Associate Justice Antonin Scalia wrote the majority opinion, joined by Chief Justice John G. Roberts and Associate Justices Anthony M. Kennedy, Clarence Thomas and Samuel A. Alito, Jr.  Justice Thomas wrote a concurring opinion and Associate Justice Stephen G. Breyer dissented, joined by Associate Justices Ruth Bader Ginsburg, Sonia Sotomayor and Elena Kagan.  

Stay tuned for more….

Lawyers who litigate generally find this scene particularly amusing because we know firsthand what goes into preparing and delivering an opening (or closing) statement, and Vinny mocks that process and all its formalities.  But more than that, Vinny distills to its essence (seven words, in fact) the central message of just about every argument:  What the other side is saying is simply not accurate.  Yet at the same time, he completely omits the sine qua non of a good argument — a reasoned basis for the conclusion it asks the decision maker to draw. 

Fortunately, neither party in AT&T Mobility, LLC v. Concepcion, No. 09-893, is represented by our fictional hero, Vinny.  Both sides are represented by very able counsel who have fully articulated the bases for their clients’ position in their briefs and argument in the United States Supreme Court. 

One of the key differences between the parties concerns the scope of Federal Arbitration Act Section 2′s savings clause, which saves from preemption state-law “grounds.  .  .  for the revocation of any contract.”  9 U.S.C. § 2 (emphasis added).  According to AT&T Mobility, the Discover Bank rule — unlike the general “shocks the conscience” standard California ordinarily applies to assess whether a contract of whatever kind is unconscionable — is not a “ground” “for the revocation of  any contract,” but a rule that discriminates against certain arbitration agreements and other forum selection agreements vis-à-vis all other contracts.  According to the Concepcions, the Discover Bank rule is simply an application of California’s general unconscionability standard, and, in any event, consistent with the United States Court of Appeals for the Ninth Circuit‘s analysis, the rule is not discriminatory because it “place[s] arbitration agreements with class action waivers on the exact same footing as contracts that bar class action litigation outside the context of arbitration.”  Shroyer v. New Cingular Wireless Serv., Inc., 498 F.3d 976, 990 (9^th Cir. 2007) (citing Discover Bank v. Superior Court of Los Angeles, 36 Cal.4th 148,165-66 (2005)) (emphasis in original). 

When I first began to analyze AT&T Mobility, I thought that the Ninth Circuit’s “equal footing” interpretation made sense.  But as I delved a little deeper, studied Section 2′s text more carefully, reviewed (for the nth time) the Supreme Court’s cases bearing on Federal Arbitration Act preemption, studied the parties’ briefs, and reviewed the argument transcript, I became more and more convinced that the Ninth Circuit’s conclusion about the “equal footing” principle — while catchy, clever and creative — was simply wrong, and would, if adopted by the United States Supreme Court, effectively rewrite Section 2 and undermine Congress’ intent and purposes in enacting the Federal Arbitration Act.  

Were I our intrepid, over-confident and sometimes ethically-challenged hero, Vinny, my comments regarding the Ninth Circuit’s “equal footing” analysis might be summarized in seven words or so.  But Vinny’s approach to legal argument would not be very effective in a case like AT&T Mobility because to understand why the United States Supreme Court should reverse the Ninth Circuit, you really need to delve into the details a bit. 

To that end, I’ve set out to analyze AT&T Mobility in quite some detail, not only for those who believe AT&T Mobility is correct, but also for the benefit of those who do not.  I’d love to hear from anyone who disagrees with my analysis on legal – as distinguished from political or policy-oriented grounds. 

My good friends Karl Bayer and Beth Graham at the Disputing blog have been kind enough to publish my ongoing, multi-part series on AT&T Mobility case, which sets out my analysis.  So far we have published Parts I, II.A, and II.B, and while I have certainly not yet analyzed all of the issues, I have addressed pretty thoroughly the interpretation and construction of Section 2′s savings clause, and how I believe AT&T Mobility’s interpretation and construction best reflects not only Section 2′s text, but also Congress’ intent and purpose.  

Here’s an excerpt from Part II.B of the series, which summarizes some of the key points on that score:

Interpreting the savings clause to mean what it says best reflects Congress’ intent and advances its purposes.  Presumably every Justice would agree that Congress’ principal goal was to abrogate the “ouster” doctrine, at least in cases brought in federal court.  Likewise presumably every Justice would agree that construing the savings clause to save from preemption only state revocation laws applicable to all contracts accomplishes that goal.  If those relatively uncontroversial propositions are true, then – putting aside outcome-based political considerations – all Justices should agree that California must apply exactly the same standard for invalidating a class waiver in an arbitration agreement on unconscionability grounds as it would otherwise apply to invalidate a contract of whatever kind.

The Concepcions, however, contend that the savings clause should be interpreted to save the Discover Bank rule from preemption because it allegedly applies to class waivers in an arbitration clause in the same way it applies to waivers of class action proceedings in litigation.  Thus, a centerpiece of the Concepcions argument – and of those of commentators and amicus curiae that agree with the Concepcions– is the following, slogan-like proposition, endorsed by the Ninth Circuit:  the Discover Bank rule “placed arbitration agreements with class action waivers on the exact same footing as contracts that bar class action litigation outside the context of arbitration.”  Shroyer v. New Cingular Wireless Serv., Inc., 498 F.3d 976, 990 (9^th Cir. 2007) (citing Discover Bank v. Superior Court of Los Angeles, 36 Cal.4th 148,165-66 (2005)).

Like many great slogans, the proposition has a rhetorical ring to it — as well as a ring of truth – but it wilts under scrutiny.  Even assuming the Discover Bank rule is the same one applied to class waivers outside the arbitration context (a question we will explore in one or more future installments), that doesn’t mean it is a rule that is applied to a contract of whatever kind.  Nor does it mean – or even purport to mean – that the Discover Bank rule places an adhesive arbitration agreement with a class waiver on the same footing with all other contracts.

Take, for example, a contract pursuant to which A sells B a tract of land and which is silent on arbitration or litigation.  Nobody would seriously contend that the Discover Bank rule has any application to such a contract, let alone provides any basis for not enforcing it.  Because the Discover Bank rule would render an adhesive arbitration agreement containing a class waiver unenforceable, but would not render our hypothetical, garden-variety real estate contract unenforceable, it places the adhesive arbitration agreement on a very different footing than that garden-variety contract.

But depending on the facts surrounding the formation of our hypothetical real estate contract, perhaps B might have a general defense to enforcement, such as fraud in the inducement or unconscionability.  Assuming the same legal standards apply to this defense as apply to all other contracts under applicable state law, applying that defense to arbitration agreements merely puts arbitration agreements on the same footing as all other contracts (including, of course, our hypothetical real estate contract).

All of this is consistent with a textual construction of Section 2’s savings clause, and serves to reinforce the validity of such a construction.  But there is more:  the Ninth Circuit’s narrow interpretation of the equal footing principle is inconsistent with one of the key goals of the Federal Arbitration Act – the elimination of the “ouster doctrine.”

Recall that the ouster doctrine rendered not only arbitration agreements, but non-arbitration forum selection clauses unenforceable.  In that sense it certainly did not discriminate between forum selection clauses in the arbitration context and forum selection clauses in the litigation context.  And to paraphrase the Ninth Circuit, the ouster doctrine unquestionably “placed arbitration agreements on the exact same footing as forum selection clauses outside the context of arbitration.”

But nobody says that Section 2’s equal footing principle was intended to save the ouster doctrine from preemption.  Since the Ninth Circuit’s narrow interpretation of that principle would do exactly that, it cannot possibly be the correct one from a purposive (or any other) perspective.

.  .  .  . 

The Ninth Circuit’s “equal footing” interpretation essentially echoes the position that [Associate] Justice [John Paul] Stevens unsuccessfully advanced in [Southland Corp. v. Keating, 465 U.S. 1 (1984)] more than 25 years ago.  Indeed, it would support the conclusion – soundly rejected by Southland — that the Federal Arbitration Act does not preempt the no-waiver provision of California’s Franchise Investment Law, because the no-waiver provision, to paraphrase the Ninth Circuit, “places arbitration agreements on the exact same footing as other contracts that purport to waive the protections of the Franchise Investment Law outside the context of arbitration.”

