Arbitration Clauses Displace Consumer and Class Lawsuits

New York Law Journal

For many litigants and lawyers it is, or soon will be, a “brave new world” in the universe of torts, class actions, and commercial litigation of all kinds—only many litigators may not know it yet. Some will be surprised, some shocked. An old, familiar word, the “A” word, now has a new, profound, forceful impact as a result of two U.S. Supreme Court decisions issued, respectively, in April 2011 and February 2012. The “A” word that has zoomed afresh onto the litigation scene with the thunderous roar and whoosh of a powerful tornado is “Arbitration.” Under these and other developments, can consumer class actions be waived via binding arbitration clauses? Yes! Can personal injury and death lawsuits be tossed because a form agreement to arbitrate was signed? Yes! Can the New York General Business Law prohibiting mandatory arbitration clauses in consumer goods transactions be preempted? Yes!

The earlier Supreme Court decision is AT&T Mobility LLC v. Concepcion,¹ a 5-4 ruling that the Federal Arbitration Act (FAA) preempts state laws that make specific categories of claims non-arbitrable. Said the Court: “[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.”²  And less than two months ago, in  Marmet Health Care Center, Inc. v. Brown,³  the court held that injury and death lawsuits against nursing homes could be barred by an arbitration agreement. These developments led New York’s Appellate Division, First Department, on March 29, to order arbitration and stay a personal injury lawsuit. Let’s home in on these issues.

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.”⁴  That provision was held in Concepcion to preempt a California Supreme Court rule adopted in a case called Discover Bank v. Superior Court.⁵  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 Discover Bank 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 Discover Bank 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.

The district court denied AT&T’s motion to compel arbitration on the ground that the arbitration agreement was unconscionable under Discover Bank. 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.

Injury Lawsuits

Lest the reader view Concepcion as some exotic ruling applicable to class action waivers in low-cost utility service contracts only, and having nothing to do with personal injury litigation, he or she should consider the hot-off-the-press March 29 ruling by New York’s Appellate Division, First Department, in Ayzenberg v. Bronx House Emanuel Campus Inc.⁶  Plaintiff wife and her husband were guests at defendant’s camp facility. She was injured and sued. Defendant moved to stay the lawsuit and to compel arbitration based on an arbitration clause contained in the application for defendant’s camp program. The document was filled out by plaintiff’s husband, bore his signature and provided for arbitration of “any dispute” resulting from their stay at defendant’s facility.

In opposition to defendant’s motion, plaintiff argued she did not sign the agreement. Moreover, she contended that New York General Business Law §399-c prohibited such an arbitration clause. Further, she urged that a “language barrier” precluded her and her husband from understanding the content of the application. The trial court denied the motion to stay and to compel arbitration pending further discovery, but the Appellate Division reversed, granted arbitration and stayed the action.

The fact that the husband signed the application was sufficient to bind the wife. The application provided for the couple’s joint participation in defendant’s program and the husband, at the very least, had apparent authority to sign up for her. As for the alleged language barrier, the husband and wife were bound by the agreement’s enforceable terms because, as stated in a case cited by the Appellate Division,  Shklovsky v. Khan,⁷  persons who are illiterate in the English language “are not automatically excused from complying with the terms of a contract which they sign simply because they could not read it. Such persons must make a reasonable effort to have the contract read to them.” Finally, said the unanimous panel in Ayzenberg, General Business Law, §399-c, which is titled “Mandatory arbitration clauses in certain contracts prohibited,” is “preempted by federal law” to the extent that the statute may prohibit the subject arbitration clause.⁸

Still not convinced that there’s a “brave new world” out there? Then consider another U.S. Supreme Court decision issued less than two months ago on Feb. 21, Marmet Health Care Center Inc. v. Brown,⁹  cited by the Appellate Division in Ayzenberg. Marmet 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 from 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.”

Strong Trend

The court in Marmet cited its prior cases in which the FAA was held to preempt a state law granting a state commissioner exclusive jurisdiction to decide an issue the parties agreed to arbitrate; a state law requiring judicial resolution of punitive damages; a state law requirement that litigants be provided a judicial forum for wage disputes; and a state financial investment statute’s prohibition of arbitration of claims brought under that  statute.¹⁰  Concepcion and Marmet reinforce this trend of FAA preemption.

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. New York’s General Business Law §399-c prohibits mandatory arbitration agreements in consumer contracts for the sale or purchase of consumer goods and, so, is targeted at arbitration categorically. Accordingly, it is displaced by FAA preemption, as the Appellate Division held in Ayzenberg.

Concepcion has been construed broadly by some courts to uphold class action waivers and mandatory arbitration clauses. Thus, the FAA has been held to preempt state statutes or case law that purport to invalidate such contract provisions on grounds of public policy or unconscionability.¹¹  Some commentary agrees that the judicial trend is toward broad application of Concepcion.¹²  The Supreme Court’s Feb. 21 Marmet decision is emphatic confirmation that Concepcion is meant to apply broadly and vigorously, not only to foreclose class actions but even personal injury and death litigation.

