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Arbitration Clause Class Waivers Upheld Again

February 17, 2016 in  News

New York Law Journal

In mid-December, the U.S. Supreme Court issued its decision in DIRECTV v. Imburgia,upholding a class arbitration waiver clause in a consumer service agreement and reversing a California appellate court’s decision in favor of two consumers who sued over early termination fees they believed to violate state law. As a result, the plaintiffs had to submit to individual arbitration and not to pursue class proceedings. DIRECTV is another high court ruling in a chain that began with the now-famous Concepcion decision in 2011. This article briefly surveys the court’s pivotal rulings leading to the DIRECTV decision and provides the pith and substance of this new ruling.

In AT&T Mobility v. Concepcion,2 a 5-4 ruling that the Federal Arbitration Act (FAA) preempts state laws that make specific categories of claims non-arbitrable, the U.S. Supreme Court said: “[w]hen state law prohibits outright the arbitration of a particular type of claim, the analysis is straightforward: The conflicting rule is displaced by the FAA.” This is a forceful premise and can cut a wide swath. Thus, in Marmet Health Care Center v. Brown3 the court held that injury and death lawsuits against nursing homes could be barred by an arbitration agreement. Let’s look closer at Concepcion, the seminal precedent in the cluster.

Section 2 of the FAA makes agreements to arbitrate “valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” That provision was held in Concepcion to preempt a California Supreme Court rule adopted in a case called Discover Bank v. Superior Court.4 The latter was widely interpreted as banning most consumer arbitration agreements requiring arbitration to be conducted only on an individual basis. In other words, California’s rule deemed “unconscionable” class action waivers in arbitration agreements incorporated into consumer contracts of adhesion where the damages claimed would be relatively small and one party had superior bargaining power. The California approach proved to be influential in other jurisdictions as mandatory arbitration of certain kinds of consumer claims were deemed against public policy.

Concepcion swept all that away. Because the California rule, as applied to AT&T’s arbitration provision, “stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress,” California’s categorical unconscionability approach was preempted. The underlying dispute in Concepcion arose from a cell phone contract between Vincent and Liza Concepcion and AT&T Mobility. By purchasing the wireless service, they received two new cell phones as part of the agreement. Although they did not have to pay for the phones, they were charged $30.22 in sales tax for the devices. They sued in a federal court that AT&T’s advertisements for “free” phones were fraudulent.

The case was later consolidated with a putative class action against AT&T involving the same issues. AT&T then moved to compel arbitration pursuant to the arbitration agreement between the parties. The cell phone arbitration clause had a class action waiver: “You and AT&T agree that each may bring claims against the other only in your or its individual capacity, and not as a plaintiff or class member in any purported class or representative proceeding.”

AT&T included “consumer-friendly,” generous provisions. The consumer would get at least a $7,500 payment if the arbitration award exceeded the last written settlement offer the company made prior to selecting an arbitrator; cost-free arbitration for non-frivolous claims; double attorney fees if the arbitrator awarded the customer more than AT&T’s last settlement offer; and the option of conducting the arbitration in person, over the phone, or solely on the filed papers.

Waiver Upheld

The district court denied AT&T’s motion to compel arbitration on the ground that the arbitration agreement was unconscionable in California. The U.S. Court of Appeals for the Ninth Circuit affirmed. It recognized that the AT&T arbitration agreement “essentially guarantees” that customers will have relief that makes them “whole.” But the court held that California law made the inability-to-arbitrate-on-behalf-of-a-class provision unconscionable.

The Supreme Court, however, reversed. It reasoned, in part, that the Discover Bank rule “interfered with fundamental attributes of arbitration.” One of these was that class arbitration “greatly increases the risks to defendants” because class arbitration has the same high stakes of class actions in court yet is subject to the sharply limited standard of judicial review of arbitration awards.

Marmet,5  the nursing home injury case, involved three negligence suits for injuries or harm filed against nursing homes in West Virginia. In each of the three cases, a patient requiring extensive nursing care died and a family member sued. The agreements signed by family members with the nursing homes included arbitration clauses requiring the parties to arbitrate all disputes. The party filing the arbitration was responsible for paying a filing fee in accordance with the Rules of the American Arbitration Association fee schedules. A state trial court dismissed the lawsuits based on the agreement to arbitrate.

The cases wound up in West Virginia’s highest court which held that “as a matter of public policy” an arbitration clause in a nursing home admission agreement adopted prior to an occurrence of negligence that results in personal injury or wrongful death, “shall not be enforced to compel arbitration of a dispute concerning the negligence.” The West Virginia court called the U.S. Supreme Court’s interpretation of the FAA “tendentious” and “created from whole cloth” and concluded that the FAA does not preempt the state’s public policy against pre-dispute arbitration agreements that apply to nursing home injury or death claims.