Finally, the Ninth Circuit’s interpretation of the equal footing principle would save from preemption any number of no-waiver rules that apply equally in the arbitration and litigation context.  For example, a state might conclude that, to ensure parties of lesser bargaining power receive a fundamentally fair hearing in a dispute with a more sophisticated party, the party with lesser bargaining power must have access to the same scope of document discovery permitted by state procedural rules, irrespective of whether the dispute is heard in state court or in arbitration.  It might, in turn, pass a statute that declares void against public policy any provision in a contract of adhesion that purports to waive a party’s right to the same scope of document discovery permitted by state procedural rules.

Once again, if the Court adopted the Ninth Circuit’s interpretation of the equal footing principle, this hypothetical state statute would not be preempted by the Federal Arbitration Act.   For it “places arbitration agreements waiving state court document discovery procedures on the exact same footing as contracts that bar such procedures outside the context of arbitration.”

In sum, an analysis of the intent and purpose of the savings clause simply underscores the necessity of interpreting Section 2 according to its plain meaning, and a purposive construction of the savings clause would thus be no different than the one a natural reading of the text requires.

Stayed tuned to Disputing and the Loree Reinsurance and Arbitration Law Forum for further coverage of the controversial AT&T Mobility case.  .  .  .

After reviewing the oral argument transcript a number of times, and listening to the audio, we still believe it more likely than not that AT&T Mobility will prevail.  We’ll develop that thought further in upcoming installments of our Disputing guest post, ”AT&T Mobility LLC v. Concepcion:  Can Discover Bank Withstand Stolt-Nielsen Scrutiny?” (Part I, here).

There have been a number of differing opinions post argument on how the Court will likely rule.  Some believe the argument foreshadows victory for the Concepcions.  Others are not so certain, and still others believe that AT&T Mobility may emerge the victor.  Like all such opinions, they are are really nothing more than educated guesswork, and should be taken with a grain of salt. 

We don’t suggest our take on things is anything more, but we share it for what it is worth.  We think the oral argument was basically a toss-up, and that it mainly confirmed what we already knew or surmised:  That this is a very difficult case, and that the eight Justices who asked questions appear to be split along ideological lines.  We expected no less in light of the 5-3 and 5-4 split decisions in Stolt-Nielsen, S.A. v. AnimalFeeds Int’l Corp., 559  U.S. ___, 130 S. Ct. 1758 (2010); and  Rent-A-Center West v. Jackson, 561 U.S. ___, 130 S. Ct. 2772 (2010). 

The key point on which the argument shed no meaningful light is what Associate Justice Clarence Thomas makes of this case.  Justice Thomas joined the Stolt-Nielsen and Rent-A-Center majority opinions, but those cases, unlike this one, did not concern the preemptive scope of the Federal Arbitration Act. 

Preemption is controversial, and its importance extends far beyond the AT&T Mobility case.    Particularly controversial — and very supportive of AT&T Mobility’s position — is the doctrine of “implied preemption,” also known as “conflict” or “obstacle” preemption. In Federal Arbitration Act cases this doctrine tells us that  state laws or policies that undermine “the goals and policies of the FAA” are preempted by the Act.  Volt Info. Sciences, Inc. v. Board of Trustees of Leland Stanford Univ., 489 U.S. 468, 477-78 (1990).

But Justice Thomas believes that the implied preemption doctrine is unconstitutional.  See Wyeth v. Levine, 555 U.S. ___, 129 S. Ct. 1187, 1205 (2009) (Thomas, J. concurring) (“implied pre-emption doctrines that wander far from the statutory text are inconsistent with the Constitution.  .  .  .”).  He also believes that Congress intended the Federal Arbitration Act to be a procedural statute that applies only in federal court.  See, e.g., Allied-Bruce Terminix Cos. v. Dobson, 513 U.S. 265 (1995) (Thomas, J., dissenting); Buckeye Check Cashing, Inc. v. Cardegna, 546 US 440 (2006) (Thomas, J., dissenting) (“[I]n state-court proceedings, the FAA cannot be the basis for displacing a state law that prohibits enforcement of an arbitration clause contained in a contract that is unenforceable under state law.”). 

He thus believes that state courts can apply state arbitration law as they see fit, irrespective of whether the result would be different had the case been brought in federal court.  While AT&T Mobility – like Stolt-Nielsen and Rent-A-Center – was brought in federal court, and everybody concedes that the Federal Arbitration Act applies, Justice Thomas remains a strong proponent of federalism.  

Justice Thomas’ deference to state law is problematic for AT&T Mobility.  Perhaps AT&T Mobility’s best argument is that the Federal Arbitration Act impliedly preempts the Discover Bank rule for the reasons set forth in Stolt-Nielsen.   Apparently concluding that the Justices in the Stolt-Nielsen majority – including Justice Thomas —  are the ones most likely to support AT&T Mobility’s position, AT&T Mobility deliberately downplayed the implied preemption issue, although it made clear that it believes the Federal Arbitration Act both expressly and impliedly preempts the Discover Bank rule. 

That was a wise strategy given Justice Thomas’ rejection of implied preemption.  Its wisdom was borne out by what transpired at the argument:  of the eight Justices that asked questions, the four more liberal ones (Associate Justices Ruth Bader Ginsburg, Stephen G. Breyer, Sonia M. Sotomayor and Elena Kagan) appear to be leaning in favor of finding that the Federal Arbitration Act does not preempt the Discover Bank rule, while the four more conservative ones (Chief Justice John G. Roberts, and Associate Justices Antonin G. Scalia, Anthony M. Kennedy, and Samuel J. Alito, Jr.) appear to be leaning in favor of finding that the Federal Arbitration Act preempts Discover Bank.      

That means Justice Thomas is likely to hold the deciding vote, but where he’ll ultimately cast it, nobody knows (at least outside the Supreme Court).  We believe there are equally plausible reasons why he might vote  for or against preemption.  

Earlier this morning the Disputing blog published the first installment of a multi-part guest post we are writing, entitled “AT&T Mobility v. Concepcion:  Can Discover Bank Withstand Stolt-Nielsen Scrutiny?”  (Read it here.)  Our focus in that post will be how Stolt-Nielsen bears on the Federal Arbitration Act preemption questions before the Court, and in particular, what (if anything) we can glean from the upcoming oral argument about those questions.  

The first installment briefly describes the preemption issues and comments on the uncertainty surrounding implied preemption because of Associate Justice Clarence Thomas’ rejection of that doctrine in his Wyeth v. Levine, 555 U.S. ___, 129 S. Ct. 1187 (2009), concurring opinion, see 129 S. Ct. at 1205 (Thomas, J., concurring), and the deference he accords state law in Federal Arbitration Act cases which (unlike AT&T Mobility) are brought in state court.  See, e.g., Buckeye Check Cashing, Inc. v. Cardegna, 546 US 440 (2006) (Thomas, J., dissenting) (“[I]n state-court proceedings, the FAA cannot be the basis for displacing a state law that prohibits enforcement of an arbitration clause contained in a contract that is unenforceable under state law.”).

The first installment also poses some examples of the types of Stolt-Nielsen-related questions Justices might ask the Concepcions’ counsel at the argument.  It will be interesting to see whether the Court asks questions of this type, and, if so, what the Concepcions have to say in response.     

The number of future installments will depend on what transpires at the argument.  We suspect that there will be at least two.  

We would like to thank Karl Bayer and Beth Graham of the Disputing blog for featuring us as an AT&T Mobility  guest blogger.

U.S. Law Week is a subscription only publication, but I received permission from the Bureau of National Affairs (“BNA”) to post a copy of the article on my LinkedIn profile.  So, if you are a member of Linkedin, you can access a copy of the article here (it does not appear in my “public” LinkedIn profile).