Holding in  In re American Express Merchants’ Litigation¹³  that a class action waiver in an antitrust case was unenforceable because it would deprive parties of their federal statutory rights, the U.S. Court of Appeals for the Second Circuit construed Concepcion narrowly so as to apply to state laws limiting arbitration agreements but not displacing federal statutory rights. The court emphasized, however, that it was not declaring all antitrust-related class action waivers unenforceable; rather, each waiver had to be analyzed individually.¹⁴

When it comes to federal Magnuson-Moss Warranty Act claims, the circuit courts have split on whether arbitration clauses should be enforced. The Ninth Circuit’s Kolev decision held that an old Federal Trade Commission rule prohibiting judicial enforcement of arbitration clauses regarding consumer claims filed under the act was a reasonable construction of the warranty statute and, so, mandatory arbitration under an automobile purchase contract was barred.¹⁵  On the other hand, the Fifth and Eleventh circuit courts have held that the Magnuson-Moss Act does not bar mandatory arbitration clauses; rather, the FAA suggests they should be enforced.¹⁶  Of interest, in a “Lemon Law” lawsuit in Alabama, the importer defendant successfully moved to compel plaintiff to arbitrate his claim even though the automobile purchase agreement was with the retail dealer and the defendant was not a signatory. The appellate court held that the broad language “all disputes” was sufficient to compel arbitration.¹⁷

Conclusion

Whether businesses should incorporate mandatory arbitration clauses containing class action waivers is a “hot” topic post-Concepcion. A trend toward including such provisions in consumer contracts of all kinds is likely. For deep-pocket, target defendants such clauses, when enforced by the courts, provide certain advantages. But, then, arbitration itself is not necessarily a cakewalk. Arbitrators, like jurors, can decide claims generating huge awards but judicial appellate review of arbitration awards is extremely limited. Much depends on the text of the arbitration clause, on what it provides and on what it does not. Arbitration agreements should be drafted carefully, and due consideration should be given to unconscionability issues, both procedural and substantive. Welcome to the brave new world of mandatory arbitration!

Michael Hoenig is a member of Herzfeld & Rubin.

Endnotes

1.  131 S. Ct. 1740 (2011).
2.  Concepcion, 131 S. Ct. at 1747.
3.  132 S. Ct. 1201 (2012).
4.  9 U.S.C. §2.
5.  113 P.3d 1100 (Cal. Sup. Ct. 2005).
6.  2012 NY Slip Op 2396 (1st Dept., March 29, 2012).
7.  273 A.D.2d 371, 372 (2d Dept. 2000).
8.  Ayzenberg, NY Slip Op 02396, at p. 2.
9.  132 S. Ct. 1201 (2012).
10.  Marmet, 132 S. Ct. at 1204—1205. The court was suspicious that the West Virginia court’s “alternative” holding that the arbitration clause was “unconscionable” was influenced by the “invalid, categorical rule” but remanded for the West Virginia court to consider whether, absent the state’s general “public policy,” the arbitration clauses were unenforceable “under state common law principles that are not specific to arbitration and preempted by the FAA.”
11.  See e.g., Litman v. Cellco Partnership , 655 F.3d 225, 231 (3d Cir. 2011) (recognizing “the holding of Concepcion to be both broad and clear: a state law that seeks to impose class arbitration despite a contractual agreement for individualized arbitration is inconsistent with, and therefore preempted by, the FAA, irrespective of whether class arbitration is desirable for unrelated reasons”; New Jersey law preempted); Green v. SuperShuttle Int’l Inc. 653 F.3d 766 (8th Cir. 2011) (challenge to class action waiver in arbitration agreement under Minnesota law foreclosed by Concepcion); Cruz v. Cingular Wireless LLC, 648 F.3d 1205, 1208 (11th Cir. 2011) (class action waiver in arbitration agreements was enforceable, even though Florida law would have invalidated agreements as contrary to public policy); Giles v. GE Money Bank, 2011 U.S. Dist. LEXIS 111018 (D. Nev. 2011) (“Several courts have recognized that the holding in AT&T Mobility is broadly applicable to state rules limiting the effect of class action waivers, and not limited to the California rule it was abrogating”; Brown v. Trueblue Inc., 2011 U.S. Dist. LEXIS 134523 (M.D. Pa. 2011) (in light of Concepcion, FAA preempts Pennsylvania’s unconscionability doctrine); Arellano v. T-Mobile USA Inc., 2011 U.S. Dist. LEXIS 52142 (N.D. Cal. 2011) (Concepcion “decided that states cannot refuse to enforce arbitration agreements based on public policy”).
12.  See A.J. Trask, “Arbitration Strategy After ‘AT&T Mobility v. Concepcion,'” Bloomberg BNA, Class Action Litigation Report, Dec. 23, 2011.
13.  667 F.3d 204 (2d Cir. 2012).
14.  See Neal R. Stoll, “Class Action Waivers of Antitrust Claims After ‘Concepcion‘,” New York Law Journal, March 13, 2012, p. 3, discussing the impact of American-Express.
15. Kolev v. Euromoters West/The Auto Gallery 658 F.3d 1024 (9th Cir. 2011).
16.  See  Walton v. Rose Mobile Homes, LLC , 298 F.3d 470, 478 (5th Cir. 2002); Davis v. Southern Energy Homes Inc., 305 F.3d 1268, 1280 (11th Cir. 2002).
17. Volkswagen Group of America Inc. v. Williams , 64 So. 3d 1062 (Ala. App. 2010).