Status and contract in AT&T Mobility v. Concepcion

The following contribution to our arbitration symposium is written by  Hiro Aragaki,  Associate Professor of Law at Loyola Law School, Los Angeles.  In two recent papers (here and here), Professor Aragaki uses the Court’s own antidiscrimination rhetoric to critique Federal Arbitration Act preemption jurisprudence and offer an alternative theoretical framework.  With Karen Halverson Cross, he filed an amicus brief in support of the respondents in AT&T Mobility LLC v. Concepcion. The posting below is taken from his current work-in-progress.

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Henry Sumner Maine once famously described the progression from traditional to modern societies as a progression “from status to contract.”  Until recently at least, the evolution of federal arbitration law might be described as charting a strikingly similar course.

Prior to the passage of the Federal Arbitration Act (FAA), common law courts denied legal status to the arbitration process by refusing to specifically enforce even post-dispute arbitration clauses.  They reasoned that arbitral tribunals did not “possess full, adequate, and complete means . . . to investigate the merits of the case, and to administer justice.”  In this era, arbitration effectively bore what Thomas Carbonneau describes as the stigma of illegitimacy: It was little more than a “bastard remedy” that “lacked official status and proper standing.”

Congress passed the FAA in 1925 in order to “shake off the old judicial hostility to arbitration” – to free arbitration from its status as second-class adjudication – by lifting the common law ban on specific performance.  Arbitration could now become whatever the contracting parties agreed it would become, and the law would henceforth give meaning to such agreements just as it did to “any contract.”  In one case after another, from Shearson/American Express Inc. v. McMahon to Rent-A-Center, West, Inc. v. Jackson, the U.S. Supreme Court has steadfastly re-affirmed these principles, transforming federal arbitration law from a paradigm based on status to one based on contract.  Widely hailed as “a resounding win for freedom of contract,” AT&T Mobility LLC v. Concepcion appears to represent the crowning achievement of this transformation.

I wish to suggest a radically different reading of Concepcion.  In my view, Concepcion does not mark the triumph of contract so much as a regression back to the old days of status – to the days when the law regulated arbitration based on assumptions about its true nature.  To explain why this is so, I will first need to review some basics of FAA preemption.

The FAA’s primary preemptive provision is found in section 2, which provides that a “written provision . . . to submit [specified disputes] to arbitration shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.”  The first clause of section 2 has generally been understood as “a policy guaranteeing the enforcement of private contractual arrangements” free of legislative interference from the states.  The second clause of section 2 contains the only existing exceptions to this rule.  It allows states to regulate the enforcement of arbitration agreements without running afoul of the FAA so long as they do so using “generally applicable contract defenses, such as fraud, duress, or unconscionability.”  The ostensible rationale for this savings clause is that by regulating arbitration agreements only by use of common law doctrines applicable to “any contract,” states do not threaten to “singl[e] out arbitration provisions for suspect status,” as they had prior to the FAA’s passage.  Instead, consistent with the contract paradigm, they merely put agreements to arbitrate on an “equal footing” with agreements to do just about anything else.

The fall of contract

The holding in Concepcion flies in the face of these widely accepted principles of FAA preemption.  The arbitration agreement in that case prohibited either party from bringing an arbitral claim in a representative format.  The lower federal courts refused to enforce this class arbitration “waiver” under the California Supreme Court’s decision in Discover Bank v. Superior Court, which set forth the conditions in which collective action waivers (in arbitration or litigation) would be deemed unconscionable.  They reasoned that, as an unconscionability standard, Discover Bank fell within the savings clause of FAA section 2 and thus avoided preemption according to the principles described above.  A divided Court in Concepcion, however, reached precisely the opposite conclusion:  Discover Bank conflicted with FAA section 2’s “primary purpose” to “‘ensure that private arbitration agreements are enforced according to their terms.’”

The only way to square the majority’s conclusion with the contract paradigm is if the Discover Bank rule somehow does not qualify as a “ground[] . . . for the revocation of any contract” falling within the savings clause – for example, because it is a rogue version of unconscionability doctrine otherwise unknown to the common law of contracts.  During briefing on certiorari and on the merits, AT&T and its amici pressed this very point, arguing that the California rule was a “distortion” that “b[ore] no resemblance” to traditional unconscionability law.  The Concepcions and their amici, in turn, argued just the opposite:  Discover Bank was nothing more than a refinement of ordinary unconscionability principles.

It cannot be underemphasized that, on this point at least, the Supreme Court did not accept AT&T’s position.  (It may have accepted AT&T’s argument that the Discover Bank rule effectively “discriminated” against arbitration, but that is a basis for FAA preemption that sounds in antidiscrimination, not contract.)  Instead, the Court assumed with the Concepcions that the Discover Bank standard was in fact a bona fide contract law doctrine but then turned around and held that this perfectly correct application of state unconscionability law was nonetheless preempted by the FAA.  If FAA preemption no longer depends on whether the state law is a genuine contract law defense, it seems to me the contract paradigm can no longer explain FAA preemption after Concepcion.  A fortiori, it no longer captures the “purposes and objectives” (Hines v. Davidowitz) of the FAA.  Something else, therefore, must be at work.

