Is the Supreme Court demanding enough as it provides incentives for the private funding of a federal small claims court?

The following contribution to our arbitration symposium is by Nancy Welsh, Professor of Law at Penn State University, Dickinson School of Law.  Her research and writing focus on negotiation, court-connected and agency-connected mediation, and arbitration. She has examined the procedural and substantive justice offered by these processes, their potential to resolve non-legal as well as legal issues, their consistency with the promise of self-determination, and, ultimately, the effects that courts, lawyers, traditional litigation, and institutionalized “alternative” processes have on each other.  She is co-author of Dispute Resolution and Lawyers, 4^th ed. (with Leonard Riskin, James Westbrook, Chris Guthrie, Richard Reuben and Jennifer Robbennolt).

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AT&T Mobility LLC v. Concepcion, decided by the Supreme Court earlier this year, involved a decidedly “small claim” and yet, its potential impact is huge.  I suspect that others involved in this symposium will argue – with justification – that Justice Scalia’s opinion in Concepcion provides a roadmap for companies interested in using arbitration as a means to avoid the “deterrent effect” of class actions – or, depending on your perspective, to avoid “the risk of ‘in terrorem’ settlements[.]”  I also suspect that others involved in this symposium will urge that Concepcion fits into a larger picture of a Supreme Court that perceives many class actions as needlessly disrupting embattled government and business leaders and generating unproductive income for plaintiffs’ and defense lawyers, rather than responding to the real needs of real people.  Charles Dickens’ Bleak House comes to mind.

But these points are not my focus.  Concepcion has the potential to be understood as the Supreme Court’s answer to a Congress that continues to funnel more cases to the federal courts while simultaneously underfunding and understaffing them.  With Concepcion and other arbitration cases, the Supreme Court is effectively providing an incentive for the private funding of a layer of judicial adjuncts to handle frequently occurring bilateral disputes between disparate parties.  Encouragement of private attorneys general is giving way to encouragement of private inferior (as in lower-level, fact-finding) judges.  And if corporate defendants have to pay someone, it should not be surprising that they would rather have their monies go to arbitrators and individual plaintiffs than class counsel.  Perhaps Concepcion is simply the next step in the evolution of a uniquely American privatized and federal small claims court, with our federal courts available only for the correction of the most egregious abuses as they engage in deferential judicial review of arbitral awards.  If I am right about this evolution, I cannot help but be concerned about the effects of increasingly reduced access to the courts on our democratic justice system.   The vast majority of our citizens, after all, have only “small claims.”

On the other hand, research shows that consumer arbitration is used mostly for collections matters.  There are a high percentage of defaults in collections matters, whether arbitrated or litigated.  Why are public courts needed to process such matters?  Is this a good use of public funds?  As state and federal courts face severe budget cuts, why not allow the affected corporations to elect and pay for alternative, private tribunals?   (As to that last question, there is an obvious response: the potential for bias, or at the very least, the de-legitimizing appearance of bias.)

My concern, though, is that the Supreme Court is not being clear enough in signaling that its approval of these judicial adjuncts is conditioned upon the implementation of structural safeguards that assure sufficient fairness, including sufficient impartiality.  Concepcion has the potential to represent a pragmatic and exciting development for dispute resolution proponents, like myself, if the Supreme Court also provides an incentive for companies to offer expeditious, effective and sufficiently fair bilateral arbitration (or other private justice) procedures for consumers.  Mediation, online redress/dispute resolution systems, or ombudspersons could fit into this picture, supplementing or even supplanting arbitration.  If a corporation chose to institutionalize an ombudsperson in addition to arbitration, for example, this neutral could collect data regarding arbitral claims and awards in order to make corporate officers aware – quickly – of emerging problems in a particular location or with a particular advertising campaign.  The corporation could take prompt corrective action, rather than waiting until it receives a demand letter threatening a class action.  If the neutrals in this sort of a private dispute system are sufficiently independent and careful—and if there are sufficient procedural safeguards–the system has the potential to serve many of the same public interests served by class actions.

Consumers also could be given the option to choose (really choose, not be forced into) the procedural “path” they prefer.  Corporations could make the options attractive enough that consumers would freely choose a private alternative rather than court.  Indeed, the average consumer looking at the two-step dispute resolution provision at issue in Concepcion might have found it quite appealing.  To initiate a dispute proceeding, the consumer had to complete a short form on the AT&T website.  AT&T could then offer to settle the claim, thus avoiding arbitration.  If AT&T did not make such an offer, or if the dispute was not resolved within thirty days, the consumer could then file a separate demand for arbitration, also through the website.  The clause further provided that: if the parties went to arbitration, AT&T had to pay all costs for non-frivolous claims; the arbitration had to take place in the county in which the customer was billed; for claims of $10,000 or less, the customer could choose the form of the arbitration – in person, by telephone or based only on paper submissions.  Also, either the consumer or AT&T could bring a claim in small claims court rather than arbitrate, and the arbitrator was authorized to award any form of individual relief (and as Justice Scalia’s opinion noted, this presumably included punitive damages).  AT&T was not permitted to seek reimbursement from the consumer for its attorney’s fees.  And, in the event that the consumer received an arbitration award greater than AT&T’s last written settlement offer, AT&T was then required to pay a $7,500 minimum recovery and twice the amount of the consumer’s attorney’s fees.

