Do-it-yourself tort reform: How the Supreme Court quietly killed the class action

The following contribution to our arbitration symposium is written by David S. Schwartz, Professor of Law at the University of Wisconsin Law School. Professor Schwartz has taught at Wisconsin since 1999.  Previously he worked as a civil rights litigator in private practice and later for the ACLU Foundation of Southern California.  Prof. Schwartz writes about arbitration, civil procedure and constitutional law.

—

Wal-Mart v. Dukes caused much consternation for placing significant limits on class actions. Surprisingly little attention, by comparison, has been paid to AT&T Mobility v. Concepcion, decided two months before Wal-Mart. Concepcion goes much farther than Wal-Mart.  It entirely kills most class actions.

Concepcion is the latest in a long line of Supreme Court decisions interpreting the Federal Arbitration Act in a manner consistently hostile to consumer and employee protection laws.  An obscure backwater of contract law, FAA jurisprudence flies under the radar of most policymakers and legal sophisticates, and its low profile is compounded by the obscurity of language and reasoning in the Supreme Court’s decisions in the area.

Concepcion appears to hold that a party to an arbitration agreement cannot be sued in a class action.  But it does so with obscure, I would say stealthy, reasoning that may account for its lack of attention relative to the Wal-Mart decision, which limits class actions rather than killing off whole swaths of them.

In Concepcion, a class of cell phone customers claiming widespread but low-stakes frauds (in the tens of dollars per person) sought classwide relief in court. AT&T asserted that express language in its arbitration clause prohibited class actions and allowed plaintiffs to proceed only as individuals and only in arbitration. The Ninth Circuit held the arbitration clause unenforceable on the ground that the class action ban was unconscionable under a California Supreme Court precedent, Discover Bank.

The U.S. Supreme Court reversed, in an opinion that eliminates consumer and employment class actions while seeming to do less than that. The stealth with which the opinion takes this breathtaking step arises from the artful ambiguity of the question presented by the petition for certiorari:

“Whether the Federal Arbitration Act preempts States from conditioning the enforcement 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.”

This phrasing does not fairly encompass the issue presented by the litigation.  Whether an arbitration agreement can be found unenforceable because it excludes class-wide arbitration procedures, and whether the availability of class-wide arbitration is necessary to vindicate a plaintiff’s claims, are beside the point. Class arbitration was never sought by either party in the case. The proceedings below posed the issue as individual arbitration under the contract versus judicial class action. The unconscionable contract term here, as in Discover Bank, was to use individual arbitration to displace and preclude class litigation.

Hewing to the misleading question presented, Justice Scalia’s opinion for the majority argues that a rule “requiring the availability of class-wide arbitration interferes with the fundamental attributes of arbitration” and is thus preempted by the FAA under the doctrine of obstacle preemption. By focusing on this version of the question, the Court manages to uphold the contractual class-action waiver without ever directly confronting the problem raised by such a holding:  that its decision allows arbitration clauses to be used to create immunity from class actions.

One might therefore read Concepcion as holding “only” that a state law rule is preempted if it requires that class arbitrations be permitted as a condition of an enforcing an arbitration clause. In other words, one could argue that Concepcion applies only to claimants seeking class arbitration. But that’s wishful thinking. The Discover Bank unconscionability doctrine holds that an arbitration class action ban is unenforceable when the plaintiffs seek to litigate a class action in court, and that is the doctrine held preempted in Concepcion. The Court could only frame the question presented the way it did by assuming the very point in controversy: once an arbitration agreement is in place, it will be enforced in some fashion, and the only question is what that arbitration will look like, not whether the claims will go forward in court due to unenforceability of the arbitration agreement. The majority implies that the Discover Bank rule and any other unconscionability rule against class action bans must be understood as an impermissible attempt at “allowing any party to a consumer contract to demand [classwide arbitration] ex post.” The Court simply does not acknowledge the existence of a rule that allows the consumer to demand classwide litigation when there is an arbitration clause present.

Without minimizing, Wal-Mart v. Dukes, getting upset about that case is like flipping out over a brief thundershower a few weeks after having slept through Hurricane Irene. The implications of Concepcion are staggering.  Most class actions arise out of contractual relationships.  Consumer, employment discrimination, wage and hour, and securities class actions all arise out of transactions that begin with a contract. Any and all potential defendants of such claims can immunize themselves from class actions by the simple expedient of adding an arbitration agreement to their contracts.  Since these are almost always adhesion contracts, all that’s required is word-processing – certainly not bargaining.