Some continue to assert that Concepcion upheld freedom of contract just because it shielded AT&T’s class arbitration waiver from California’s law of unconscionability.  But it would be an odd conception of contractual liberty if a law were taken to restrict freedom of contract simply because it interfered with the parties’ agreement as written.  For example, would we consider contracting parties to be freer if the state held them to an agreement that had been procured by fraud or duress?  An agreement that turns out to be impracticable?  Or one that lacks consideration?  Surely these examples demonstrate that refusing to enforce agreements to the letter can do just as much to augment freedom of contract as it can to diminish it.

The rise of status

If the contract paradigm does not explain the outcome in Concepcion, what does?  The answer is far more complex than I have the time to explain here.  But as I have already hinted, it has something to do with status.

A keystone of the holding in Concepcion is the Court’s determination that class arbitration is not really “arbitration.”  Class arbitration, we are told, is time consuming, formalistic, and procedurally complex – all the things that arbitration under the FAA is neither supposed to be nor likely can be.  “Arbitration is poorly suited to the higher stakes of class litigation” because, unlike the de novo review of class certification questions available in court, the vacatur standards in FAA section 10 amount to “no effective means of review.”  Moreover, “[a]rbitrators are not generally knowledgeable in the often-dominant procedural aspects of certification,” so that it is “at the very least odd to think that an arbitrator would be entrusted with ensuring that third parties’ due process rights are satisfied.”  In Concepcion, the Court held that making these quintessentially litigation-like demands on arbitration “interferes with fundamental attributes of arbitration (emphasis added).”

In these passages from Concepcion, the Court wanders deep into the lair of essentialism.  The false hope of discovering arbitration’s true nature led it to embark on this unfortunate path a year earlier, in Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp.  There, the Court held that if an arbitration agreement is silent about whether to permit class proceedings and there is no other extrinsic evidence of the parties’ intent on the matter, arbitrators may not – consistent with the FAA – impose such proceedings.  The rationale was that class arbitration “changes the nature of arbitration to such a degree that it cannot be presumed that the parties [objectively] consented to it (emphasis added).”

This type of essentialism is dangerous: It can be used to legitimize result-driven decisions and to entangle arbitration unnecessarily in the political skirmishes of lawyers and their client-constituents.  As I have explained elsewhere (see here and here), just decades ago the Court marshaled similar essentialistic arguments about arbitration’s inherent nature in order to undo valid, broadly worded arbitration agreements and thereby to permit plaintiffs asserting federal statutory claims to bring those claims in court.  Only later would the Court come to see that its “outmoded presumptions” about arbitration’s status masked the very same anti-arbitration hostility that the FAA was designed to reverse.  The same, I hope, will one day be appreciated about the Court’s pronouncements in Concepcion and Stolt-Nielsen.

To be sure, status can favor as much as disfavor a class of persons or things.  But anyone who believes that Concepcion favors arbitration would be sorely mistaken for several reasons.

First, it is important to distinguish between favoring the institution of arbitration and favoring its most loyal patrons.  The result in Concepcion may favor big businesses that wish to avoid collective action claims (whether in arbitration or litigation). But that does not necessarily mean it favors arbitration.

Second, it is not even clear that Concepcion favors business.  Consider in this vein the one thousand or so duplicative arbitrations recently filed by plaintiffs’ law firms on behalf of AT&T customers seeking to block AT&T’s announced merger with T-Mobile.  At least in part a “be careful what you wish for” response to Concepcion and Stolt-Nielsen, these cases expose the problematic flip-side of the proposition that arbitration’s status is fundamentally incompatible with the class mechanism.  Together with the collateral ligation they will almost certainly spawn, these cases also represent a staggering waste of legal, psychological, and material resources – precisely the type of waste that the FAA was designed to avoid.  All of us, not least of which arbitration, are the worse off for it.

Third, there is a fine line between favoritism and infantilization.  Consider Muller v.Oregon, a 1908 case in which the Court upheld a paternalistic statute making it a crime to employ women for more than ten hours per day.  The Court conceded that the statute would be unconstitutional if it restricted the employment of male workers, but it held that “inherent difference[s]” between men and women justified restricting the working hours of women, even if they wished to work longer.  As the Court would acknowledge in more recent times, these notions about the nature of the sexes “put women, not on a pedestal, but in a cage.”  I argue that Concepcion is to arbitration what Muller was to gender.

Tellingly, even AT&T infantilizes arbitration in the recent complaints it filed in district courts to enjoin the merger arbitrations.  In those complaints, AT&T argued – ironically – that allowing the individual arbitrations to proceed would cause it irreparable injury because, among other things, arbitrators would be called on to evaluate “highly sophisticated and complex econometric and engineering models” and conduct “a detailed assessment of this evidence as it relates to the benefits to consumers and businesses” – tasks that presumably cannot be expected from an essentially fast, cheap, and simple adjudicative forum.  These statements may come from the mouthpiece of arbitration’s supposed champion, but they certainly do not favor arbitration.  They are better seen as embodying the type of anti-arbitration hostility that the Court’s own jurisprudence resoundingly forbids.