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Life After Concepcion: Two Courts Reach Different Results

By Lee A. Rosengard
Posted: 23rd August 2012 09:39

What is one to make of the Supreme Court’s decision in AT&T Mobility LLC v. Concepcion, – U.S. – , 131 S.Ct. 1740, 179 L.Ed.2d 742 (2011), and what are courts taking from that decision in making subsequent rulings?  Two cases decided after remand by the Supreme Court following Concepcion come out in opposite directions, and leave companies that want their waiver-of-class-arbitration clauses to come within Concepcion and not fall outside its protection without predictability as to the enforceability of those clauses.
Concepcionheld that § 2 of the Federal Arbitration Act requires enforcement of an arbitration agreement “save upon such grounds as exist at law or in equity for the revocation of any contract,” and does not “preserve state-law rules that stand as an obstacle to the accomplishment of the FAA’s objectives.”  131 S.Ct. 1748.  The Concepcions had purchased AT&T cell phone service that was advertised to include free phones.  Upon being charged sales tax on the phones, they commenced a putative class action against AT&T.  Id. at 1744.  AT&T then moved to compel arbitration under the customer agreement, which “provided for arbitration of all disputes between the parties, but required that claims be brought in the parties’ individual capacity, and not as a plaintiff or class member in any purported class or representative proceeding.”  Id.  The district court specifically found that the arbitration agreement “was ‘quick, easy to use’ and likely to ‘promp[t] full or . . . even excess payment to the customer without the need to arbitrate or litigate.’”  Id. at 1745.  The district court also found that the provision of  $7,500 premium in the event the consumer was awarded more than AT&T’s final written settlement offer served as “substantial inducement” for the consumer to pursue individual as opposed to class-wide arbitration.  Id. 
Nonetheless, the district court ruled that the outcome was governed by the California Supreme Court’s decision in Discover Bank v. Superior Court, 36 Cal.4th 148, 30 Cal.Rptr.3d 76, 113 P.3d 1100 (2005), which held that class arbitration waivers in consumer adhesion contracts were unconscionable and contrary to public policy when the “disputes between the contracting parties involved small amounts of damages, and when it is alleged that the party with the superior bargaining power has . . . deliberately cheat[ed] large numbers of consumers out of individually small sums of money.”  30 Cal.Rptr. 3d at 87, 113 P.3d at 1110.  The Ninth Circuit affirmed, holding that the Discover Bank rule was not preempted by the FAA because it was simply “a refinement of the unconscionability analysis applicable to contracts generally.”  Concepcion, 131 S.Ct. at 1745.
The Supreme Court held otherwise, ruling that “[r]equiring the availability of class-wide arbitration interferes with fundamental attributes of arbitration and thus creates a scheme inconsistent with the FAA.”  Id. at 1748.  The Supreme Court continued that requiring class actions to be available was inconsistent with the principal purpose of the FAA, namely to ensure that private arbitration agreements are enforced “according to their terms.”  Id.  It further held that state rules that required the availability of class-wide arbitration were inconsistent with the FAA’s objective of “affording parties discretion” in designing arbitration processes to allow for efficient, streamlined, tailored mechanisms to address a dispute.  Id. 
In considering the impact of Concepcion, we examine two cases that the Supreme Court, at – U.S. – , 131 S.Ct. 2872, 179 L.Ed.2d 1184 (2011) (table), vacated and remanded following that decision.  In Litman v. Cellco P’ship, 655 F.3d 225 (3d Cir. 2011), the governing arbitration agreement contained a clause that did not permit class arbitrations, even if authorised by the procedures of the two organisations under whose auspices the arbitration could take place, the American Arbitration Association or the Better Business Bureau.  Id. at 227.  The plaintiffs opposed the defendant’s motion to compel individual arbitration, arguing that under the New Jersey Supreme Court’s decision in Muhammad v. County Bank of Rehoboth Beach, Delaware, 189 N.J. 1, 912 A.2d 88 (2006), the class action waiver was unconscionable and therefore unenforceable under New Jersey law.  Id. at 228.  The defendant (“Verizon Wireless”) did not challenge the applicability of Muhammad, but argued that it was preempted by the FAA.  Id.
