The article is reprinted below with permission, and I would like to thank Elaine Song, a member of the New York Law Journal’s editorial staff, for her assistance and work in getting this published in New York’s leading legal trade publication.  

Reprinted with permission from the May 18, 2011 edition of the New York Law Journal© 2010 ALM media Properties, LLC. All rights reserved. Further duplication without permission is prohibited. For information, contact 877-257-3382, reprints@alm.com or visit www.almreprints.com:

Outside Counsel

Arbitrator Evident Partiality Standard Under Scrutiny in ‘Scandinavian Re’

Philip J. Loree Jr. ContactAll Articles

New York Law Journal

May 18, 2011

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Philip J. Loree Jr.

Section 10(a)(2) of the Federal Arbitration Act (FAA) authorizes federal district courts to vacate arbitration awards “where there was evident partiality…in the arbitrators….”¹ Just as 28 U.S.C. §455 imposes impartiality requirements on federal judges, so too does Section 10(a)(2) on arbitrators.

To implement Section 10(a)(2)’s arbitral impartiality standards, courts have imposed on neutral arbitrators a duty to disclose circumstances that establish evident partiality. The scope of the duty to disclose relationships and interests that disqualify a neutral on evident partiality grounds, and what types of interests and relationships can establish evident partiality, are topics muddled by unclear, semantically malleable standards, which sometimes baffle judges, arbitrators, and in-house and outside counsel.

The pending appeal in Scandinavian Reinsurance Co. v. Saint Paul Fire & Marine Ins. Co.² presents the U.S. Court of Appeals for the Second Circuit with an opportunity to provide additional, meaningful guidance on arbitral impartiality standards, including arbitrator disclosure obligations. There the district court vacated a final arbitration award on evident partiality grounds even though none of the arbitrators had personal or financial relationships with the parties or interests in the outcome. The district court said the award had to be vacated because two of the arbitrators did not disclose to the parties facts about their involvement in an allegedly related proceeding—facts that would have no bearing on whether a similarly situated federal judge was impartial under much stricter judicial impartiality standards.

The question the court will decide is whether FAA Section 10(a)(2) authorized the district court to vacate the award under these circumstances. The answer should be “no,” and here’s why.

The District Court Decision

Scandinavian Re arose from a petition to vacate a final award issued by three experienced, well-known and respected industry arbitrators appointed to resolve a reinsurance dispute. The district court vacated the award because two arbitrators (one neutral, one party-appointed) did not disclose their temporally overlapping service on another arbitration panel hearing a case the district court characterized as concerning: (a) a common witness; (b) “similar” issues; (c) “similar” contract terms; (d) “the same type of reinsurance business”; and (e) a party that was the successor-in-interest to reinsurance business the prevailing party in the Scandinavian Re arbitration had assumed. (The parties dispute the accuracy of these findings, but, as we shall see, that doesn’t matter.)

The district court held that the arbitrators’ undisclosed, overlapping service in the other arbitration created “a material conflict of interest” establishing evident partiality:

[T]he Scandinavian Re Arbitration and the [other arbitration] were presided over by two common arbitrators, overlapped in time, shared similar issues, involved related parties, included…a common witness that supported interpreting [the agreement in the other arbitration] as written but interpreting the Scandinavian Re Agreement in light of Scandinavian Re’s intent at the time it entered into the agreement. Additionally, [another witness] was employed by [a party in the other arbitration which had purchased reinsurance business originally assumed by the prevailing party in the Scandinavian Re arbitration] at the time she appeared as a witness in the Scandinavian Re Arbitration. By participating in both [arbitrations, the arbitrators] placed themselves in a position where they could receive ex parte information about the kind of reinsurance business at issue in the Scandinavian Re Arbitration, be influenced by recent credibility determinations they made as a result of [the common witness'] testimony in [the other arbitration], and influence each other’s thinking on issues relevant to the Scandinavian Re Arbitration. By failing to disclose their participation in the [other arbitration], [the two arbitrators] deprived Scandinavian Re of an opportunity to object to their service on both arbitration panels and/or adjust their arbitration strategy….³

Analysis

The case turns on whether the Scandinavian Re arbitrators met arbitral impartiality standards, which are more demanding than judicial impartiality standards.⁴ While federal judges are disqualified for partiality “in any proceeding in which [their] impartiality might reasonably be questioned”—a/k/a the “appearance of bias” standard—in the Second Circuit “an arbitrator is disqualified [for evident partiality] only when a reasonable person, considering all of the circumstances, ‘would have to conclude that [the] arbitrator was partial to one side.’”⁵

Conventional wisdom suggests the Second Circuit should simply determine whether “a reasonable person…would have to conclude” the arbitrators were partial. But the Second Circuit can (and should) decide Scandinavian Re under explicitly defined standards set forth by statute and interpreted by U.S. Supreme Court and other federal courts: the judicial impartiality standards.