We would like to thank Tom for conducting a very professional interview and following up with a well-written, comprehensive and informative article about this critically important case.

We are following AT&T Mobility closely, and will be commenting further on it in the near future.  I am also working on a guest-post about the case for another ADR-oriented blog.  Stay tuned for details….

Introduction

Part I of this two-part post (here) briefly discussed the background of  AT&T Mobility LLC v. Concepcion, No. 09-893, a case pending before the United States Supreme Court that will be argued on November 9, 2010.  We now delve into the details of the preemption questions before the Court and take a guess at the outcome. 

Federal Arbitration Act Preemption

The Federal Arbitration Act does not preempt all state law applicable to arbitration agreements, but it expressly preempts state law that conflicts with Section 2, and impliedly preempts all state law that “stands as an obstacle to the accomplishment and execution of the full purposes of Congress”  embodied in the Federal Arbitration Act.  See Shroyer v. New Cingular Wireless Serv., Inc., 498 F.3d 976, 988 (9^th Cir. 2007) (citations and quotation omitted). 

Does Section 2 of the Federal Arbitration Act Expressly Preempt the Discover Bank Rule?

Section 2 of the Federal Arbitration Act declares that arbitration agreements within its scope “shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.”  9 U.S.C. § 2.  Section 2 establishes substantive federal law that expressly preempts all conflicting state law, except for state law that permits “the revocation of any contract” or governs the formation, interpretation, or construction of contracts generally. 

The exception to federal preemption is exceedingly narrow, for it saves from preemption only state laws that apply equally across the board to all contracts.  The United States Supreme Court summarized it well when it said:

States may regulate contracts, including arbitration clauses, under general contract law principles and they may invalidate an arbitration clause ‘upon such grounds as exist at law or in equity for the revocation of any contract.  What States may not do is decide that a contract is fair enough to enforce all its basic terms (price, service, credit), but not fair enough to enforce its arbitration clause.  The Act makes any such state policy unlawful, for that kind of policy would place arbitration clauses on an unequal footing, directly contrary to the Act’s language and Congress’s intent.

Allied-Bruce Terminix Cos. v. Dobson, 513 U.S. 265, 281 (1995) (citations and quotations omitted; emphasis in original).  

By preempting state laws that do not apply to all other contracts, it makes arbitration agreements as enforceable of all other contracts, and prevents states from discriminating against them or otherwise making them less enforceable than all other contracts.  

The Supreme Court has said that state law grounds for the revocation of “any contract” include “generally applicable contract defenses, such as fraud, duress, or unconscionability,”  and that these defenses “may be applied to invalidate arbitration agreements without contravening § 2.”  Doctor’s Associates, Inc. v. Casarotto, 517 U.S. 681, 687 (1996).  The United States Court of Appeals for the Ninth Circuit and the California Supreme Court say that the Discover Bank rule is a state law ground for the invalidation of any contract (or at least for invalidating a class action waiver made part of the contract) for two reasons. 

First, the Discover Bank rule is part of California’s unconscionability law, and unconscionability is a defense to the enforcement of “any contract.”  California permits any contract to be voided on unconscionability grounds if, at the time it was made, it was both procedurally and substantively unconscionable.  Procedural unconscionability can be established by showing that a party with superior bargaining power offered the agreement on a take-it-or-leave it basis or the bargaining process was otherwise unfair.  Substantive unconscionability is established if the agreement “shock[s] the conscience,” or is one that a person would have to be “under delusion” to enter.  Odell v. Moss, 130 Cal. 352, 358 (1900); Belton v. Comcast Cable Holdings, LLC, 151 Cal.App.4^th 1224, 1245 (1st Dist. 2007); California Grocers Ass’n v. Bank of Am., 22 Cal.App. 4^th 205, 215 (1st Dist. 1994).   California applies a “sliding scale” rule – if the degree of procedural unconscionability is relatively low, then a greater showing of substantive unconscionability is required, and vice-versa. 

The Discover Bank rule says that, as a matter of law, an agreement to waive class arbitration or litigation is procedurally unconscionable if it is contained in a contract of adhesion and is substantively unconscionable if it is:  (a) “in a setting in which disputes between the contracting parties predictably involve small amounts of damages;” and (b) “it is alleged that the party with superior bargaining power has carried out a scheme to deliberately cheat large numbers of consumers out of individually small sums of money.”  Discover Bank v. Superior Ct., 36 Cal.4^th 148, 162-63 (2005). 

Second, the Discover Bank rule is an application of Cal. Civ. Code § 1668, which declares certain exculpatory contracts to be “against the policy of the law:”

All contracts which have for their object, directly or indirectly, to exempt anyone from responsibility for his own fraud, or willful injury to the person or property of another, or violation of law, whether willful or negligent, are against the policy of the law. 

Cal. Civ. Code § 1668. 

A key premise of the Discover Bank rule is that class waivers are exculpatory contract provisions because consumers that have been the victims of alleged small-dollar but widespread fraud will, for economic reasons, allegedly be deterred from pursuing their small-dollar claims in individual, bilateral arbitrations or litigations.  According to California law an agreement that deprives consumers of class procedures exculpates the corporate wrongdoer from full responsibility for its fraud, or at least is intended to do so.  

Because California law bars enforcement of all unconscionable contracts, and all exculpatory contracts falling within Section 1668 of its Civil Code, and because the Discover Bank rule applies to class action waivers in contracts that do not contain arbitration agreements, the California Supreme Court and the Ninth Circuit hold that it does not discriminate against arbitration agreements in violation of Section 2. 

While this conclusion admittedly has a superficial ring of reason to it, it cannot withstand scrutiny.  The Discover Bank  rule may be based on or derived from general unconscionability-law principles and Cal. Civ. Code Section 1668, but it is not a general rule that applies to all contracts. 

To be sure, the rule targets not only certain arbitration agreements, but also a very small class of other contracts that do not contain arbitration agreements, but which purport to require a party to waive the right to bring a class action in court.  That alone, however, cannot save the rule from preemption, for the rule is no less discriminatory of arbitration agreements simply because it also happens to apply to another small subset of – but not all other – contracts.   Far from a general ground for the revocation of “any contract,” it is a special rule that applies principally to arbitration agreements.   Section 2 expressly preempts all state laws that discriminate against arbitration agreements, and the Discover Bank rule does exactly that.

That doesn’t mean California law on unconscionability or exculpatory contracts can’t be invoked to void an arbitration agreement in whole or in part.  But it does mean that California must apply to arbitration agreements the same standards for assessing unconscionability or Section 1668 enforceability that it applies to all other contracts. 

California could therefore apply its general rule against unconscionable contracts to an arbitration agreement.  That rule allows courts to void only those adhesive contracts that “shock the conscience” or would be accepted only by the delusional.  The ultra-consumer-friendly arbitration agreement in AT&T could never meet this rigorous test, the Ninth Circuit never suggested that it could, and, to our knowledge, the Concepcions do not contend that it could.   

California could also probably apply its general rule against exculpatory contracts to an arbitration agreement without violating Section 2.  One might legitimately argue that an arbitration agreement would violate Section 1668’s general rule if, for example, the agreement required arbitration of fraud claims, but forbade the arbitrators from awarding full monetary relief for fraud.     But nothing in the AT&T Mobility arbitration agreement purports to impair the Concepcions’ rights – or those of any other party that has the same or a similar agreement with AT&T Mobility – to obtain in bilateral arbitration the same monetary relief from fraud that it might obtain in class arbitration or litigation.       

There is yet another reason why California’s Discover Bank rule is not a rule of general contract law:  it is not a rule that is intended to  govern the validity or enforceability of any particular contract viewed in isolation, but a dispute resolution or consumer protection policy that seeks to guarantee class procedures are available to consumers in circumstances where many consumer parties have entered into independent, substantially similar adhesive contracts with a common corporate party and one or more consumers allege small dollar but widespread fraud.  Even assuming there is an empirical basis for the Discover Bank rule, and that it otherwise reflects a reasonable exercise of judicial power to declare public policy, the policy it is designed to advance has nothing to do with the enforceability of contracts generally, everything to do with the enforceability of consumer dispute resolution contracts particularly, and most to do with regulating consumer arbitration agreements specifically.       

