Mandatory Pre-Dispute Arbitration Agreements and Your Rights: A Post-Concepcion Primer

Darin Ranahan

The US Supreme Court’s April 27, 2011 decision in AT&T Mobility LLC v. Concepcion (2011) 563 U.S. _ is just the latest in a disturbing slide of the high court away from individual rights and liberties towards ever increasing corporate impunity. With its Concepcion decision, the Court further rolls back one of the lasting achievements of the civil rights and environmental movements, class actions.

Mandatory Pre-Dispute Arbitration Agreements

At the heart of the case is the issue of “class arbitration waivers” in “mandatory pre-dispute arbitration agreements.” Many if not most consumers and employees would likely scratch their heads at what those terms mean, so allow me to provide some background explanation.

First, what is arbitration? Arbitration is, in essence, a private way of resolving disputes, analogous to litigation through public courts. Whereas courts derive their authority from the state, arbitrators derive their authority from the consent of the parties. So, for example, let’s say Amil does some yard work on contract for his neighbor, Belinda, who then stiffs him on the bill. Amil could sue Belinda in court for breach of contract. Alternatively, Amil and Belinda could mutually agree to go to another neighbor, Donaldo, who has no skin in the game, and ask him to resolve their dispute, with both Amil and Belinda agreeing to abide by Donaldo’s decision as to whether or not Belinda owes Amil money. In this instance, Donaldo would be acting as an arbitrator, a private judge of sorts. Why would Amil and Belinda want to go to Donaldo instead of court? Donaldo likely doesn’t require the same fees and procedures as the court does, and Amil and Belinda may not need to hire lawyers to settle their dispute with Donaldo, while they almost certainly would have to in order to settle their dispute in court.

Next, what is a pre-dispute arbitration agreement? To continue the above example, let’s say that when Amil signed the contract with Belinda, before she stiffed him on the bill, they both agreed that if any problems arose out of their agreement, they would have to resolve them through their other neighbor, Donaldo, and would not have the option of going to court. Why would Amil agree to give up his option to go to court? A firm believer in law and economics might argue that Amil could reap additional payment in exchange for his agreement to give up his rights – for example, let’s say that Belinda pays Amil $5 extra in exchange for his giving up his right to go to a public court. So agreeing to have arbitration be one’s sole resort for resolving some future dispute is what’s known as a pre-dispute arbitration agreement.

What is a mandatory pre-dispute arbitration agreement? Continuing from above, let’s say Belinda, as a requirement of doing her yard work, will only hire people who will sign a pre-dispute arbitration agreement. In that case, the agreement would be mandatory in order to do business with her.

Class arbitration borrows from the principles behind what are called class actions in the court system. A class action is a form of litigation in which one or more individuals bring a lawsuit on behalf of a larger group of individuals, known as a “class.” These individuals must all have, more or less, the same claim. For example, let’s say a large company categorically fails to pay its employees time and a half for the hours of overtime each employee works. Each employee could bring her own individual claim, but given the similarity of the claims, it may be more economical to just have one individual bring a class action on behalf of all the employees. This way if there are 1000 employees, you can consolidate their cases into 1 trial, rather than having to conduct 1000 different trials.

Class actions make even more sense when weighed against the low value of certain wrongs. For example, let’s say a mobile phone company erroneously bills each of its 1 million customers $1. In all likelihood, the customer, even if she realizes she has been wronged, will not waste the time, energy, and expense of bringing a lawsuit to recover that $1. However, a lawyer might be more interested in bringing the case for all 1 million customers in order to recover $1 million, in addition to any accompanying attorneys’ fees. The customer still reaps $1, or as close to that as the lawyer is able to get for her, and the company is still penalized for bilking its customers, but the customer does not need to lift a finger.

However, let’s say that this phone company has required all of its customers to sign a mandatory pre-dispute arbitration agreement. Now, those 1 million customers are funneled into a private arbitration system. Some arbitration agreements are equipped to handle this situation, allowing for an analogous procedure to class actions, class arbitration. In this case, like in a class action, one or a handful of customers could bring the case on behalf of the whole group of wronged customers, saving the other 999,999 the time, effort, and expense of having to proceed through their own individual arbitration.