All of this sounds very good, although it is important to note that AT&T inserted some of the most appealing terms only after the Concepcions filed their lawsuit.  The Ninth Circuit undertook some hard-headed risk analysis in reviewing the clause, ultimately concluding that a consumer was terribly unlikely to receive the $7,500 premium payment.  If a consumer made a small claim in arbitration, AT&T could avoid paying the premium and attorney’s fees as long as it paid the face value of the claim at any point before the selection of the arbitrator.  “Thus,” according to the Ninth Circuit, “the maximum gain to a customer for the hassle of arbitrating a $30.22 dispute is still just $30.22.”

The Ninth Circuit’s analysis is not illogical, though it does ignore social science research showing that human beings are not entirely rational as they make decisions.  People still gamble in casinos.  It could very well be that AT&T’s arbitration provision with its online elements, the premium payment and reimbursement for attorney’s fees would encourage consumers to make claims, thus benefitting themselves and alerting AT&T to problem areas.  Indeed, rather than thinking of AT&T as a company that required deterrence, perhaps we can think of it as a company that would have welcomed the opportunity to learn about problems from its customers and improve its goods and services.  That approach may seem naïve, but it also makes good business sense.

But if the clause makes this much sense, did AT&T actually require class waiver as the quid pro quo for its funding of a private dispute resolution system?  I am not at all certain about the answer to that question.  I worry, though, that several members of the Supreme Court assumed that class waiver was a non-negotiable term, absolutely necessary to persuade corporations to fund bilateral arbitration.  And therefore, these Justices failed to demand enough in return for consumers’ loss of their right to aggregate small claims.  If a company seeks and wins a class waiver, it certainly seems that any proposed substitute process must be sufficiently attractive and fair.  In reading Justice Scalia’s opinion, however, it sounds like any old form of rough justice will do for the arbitration of consumer matters, since individual disputes tend to be so small – and thus essentially meaningless and consequence-free unless and until they are aggregated.  In reality, of course, these “small claims” are not necessarily meaningless and consequence-free for the people who are dealing with them.  And based on the dispute resolution clause at issue, Concepcion need not be understood to expect so little from arbitration.

Nonetheless, at this point, the “rules” apparently emerging from Concepcion are strikingly broad-brush and patently undemanding.  One is that “[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.”  A second is that “[s]tates cannot require a procedure that is inconsistent with the FAA, even if it is desirable for unrelated reasons.”  Many overburdened state and federal courts are using this language from the plurality’s opinion as they order consumers and employees away from the courts and away from class proceedings, into privatized bilateral arbitration.

This understanding of Concepcion, however, is incomplete.  Immediately following the quoted language above regarding the fate of procedures that are inconsistent with the FAA, for example, Justice Scalia’s opinion clarifies that in Concepcion, a class proceeding was not necessary because AT&T had fashioned a sufficiently attractive and just bilateral proceeding as the substitute:

“[T]he claim here was most unlikely to go unresolved.  As noted earlier, the arbitration agreement provides that AT&T will pay claimants a minimum of $7,500 and twice their attorney’s fees if they obtain an arbitration award greater than AT&T’s last settlement offer.  The District Court found this scheme sufficient to provide incentive for the individual prosecution of meritorious claims that are not immediately settled, and the Ninth Circuit admitted that aggrieved customers who filed claims would be “essentially guarantee[d]” to be made whole. . . Indeed, the District Court concluded that the Concepcions were better off under their arbitration agreement with AT&T than they would have been as participants in a class action, which “could take months, if not years, and which may merely yield an opportunity to submit a claim for recovery of a small percentage of a few dollars.””

If the Supreme Court is indeed providing an incentive for the private funding of an expanding layer of judicial adjuncts, it will inevitably be called upon to ensure that these adjuncts’ procedures meet the essential requirements of procedural justice – e.g., notice, the opportunity to be heard and to rebut witnesses, a sufficiently impartial decision-maker.  Such expectations will, of course, require enforcement.  This could mean fashioning a principled basis for departing from deferential judicial review, borrowing perhaps from MetLife v. Glenn’s approach to the weighting of conflicts of interest in the ERISA context.  It could mean importing due process considerations into interpretation of the FAA, something the Supreme Court has done before.  Other options could include determining mechanisms for the “removal” of a case from a private tribunal to a public court, or bringing  adjuncts in-house.  Regardless of the appropriate solution, what is clear is that the creation of this new layer of adjuncts will almost certainly mean working through all of the issues that have arisen when the federal courts have struggled in the past with the inconsistent procedures and decisions of state courts, administrative adjudicators, and legislative courts.  It will also require the provision of sufficient resources to our courts.  Thus, even as we dispute resolution proponents encourage the courts’ embrace of “alternative” dispute resolution processes such as arbitration, we also need to urge sufficient funding and staffing for our state and federal courts, to enable them to play their essential role in bringing life to the heady but difficult promises made by our still-young democratic nation.