Chief Judge Frank H. Easterbrook of the U.S. Court of Appeals for the Seventh Circuit has demonstrated that initially considering whether arbitrators met judicial impartiality standards can greatly simplify the resolution of many evident partiality (and certain contractual, arbitrator-qualification) questions, because doing so not only avoids the philosophical debate and policy-oriented analysis that the “reasonable person would have to conclude” test invites, but in many cases, including Scandinavian Re, can provide added assurance about the validity of the outcome. For if arbitrators satisfy judicial impartiality standards, they necessarily satisfy arbitral ones, which are less demanding.⁶

What Are the Judicial Standards? The statute, 28 U.S.C. Section 455, sets forth the judicial impartiality standards that a federal judge must meet in each case over which he or she presides. Section 455(a) describes a “catchall,” “appearance of bias” impartiality standard: “(a) Any justice, judge, or magistrate judge of the United States shall disqualify himself in any proceeding in which his impartiality might reasonably be questioned.”⁷ Section 455(b) sets out specific circumstances under which a judge is disqualified from hearing a case because of actual bias or prejudice or certain personal, financial or professional relationships or interests that are presumed to conflict with the parties’ interest in having an impartial decision maker.⁸

Judges who do not meet these demanding judicial impartiality standards in any given case are obligated to recuse themselves, that is, to step aside and let another judge hear the matter. If they do not do so, and an appellate court rules they should have, then their orders and judgments may be vacated.

Were the ‘Scandinavian Re’ Arbitrators Disqualified Under §455(b)? The best way to assess impartiality under §455 is to consider first whether the arbitrators—were they federal judges—would have been disqualified on §455(b) grounds. The only §455(b) ground that might provide even a barely plausible basis for challenging impartiality in a case like Scandinavian Re is §455(b)(1), which requires judges to disqualify themselves “[w]here [they have]…a personal bias or prejudice concerning a party, or personal knowledge of disputed evidentiary facts concerning the proceeding.”⁹ But the Scandinavian Re arbitrators did not violate subsection 455(b)(1).

In Liteky v. United States,¹⁰ the Supreme Court explained that predispositions judges reach based on information obtained in an adjudicative capacity do not evidence Section 455(b)(1) “bias” or “prejudice,” except in extraordinary circumstances. The Court said the terms “bias” and “prejudice” “connote a favorable or unfavorable disposition or opinion that is somehow wrongful or inappropriate, either because it is undeserved, or because it rests upon knowledge that the subject ought not to possess…or because it is excessive in degree….”¹¹ Under the so-called “extrajudicial source doctrine,” alleged “bias” or “prejudice” generally cannot be based on knowledge obtained from participation in judicial proceedings, or on predispositions reasonably formed as a result, because there is nothing wrongful or inappropriate about judges having such knowledge or predispositions.¹²

Knowledge obtained from other proceedings; judicial opinions reached during those proceedings concerning applicable law and its application to facts; and judicial views formed during those proceedings concerning a party’s or witness’ credibility or character may cause a judge to be favorably or unfavorably disposed to a particular position, party or witness. But absent “deep-seated favoritism or antagonism that would make fair judgment impossible,” those predispositions are not “wrongful” or “inappropriate” and thus do not establish bias or prejudice.¹³

Assuming for argument’s sake that the district court’s factual findings were accurate, at most the Scandinavian Re arbitrators served in two proceedings featuring a common witness, some similar issues and contract terms, the same type of reinsurance business, and a related party. Even if there were no “extrajudicial source doctrine,” those facts would hardly suggest §455(b)(1) “bias” or “prejudice.”