Yet, many companies include in their mandatory pre-dispute arbitration agreements a class arbitration waiver, meaning that the class arbitration procedure described above is not available. Not only that, but the wronged customer or employee can’t take their case to court in a class action procedure, as, due to the mandatory pre-dispute arbitration agreement, they have already waived that right. Thus, in the above example, the only option would be for the 1 million customers to proceed with 1 million separate arbitration procedures for $1 each. Realistically, this won’t happen and the phone company will have effectively stolen $1 million from its customers with impunity.

AT&T v. Concepcion’s Factual Background

Class arbitration waivers are at the heart of the US Supreme Court’s decision in Concepcion. At issue in the case was a rule, established by the CaliforniaSupreme Court in a 2005 opinion, Discover Bank v. Superior Court (2005) 36 Cal.4th 148, that class arbitration waivers in mandatory pre-dispute arbitration agreements are per se unconscionable, meaning that even if someone signed such an agreement, a court would not enforce it.

The plaintiffs in Concepcion had been charged $30.22 in sales tax after being provided a supposedly free phone from AT&T. They filed a class action against AT&T for false advertising and fraud by charging sales tax on phones it advertised as free.

AT&T sought to move the class action into arbitration on the basis of a mandatory pre-dispute arbitration agreement requiring that claims be brought in the parties’ individual capacities, prohibiting class proceedings. Both the trial court and the Ninth Circuit held that, based on the California Supreme Court’s Discover Bank decision, the arbitration agreement was unconscionable, meaning that they would not enforce it, allowing the class action to proceed through the court system.

Court Decision

In its opinion, authored by Justice Scalia, the Supreme Court overturned the lower courts’ decisions. The Court held that California’s Discover Bank rule refusing to enforce class arbitration waivers in mandatory pre-dispute arbitration agreements was preempted by the Federal Arbitration Act.

The Court’s opinion offers quite the rosy picture of arbitration. According to Scalia, the Federal Arbitration Act, which governs arbitration agreements, established a national policy giving arbitration agreements the utmost level of judicial respect. While certain contractual defenses can invalidate part of an arbitration agreement (for example, if someone enters an arbitration agreement due to fraud or duress), any blanket rule limiting arbitration agreements, such as California’s, contravenes the national priority of supporting arbitration agreements, according to Scalia.

The Court’s opinion then sings the praises of arbitration: the decisionmaker can be a specialist in the relevant field, the proceedings can be kept confidential, and the informality of arbitration agreements reduces the cost and increases the speed of dispute resolution, as compared to pursuing a case in court.

Scalia’s opinion looks at arbitration in a logical vacuum, completely separated from the realities of class action litigation and modern-day arbitration agreements. For one, the Federal Arbitration Act, enacted in 1925, was not drafted with modern day consumer, tort, or employment class actions in mind. In fact, the sort of arbitration imagined was between merchants, with relatively equal bargaining power, seeking to resolve disputes of fact under the customs of their industries. An example might be a wholesaler of merchandise entering an agreement with a retailer of merchandise for the sale of a certain product. Both parties know what they’re getting into, are more or less equally savvy, and likely have the option of going elsewhere to conduct their business.

The modern-day class action, in fact, did not blossom until forty years after the Federal Arbitration Act, when civil rights and environmental groups sought to empower traditionally disadvantaged groups to band together and collectively enforce their rights. The policy of supporting the norm of opt-out class actions was formally included in the Federal Rule of Civil Procedure 23, as amended in the mid 1960s.

Why Is the Supreme Court’s Concepcion Decision Such a Raw Deal for Employees?

Although the Concepcion decision covered a consumer case, the use of arbitration agreements is rampant among American employers. Until now, the class action mechanism has been absolutely crucial towards employees’ ability to enforce their rights. For example, if an employer consistently fails to pay its employees one hour of overtime a month, costing each employee $10 per month, most employees would not go to the hassle of bringing a lawsuit. However, if that same employer has ten thousand employees, all of a sudden you have a multi-million dollar lawsuit that an attorney may be willing to carry through to fruition, stopping the employer from skimming off the top at the expense of its employees and getting those employees the money they are rightfully owed.

