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Archive for November 17th, 2010

The Supreme Court heard argument last week in the case that many commentators were calling a possible death knell for consumer class actions.  (See previous CAB posts on  Nov. 4, 2010 and Nov. 9, 2010)

So does the future of consumer class actions still seem dire after oral argument?

The basic issue is whether the Federal Arbitration Act pre-empts state contract law when state courts find class arbitration waivers unconscionable.  In other words, if an arbitration clause forecloses the possibility of a consumer class action, can state courts declare the waiver unconscionable, and therefore invalid?

Moreover, if states are permitted to find arbitration clauses that bar class actions unconscionable, will it end arbitration as a viable tool of conflict resolution?  Companies may avoid arbitration provisions in the future because none will want to deal with class arbitrations, which offer all the procedure of court litigation plus plenty of liability exposure, without the benefit of judicial review.

 Several Justices made comments suggesting a lack of comfort in telling states they can’t decide for themselves what constitutes an unconscionable contract.  If that sentiment plays out in the opinion, concerns about federalism and states rights may play a larger role in the outcome than any pro-business or pro-consumer bias or any leaning for or against class actions among the Court’s members.

 JUSTICE SCALIA: “What if — what if a State finds it unconscionable to have an arbitration clause in an adhesion contract which requires the arbitration to be held at a great distance from — from where the other party is and requires that party to pay the cost of the arbitration? Can a State not find that to be unconscionable?”

Justice Kagan followed up on the theme, questioning AT&T Mobility’s apparent position that state courts should generally have discretion to find contract provisions unconscionable, except class arbitration waivers.

JUSTICE KAGAN:  “… how about a provision prohibiting certain kinds of attorney’s fees? How about a provision prohibiting certain kinds of — a law prohibiting certain kinds of discovery provisions? And you said that would be fine, for the State courts to hold those things unconscionable, but it’s not fine for the State court to hold a class arbitration prohibition unconscionable. So what separates the two? How do we know when something is on one side of the line and something is on the other?”

In the face of arguments that California’s unconscionability law is disproportionately hostile to arbitration waivers, Justice Ginsberg, among others, observed that California applies its unconscionability doctrine equally to both arbitration contracts as well as non-arbitration contracts.

JUSTICE GINSBURG: “There is nothing that indicates that California’s laws are applying a different concept of unconscionability. You haven’t come up and said, oh, look what they did here. And in another case they said it has to shock the conscience.  Maybe across the board, California is saying: We think that unconscionability should have a broader meaning. Is it unfair to the weaker party to the bargain? Is there really no genuine agreement here? And if that is so, that will fit our definition of unconscionability.  How do we draw the line between a law that says discovery has to happen in arbitration, and one that says a — in a contract of adhesion, if the superior party retains the right to do discovery but tells the inferior party, you can’t? And a State says, that’s unconscionable.”

In response, Andrew Pincus, the attorney representing AT&T Mobility, with the help of Justice Alito, made the point that the California courts did in fact apply the state’s unconscionability doctrine differently to the class arbitration waiver in the Concepcion’s contract.  That is, the lower courts did not focus on the fairness of the contract’s terms to the Concepcions, the  actual plaintiffs before the court.  This runs contrary to the way most contract terms are assessed for fairness.  Instead, the courts focused on the contract’s fairness to a future class of possible plaintiffs.  If the lower courts had viewed the generous arbitration clause in the Concepcion’s phone contract for its fairness to the Concepcions, the contract may not have been deemed unconscionable.  Instead, the lower courts appear to have found the arbitration clause unconscionable merely because it barred the class action device.

 MR. PINCUS: “First of all, let me explain why the hypotheticals that you posit and that Justice Scalia posited and that Justice Sotomayor posited have been addressed under the traditional unconscionability doctrine that we described. In all of those cases, what courts have said is this provision — we are measuring whether it is unconscionable at the time of contracting; we are looking at the effect on the party before the court; can this person get to arbitration, is the fee too high, is it too far away. What about — we are looking at the effect on this particular person and we are deciding whether it shocks the conscience or whatever their across-the-board State standard is.  And in all of those cases, that’s what those courts do, and that’s why those provisions have been  invalidated, because they are invalidated under an evenhanded application of the unconscionability provisions that courts apply when they assess –”

 JUSTICE ALITO: “I thought that — I don’t want to interrupt your complete answer.”

 MR. PINCUS: “Sure.”

 JUSTICE ALITO: “But I thought that was the gist of your argument, the heart of your argument, that traditional unconscionability in California and elsewhere focuses on unfairness to the party who is before the tribunal. So here it would be unfairness to the Concepcions, rather than unfairness to other members of the class who are not before the court.”

 MR. PINCUS: “That’s exactly right, Justice Alito.”

 Read the entire transcript or listen to an audio recording at Scotus Blog

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