SCOTUS and the Mandatory Arbitration Revolution: Part 3/7 (Current Legal Precedents)

The Supreme Court’s Current Interpretation of the FAA

From the year 2000 until 2018, there have been over 10 Supreme Court cases involving arbitration, many of which included extended discussion about mandatory arbitration. In order to better understand the evolution of the Supreme Court’s increasingly broad interpretation of the FAA, and its expanded use of mandatory arbitration, it will help to have a brief summary of the most recently decided cases and what they mean for consumers/employees. These Supreme Court cases are AT&T Mobility v. Concepcion, 563 U.S. 333 (2011), American Exp. Co. v. Italian Colors Restaurant, 667 F. 3d 204 (2013), and DirecTV v. Imburgia, 577 U.S. ___ (2015).

AT&T Mobility v. Concepcion

In AT&T Mobility v. Concepcion, the Supreme Court decided to validate class action bans (CABs) in consumer mandatory arbitration clauses (MACs). Concepcion developed from an individual lawsuit brought against AT&T accusing the company of defrauding its customers by charging a $15 sales tax on a cell phone that was advertised as free. More individuals sought to join the case and it was eventually consolidated into a class-action lawsuit. Yet AT&T sought to compel arbitration between itself and Concepcion. Contained in AT&T’s service contract with Concepcion contained a MAC that required both parties to resolve disputes through arbitration and that parties only bring actions via an individual capacity. Therefore, there was no possibility of litigation of any kind available to Concepcion.

Legal scholar Noah Aschen explains that during this time one pertinent legal development was California’s “Discover Bank rule,” which held that corporations could not draft class-action bans (CABs) that protected them from litigation directly related to a violation of a good business practice. The California district court who first ruled on AT&T Mobility v. Concepcion and the justices there utilized this rule and deemed that the arbitration clause in the AT&T contract was invalid on grounds of unconscionability. AT&T appealed the ruling to the 9th Circuit Court of Appeals who affirmed the 9th District Court’s ruling, but determined that the FAA did not eliminate or cancel out the “Discover Bank rule” because it was actually a “refinement of the unconscionability analysis under California contract law.”1 Ultimately, however, the Supreme Court reversed both lower courts decisions and ruled in favor of AT&T.

Drawing from §2 of the FAA, the Supreme Court noted that the legislation provides grounds for invalidating an arbitration agreement oriented toward “generally applicable contract defenses.”2 Yet the Court held that defenses which only apply to arbitration clauses (or come from the fact that an arbitration agreement is the issue at hand) are prohibited by the FAA. Rather, the scope of Concepcion’s defense must be broader and more robust relative to the contents of the contract (e.g. unconscionability). Thus, California’s “Discover Bank rule” fell outside of the scope of §2 of the FAA and could not be utilized to invalidate the arbitration clause in AT&T’s service contract. The Supreme Court’s decision meant that, under the FAA, businesses that have a contract with consumers or employees that consist of mandatory arbitration agreements (MAAs) with class action waivers (CAWs) can legally compel consumers to handle any and all disputes in the form of individual arbitrations, rather than in court as part of a class-action lawsuit.

American Exp. Co. v. Italian Colors Restaurant

The next Supreme Court case to be considered is American Exp. Co. v. Italian Colors Restaurant (henceforth ICR). Another class-action lawsuit, this time against American Express, involved §1 of the Sherman Antitrust Act. ICR claimed that American Express utilized its economic power in the general market to force businesses to accept select major credit cards at rates that were nearly 30% higher than those for similar/competing major credit cards. Ultimately at stake for ICR was $18,850 or $38,549 tripled under the conditions of existing anti-trust laws.3

The arbitration clause in the American Express merchants’ agreement explicitly required that merchants waive any and all rights to arbitrate their claims with American Express as a class or group. ICR disagreed and felt that litigation was warranted in this case since there would be ‘prohibitively high costs’ to arbitrate the dispute. Indeed, as part of their overall case, they provided the expert testimony of an economist who crunched the numbers for them and determined that it would take them nearly $1.5 million dollars in legal and related fees in order to, potentially, earn a maximum of $38,549.4 Such an endeavor, it was claimed, was prohibitively expensive and ought to be grounds for not enforcing the mandatory arbitration clauses of their contract.

Justice Scalia, in writing for the majority, declared that the class-action waiver of the American Express agreement is valid “irrespective of whether it would make it impractical for merchants to bring individual claims.”5 Thus, ICR thus lost the case even though it was capable of showing that the pursuit of arbitration would not only not earn them their claimed award, but also they would lose a certifiable fortune in arbitration fees.6 From this ruling, one can draw three key conclusions: (1) that class-wide arbitration waivers for federal statutory claims will be upheld unless there is explicit congressional guidance to the contrary, (2) facing a significant burden, such as prohibitively high costs, in the pursuit of a statutory right is not the same as waiving the right itself to seek such a remedy, and (3) the Supreme Court’s broad interpretation of the FAA deems that the importance of enforcing MAAs is greater than that of preserving individuals’ low-value litigation claims.7

DIRECTV, Inc. v. Imburgia

Finally, there was the case of DirecTV, Inc. v. Imburgia. This case originated as a punitive class action lawsuit as well. It was brought against DIRECTV by numerous consumers who were charged early termination fees associate with the terms and conditions of their DIRECTV service contracts. The service contract in question contained a Class Action Ban (CAB), but also included provisions that invalidated the arbitration clause if the laws of the consumer’s state made such an agreement unenforceable. California law did have such consumer protections in place and Imburgia believed they would be upheld.

The 6-3 majority of the justices disagreed. Since the Supreme Court had previously held in the case of AT&T Mobility LLC v. Concepcion, that requiring contract enforcement was invalid, doing so under California state law would thus conflict with the Federal Arbitration Act. Since the California state law was pre-empted by the FAA, it was, therefore, invalid itself. And no invalid law could be used to invalidate valid law. Though controversial, the Supreme Court found this to be a relatively straightforward case.

Before we can determine whether such an expansion at the hands of the Supreme Court is ultimately helpful or harmful we must understand the value of arbitration from the perspective of an advocate. In order to do so, it is necessary to understand some of the key benefits that they promote about mandatory arbitration.

1 AT&T Mobility v. Concepcion, 563 U.S. 333 (2011), 1.
2 Ibid.
3 Barnes, “How Mandatory Arbitration Agreements and Class Action Waivers Undermine Consumer Rights,” 344.
4 Ibid.
5 Am. Express Co. v. Italian Colors Rest., 570 U.S. ___ (2013), 1-2.
6 Barnes, “How Mandatory Arbitration Agreements and Class Action Waivers Undermine Consumer Rights,” 344.
7 Noah Aschen, “Tearing Down the Wall Protecting Mandatory Arbitration: A Critical Evaluation of Mandatory Arbitration Clauses in Consumer Contracts,” Dispute Resolution Journal 71:3 (2016), 59.

Tagged: , , , , , , ,

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: