compel arbitration of her individual claims.  On April 28, 2011, the court denied the defendants’ motion.  Following the decision in AT&T Mobility, Goldman Sachs filed a motion for reconsideration in light of the Supreme Court’s holding in that case.  The court again denied the motion, noting that:

“Concepcion involved the preemption of state contract law by a federal preference for arbitration embodied in a federal statute, the FAA.  The Court’s analysis focused on the FAA’s savings clause (allowing “arbitration agreements to be declared unenforceable ‘upon such grounds as exist at law or in equity for the revocation of any contract,’ ” emphasizing that it did not save the state contract law at issue in the case because “nothing in it suggests an intent to preserve state-law rules that stand as an obstacle to the accomplishment of the FAA’s objectives.”  This case demands consideration of a separate issue: whether the FAA’s objectives are also paramount when, as here, rights created by a competing federal statute are infringed by an agreement to arbitrate.  The Court’s analysis in Concepcion relied in part on the idea that, because class arbitration is an awkward procedure that cannot be read into arbitration contracts, “class arbitration, to the extent it is manufactured by [state common law] rather than consensual, is inconsistent with the FAA,” and therefore preempted by it.  In this case, . . . what is at issue is not a right to proceed, procedurally, as a class, but rather the right guaranteed by Title VII, to be free from discriminatory employment practices.”

Based on this analysis, the Court concluded that the AT&T Mobility case did not clearly reach rights secured under Title VII, and the Court refused to grant a motion for reconsideration based upon the decision.

In Re Checking Account Overdraft Litigation the United States District Court for the Southern District of Florida took another approach.  The plaintiffs in that case held checking accounts at four banks, and all of the accounts were governed by deposit agreements, which contain arbitration clauses requiring the arbitration of any claims related to the accounts at the election of either the accountholders or the banks.  Prior to the decision in AT&T Mobility, the lower court had denied motions to compel arbitration, and the matter went to the Eleventh Circuit.  While pending on appeal, the Eleventh Circuit decided Cruz v. Cingular Wireless,.  In Cruz, for the first time since AT&T Mobility, the Eleventh Circuit passed on the validity of a class action waiver in a consumer contract’s arbitration agreement.  The Cruz plaintiffs were customers of A&&T Mobility, LLC.  They filed a class action lawsuit under the Florida Deceptive and Unfair Trade Practices Act, challenging AT&T’s practice of charging them a two-dollar monthly fee for an optional “Roadside Assistance Plan” that they never ordered.  Notably, before initiating cellular phone service, the Cruz plaintiffs signed the very same arbitration agreement, containing the same class action waiver, upheld by the Supreme Court in AT&T Mobility. In light of Cruz, the matter was remanded to the trial court.

On remand, the trial court held:

“As a threshold matter, the Court must determine whether this Court or an arbitrator should determine whether the respective Plaintiffs’ claims are arbitrable.  Each of the agreements contains a so-called “delegation clause,” which delegates this threshold question of arbitrability to the arbitrator.  (cases omitted)  Accordingly, each of the Defendant Banks argues that an arbitrator should determine whether the arbitration agreements at issue are unconscionable.”

However, “arbitration should not be compelled when the party who seeks to compel arbitration has waived that right.”  Morewitz v. West of England Ship Owners Mut. Protection and Indem. Ass’n (Luxembourg), 62 F.3rd 1356, 1355 (11th Cir. 1995).  As the Eleventh Circuit explained in Morewitz:

“Waiver occurs when a party seeking arbitration substantially participates in litigation to a point inconsistent with an intent to arbitrate and this participation results in prejudice to the opposing party.  Prejudice has been found in situations where the party seeking arbitration allows the opposing party to undergo the types of litigation expenses that arbitration was designed to alleviate.

Here, all four Defendant Banks asked this Court to determine this question in their original motions to compel arbitration, filed well over a year ago.  In the original motions, none of the banks moves this Court to allow an arbitrator to determine this threshold issue.  Now, after forcing Plaintiffs to incur the expense of opposing the original motions to compel in this Court, as well as on appeal to the Eleventh Circuit, Defendants argue for the first time on remand that an arbitrator should determine this issue.  In light of the late stage of the proceedings on this question, Defendants have waived their right to arbitrate the threshold issue of unconscionability.”

CONCLUSION

Class action waivers in arbitration agreements will continue to be tested under state unconscionability standards, and it is unlikely that state and lower federal courts will totally disregarding the broad holding of AT&T Mobility.  However, many lower courts will evaluate arbitration agreements very carefully, and missteps in the creation of arbitration agreements or in their implementation may well create situations in which the lower courts will find the AT&T Mobility holding either not controlling, inapposite or waived.