After Concepcion, this same employer simply needs to include an arbitration agreement with a class arbitration waiver as a mandatory condition of employment. In this case, the employee must either sign the arbitration agreement or lose her job. Most, if not all, employees would sign the arbitration agreement. Following the employees’ signature, the employer would have carte blanche to resume its practice of skimming overtime pay from its employees. Yes, the employees would have the opportunity to individually arbitrate their claims and likely some would. However, for many, the hours upon hours required to arbitrate their claim would not be worth the $10 per month they could receive through arbitration.

The Supreme Court’s analysis of the efficiency gains available through individual arbitration completely misses the mark. In fact, in a situation such as the one I present, if each and every employee so wronged by the employer were to arbitrate her individual claim, the amount of time, energy, and expense exerted on resolving all ten thousand individual claims would exponentially outweigh the time, energy, and expense exerted on a single, consolidated class action or class arbitration.

Moreover, there would be a much higher likelihood of inconsistent results – ten thousand different cases potentially means up to ten thousand different arbitrators, each with her own understanding of the law. And, chances are, the arbitrator deciding the case would be one who views the law in a light favorable to the employer! The employer, after arbitrating a few of these cases, would have an understanding of h ow each arbitrator feels about this kind of claim. The individual employee, on the other hand, would have no way of being familiar with the individual arbitrators and, because she wouldn’t be able to find a lawyer to take her case due to its low individual value, would have no one to consult about the selection of arbitrators. Thus, the employer could consistently push employer-biased arbitrators onto its unsuspecting employees, getting away with wage theft, discrimination, or any other number of civil wrongs against its employees in the process.

What Are We to Do?

The prospects for consumer and employee rights seem grim following the Supreme Court’s Concepcion decision. However, there is some silver lining.

For one, there is already movement at the federal level to overturn the Supreme Court’s decision. Senator Franken of Minnesota has introduced the Arbitration Fairness Act, which would specifically overturn Concepcion. While the current political balance in the federal government makes its immediate passage unlikely, if Democrats do well in the 2012 election it could face higher prospects of passage.

Second, states can still hold class waivers in arbitration agreements unconscionable, and thereby unenforceable, if they go through the normal steps required in an unconscionability analysis of contracts. While this is more burdensome than the blanket Discovery Bank rule overturned by Concepcion, it can be done. The California Supreme Court, in its Armendariz v. Foundation Health Psychcare Services, Inc. (2000) 24 Cal.4th 83 decision, articulated several factors that go into how a court is to determine unconscionability beyond traditional unconscionability analysis, including whether or not there are (1) neutral arbitrators; (2) more than minimal discovery; (3) a written decision by the arbitrator; and (4) all types of relief otherwise available in court; as well as (5) whether the arbitration agreement requires employees to pay either unreasonable costs or any arbitrators’ fees or expenses as a condition of access to the arbitration process.

Third, states can come up with more creative ways of preventing class waivers in arbitration agreements. The Concepcion decision only speaks to a blanket rule holding class waivers in arbitration agreements to be unconscionable. Unconscionability is a defense against enforcement of a contract. In other words, a contract exists, but because it is unconscionable, courts won’t enforce it. On the other hand, California could pass a law holding class waivers in arbitration agreements to be void and unlawful, meaning that a purported contract with a class waiver does not actually form a contract, and thus does not bind the parties. An example of a void contract would be one to do illegal or impossible acts. For example, you can’t legally contract to kill someone for money, kill that person, and then go to court if the person who put the hit out refuses to pay. Any judge would say that the contract was void ab initio, meaning it was void from the beginning and therefore unenforceable. While the distinction between using unconscionability as a defense against enforcement and voiding a contract as a way to say that a valid contract never even existed may seem like an over-nuanced, divorced-from-reality, complete legal fiction (it is), the Supreme Court is demonstrably not above using such fictions to affect consumers’ and employees’ real-world legal rights (here’s looking at you, Scalia).

In any event, an employee faced with signing an arbitration agreement should carefully review that agreement and see if there is any way she can feasibly refuse to sign it. If she has no other option, she still may have several escape routes down the line.