The U.S. Supreme Court acted swiftly to grant certiorari, vacate the West Virginia ruling and remand for proceedings not inconsistent with the court’s opinion. This time the Supreme Court did not act 5-4, but unanimously, in a “per curiam” opinion. The FAA says an arbitration agreement “shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” The statute’s text, said the court, “includes no exception for personal-injury or wrongful-death claims.” It “requires courts to enforce the bargain of the parties to arbitrate” and it “reflects an emphatic federal policy in favor of arbitral dispute resolution.”

Citing Concepcion, the court emphasized that when state law “prohibits outright” arbitration of a particular type of claim, the conflicting state rule is displaced and preempted by the FAA. West Virginia’s prohibition against pre-dispute agreements to arbitrate nursing home injury or death claims was a “categorical rule prohibiting arbitration of a particular type of claim” and thus was “contrary to the terms and coverage of the FAA.”

The FAA Section 2’s “savings clause” (arbitration agreements are valid, irrevocable and enforceable, “save upon such grounds as exist at law or equity for the revocation of any contract”) could, in a given case, put into play state law defenses that are applicable to “any contract.” Concepcion advised that this could include state law defenses such as fraud, duress or unconscionability. But a state’s “general” contract defenses aimed primarily at arbitration agreements or targeting or applying to arbitration agreements disproportionately will be preempted.

In my June 2013 column6 I reported on the U.S. Supreme Court’s decision in Oxford Health Plans v. Sutter,7 upholding an arbitrator’s decision to allow class arbitration, but only because the parties there agreed that the arbitrator should decide whether their contract authorized class arbitration. The defendant’s decision to challenge “arbitrability” of the issue in court came too late. Thus, even though the underlying agreement was “silent” on whether the parties had intended to permit class arbitration, the arbitrator’s construction “holds, however good, bad or ugly.”

Since contracts that are “silent” regarding class arbitration have a measure of frailty in this regard—indeed, the court in Oxford said in footnote 2: “this Court has not yet decided whether the availability of class arbitration is a question of arbitrability”—my column advised those firms electing to arbitrate disputes to incorporate “class action waivers” in their contractual arbitration clauses.

In American Express Co. v. Italian Colors Restaurant,8 the court held the FAA does not permit courts to invalidate a contractual waiver of class arbitration on the ground that the plaintiff’s cost of individually arbitrating a federal statutory claim exceeds the potential recovery. The Amex decision, as it is popularly called, involved federal antitrust class action claims by merchants alleging American Express violated the Sherman and the Clayton Acts by forcing merchants to accept its credit cards at rates some 30 percent higher than fees for competing credit cards. Amex fought the court class action proceedings by moving to compel individual arbitration in accordance with the class waiver provision.

In resisting Amex’s motion, the plaintiffs submitted an economist’s declaration that estimated the costs of an expert’s analysis needed to prove the individual antitrust claims would be at least several hundred thousand dollars, and “might exceed $1 million.” Compared to the individual plaintiff’s maximum antitrust recovery of some $12,850 (or $38,549 when trebled), such costs were deemed “prohibitive.” The district court, nonetheless, granted the defense motion to compel individual arbitration, but the U.S. Court of Appeals for the Second Circuit reversed holding that the class waiver was unenforceable since Concepcion involved FAA preemption of a state statute. In Amex, however, the federal statutes were not intended to be preempted. A petition for rehearing en banc was denied with five judges dissenting.

‘Concepcion’s’ Strength

The Supreme Court’s 5-4 decision in Amex was emphatic confirmation of Concepcion’s strength. The court held that the FAA does not permit courts to invalidate a contractual class action waiver on the ground that a plaintiff’s cost of individually arbitrating a federal statutory claim exceeds the potential recovery. The expense of litigation is not a determinative factor: “[T]he antitrust laws do not guarantee an affordable procedural path to the vindication of every claim.” The fact that “it is not worth the expense involved in proving a statutory remedy does not constitute the elimination of the right to pursue that remedy.” (Emphasis by court.)

Justice Antonin Scalia, writing for the five-justice majority, confirmed the vitality of Concepcion: “Truth to tell, our decision in AT&T Mobility all but resolves this case. There we invalidated a law conditioning enforcement of arbitration on the availability of class procedure because that law ‘interfere[d] with fundamental attributes of arbitration.'” Class arbitration “sacrifices the principal advantage of arbitration—its informality—and makes the process slower, more costly, and more likely to generate procedural morass than final judgment.” And, in its footnote 5, the court reminded us that “the FAA’s command to enforce arbitration agreements trumps any interest in ensuring the prosecution of low-value claims.”