Importantly, as the district court opinion in Litman makes clear, both sides agreed that the plaintiffs’ allegations involved low-dollar value consumer claims, complicated financial arrangements and multiple out-of-state entities that prevented plaintiffs from being able to vindicate the public interests in the absence of a class action proceeding.  Litman v. Cellco P’ship, 2008 WL 4507573 at*4 (D.N.J. 2008).  Plaintiffs relied on “the effect of the arbitration provisions to frame their unconscionability arguments:  they ‘contend that the provision is unconscionable because of what it provides, i.e., arbitration of disputes on an individual basis in place of litigation possibly brought on a class action basis.’”  Id. at 86, quoting Gay v. CreditInform, 511 F. 3d 369, 395 (3d Cir. 2007).  The district court concluded, however, that the FAA nevertheless required it to uphold the arbitration provision in the plaintiffs’ service agreement with Verizon Wireless, and compelled individual arbitration.  Id. At 87.  An appeal followed.
After the briefing in Litman in the Third Circuit was completed, the Third Circuit decided Homa v. American Express Co., 558 F.3d 225 (3d Cir. 2009), in which it held that the conclusion expressed by the New Jersey Supreme Court in Muhammad, invalidating class action waivers, was not preempted by the FAA.  It reached this conclusion because, it reasoned,  Muhammad provided a defense against “all waivers of class-wide actions, not simply those that also compel arbitration.”  Homa, 558 F.3d at 230.  Based on its decision in Homa, the Third Circuit then vacated the district court’s order compelling the Litman plaintiffs to arbitrate and remanded the case for further proceedings, which might have involved some class-wide dispute resolution.  Litman, at 229.  Verizon filed a motion to stay the Third Circuit’s mandate pending the filing of a petition for writ of certiorari.  The Third Circuit allowed the stay, and Verizon filed its petition.  The Supreme Court then decided Concepcion, granted Verizon’s petition, vacated the Third Circuit’s opinion and order, and remanded the case for review.  Cellco P’ship v. Litman, 131 S.Ct. at 2872.
On remand, the Third Circuit concluded that Homa was abrogated by Concepcion and that Muhammad was preempted by the FAA.  The court stated:
“We understand the holding of Concepcion to be both broad and clear:  astate 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. . . .  It follows that the arbitration clause at issue here must be enforced according to its terms, which required individual arbitration and forecloses class arbitration.”
Litman v. Cellco P’ship, 655 F.3d at 231 (internal quotations omitted.)  The Third Circuit therefore affirmed the district court’s order compelling individual arbitration of the appellants’ claims.  Id. at 232.  Appellants’ further petition for certiorari was denied.  132 S.Ct. 1046 (2012).
The Supreme Court of Missouri reached quite a different result on remand in Brewer v. Missouri Title Loans, 364 S.W.3d 486 (Mo. 2012).  There, the plaintiff had borrowed $2,215 from the title company in a loan that was secured by her automobile and where the annual percentage rate was 300 percent.  Id. at 487.  After making two payments of more than $1,000, but seeing her loan principal reduced by six cents, plaintiff filed a class action petition against the title company alleging violation of a variety of statutes.  Id. at 488.  The trial court found the class arbitration waiver in the loan agreement unconscionable and unenforceable.  Id.  It further considered a number of the other aspects of the arbitration clause, finding that there was a disparity of bargaining power, that the provision was one sided because only the customer, and not the title company, gave up their rights to relief in the courts, and that the title company admitted that the provision that each party be responsible for its own costs and attorney’s fees in arbitration placed a high burden on consumers.  Id.  It also found that these facts, too, rendered the agreement unconscionable when considered as an individual action.  The court ordered the claim to proceed to arbitration to determine whether it was suitable for class treatment.  Id.  The title company appealed.  The Supreme Court of Missouri held that the class arbitration waiver was unconscionable and struck the arbitration agreement in its entirety.  Id.  The title company petitioned for certiorari, which petition the United States Supreme Court granted and remanded the case for further consideration in light of ConcepcionId. 
