Arbitration opponents are mounting attacks in Congress and the federal agencies.
By Andrew Pincus
In the year since the U.S. Supreme Court decided AT&T Mobility v. Concepcion, courts have eliminated many obstacles to enforcement of fair and effective arbitration provisions. Companies that previously viewed arbitration as too uncertain to justify the expense of creating a dispute resolution system are taking a second look and, frequently, adopting arbitration.
But the opponents of arbitration are not giving up. In addition to devising legal arguments to try to narrow Concepcion, they are mounting a policy attack — urging Congress and federal agencies to ban predispute arbitration in the consumer and employment contexts.
This reflexive hostility to arbitration is disappointing. Lawyers learn that the judicial system is the gold standard for dispute resolution — but the realities of today's courts, especially for the types of injuries most often suffered by consumers and employees, bear little resemblance to the idealized system studied in law school. We should be searching aggressively for alternative approaches that provide more justice more effectively and more efficiently for more people. Arbitration does just that.
The question in Concepcion was whether state law may invalidate an arbitration agreement that does not permit class proceedings. Although most states had concluded that arbitration provisions requiring adjudication of claims on an individual basis, and forbidding class proceedings, were not unconscionable as a matter of state law, a minority of states held such provisions unenforceable.
The Federal Arbitration Act limits the states' power to refuse to enforce arbitration agreements. Concepcion determined that the FAA bars states from conditioning enforcement of arbitration agreements on the inclusion of class procedures. The Court said arbitration is inherently a system of individualized dispute resolution, and "[r]equiring the availability of class-wide arbitration interferes with fundamental attributes of arbitration and thus creates a scheme inconsistent with the FAA."
As soon as Concepcion was decided, the race to define the reach of the decision began. The first cases involved arbitration of plaintiffs' claims that, like those in Concepcion, arose under state law. Opponents of arbitration argued:
• Arbitration provisions that lack the pro-consumer provisions of AT&T's clause (such as a substantial premium for cases in which the arbitrator awards more than AT&T's settlement offer) are outside Concepcion's holding.
• Plaintiffs can avoid Concepcion by demonstrating that their particular claims cannot be vindicated effectively in individualized arbitration (because of high expert witness fees and/or discovery costs). These arguments have been rejected overwhelmingly. Concepcion's broad applicability in the context of state-law claims is now settled.
Plaintiffs have focused especially on state-law causes of action that authorize one claimant to obtain damages or injunctive relief on behalf of an entire class. They argue that arbitration contracts limiting a plaintiff to individual relief are unenforceable with respect to such claims, notwithstanding Concepcion. Many, but not all, courts have rejected this argument, including the U.S. Court of Appeals for the Ninth Circuit in Kilgore v. KeyBank N.A.
The most vigorous legal debate involves claims arising under federal law. The Second Circuit in In re American Express held that, because Concepcion rested on pre-emption principles, it is restricted to state-law claims. On this view, an arbitration contract requiring individualized adjudication may not be applied to a federal claim if the plaintiff provides evidence that the cost of proving the claim makes it unrealistic to pursue individually. Other courts disagree.
The argument that Concepcion is not relevant to federal claims is wrong. The Supreme Court's conclusion that requiring class proceedings "interferes with fundamental attributes of arbitration and thus creates a scheme inconsistent with the FAA" is an interpretation of the FAA. When a federal court holds a federal claim arbitrable, it has concluded that Congress did not exclude the claim from the policy favoring arbitration embodied in the FAA. That means that all of the standards embodied in the FAA apply, absent an express congressional command to the contrary. Those standards, Concepcion held, require courts to honor agreements providing for individualized arbitration.
THE POLICY DEBATE
The blistering litigation pace — Concepcion has been applied in hundreds of cases in federal courts alone — has been accompanied by an intense policy debate. Congress has held hearings, the National Labor Relations Board's D.R. Horton decision attempts to shield employment contracts from Concepcion (and is now on review before the Fifth Circuit), and the Consumer Financial Protection Bureau has begun a study of arbitration.
The policy argument for arbitration is strong. Most injuries suffered by consumers and employees are individualized and too small to attract a lawyer's services. Our courts are expensive, overburdened and virtually impossible for nonlawyers to navigate. For these claims, it is arbitration or nothing. The fairness of arbitration is supervised by courts applying general unconscionability principles. Provisions barring punitive damages or attorney fees, appointing biased decision-makers, or requiring hearings far from a consumer's home are routinely invalidated.
And even small claims can be vindicated in arbitration. Social media allow plaintiffs lawyers to advertise for customers with similar modest claims, and to agglomerate enough individual claims to support the costs of litigating these claims.
Class actions, on the other hand, mostly benefit lawyers — both the plaintiffs bar and the defense bar. The low rates at which class members collect settlement shares rule out any compensation rationale. And the high rate of settlement, without regard to the underlying merits, undermines deterrence justifications.
Opposing arbitration in order to preserve class actions — thereby making it impossible for those with individualized claims to obtain any relief at all — puts lawyers' interests first and reduces access to justice.
Andrew Pincus, a partner in the Washington office of Mayer Brown, argued Concepcion for AT&T Mobility and has filed briefs and submitted testimony on the issues discussed in this article. He specializes in appellate litigation and has argued 23 cases in the Supreme Court.
Reprinted with permission from the May 28, 2012 edition of The National Law Journal © 2012 ALM Properties, Inc. All rights reserved. Further duplication without permission is prohibited.