 Does the Federal Arbitration Act Impliedly Preempt the Discover Bank Rule?

Even if state law is not expressly preempted by the Federal Arbitration Act, it may be impliedly preempted if it conflicts with the purpose of the Act, or the strong federal policy in favor of arbitration that it seeks to advance.  State laws or policies that undermine “the goals and policies of the FAA” are preempted by the Act.  Volt Info. Sciences, Inc. v. Board of Trustees of Leland Stanford Univ., 489 U.S. 468, 477-78 (1990).  

The Ninth Circuit held that the Discover Bank rule did not conflict with policies and purposes of the Federal Arbitration Act for essentially the same reasons it held that Section 2 did not expressly preempt the rule.  Those reasons do not save the rule from implied preemption anymore than they save it from express preemption, but there is more. 

The Ninth Circuit decided AT&T Mobility before the Supreme Court decided Stolt-Nielsen, S.A. v. AnimalFeeds, Inc., 130 S. Ct. 1758 (2010), which spelled out in no uncertain terms what Federal-Arbitration-Act policy was as respects class arbitration.   In Stolt-Nielsen the Court reaffirmed that “the central or ‘primary’ purpose of the FAA is to ensure that ‘private agreements to arbitrate are enforced according to their terms” and according to “the contractual rights and expectations of the parties.”  130 S. Ct. at 1773 (citations and quotations omitted).  To that end, said the Court, the Act “imposes certain rules of fundamental importance, including the basic precept that ‘arbitration is a matter of consent, not coercion.’”  130 S. Ct. at 1773 (citations omitted).  These rules authorize the parties to:  

1. generally “structure their arbitration agreements as they see fit[;]” 
2. “agree to limit the issues they choose to arbitrate[;]”
3. “agree on the rules under which any arbitration will proceed[;]”
4. “choose who will resolve specific disputes[;]” and
5.  “specify with whom they choose to arbitrate.”

130 S. Ct. at 1773-74 (citations and quotations omitted; emphasis  in original).

The Court admonished “courts and arbitrators to give effect to these contractual limitations” and reminded them not to “lose sight of the purpose of the exercise:  to give effect to the intent of the parties.”  130 S. Ct. at 1774-75 (citations omitted). 

From these Federal Arbitration Act “fundamental rules of importance” Stolt-Nielsen derived a new rule that effectively puts the kibosh on judicial attempts to nullify class waivers:  “a party may not be compelled under the FAA to submit to class arbitration unless there is a contractual basis for concluding that the party agreed to do so.”  130 S. Ct. at 1775 (emphasis in original).  The Discover Bank rule squarely conflicts with this and other Federal Arbitration Act “rules of fundamental importance,” because it either (a) imposes class arbitration on parties that not only did not agree to it, but expressly forbade it; or (b) requires parties to submit their dispute to class-action litigation, all in derogation of their arbitration agreement. 

Stolt-Nielsen has set Discover Bank on a collision course not only with the Federal Arbitration Act, but with itself.  Discover Bank assumes that, if consistent with state law on severability a class waiver can be severed from an arbitration agreement that is otherwise silent on class relief, then an arbitrator could impose class arbitration.  That’s part of the justification for Discover Bank; it is allegedly not an anti-arbitration rule because it permits class arbitration. 

Stolt-Nielsen has negated this key premise of Discover Bank by rejecting the argument that class arbitration is a mere matter of arbitral procedure and holding that courts or arbitrators cannot impose class arbitration without the parties’ affirmative consent.  It teaches us that if the parties’ agreement is silent on class relief, then the parties have not agreed to class arbitration, and thus cannot be compelled to participate in it, even if state law would deem the parties to have consented to class arbitration.    

If the Supreme Court were to hold that the Federal Arbitration Act does not preempt Discover Bank, then it would transform Discover Bank into a rule that not only barred class waivers, but also a certain class of ordinary arbitration agreements that are simply silent on class procedures, something that the Discover Bank rule does not purport to do.  And the result could not be squared with the Federal Arbitration Act. 

Stolt-Nielsen renders class waivers irrelevant in most cases.   If the waiver can be severed consistent with state law on severability applicable to any contract, then what is left is usually an arbitration agreement that is silent on class arbitration.  But under the Federal Arbitration Act, such an arbitration agreement provides no basis for a court or arbitrator to compel class arbitration, and a court faced with such an agreement has no choice but to compel bilateral arbitration.

That demonstrates that the Federal Arbitration Act impliedly preempts the Discover Bank rule, because it does not allow the rule to accomplish its intended result, which was to require class arbitration in cases where the parties expressly provide for bilateral arbitration only.  In the recent, post-Stolt-Nielsen, Fensterstock v. Education Finance Partners, ___ F.3d ___ (2d Cir. July 12, 2010), case (blogged here), the United States Court of Appeals for the Second Circuit attempted to avoid this foregone conclusion by completely ignoring the Federal Arbitration Act “rules of fundamental importance,” and holding that, under Discover Bank, the entire arbitration agreement was void because merely severing the class waiver would not permit class arbitration.  In attempting to implement the purposes of the Discover Bank rule it was forced to effectively expand the scope of the rule into one that voids not only class arbitration waivers, but also arbitration agreements that do not affirmatively authorize class relief.     

Ironically, the conclusion the Second Circuit reached in Fensterstock negates the key premise on which it was based.  The reason the Second Circuit saw fit to apply the Discover Bank rule in the first place was that it was purportedly a state law rule that applied to all contracts generally because it applied equally to arbitration agreements and contracts that waived class litigation.  But the expanded Discover Bank rule cannot survive express preemption even on that questionable basis. 

The expanded Discover Bank rule discriminates against adhesive arbitration agreements that are silent on class arbitration by voiding them, but enforcing all other contracts that are silent on class litigation.  The Discover Bank rule does not condition enforcement of non-arbitration agreements on the parties agreeing to submit to class action litigation proceedings.  Class litigation is provided for by applicable state procedural law or the Federal Rules of Civil Procedure; nobody has to consent to it.   But the Discover Bank rule as applied by the Second Circuit conditions enforcement of adhesive arbitration agreements on the parties affirmatively consenting to class arbitration in cases where the consumer alleges small-dollar but widespread fraud. 

That inescapable conclusion causes the Second Circuit’s express and implied preemption analysis to collapse like a house of cards.  The Second Circuit’s expanded Discover Bank rule treats arbitration agreements that are silent on class arbitration differently than all other contracts that are silent on class litigation, and there is no basis – however thin – for contending otherwise. 

It also bulldozes the Ninth Circuit’s express and implied preemption analysis in AT&T Mobility.  For Stolt-Nielsen renders irrelevant the Discover Bank rule unless it is construed to apply in a way that puts arbitration agreements on a wholly different footing than all other contracts. 

What is the Likely Outcome in AT&T Mobility?

Predicting the outcomes of cases pending before the Supreme Court is, at best, educated guesswork.  But we do not think that the Supreme Court can affirm the Ninth Circuit unless it is prepared to make significant exceptions to its prior jurisprudence interpreting the Federal Arbitration Act, or fashion a whole new set of rules and policies that apply to adhesive arbitration agreements.   

It seems highly unlikely that a majority of the Court will be willing to take such a bold step, particularly in light of the recently decided Stolt-Nielsen case.  Congress could, of course, do so, and under the Dodd-Frank Act (blogged here), the Bureau of Consumer Financial Protection and the Securities and Exchange Commission may have the power to do so as respects arbitration agreements contained in the financial service, broker-dealer, and investment-advisory contracts that the Dodd-Frank Act authorizes them to regulate. 

Our best guess is that the Court will stay the course it has set over the last few decades in the many Federal Arbitration Act cases it has decided, and let Congress change the law if it sees fit. 