But assuming (in the absence of evidentiary support) the arbitrators’ service in the other arbitration influenced their thinking in the Scandinavian Re arbitration, there is nothing wrongful or inappropriate about a judge—or by extension, an arbitrator—having or using in proceeding B knowledge or experience properly obtained in an adjudicative capacity from proceeding A.¹⁴ And nobody—including the district court judge—says that the arbitrators’ participation in the other arbitration resulted in “deep-seated favoritism or antagonism that would make fair judgment impossible.”¹⁵

The Scandinavian Re arbitrators also had no “personal knowledge of disputed evidentiary facts concerning the proceeding,” Section 455(b)(1)’s other basis for disqualification. Perhaps the arbitrators had already heard in one proceeding testimony on factual issues common to both, including testimony from a common witness. Perhaps they were already familiar with the relevant contract wording, which allegedly was similar.

But that doesn’t mean they obtained personal knowledge of the facts established or advocated in the other arbitration and thus could testify as fact witnesses in that arbitration, let alone in the Scandinavian Re arbitration. No one claims they were involved in or had personal knowledge of the disputed transactions; whatever knowledge they had was obtained solely in an adjudicative capacity.

Were the ‘Scandinavian Re’ Arbitrators Disqualified Under §455(a)? The only remaining question is whether the arbitrators were disqualified under §455(a)’s catchall, “appearance of bias” standard. Liteky provides an easy answer: A judge’s “impartiality” cannot “reasonably be questioned” where, as in Scandinavian Re, the alleged impartiality is based on knowledge obtained or opinions or views formed by the judge in the ordinary course of legitimately discharging his or her adjudicative responsibilities in another proceeding.¹⁶

Was There Any Legitimate Basis for the District Court’s Decision? The answer is “no.” Even if the strict judicial impartiality standards applied to the Scandinavian Re arbitrators, they satisfied them, and that necessarily means they satisfied the more lenient ones imposed by §10(a)(2).

The district court’s conclusion that the arbitrators had a “material conflict of interest” was therefore misplaced. The district court said the arbitrators “placed themselves in a position where they could receive ex parte information about the kind of reinsurance business at issue in the Scandinavian Re arbitration, be influenced by recent credibility determinations they made as a result of [the common witness'] testimony in [the other arbitration], and influence each other’s thinking on issues relevant to the Scandinavian Re Arbitration.”¹⁷ But a decision maker cannot have a “conflict of interest” unless he or she has a personal or financial interest in the outcome of the matter that conflicts with the parties’ interest in the decision maker’s impartiality.¹⁸ Liteky forecloses any argument that a decision maker’s discharge of legitimate adjudicative functions in matter A can create an “interest” in the outcome of related matter B, let alone a conflicting one.¹⁹

The risk that the arbitrators might “influence each other’s thinking on” allegedly similar, common issues likewise does not create a conflict of interest or otherwise establish evident partiality. That risk is present to some degree in appellate courts that use rotating, three-judge panels, and is particularly high in the U.S. Supreme Court, where the same nine justices generally hear each case. But nobody thinks that federal judges or Supreme Court justices must recuse themselves in matter B simply because they served together on the Court when it heard related matter A, and thus might influence each other’s thinking in matter B.

But Didn’t the Arbitrators Fail to Disclose Their Service on the Other Arbitration Panel? Some may think that the Second Circuit should affirm the district court because the arbitrators did not disclose their involvement in the other arbitration. They may think that the arbitrators’ failure to disclose their service amounted to evident partiality because it allegedly evidenced some deceptive motive on the arbitrators’ part that somehow spoiled the award. Alternatively, some may, like the district court judge, think that the arbitrators’ nondisclosure somehow “deprived Scandinavian Re of an opportunity to object to their service on both arbitration panels and/or adjust their arbitration strategy,”²⁰—even though an evident-partiality conclusion does not follow from that doubtful premise.

These arguments are misplaced for several reasons, but it is enough to say that accepting them would impose on arbitrators impartiality standards far more onerous than those federal judges must meet.

In the Second Circuit, courts may vacate awards for evident partiality where arbitrators fail to disclose a “material relationship with…a party” or a material interest—financial or personal—in the outcome of the arbitration.²¹ There is nothing controversial about that, for an arbitrator’s material relationship with a party or person or material financial interest in the outcome would establish partiality under both judicial and arbitral impartiality standards.

But in Scandinavian Re the undisclosed circumstances provided no basis for disqualification under Sections 455(a) or (b), which means that not even a federal judge would have been obligated to disclose them.²² The Scandinavian Re arbitrators were not required to disclose anything that a similarly situated federal judge would not have to disclose, and the Second Circuit should so rule.