On remand, the title company asserted that the FAA wholly preempted Missouri’s common law of unconscionability.  The Missouri Supreme Court disagreed.  It read Justice Scalia’s majority opinion in Concepcion, further informed by Justice Thomas’ concurrence, as standing for the proposition:
“that the [FAA] generally does not permit a state to bar class action waivers by finding an arbitration agreement unconscionable on the basis of a class action waiver alone.  The Scalia opinion does not state, however, that the [FAA] otherwise preempts traditional state law defenses to contract formation such as unconscionability, duress, fraud, and Justice Thomas is clear that he would apply those defenses.  But Concepcion teaches these defenses cannot be used in a way that would hold otherwise valid arbitration agreements unenforceable for the sole reason that they bar class relief.  That was what had happened in Concepcion.”Id. at 488-89.
The Supreme Court of Missouri noted that the Discover Bank rule, which Concepcion found was preempted by § 2 of the FAA, did not include any finding “that the consumer is worse off under individual arbitration as opposed to class arbitration or that the individual terms of the arbitration agreement are otherwise onerous or unfair.”  Id.  at 489.  It continued:
“The practical effect of the Discover Bank rule, therefore, is to invalidate class arbitration waivers in most consumer contracts even if traditional factors of unconscionability are absent.”
Id.Importantly, the Supreme Court of Missouri held that it did not follow that all state law unconscionability defenses are preempted by the FAA in all cases.  Id. at 490.  It noted that the Discover Bank rule imposed a unique obstacle to arbitration” because it conditioned the enforceability of certain arbitration agreements on the available of class-wide arbitration, “even if the arbitration contract at issue provides a consumer with more favorable terms in individual arbitration than in class arbitration.” 
Id.  It then found that holding that the § 2 saving clause preempts all state law unconscionability defenses “would be inconsistent with both the saving clause and the majority’s express recognition of unconscionability as one of the generally applicable contract defenses that retains vitality under the § 2 saving clause.”  Id.  Thus, it held, “Concepcion permits state courts to apply state law defenses to the formation of the particular contract at issue.”  Id. at 492.
The Supreme Court of Missouri went on to find that the evidence in the case before it supported a determination that the agreement’s arbitration clause was unconscionable.
“There was evidence that the entire agreement – including the arbitration clause – was non-negotiable and was difficult for the average consumer to understand and that the title company was in a superior bargaining position,  Brewer could not negotiate the terms of the agreement, including the terms of the arbitration clause.  Indeed, the evidence further demonstrated that no consumer ever successfully had renegotiated the terms of the title company’s arbitration contract.” 493.  There was also evidence that the terms of the agreement were extremely one-sided, that no consumer had ever arbitrated a claim against the title company, and that, according to plaintiff’s expert witnesses, it was unlikely that a consumer could retain counsel to pursue individual claims.  Id. at 493-94.  Finally, the agreement was not bilateral, because while the consumer was bound to arbitrate her claims, the title company could seek judicial or other process.  Id. at 494.  Thus, the court found that the disparity in bargaining power, in addition to the disparity between the parties’ remedial options, constituted strong evidence that the class arbitration waiver was unconscionable.  It therefore held that the entire agreement was unenforceable.  Id. at 496.
In examining these cases, we see that despite an onerous arbitration provision that both sides agreed was unconscionable, the Third Circuit followed the decision in Concepcion, compelling individual arbitration.  On the contrary, under similar circumstances, the Supreme Court of Missouri found reason to void the entire arbitration provision before it on the ground of unconscionability.  Time will tell whether more courts will follow Litman, and enforce arbitration provisions that prohibit class claims, or follow Brewer, and try to find reasons to relieve consumers of their obligations to arbitrate under clauses that require individual arbitration and prohibit class treatment.  The future impact of Concepcion remains to be seen.

Lee A. Rosengard is a partner at Stradley Ronon, where he has been a commercial litigator for 35 years. He serves as the firm’s general counsel, is co-chair of the ADR Practice Group and is former chair of the Litigation Practice Group.  He is a member of the CPR Institute Panel of Distinguished Neutrals, the American Arbitration Association Commercial Panel and Large Complex Case Panel, and also serves as a Judge Pro Tempore for the Philadelphia Court of Common Pleas Commerce Program.  He is past chair of the Philadelphia Bar Association’s Alternative Dispute Resolution Committee and a Lecturer in Law of the Faculty of Villanova University School of Law.  Mr. Rosengard has been named a Pennsylvania Super Lawyer® consecutively since 2004.  He was also recognised as a preeminent AV-rated attorney by Martindale-Hubbell.
Lee A. Rosengard can be contacted by phone on +1 215 564 8032or alternatively via email at

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