Stay tuned for further coverage of the perplexing and exceedingly important AT&T Mobility case.  .  .  .

Introduction

In our recent feature “What to Make of the Second Circuit Voiding a Class Action Waiver Under California’s Discover Bank Rule,” we briefly discussed AT&T Mobility LLC v. Concepcion, No. 09-893, a case which asks the United States Supreme Court to determine whether the Federal Arbitration Act preempts California’s Discover Bank rule.  The Discover Bank rule deems unconscionable class action and class arbitration waivers in adhesive contracts in circumstances where a consumer alleges that a party with superior bargaining power has committed widespread but small-dollar fraud.  Petitioner AT&T Mobility LLC (“AT&T Mobility”) has filed its brief (here); various organizations, including the Chamber of Commerce of the United States of America, have filed an impressive stack of amicus curiae briefs supporting AT&T Mobility (here); Vincent and Liza Concepcion (the “Concepcions”) have filed their brief, which was posted online earlier today (here); and AT&T will presumably submit a reply brief.  The Court has scheduled argument for November 9, 2010. 

AT&T Mobility is an extremely important case because it will decide whether the Federal Arbitration Act preempts certain state law unconscionability and public-policy-based rules that are principally directed at class arbitration and class action waivers.  This issue has spawned a number of conflicting decisions in the state and federal courts, including Feeney v. Dell, Inc. 454 Mass. 192 (2009), a case we blogged back in 2009 (posts here and here). 

This two-part feature takes a closer look at AT&T Mobility, considers the principal issues before the Court, and ventures a guess on what the outcome will be.   This Part I discusses the background of the case, and Part II (here) outlines Federal Arbitration Act preemption rules, analyzes and explains why we believe the Federal Arbitration Act expressly and impliedly preempts the Discover Bank rule, and provides our best guess as to what the Supreme Court will conclude.    

AT&T Mobility:  Background

Like plaintiffs in most other class waiver cases the Concepcions’ claim is small; they seek only about $30.00 in compensatory damages.  They say AT&T Mobility, a cell-phone communications provider, fraudulently represented that it would give them free cell phones, but allegedly charged federal and state taxes for these “free” phones. 

The Concepcions want to proceed on a class action basis, and to that end they wish to bypass a clear and unambiguous class waiver contained in the arbitration agreement in their contract with AT&T Mobility.  The arbitration agreement stipulates that it shall be void in its entirety if a court does not enforce the waiver. 

The Concepcions say the waiver is unenforceable under California’s Discover Bank rule, which renders a class-action or class-arbitration waiver unenforceable on unconscionability grounds if:    

[1]  found in a consumer contract of adhesion

[2]  in a setting in which disputes between the contracting parties predictably involve small amounts of damages, and

[3]  it is alleged that the party with the superior bargaining power has carried out a scheme to deliberately cheat large numbers of consumers out of individually small sums of money. 

Discover Bank v. Superior Ct., 36 Cal.4^th 148, 162-63 (2005). 

AT&T Mobility’s arbitration agreement is unique in that it contains some very consumer friendly provisions, which were summarized this way in AT&T Mobility’s initial Supreme Court brief: 

Cost-free arbitration for non-frivolous claims: ‘[AT&T Mobility] will pay all [American Arbitration Association (“AAA”)] filing, administration and arbitrator fees’ unless the arbitrator determines that the claim “is frivolous or brought for an improper purpose (as measured by the standards set forth in Federal Rule of Civil Procedure 11(b))” [in which case arbitration costs payable by the consumer are capped at $125.00]. 

Convenience:  Arbitration takes place ‘in the county.  .  . of [the customer’s] billing address,’ and for claims of $10,000 or less, customers have the exclusive right to choose whether the arbitrator will conduct an in-person hearing, a hearing by telephone, or a “desk” arbitration in which ‘the arbitration will be conducted solely on the basis of documents submitted to the arbitrator.’

Flexible consumer procedures:  Arbitration is conducted under the AAA’s Commercial Dispute Resolution Procedures and the Supplementary Procedures for Consumer-Related Disputes, which the independent, non-profit AAA designed with consumers in mind;

Small claims court option:  Either party may bring a claim in small claims court in lieu of arbitration;

Full remedies available:  The arbitrator may award the claimant any form of individual relief (including statutory attorneys’ fees, statutory damages, punitive damages and injunctions) that a court could award; and

No confidentiality requirement:  Customers and their attorneys are not required to keep the results of the arbitration confidential. 

AT&T Mobility’s Br. at 5-6. 

The arbitration clause also contains a number of consumer-friendly features designed to encourage California consumers to submit to bilateral arbitration even small-dollar claims:   

$7,500 minimum recovery if arbitral award exceeds [AT&T Mobility’s] last settlement offer:  If the arbitrator awards a California customer relief that is greater than [AT&T Mobility’s] last ‘written settlement offer made before an arbitrator was selected’ but less than $7,500, [AT&T Mobility] will pay the customer $7,500 rather than the smaller arbitral award;

Double attorneys’ fees:  If the arbitrator awards the customer more than [AT&T Mobility’s] last written settlement offer, than [AT&T Mobility] will ‘pay [the customer’s] attorney, if any, twice the amount of attorneys’ fees, and reimburse any expenses, that [the] attorney reasonably accrues for investigating, preparing, and pursuing [the] claim in arbitration;” and

[AT&T Mobility] disclaims right to seek attorneys’ fees:  “Although under some laws [AT&T Mobility] may have a right to an award of attorneys’ fees and expenses if it prevails in an arbitration, [AT&T Mobility] agrees that it will not seek such an award [from the customer].”

AT&T Mobility’s Br. at 6-7.

The district court said these provisions “sufficiently incentivize[] consumers” to pursue “small dollar” claims and “prompts” AT&T to make settlement offers favorable to consumers “even for claims of questionable merit.”  It nonetheless denied AT&T Mobility’s motion to compel arbitration, holding that the class waiver was unconscionable under California’s Discover Bank rule because it forbid the Concepcions from representing a class of allegedly similarly-situated claimants. 

The United States Court of Appeals for the Ninth Circuit acknowledged that the arbitration agreement “essentially guarantee[ed]” that AT&T Mobility “will make any aggrieved customer whole who files a claim.”  Laster v. AT&T Mobility LLC, 584 F.3d 849, 856 n.9 (9th Cir. 2009), cert. granted sub nom. AT&T Mobility LLC v. Concepcion,  ___ U.S. ___, 130 S.Ct. 3322 (2010).  But relying on its previous decision in Shroyer v. New Cingular Wireless Serv., 498 F.3d 976 (9^th Cir. 2007), it held that the class waiver was unconscionable  under Discover Bank, and that the Discover Bank rule was not expressly or impliedly preempted by the Federal Arbitration Act.   

The question before the Supreme Court is: “Whether the Federal Arbitration Act preempts States from conditioning the enforceability of an arbitration agreement on the availability of particular procedures – here, class-wide arbitration – when those procedures are not necessary to ensure that the parties to the arbitration agreement are able to vindicate their claims.”  That’s simply another way of asking whether the Federal Arbitration Act preempts the Discover Bank rule under the circumstances presented in AT&T Mobility. 

If the Supreme Court affirms the Ninth Circuit, the Concepcions will be permitted to pursue the class action complaint they filed in the district court.  If the Supreme Court holds that the Federal Arbitration Act preempts the Discover Bank rule, and reverses the Ninth Circuit, then the Concepcions will be required to arbitrate their $30.00 dispute with AT&T Mobility on a strictly bilateral basis.

In Part II (here) we delve into the preemption issues and take a guess at how the Supreme Court will dispose of this case.

U.S. Law Week is a subscription only publication, but I received permission from the Bureau of National Affairs (“BNA”) to post a copy of the article on my LinkedIn profile.  So, if you are a member of Linkedin, you can access a copy of the article here (it does not appear in my “public” LinkedIn profile).

We would like to take this opportunity to thank Tom P. Taylor for conducting a very professional interview and following up with a very professional article.  We would also like to thank Bernard J. Pazanowski, who co-authored the article with Tom.