Philip J. Loree Jr. is a partner at Loree & Loree in Manhasset.

Endnotes:

1. 9 U.S.C. §10(a)(2).

2. No. 09 Civ. 9531(SAS), 2010 WL 653481 (S.D.N.Y. Feb. 23, 2010).

3. Scandinavian Reinsurance Co. v. Saint Paul Fire & Marine Ins. Co., No. 09 Civ. 9531(SAS), 2010 WL 653481, at *8 (S.D.N.Y. Feb. 23, 2010), appeal pending No. 10-910-cv (2d Cir.).

4. See Applied Indus. Materials Corp. v. Ovalar, 492 F. 3d 132, 137 (2d Cir. 2007); Morelite Constr. Corp. v. New York City Dist. Council Carpenters Benefit Fund, 748 F.2d 79, 83-84 (2d Cir. 1984).

5. Ovalar, 492 F.3d at 137 (quoting Morelite, 748 F.2d at 84 (emphasis added)).

6. See Trustmark Ins. Co. v. John Hancock Life Ins. Co. (U.S.A.), No. 09-3682, 2011 WL 285156 (7th Cir. Jan. 31, 2011) (Easterbrook, C.J.); Sphere Drake Ins. Co. v. All American Life Ins. Co., 307 F.3d 617 (7th Cir. 2002) (Easterbrook, J.).

7. 28 U.S.C. §455(a).

8. 28 U.S.C. §455(b).

9. 28 U.S.C. §455(b)(1).

10. 510 U.S.540, 550 (1994) (Scalia, J.).

11. See 510 U.S. at 550 (emphasis in original).

12. 510 U.S. at 550.

13. 510 U.S. 550-51 & 555-56 (citations omitted).

14. See 510 U.S. at 550.

15. 510 U.S. at 555.

16. 510 U.S. at 552.

17. 2010 WL 653481 at *8.

18. See, generally, Trustmark, 2011 WL 285156, at *3.

19. See Liteky, 510 U.S. at 550-51 & 552-55; Trustmark, 2011 WL 285156, at *3.

20. See 2010 WL 653481, at *8.

21. Applied Indus. Materials, 492 F.3d at 137 (material financial relationship with a party); see also Pitta v. Hotel Assoc. of New York City, 806 F.2d 419, 423-24 (2d Cir. 1986) (material personal interest in the outcome); Morelite, 748 F.2d at 84-85 (father-son relationship with a party).

22. See Sphere Drake, 307 F.3d at 622.

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.

The article discusses Rent-A-Center in detail, explores its implications and argues, among other things, that:

There are divergent opinions on Rent-A-Center‘s significance.  Some apparently believe that it heralds the end of alternative dispute resolution as we know it, and others, including Supreme Court guru, Carter G. Phillips — a partner in the Washington, D.C., office of Sidley Austin who was a member of the employer’s Supreme Court legal team — suggest that the opinon is so narrow that it will have little or no meaningful influence on future cases.

Both views have some merit, but neither is 100% on the mark.

28 Alternatives at 168 (citation omitted). 

The article is the first of a two-part series.  The second part will discuss and critically analyze the Supreme Court’s decision in Granite Rock Co. v. International Brotherhood of Teamsters, No. 08–1214 (June 24, 2010), and will be published in the October 2010 edition of Alternatives. 

Alternatives also recently published two other articles I wrote earlier this year, both of which were featured as cover stories:  “Stolt-Nielsen Delivers a New FAA Rule — And then Federalizes the Law of Contracts,” 28 Alternatives 121 (June 2010), and “It’s Time for Doctrines:  The Supreme Court Wrestles with ‘Severablility’ and the ‘Clear and Unmistakable Standard,” 28 Alternatives 73 (March 2010).  (See Loree Reinsurance and Arbitration Law Forum posts here and here.)

Alternatives is a subscription-only publication. Subscription information is available at this page, as well as at the publisher’s, John Wiley & Sons’s,  website here.

I would like once again to take this opportunity to thank CPR, and Russ Bleemer, Editor of Alternatives, for their kind assistance and support in featuring my article.   CPR is one of the most prestigious ADR organizations in the United States, and, as I have said before, Russ is a very intelligent, dedicated and professional editor with whom it is a pleasure to work.

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.