[Ed. note: Following find interesting comments about AT&T v. Concepcion, a case pending before the U.S. Supreme Court. Read more about the case here. These comments were first posted at Paul Lurie’s excellent listserv and we are reprinting them with the author’s permission.]
By James M. Gaitis
Ultimately, we are faced with at least four different possible outcomes for consumer arbitration provisions containing class preclusion clauses. These potential outcomes depend both on what the Supreme Court does and, perhaps, on what lower courts might to on a case-by-case basis:
- Class preclusion clauses are deemed unenforceable (e.g., are unconscionable, violate public policy, etc.) and the remaining arbitration provision is deemed severable and enforceable (the result here is a class arbitration);
- Class preclusion clauses are deemed unenforceable and the remaining arbitration provision is not severable and thus, also, is unenforceable (the result here is no arbitration without a post-dispute agreement to arbitrate) (this, by the way, was what it appears the Federal District Court for the Northern District of California recently decided and then affirmed in a post-Stolt-Nielsen ruling in McArdle v. AT&T Mobility, 2010 WL 1875812 (May 10, 2010)) ;
- Class preclusion clauses are deemed enforceable but that makes the remaining arbitration provision unconscionable and thus unenforceable (the result here is no arbitration without a post-dispute agreement to arbitrate); and
- Class preclusion clauses are deemed enforceable as is the remaining arbitration provision (the result here is a standard, non-class arbitration).
At this point in time, it is less than likely that the Supreme Court would resolve all of these issues. Rather, at most I would think we can expect the Court to possibly make a sweeping ruling on the enforceability of class preclusion clauses but not on associated issues regarding severability of the remainder of the arbitration clause or generic issues regarding the unconscionability of general consumer arbitration provisions.
I think the correct balancing of federal preemption considerations in consumer cases (and by that I mean balancing both sides of the issue–e.g., the Casarotto type cases and the AT&T Mobility type cases) should, in the abstract, most often result in No. 3, above–i.e., that class preclusion clauses are, indeed, enforceable because they plainly evidence a party’s unwillingness to engage in a particular type of arbitration, but that the remaining consumer arbitration provision in many if not most cases will be (on a case-by-case basis) unconscionable because, in the absence of a class arbitration, it does not afford a realistic remedy. Having said that, I would guess (as Jim Madison suggests as a possibility) that when all the dust clears (whenever that might be) the present composition of the Court is likely to lead us toward result No. 4.
One observation about preemption and the class preclusion clause: I believe that the application and enforcement of a type of federal substantive contract law (a concept I believe Tom Stipanowich and perhaps others have addressed) in the context of FAA preemption is not only appropriate but, also, necessary. I say that because in the absence of such a federal omnipresence, states could too easily circumvent the primary objective of the FAA–i.e., to enforce “agreements” to arbitrate. That is what the Montana legislature and then the Montana Supreme Court did in Casarotto. And, on the flipside of the analysis, that is what any state legislature or court could attempt to do in the context of unconscionability issues. Indeed, the Montana legislature easily could have stated that any arbitration contract that does not contain 20 point bold lettering in Red type, warning consumers of the presence of an arbitration provision, “is deemed unconscionable, per se.” The point here is that while state contract interpretation law understandably should determine what the parties intended when they signed an arbitration agreement, that law should not be used, or permitted, to subvert the primary rule that the parties must literally and freely agree to resolve their disputes through a specific dispute resolution procedure. As heinous as a class preclusion clause may be, the one thing that cannot be said about it is that it evidences an agreement to resolve disputes through class arbitration. Hence my view that result No. 3., above, is the most consistent with the precepts underlying the FAA and with the Court’s decisions to date.
James M. Gaitis is the former Director of the International Dispute Management Programme at the Centre for Energy, Petroleum & Mineral Law & Policy, University of Dundee, Scotland, where he remains a member of the Global Faculty. He is the Editor-in-Chief of the second edition of The College of Commercial Arbitrators Guide to Best Practices in Commercial Arbitration (J. Gaitis, C. von Kann, R. Wachsmuth forthcoming Fall 2010) and the author of numerous law review articles on the topic of arbitration, several of which have been repeatedly cited to the United States Supreme Court and lower state and federal appellate courts. Over the past twenty years he has served on a diverse array of arbitration rosters, including as a Fellow of the College of Commercial Arbitrators, a Fellow of the Chartered Institute of Arbitrators, and as a panelist on the AAA Complex Case Panel and the Energy/Oil & Gas Panels of the AAA and CPR. He received his BA from the University of Notre Dame and his JD from the College of Law at the University of Iowa where he was an editor of the Iowa Law Review. He is also the author of two published novels. He may be reached via email at: email@example.com.