We will find out whether the Court intends to continue down the same path when it decides AT&T Mobility v. Concepcion next term, a case that raises the question whether California’s Discover Bank  unconscionability rule is pre-empted by the Federal Arbitration Act.  That rule deems unconscionable under California law class-action or class-arbitration waivers where:  (a) “the waiver is found in a consumer contract of adhesion in a setting in which the disputes between the contracting parties predictably involve small amounts of damages”; and (b) “it is alleged that the party with the superior bargaining power has carried out a scheme to deliberately cheat large numbers of consumers out of individually small sums of money.  .  .  .”  Discover Bank v. Superior Court, 36 Cal. 4th 148, 162-63 (2005) (citing Cal. Civ. Code § 1668). 

The Discover Bank rule is grounded in a California-law principle – embodied in Cal. Civ. Code § 1668 – that “contracts which have for their object, directly or indirectly, to exempt anyone from responsibility for his own fraud.  .  .  are against the policy of the law.”   See Cal. Civ. Code § 1668.  If a company is allegedly engaging in fraudulent acts designed to cheat numerous consumers out of small amounts of money, a class action or class arbitration waiver may, if enforced, effectively act as an exculpatory provision that insulates the company from the consequences of its small scale, but widespread fraud, because the individual, allegedly defrauded consumers have little incentive to pursue separate actions or arbitrations to recoup trivial amounts of damages.  See Discover Bank, 36 Cal. 4th at 162-63.  Any contract that had that effect – whether it is a class action waiver in an arbitration clause, an exculpatory agreement or a contract that simply forbids class actions  – would be unconscionable under the rule.  

In Fensterstock v. Education Finance Partners, No. 09-1562-cv, slip op. (2d Cir. July 12, 2010), the United States Court of Appeals for the Second Circuit suggested one path that the United States Supreme Court might take on Discover Bank preemption.  In an interesting opinion, Senior Circuit Judge Amalya Lyle Kearse, joined by Circuit Judges José A. Cabranes and Chester J. Straub, held that the Discover Bank rule was not preempted by the Federal Arbitration Act.  According to the Second Circuit, California’s  Discover Bank rule “’places arbitration agreements on the exact same footing as contracts that bar class action litigation outside the context of arbitration,’” and for that reason the rule is not preempted by the Act.  Slip op. at 16-17 (quoting Shroyer v. New Cingular Wireless Serv., Inc., 498 F.3d 976, 990 (9^th Cir. 2007) (emphasis in original)). 

On first blush the Second Circuit’s decision seems reasonable.  But there are some important issues lurking beneath the surface that the Supreme Court will need to address when it decides AT&T Mobility. 

In Stolt-Nielsen the Supreme Court, among other things, established certain Federal Arbitration Act “rules of fundamental importance,” which trump inconsistent state law.  (Blogged here.)   One of these is that parties may “specify with whom they chose to arbitrate.”  Stolt-Nielsen, slip op. at 19 (emphasis in original).   And another – the one that controlled the outcome of Stolt-Nielsen – is that  “a party may not be compelled under the FAA to submit to class arbitration unless there is a contractual basis for concluding that the party agreed to do so.”  Slip op. at 20 (emphasis in original).  The Court admonished that it “falls to courts and arbitrators to give effect to these [and other enumerated] contractual limitations, and when doing so, courts and arbitrators must not lose sight of the purpose of the exercise:  to give effect to the intent of the parties.”  Slip op. at 20. 

Application of these rules to an arbitration agreement containing a class-arbitration or class-action waiver would presumably result in enforcement of that waiver as a matter of federal law.  The rule that the parties can choose with whom they arbitrate necessarily preempts any state law or policy that would declare void or unenforceable such an express choice made by the parties to limit the universe of persons with whom they agreed to arbitrate.  And the Discover Bank  rule – for all its reasonableness and good intentions – is just such a rule.

Alternatively, the Stolt-Nielsen rule that affirmative consent — not mere silence – is required for a court or arbitration panel to compel class arbitration strongly suggests that class-arbitration or class-action waivers are irrelevant.  Even if one is excised from the arbitration clause, what is left is usually an arbitration clause that is silent on class arbitration.  But under Stolt-Nielsen courts and arbitrators cannot compel class arbitration in the face of silence.   So the net effect of including such a waiver in a contract that is otherwise silent on class arbitration is zero, which hardly makes the waiver a candidate for nonenforcement under the Discover Bank rule.  

The Supreme Court’s disposition of the American Express Merchants’ Litigation matter suggests that it believes Stolt-Nielsen is relevant to the question whether class arbitration waivers are enforceable or simply irrelevant.  Readers may recall that in May 2009 American Express filed a cert petition in the American Express Merchants’ Litigation.  The Second Circuit had held that an arbitration agreement provision forbidding class-action arbitration was invalid and unenforceable on federal public policy grounds under the circumstances of that case, which involved federal antitrust claims.  See Re American Express Merchants’ Litigation, 554 F.3d 300 (2d Cir. 2009), vacated and remanded sub nom., American Express Co. v. Italian Colors Restaurant, No. 08-1473 (May 3, 2010). 

On May 3, 2010 the Court issued a summary order in American Express Co. v. Italian Colors Restaurant, granting certiorari, summarily vacating the Second Circuit judgment, and remanding it “for further consideration in light of” Stolt-Nielsen.   Justice Sotomayor “took no part in the consideration or decision” of the petition.   See Italian Colors, No. 08-1473 (May 3, 2010) (summary disposition).  It is unclear whether the Court vacated the judgment because it believed the waiver was enforceable or irrelevant, or whether there was some other Stolt-Nielsen-related reason.  

In Fensterstock the Second Circuit apparently did not figure Stolt-Nielsen or Italian Colors into its preemption analysis.  Oddly enough it relied on Stolt-Nielsen for the proposition that the class-arbitration waiver could not be severed from the remainder of the arbitration agreement, because if the class arbitration waiver were removed, the arbitration clause would be silent on class arbitration, which in turn meant that the court could not compel class arbitration.  While that conclusion probably should have led the court to rethink its preemption analysis, instead it led the court to conclude further (and implausibly) that the entire arbitration clause could not be enforced, and that the claimant could pursue a class action in court.  But that reasoning makes little sense because it suggests that an arbitration clause that contains no class-arbitration waiver, and  is simply silent on class arbitration,  would violate the Discover Bank rule.        

The question that will likely arise in AT&T Mobility is whether Stolt-Nielsen’s “rules of fundamental importance” require enforcement of the waiver despite contrary state law governing contracts generally.  If the Court decides to follow the same path it was on this past term, then it might well find that the Stolt-Nielsen rules of “fundamental importance” trump the Discover Bank rule, or render irrelevant both the class waiver and the Discover Bank rule.  But if at least one member of the Stolt-Nielsen/Rent-A-Center majority decides to break ranks, then it could be that the Court adopts an analysis similar to that used in Fensterstock. 

The narrow nature of the Discover Bank rule, coupled with strong public policy considerations against allowing parties to effectively insulate themselves from liability for fraud, could cause such a break in the ranks.  If that turns out to be the case, perhaps the Court will say that the “rules of fundamental importance” are subject to state law defenses applicable to ordinary contracts, and that the Discover Bank  rule constitutes such a defense.  Or the Court might say that the “rules of fundamental importance” are different – or are to be applied differently – in cases involving adhesive contracts.   

Whatever position a majority of the Court may take, the stakes are fairly high.  There has already been a good deal of political fallout resulting from the Court’s arbitration decisions this term, and the practical implications of that fall-out are not entirely clear in terms of whether the Arbitration Fairness Act of 2009 is likely to be passed.  But even if Rent-A-Center does not precipitate legislative action on the Arbitration Fairness Act, a reversal in AT&T Mobility could well be the proverbial straw that broke the camel’s back.  On the other hand, an affirmance in AT&T Mobility — coupled with an adjustment of the “rules of fundamental importance” in the adhesive contract context — might well shift public attention from anti-arbitration legislation on to something more – for lack of a better phrase — fundamentally important.