It’s not even the case that current employees or existing customers are “grandfathered” under some prior set of rules.  For many years now, courts have uniformly upheld arbitration clauses contained in unilateral contract amendments, such as credit-card bill-stuffers, written notices to employees, revisions to the employee handbook, and the like.

Every 1L understands, as Justice Stevens put it in Amchem Products v. Windsor, that [t]he policy at the very core of the class action mechanism is to overcome the problem that small recoveries do not provide the incentive for any individual to bring a solo action prosecuting his or her rights.” Equally obvious is the flip side of this coin:  putative defendants can engage in low stakes frauds and law violations with impunity and, if the number of occurrences is large enough, quite profitably.  Not surprisingly, it has been an open secret for over a decade that a major motivation “perhaps the dominant motivation” for the imposition of arbitration clauses in adhesion contracts has been the hope that these clauses would blossom into class action waivers.

Connoisseurs of judicial craft might find poignant ironies in the majority and dissenting opinions. Justice Scalia grounds his majority analysis on the very sorts of attacks on arbitration that are supposedly improper under current, pro-arbitration doctrine. Arbitration is poorly suited to the higher stakes of class litigation,” arbitration procedures and arbitrators are not to be entrusted with ensuring that third parties due process rights are satisfied,” and arbitration’s absence of multilayered [judicial] review makes it more likely that errors will go uncorrected. How bizarre to see these same arguments long advanced by pro-consumer arbitration critics used by Justice Scalia to attack arbitration’s inadequacies in order, then, to enforce an arbitration clause.

The four-Justice dissent by Justice Breyer is a major disappointment to anyone looking for a vindication of the judicial class action as a necessary remedy for consumer or employment claims.  Instead, the dissent confines itself to an argument for the suitability of arbitration to handle class claims.  Perhaps the dissenters think that by not naming the grave outcome, the majority’s decision to eliminate class actions will not be real. This is the most recent in a long line of disappointing opinions by liberal Justices in FAA cases, who have never come out and said that mandatory arbitration undermines procedural fairness and thereby threatens the substantive rights of consumers and employees.  Stating that side of the debate in a clear and principled way has always taken a back seat to the liberal Justices’ presumably tactical preference for muddled compromises in FAA cases.

Concepcion is the culmination of twenty-five years of Supreme Court arbitration jurisprudence that has turned the FAA into a do-it-yourself tort reform statute.  By adding an arbitration clause, a would-be defendant can do away with juries, with pesky discovery into its documents or employees’ testimony, and, now, with class actions.  It is a case study in broad-ranging common-lawmaking based on the thinnest of legislative foundations.  As now retired Justice O’Connor put it, concurring in Allied Bruce Terminix v. Dobson, “the Court has abandoned all pretense of ascertaining congressional intent with respect to the Federal Arbitration Act, building instead, case by case, an edifice of its own creation.”

Simply put, the FAA was enacted in 1925 to reverse a judicial presumption against enforcing arbitration agreements and, thereby, to put arbitration agreements “upon the same footing as other contracts” (in the words of the enacting 1924 House report).  Or as the Supreme Court itself later said in Prima Paint Corp. v. Flood & Conklin Mfg., the FAA was intended to “make arbitration agreements as enforceable as other contracts, but not more so.”  Section 2 of the FAA included language expressly preserving generic contract defenses, which until recently were thought to include doctrines such as unconscionability and voidness as against public policy.

Increasingly since the early 1980s, the Supreme Court has made arbitration agreements into supercontracts.  A “normal” contract is subject to the hornbook principle that contract terms exempting the drafting party from its own intentional wrongs are void as against public policy.  An adhesion contract term stating that “no class action may be brought against Company” would probably be held void as against public policy, or as an illegal exculpatory clause, or unconscionable by virtually every court in the country.  But the U.S. Supreme Court now upholds a clause accomplishing this very thing; it need only be done using the vehicle of an arbitration clause.

Merry Christmas, general counsel.  Now get busy amending those contracts!