Concepcion and the Arbitration Fairness Act

The following is the first contribution to our online arbitration symposium. The author, Christopher R. Drahozal, is the John M. Rounds Professor of Law and Associate Dean for Research and Faculty Development at the University of Kansas School of Law.  He is an Associate Reporter for the Restatement (Third) of the U.S. Law on International Commercial Arbitration and served as the Chair of the Arbitration Task Force of the Searle Civil Justice Institute.

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In a press release dated the same day as the Supreme Court’s decision in AT&T Mobility v. Concepcion, Senators Franken and Blumenthal and Representative Hank Johnson announced that they would be reintroducing the Arbitration Fairness Act (AFA) into Congress.  Although the AFA has taken various forms over the years, its most recent iteration provides that “no predispute arbitration agreement shall be valid or enforceable if it requires arbitration of an employment dispute, consumer dispute, or civil rights dispute.”  According to Senator Franken, “[t]he Arbitration Fairness Act would help rectify the Court’s most recent wrong [in Concepcion] by restoring consumer rights,” while Senator Blumenthal asserted that “[t]he Arbitration Fairness Act would reverse this decision and restore the long-held rights of consumers to hold corporations accountable for their misdeeds.”  Consumer groups likewise touted the Arbitration Fairness Act as a necessary response to the Concepcion decision.

Of course, the political realities are such that Congress is unlikely to enact the AFA.  A more likely regulatory response would come from the Consumer Financial Protection Bureau (CFPB), which is authorized to “prohibit or impose conditions or limitations on the use of” pre-dispute arbitration agreements in “consumer financial product or service” contracts “if the Bureau finds that such a prohibition or imposition of conditions or limitations is in the public interest and for the protection of consumers.”  The CFPB could adopt a narrower version of the AFA in response to Concepcion, limited to contracts within its regulatory authority, so long as the statutory prerequisites were met.

So is enactment of the Arbitration Fairness Act (or a narrower version thereof by the CFPB) an appropriate response to Concepcion?  I focus on the core holding of Concepcion: that the Federal Arbitration Act preempts state court decisions holding class arbitration waivers unconscionable.  Certainly enacting the AFA would address the concerns of consumer groups that businesses might use arbitration clauses, combined with class arbitration waivers, to reduce or eliminate the availability of class relief.  If pre-dispute arbitration clauses are unenforceable in consumer contracts, then such clauses cannot be used to avoid class relief.

But enacting the AFA would be an overbroad response to the Court’s decision in Concepcion – it would do more than simply reverse Concepcion – for two reasons.  (Note that for the rest of this post I take as a working assumption that Concepcion should be overruled.  That assumption itself is an issue worth debating, but it is not the subject of this post.  My point here is that, even assuming Concepcion should be overruled, a ban on pre-dispute arbitration clauses is an overbroad way to do so.)

First, although some businesses use arbitration clauses to reduce their susceptibility to class relief, the available evidence suggests that avoiding class relief is not the only reason businesses use arbitration clauses in their consumer contracts.  The fact that arbitration clauses also include class arbitration waivers is often cited as evidence that avoiding class relief is the business’s motivation for using arbitration.  But in a sample of 299 consumer arbitrations administered by the American Arbitration Association in 2007, only 109 (or 36.5%) arose out of arbitration clauses with class arbitration waivers.  The use of class arbitration waivers varied systematically by industry (as shown in the figure below, click to enlarge):

“[a]ll cases involving cell phone companies (5 of 5, or 100.0%) and all cases involving credit card issuers (26 of 26, or 100.0%) arose out of arbitration clauses with class arbitration waivers.  By comparison, just over half of cases arising out of car sale contracts (34 of 64, or 53.1%) and contracts with home builders (11 of 17, or 64.7%) included class arbitration waivers.  Meanwhile, none of the cases arising out of insurance contracts or real estate brokerage agreements included class arbitration waivers.”

While some of the clauses studied might predate the growth in class arbitration in recent years (prior to Concepcion), the data nonetheless suggest that reasons other than avoiding class relief motivate the use of arbitration clauses by businesses in some industries.  If so, making all consumer arbitration clauses unenforceable would be an overbroad response to concerns about the effect of arbitration clauses on the availability of class relief.

Second, using the Arbitration Fairness Act to reverse Concepcion would be an overbroad response for another reason:  it would establish a uniform federal rule rather than permitting states to adopt their own regulatory approaches.  (Indeed, the same point would apply to narrower regulatory responses to Concepcion, such as requiring all consumer arbitration clauses to permit class arbitration or excluding class actions from the scope of consumer arbitration clauses.  While such approaches would avoid the first type of overbreadth discussed above, they would still replace a diversity of state approaches with a uniform federal rule.)

Prior to Concepcion, states had taken differing approaches to the enforceability of class arbitration waivers.  Thus, while courts in some states, like California, had held class arbitration waivers unenforceable, courts in other states had upheld such provisions.  (One classification of court decisions on the issue is available here.)  Although the petitioners and respondents in Concepcion disagreed about the precise status of the decisions in various states, they agreed that there were a diversity of approaches.

Concepcion replaced that diversity of approaches with a single rule permitting class arbitration waivers.  The AFA would go to the opposite extreme, replacing that diversity of approaches with a single rule making all pre-dispute consumer (and employment) arbitration clauses unenforceable (whether they include class arbitration waivers or not).  Stated otherwise, if the Court had ruled the other way in Concepcion, it would not have outlawed class arbitration waivers altogether, much less outlawed pre-dispute consumer arbitration agreements altogether.  State laws or decisions that permitted such provisions or agreements would have remained effective.  To reverse Concepcion, then, one should adopt a rule that permits states to decide whether to enforce class arbitration waivers, rather than a rule (like the Arbitration Fairness Act) that makes all consumer arbitration clauses unenforceable.

I am well aware that Concepcion itself (indeed, the whole line of Supreme Court FAA preemption decisions, beginning with Southland Corp. v. Keating) is subject to such criticisms on federalism grounds.  Concepcion precludes states from making class arbitration waivers unenforceable, while Southland precludes states from making consumer and employment arbitration agreements unenforceable.  My point here is simply that such criticisms do not justify enacting the Arbitration Fairness Act, which is no more federalism friendly than Southland.  If one wants to overrule Southland, the way to do so is to make the FAA inapplicable in state court (or, more generally, to permit states to regulate consumer arbitration clauses), not to adopt the opposite, but equally uniform, federal rule.  But none of the bills introduced in Congress in recent years seeks to do that, just like none of the responses to Concepcion seeks only to reverse that decision.

The bottom line is that Concepcion does not justify enacting the Arbitration Fairness Act (or a ban on pre-dispute arbitration clauses in contracts within the jurisdiction of the CFPB).  Seeking to reverse the decision would at most justify returning the authority to regulate class arbitration waivers to the states, not a uniform federal rule.  And even if the objection to Concepcion is a broader one – such as that the decision illustrates how businesses can use arbitration clauses and class arbitration waivers to avoid class relief – the Arbitration Fairness Act still would be an overbroad response.  Instead, the appropriate response on that view would be to make class arbitration waivers (not all pre-dispute arbitration clauses) unenforceable, or to exclude class actions from the scope of consumer and employment arbitration clauses.