A.   Introduction

In Part V.A of our Stolt-Nielsen reinsurance-arbitration practice series (here), we said that after Stolt-Nielsen courts will likely get to decide in the first instance whether the parties consented to consolidated arbitration.  If we are correct, that will be a fundamental change because courts will presumably construe the terms of the parties’ contracts more strictly than many arbitrators might, and those constructions will be subject to appellate review. 

In this Part V.B we consider what a party will likely need to show to persuade a court to consolidate arbitrations, and explain why we believe that courts will not frequently order consolidation.  In Part V.C. we shall explain the strategic and practical implications of the changes that Stolt-Nielsen will likely bring about in consolidated reinsurance-arbitration practice.         

 B.   What Will One Have to Show to Establish Consent to Consolidated Arbitration?

What a party must show to establish consent to consolidated arbitration will depend  on whether the dispute involves (a) multiple, bilateral contracts between the same parties; (b) multiple, bilateral contracts between a cedent and different reinsurers; (c) one or more multilateral contracts between a cedent and the same group of multiple reinsurers; (d) multiple, multilateral contracts between a cedent and different groups of reinsurers; or (e) some combination of (a) or (b) and (c), or (d).  While a party may show consent to consolidated arbitration in Scenario (a) by demonstrating that at least one of the arbitration clauses is broad enough to encompass the multi-contract dispute (see Part V.A, here), the party seeking consolidation must show more to establish consent in Scenarios (b) through (e).   Our focus here will be establishing consent in those Scenarios.   

1.      Scenario (b):  Multiple, Bilateral contracts Between a Cedent and Different Reinsurers

Scenario (b) may arise where a cedent seeks consolidated arbitration of a dispute arising out of a group of separate, bilateral facultative or treaty reinsurance contracts between the cedent and different reinsurers.  Suppose that Cedent C entered into a series of three consecutive, one-year bilateral facultative reinsurance agreements, Contracts 1, 2 and 3, with three different reinsurers, Reinsurers 1, 2 and 3.  Cedent C has billed each reinsurer for a portion of the settlement of an environmental claim that it has allocated to the three-year period covered by the contracts. 

Cedent C can easily demonstrate that it agreed to separate, bilateral arbitrations with R1, R2 and R3 and vice-versa, and that the dispute over each reinsurer’s share of the settlement falls within the scope of its arbitration agreement with that reinsurer.  But Stolt-Nielsen requires more. 

Cedent C must somehow demonstrate that each of the reinsurers consented to arbitrate in a single proceeding to which each of the other reinsurers are parties.  And since most reinsurance arbitration agreements provide for tri-partite arbitration — with each of the parties appointing an arbitrator, who in turn appoint a neutral  umpire — the reinsurers must agree to act as a single party for the purposes of arbitrator selection. 

If the reinsurers had contemplated consolidated arbitration involving nonparties to their contracts each presumably would have included a provision in their arbitration agreement that allowed for that.  Consider, for example, the relevant terms of Brokers and Reinsurance Markets Association standard arbitration clause 6K:

As a condition precedent to any right of action hereunder, any dispute arising out of this Contract, whether arising before or after termination, shall be submitted to the decision of a board of arbitration composed of two arbitrators and an umpire,  meeting in (City, State), unless otherwise agreed. 

.  .  .  .

If more than one reinsurer is involved in the same dispute, all such reinsurers shall constitute and act as one party for purposes of this Article, and communications shall be made by the Company to each of the reinsurers constituting the one party, provided that nothing therein shall impair the rights of such reinsurers to assert several, rather than joint, defenses or claims, nor be construed as changing the liability of the Reinsurer under the terms of this Contract from several to joint. 

(A compilation of BRMA standard contract provisions can be found here.) 

This clause, of course, was designed for use in multilateral reinsurance treaties – not bilateral facultative certificates — otherwise the phrase “provided that nothing .  .  .  shall.  .  .  be construed as changing the liability of the Reinsurer under the terms of this Contract from several to joint[,]” would be unnecessary.  But if this provision, or something very much like it, was included in each of the arbitration agreements in our hypothetical, then it would least arguably establish consent to consolidated arbitration on the part of R1, R2 and R3. 

Note that the last paragraph uses “reinsurer” and “reinsurers” in the lower case in the first part of the provision, but uses “Reinsurer” in the upper case in the last part:  “nor be construed as changing the liability of the Reinsurer under the terms of this Contract from several to joint.”  If “Reinsurer” in the upper case is defined elsewhere as denoting a reinsurer that is a party to the contract, then “reinsurer” or “reinsurers” in the lower case could – and perhaps should – be construed to refer to any reinsurer, irrespective of whether it is a party to the contract containing an arbitration clause.  A court could therefore construe the provision as consent to consolidated arbitration involving nonparties to the contract.  Or a court might conclude that the provision was ambiguous, and direct an arbitration panel to determine whether “reinsurer” and “reinsurers” in the lower case includes reinsurers that are not parties to the contract (an issue could arise whether that should be determined by three separate arbitration panels or a court).   

But suppose our hypothetical agreements did not expressly authorize consolidated arbitration.  Unless all three reinsurers unreservedly appointed the same arbitrator in response to the arbitration demand, there would be nothing to suggest the parties agreed to consolidation.  

Indeed, a persuasive argument might be made that the agreements prohibited arbitration, because many arbitrator selection provisions expressly say each party gets to appoint its own arbitrator.  Consider BRMA clause 6l: 

 Should an irreconcilable difference of opinion arise between the parties to this Contract as to the interpretation of this Contract or transactions with respect to this Contract, such difference will be submitted to arbitration upon the request of one of the parties, one arbiter to be chosen by the Company and one by the Reinsurer and an umpire to be chosen by the two arbiters before they enter into arbitration. 

.  .  .  . 

Assuming “Company” is defined as the cedent and ”Reinsurer” is defined only as a reinsurer that is a party to the contract, this provision entitles each of two parties to appoint their own arbitrator.  It is not susceptible of an interpretation that would require a reinsurer that is a party to the contract to appoint an arbitrator with the advice and consent of any non-parties, let alone one that would act on behalf of the reinsurer and those non-parties.   

So if our hypothetical arbitration agreements contained arbitrator selection provisions like this one, then R1 would be entitled to appoint arbitrator A under Contract 1, R2 would be entitled to appoint arbitrator B under Contract 2, and so on.  The provision would therefore effectively prohibit consolidated arbitration, which would require R1, R2 and R3 to appoint a single arbitrator to act on their collective behalf, all in derogation of the arbitration agreements.        

The provision may also effectively prohibit consolidation because the arbitration clause expressly applies to “irreconcilable difference[s] of opinion.  .  . between the parties to this Contract.  .  .  .”  (Emphasis added)  That strongly suggests that the parties did not agree to arbitrate disputes between the parties to the contracts and parties to other contracts.  While a semantic argument may be made that “between the parties to this Contract” is not the same as “between the parties to this Contract  and no others,” requiring the parties to affirmatively exclude the existence of an agreement to arbitrate with third parties when the agreement to arbitrate does not provide for arbitration with them in the first place would contradict the letter and spirit of Stolt-Nielsen and its “FAA rules of fundamental importance.”  As discussed in Part IV, here, those rules require affirmative consent to class or consolidated arbitration, not intent to exclude class or consolidated arbitration. 

Let’s assume that our hypothetical agreements are silent on consolidated arbitration in the sense that they neither authorize nor prohibit it.    The question before the court would then be whether it could imply consent to consolidation.    

As discussed in Part IV, here, the Stolt-Nielsen Court considered whether consent to class arbitration might be implied as a matter of law.  The Court did so from the standpoint of the procedural arbitrability doctrine, explaining that “in certain contexts, it is appropriate to presume that parties that enter into an arbitration agreement implicitly authorize the arbitrator to adopt such procedures as are necessary to give effect to the parties’ agreement.”  Stolt-Nielsen, slip op. at 20-21 (citations omitted; emphasis added).  The Court said that such a presumption was grounded “in the background principle that ‘[w]hen the parties to a bargain sufficiently defined to be a contract have not agreed with respect to a term which is essential to a determination of their rights and duties, a term which is reasonable in the circumstances is supplied by the court.’”  Slip op. at 21 (quoting Restatement Second of Contracts § 204 (1979)).