In the court’s newest decision in this chain, DIRECTV, the service agreement had a provision that “any Claim either of us asserts will be resolved only by binding arbitration.” The agreement also set forth a waiver of class arbitration. However, it also provided that, if the “law of your state” makes the waiver of class arbitration unenforceable, then the entire arbitration provision “is unenforceable.” The California courts held the arbitration provision unenforceable since the words “law of your state” made California law determinative even if that law were inconsistent with Concepcion. The Supreme Court, however, reversed.

The contract’s reference to “state law,” absent any indication to the contrary, is governed by its ordinary meaning, namely “valid” state law.9 The court emphasized that, while Concepcion was a “closely divided” holding (5-4 decision) and lower court judges can note their disagreement with the decision, “[n]o one denies that lower courts must follow” Concepcion. The FAA “is a law of the United States, and Concepcion is an authoritative interpretation of that Act. Consequently, the judges of every State must follow it.”10

Since Concepcion issued in 2011, there has been a great deal of commentary, much of it extremely critical and some of it quite strident.11 In particular, the “doomsday” kind of commentary seemed to impart an emotional, “over-the-top” message in the face of a rather generous legal system. Then, too, the Concepcion arbitration provision enforced by the court there was quite generous.

A more detailed examination of the topic appears in a law review article I co-authored with Linda Brown, an appellate specialist at my firm. What were the competing rationales? The exceptions? How “bad” was the Concepcion aftermath? Since the article literally was at the printer in December when DIRECTV issued, we could only include minimal discussion of the new ruling.

The article—”Arbitration and Class Action Waivers Under Concepcion: Reason and Reasonableness Deflect Strident Attacks”—examines the roots of the Concepcion decision and the considerations that support it.12 It also reviews judicial developments post-Concepcion as well as “exceptions” to the rule.13 The attempts by claimants to mount additional theories or defenses to defeat enforcement of class waivers, with varying success, are surveyed.14 In the latter section we discuss challenges on “unconscionability” grounds and the features courts look at to decide the issue; challenges on contract formation grounds; failure to give assent and “illusoriness” of the agreement; issues of waiver and estoppel; and the effect of excessive arbitration and administrative fees. We also discuss judicial developments where the agreement is silent about class arbitration;15 and, too, whether arbitration agreements can be enforced by and against non-signatories.16


Arbitration and class action waiver provisions are a fact of life. The Supreme Court says they are enforceable. There are complex considerations affecting the ability of lawyers to challenge as well as to enforce such provisions. The chain of decisions and our law review article discussed above can be useful resources in the lawyer’s quest to defend or defeat such provisions.


  1.  136 S. Ct. 463, 2015 U.S. LEXIS 7999 (Dec. 14, 2015).
  2.  563 U.S. 333 (2011).
  3.  132 S. Ct. 1201 (2012).
  4.  113 P. 3d 1100 (Cal. 2005).
  5.  Supra n. 3.
  6.  M. Hoenig, “U.S. Supreme Court Issues Incomplete Clarification on Class Arbitration,” NYLJ, June 17, 2013, p. 3.
  7.  2013 U.S. LEXIS 4358 (Sup. Ct. June 10, 2013).
  8.  2013 U.S. LEXIS 4700 (Sup. Ct. June 20, 2013).
  9.  DIRECTV, 2015 U.S. LEXIS 7999, at *13.
  10.  Id. LEXIS at *9—*10. For a recent, informative article on the impact of DIRECTV and Concepcion and the potential to challenge the effect of these precedents, see Thomas A. Dickerson and Cheryl E. Chambers, “Challenging ‘Concepcion’ in New York State Courts,” NYLJ, Dec. 29, 2015, pp. 4, 7. The authors are associate justices of the Appellate Division, Second Department. Justice Dickerson is the author of “Class Actions: The Law of 50 States” (Law Journal Press 2016).
  11.  See e.g., M. Hoenig & L. Brown, “Arbitration and Class Action Waivers Under Concepcion: Reason and Reasonableness Deflect Strident Attacks,” 68 Ark. L. Rev. 669 n. 4 (No. 3, December 2015) (e.g., one law review article referred to the court’s rulings as a “tool to insulate corporations from facing meaningful accountability for cheating large numbers of consumers”).
  12.  Id., 68 Ark. L. Rev. at 669—687.
  13.  Id. at 687—699.
  14.  Id. at 699—717.
  15.  Id. at 718—723.
  16.  Id. at 724—730.