AT&T Mobility vs. Concepcion: From unconscionability to vindication of rights

The following contribution to our arbitration symposium is by Myriam Gilles, who teaches aggregate litigation and torts at Cardozo Law School and has written extensively on  class action waivers.

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Last April, a divided Supreme Court decided AT&T Mobility v. Concepcion, holding that the Federal Arbitration Act preempts California’s “Discover Bank rule,” under which class action waivers in arbitration agreements were generally deemed unconscionable and unenforceable.  While more attention was paid to Wal-Mart v. Dukes, the AT&T ruling is the real game-changer for class action litigation, as it permits most of the companies that touch consumers’ day-to-day lives to place themselves beyond the reach of aggregate litigation by simply incorporating class waiver language into their standard-form contracts.

But what are the limits of AT&T?  Specifically, what are the implications for challenges to class action waivers based upon their role in preventing plaintiffs from vindicating federal statutory rights?

Unlike the state law unconscionability challenge that underlay Discover Bank, the vindication of rights challenge takes as its starting point the Supreme Court’s recognition in Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc. (1985) that federal statutory claims are fully arbitrable, but only “so long as the prospective litigant effectively may vindicate its statutory cause of action in the arbitral forum.”  Applying this precept, the Supreme Court in Green Tree Financial Corp. v. Randolph (2000) recognized that “the existence of large arbitration costs could preclude a litigant . . . from effectively vindicating her federal statutory rights in the arbitral forum,” and it established a test: “where a party seeks to invalidate an arbitration agreement on the ground that arbitration would be prohibitively expensive, that party bears the burden of showing the likelihood of incurring such costs.”

The vindication of rights challenge to class action waivers, which I first outlined in a 2005 law review article, has been fully aired in only a handful of federal courts (which is perhaps unsurprising given the apparent viability of state-law based unconscionability challenges until AT&T came along).  In the two circuit court decisions to tackle the issue directly –

the First Circuit’s decision in Kristian v. Comcast and the Second Circuit’s two rulings in In re American Express Merchants Litigation (“Amex”) – the challenge was upheld and the waiver voided.  The Fourth and Eleventh Circuits have likewise “acknowledged that if a party could demonstrate that the prohibition on class actions likely would make arbitration prohibitively expensive, such a showing could invalidate an agreement.”  And no circuit has rejected the challenge.

The question of AT&T’s effect on Amex and the vindication of rights challenge to class waivers is currently sub judice before the Second Circuit, and many are watching to see how that court rules.  For two reasons, the vindication of rights analysis should be unaffected by AT&T.

First, the sole basis for the Supreme Court’s decision in AT&T was preemption.  Once the Court determined that the Discover Bank rule stood as an “obstacle to accomplishment and execution of the full purposes and objectives of Congress,” as expressed in the FAA, the Supremacy Clause kicked in and dictated that the FAA preempts the state law rule.  By contrast, where the enforcement of an arbitration agreement under the FAA would prevent vindication of a federal statutory right, no such preemption doctrine governs.  Instead, the governing principle is supplied by the “federal substantive law of arbitration,” under which federal courts harmonize the FAA and federal statutes by applying the “vindication of statutory rights analysis” of Randolph and related case law.

Under this federal harmonizing analysis, an agreement to arbitrate a federal statutory claim must be enforced as written, unless and until enforcement of the arbitration provision would preclude the claimant from vindicating its federal statutory rights.  In a case where “a party seeks to invalidate an arbitration agreement on the ground that arbitration would be prohibitively expensive,” Randolph harmonizes the FAA with substantive federal remedial statutes by mandating that “that party bears the burden of showing the likelihood of incurring such costs” – i.e., that it would incur costs so steep as to preclude vindication of the federal right.

Second, the successful vindication of rights challenges in Amex and Kristian were based on detailed factual showings that, if the arbitration agreement were enforced as written with its class action waiver, the plaintiffs would be flatly unable to vindicate their rights.  The Discover Bank rule at issue in AT&T, by contrast, did not require a claimant to prove that she was precluded from vindicating her rights under a particular arbitration clause in a particular case.  Justice Scalia noted that the categorical Discover Bank rule was not justified by the observation that, in many cases, “class proceedings are necessary to prosecute small-dollar claims that might otherwise slip through the legal system.” But that is very different from rejecting a vindication of rights challenge.  Indeed, the majority opinion suggested that the Concepcions could have vindicated their rights under the particular arbitration clause at issue in AT&T, which provided for a $7500 cash bounty for claimants who win an award greater than defendant’s final pre-award offer, among other things.

It would therefore be quite a stretch to argue that AT&T cuts off a claimant’s ability to make a case-by-case showing under Randolph.  After all, the AT&T Court expressly granted certiorari to consider whether states may condition the enforceability of an arbitration agreement on the availability of class-wide procedures “when those procedures are not necessary to ensure that the parties to the arbitration agreement are able to vindicate their claims.”

So the vindication of rights challenge to class action waivers should survive AT&T intact.  But its scope may be more limited than meets the eye, as claimants must prove that the enforcement of a class action waiver would make it “prohibitively expensive” for an individual claimant to arbitrate a federal statutory claim on an individual basis. Post-AT&T, companies are likely to draft ostensibly generous arbitration clauses, providing for cash “bounties” or double or treble attorney’s fees to claimants who receive an arbitration award superior to the defendant’s final pre-award offer, or providing that all costs of suit (and not merely shiftable costs) are recoverable by a prevailing plaintiff. All of this makes it unlikely that lower courts will find the claimant faces “prohibitive costs,” given Justice Scalia’s apparent view (right or wrong) that the cash bounty feature of the AT&T agreement allowed the Concepcions effectively to vindicate their rights in an individual proceeding.