While the Court could and should have concluded its analysis at that point — the parties’ agreements were undisputedly bilateral, and could be given effect by ordering bilateral arbitration, rendering it unnecessary to imply consent to class arbitration – the Court went on to explain that class arbitration “changes the nature of arbitration to such a degree that it cannot be presumed the parties consented to it by simply agreeing to submit their disputes to an arbitrator.”  Slip op. at 21.  For, in what the Court termed “bilateral arbitration,” the “parties forgo the procedural rigor and appellate review of the courts in order to realize the benefits of private dispute resolution:  lower costs, greater efficiency and speed, and the ability to choose expert adjudicators to resolve specialized disputes.”  Slip op. at 21 (citations omitted).

In reaching that conclusion the Court said that “the relative benefits of class-action arbitration are much less assured, giving reason to doubt the parties’ mutual consent to resolve disputes” in that manner.  Slip op. at 21-22.  The Court emphasized “just some of the fundamental changes brought on” by class arbitration:

1.  “An arbitrator chosen according to an agreed upon procedure .  . . no longer resolves a single dispute between the parties to a single agreement, but instead resolves many disputes between hundreds or perhaps even thousands of parties[;]”

2.  Under the AAA Class Arbitration Rules the “presumption of privacy and confidentiality” that ordinarily applies in bilateral arbitration does not apply in class arbitration, “thus frustrating the parties’ assumptions when they agreed to arbitrate[;]”

3.  A class arbitration award does not simply purport to bind the parties to a single arbitration agreement, but “adjudicates the rights of absent parties as well[;]” and

4. “[T]he commercial stakes of class-action arbitration are comparable to those of class-action litigation, even though the scope of judicial review is much more limited.” 

Slip op. at 22-23.  

These considerations are not fully applicable to consolidated arbitration: 

1.  As in class arbitration, in consolidated arbitration an arbitrator chosen according to an agreed upon procedure no longer resolves a single dispute between the parties to a single agreement, but instead resolves many disputes .  Unlike class arbitration, however, consolidated arbitration generally involves disputes ranging from a few to perhaps tens of parties, not “hundreds or perhaps even thousands of parties.” 

2. Unlike class arbitration governed by the AAA Class Arbitration Rules, the presumption of confidentiality can be maintained in consolidated reinsurance arbitrations.  But reinsurers forced to participate in consolidated arbitration must sacrifice some of that confidentiality vis-à-vis their fellow reinsurers. 

3.   A consolidated arbitration award does not simply bind parties to a single arbitration agreement, but, unlike a class arbitration award, it does not purport to “adjudicate[] the rights of absent parties.  .  .  .”   

4.  Like those of class arbitration, the commercial stakes of consolidated arbitration are comparable to those of consolidated litigation, even though the scope of judicial review is much more limited.  But generally those commercial stakes are not as high as those of class arbitration. 

Even though the considerations the Court cited are not fully applicable to consolidated arbitration, there are a number of significant reasons why implying consent to consolidated arbitration may materially alter the nature of what would otherwise be bilateral arbitration, thereby frustrating the parties’ expectations.  A non-exhaustive list of these would include:    

1.  In consolidated arbitration, the reinsurers are forced to agree collectively on a single, party-appointed arbitrator to resolve multiple disputes even though most arbitrator selection provisions would allow each reinsurer to choose what it –  and no one else – concludes to be the most suitable party-appointed arbitrator for a given dispute.   Most arbitrator selection provisions also allow the parties considerable input in selecting the most suitable umpire candidates for a particular dispute.  These arbitrator-selection rights are considerably watered down – if not eliminated — when a group of reinsurers is required to select collectively a single party-appointed arbitrator and to agree collectively on a list of suitable umpire candidates.       

2.  Consolidated proceedings are an incident of litigation that the parties could have taken advantage of had they not agreed to arbitrate.  Parties who agree to arbitration typically sacrifice the procedural niceties of court adjudication for the informality, efficiency, speed and confidentiality of bilateral arbitration.    

3.   Consolidated proceedings may be more efficient from the standpoint of the institution or persons hearing the matter, that is, the court or the arbitration panel.  Judicial efficiency is important from a public policy standpoint because it is publicly funded.  But arbitration is privately funded, and multiple, private arbitration proceedings do not usually impose a significant extra burden on the public fisc (other than the relatively modest increased cost associated with multiple summary-enforcement proceedings, which may or may not be necessary, or which may not be contested). 

4.  To the extent that consolidated arbitration promotes efficiency it does so principally for the benefit of the cedent, which is spared the expense of multiple proceedings.  But each individual reinsurer may incur more time and monetary costs in a multi-party, consolidated proceeding than it might incur in bilateral arbitration. 

5.  Consolidated arbitration tends to tactically benefit the cedent at the expense of the reinsurer for the reasons to be set forth in Part V.C.  To the extent cedents may be tactically disadvantaged by having to commence multiple, bilateral proceedings, they may avoid that disadvantage by not agreeing to arbitrate or insisting on a provision authorizing consolidation. 

These and other considerations may convince courts not to imply consent to consolidated arbitration in the face of silence. 

2.      Scenarios (c) through (e)  

Scenarios (c) through (e) arise where there are:

1. One or more multilateral contracts between a cedent and the same  group of multiple reinsurers (Scenario (c));
2. Multiple, multilateral contracts between a cedent and different groups of reinsurers (Scenario (d)); or
3. Some combination of Scenarios (a), (b), (c) or (d) (Scenario (e)). 

As in Scenario (b), to establish consent to consolidated arbitration in any of these scenarios a cedent would have to show that all of the reinsurers consented to consolidation.  For essentially the same reasons discussed in Section B.1., above, cedents will likely have difficulty doing so in the absence of a provision authorizing consolidation.    

C.   How Frequently will Courts Consolidate Arbitrations or Direct Arbitrators to Determine Whether the Parties Consented to Consolidation? 

The answer is probably “not very.”  If courts decide whether the parties consented to consolidated arbitration, they are likely to apply state law principles of contract construction fairly strictly – at least more strictly than many arbitrators have.  Their decisions will also be subject to appellate review, which will presumably make it more likely that any decision imposing consolidation will have a sound basis in applicable law and the parties’ agreement. 

For the reasons discussed in Section B.1., above, there will probably be a number of cases where the agreements are not susceptible to an interpretation permitting consolidated arbitration or where they effectively prohibit it.  Where the agreements are silent, many courts may conclude that there is no sound basis for implying consent to consolidation.  

That does not mean that courts will never find consent to consolidated arbitration.  In Scenario (a) cases – where there are multiple, bilateral contracts between the same parties – courts may find that the parties’ arbitration clauses are broad enough to encompass a consolidated proceeding.  There may also be cases where state arbitration law permits courts or arbitrators to impose consolidated arbitration where the agreements are silent on that score.  If the parties clearly and unambiguously agreed that state arbitration law governs, then courts may find that the parties consented to the application of that state law.  And certain agreements provide for consolidated arbitration of one form or another or have language that is ambiguous as to whether consolidated arbitration is permitted.  In those cases, courts will likely either compel consolidated arbitration or submit the construction question to arbitrators, who may in turn order consolidation.    

But Stolt-Nielsen has changed the legal landscape on consolidated arbitration fairly dramatically, and on balance we think that courts will not readily consolidate arbitrations in the way that arbitrators have under the Bazzle regime.  In Part V.C, we explore the practical and strategic implications of this change.

Editor’s Note:  Here’s a list of links for Parts I through V of our Stolt-Nielsen reinsurance-arbitration series: 

Part I, Part II, Part III, Part IV, Part V.A, Part V.B, and Part V.C