By David Ziemer
The enforceability of class action waivers and mandatory arbitration clauses in consumer contracts is stuck in limbo.
Right now, mandatory arbitration is considered “substantively unconscionable” under Wisconsin law. In Cottonwood Fin. Ltd., v. Estes, 2010 WI App75, 325 Wis.2d 749, 784 N.W.2d 726, the Wisconsin Court of Appeals held that an arbitration provision that included a class action waiver violated sec. 421.106(1) of the Wisconsin Consumer Act.
But when the lender sought review in the Wisconsin Supreme Court, the court ordered that the petition for review be held in abeyance pending the U.S. Supreme Court’s disposition of AT&T Mobility, LLC v. Concepcion, No. 09-893. Oral arguments in that case were held on Nov. 9, and a ruling is due by July 1.
How did we get here?
Wisconsin law regarding this issue has its genesis in Wisconsin Auto Title Loans Inc., v. Jones, 2006 WI 53, 290 Wis.2d 514, 714 N.W.2d 155.
Wisconsin Auto Title involved, as the name suggests, a lender who makes loans requiring that the borrower deliver a security interest in his car in exchange for the loan. The Wisconsin Supreme Court held that the contract in question was both procedurally and substantively unconscionable.
It was found substantively unconscionable because it limited the borrower to arbitration as a remedy, but permitted the lender to file a replevin action in court if the borrower failed to pay back the loan. Id., at 160.
Before concluding, the court said in dicta that the borrower’s inability to seek class action remedies supports its conclusion of substantive unconscionability. Id., at 177. The court added that, in its opinion, the Federal Arbitration Act does not preempt the Consumer Act. Id., at 176-178.
Relying in part on the class-action dicta in Wisconsin Auto Title, the Wisconsin Court of Appeals soon held that a mandatory arbitration provision in a credit card agreement was substantively unconscionable, in Coady v. Cross Country Bank, 2007 WI App 26, 299 Wis.2d 420, 729 N.W.2d 732.
Two factors led to the conclusion: (1) the agreement contained a Delaware choice of law provision, effectively nullifying the Wisconsin Consumer Act; and (2) it prohibited class-wide relief. Id., 729 N.W.2d at 746. The court specifically agreed with California case law holding that class action waivers are unconscionable. Id., at 747.
Finally, last year, in Cottonwood, the Court of Appeals held that a payday lender’s mandatory arbitration clause was substantively unconscionable based solely on one factor: the class action waiver. Cottonwood, 325 Wis.2d at 757.
As noted Sept. 21, the Wisconsin Supreme Court ordered review of that decision held in abeyance.
The AT&T case
The case before the U.S. Supreme Court involves a class action alleging that AT&T’s offer of a “free” phone to anyone who signs up for service was fraudulent, because AT&T charges the new subscriber sales tax on the retail value of the “free” phone.
AT&T demanded individual arbitration of claims, citing a mandatory arbitration provision that barred class actions. Applying California case law, both the district court and the 9th Circuit held the arbitration clause unconscionable.
The 9th Circuit also held that the FAA does not preempt California law governing the unconscionability of class action waivers in consumer contracts.
The Center for Class Action Fairness, a public interest firm that represents class action members pro bono, filed an amicus curiae brief in support of AT&T in the Supreme Court. The brief does not address the preemption issue, but contends that arbitration is usually a superior remedy for consumers than class actions.
Ted Frank, who founded the Center, noted the AT&T contract provided for arbitration in which the entire cost would be paid by AT&T, and provided that it would pay a premium to any consumer who prevailed.
“AT&T quite reasonably argued that there is no unconscionability,” Frank said. “It is one thing if an agreement prohibited class actions and provided no other remedy, but here, AT&T provided a fair alternative.”
The benefits of arbitration far outweigh the class action remedy, he said, because of the enormous expense and time involved in litigating class actions, and the fact that in many class actions, the attorneys reap most of the benefits, rather than the consumers.
“If a company creates an alternative dispute mechanism that provides compensation, and is quicker and better than class actions, where is the unconscionability?” he said. According to Frank, courts in California and Wisconsin, by concluding that the lack of class actions as a remedy is unconscionable, have treated the right to file a class action as an end in and of itself rather than a means, “allowing the procedural tail to wag the substantive dog.”
Peter Koneazny, an attorney with the Legal Aid Society of Milwaukee Inc. who represented the class in Wisconsin Auto Title, acknowledged that the arbitration clause in the AT&T case was particularly user-friendly relative to most arbitration clauses.
For that reason, Koneazny said he thought it would be “wildly activist” for the Supreme Court to hold that the FAA preempts states from ever finding mandatory arbitration clauses unconscionable.
The court could rule in favor of AT&T, Koneazny said, but on narrow grounds, and that class action waivers could still be held unconscionable under state laws if there is no other practical remedy.
Professor Andrea Schneider, who teaches arbitration at Marquette University Law School, said the oral arguments in AT&T also suggest that the court will not issue such a broad ruling.
Schneider noted that, in the past, the court has held state laws preempted under the FAA when they discriminate against arbitration in favor of litigation. Much of the oral argument, Schneider said, focused on that narrower issue – whether the California courts were setting a lower standard for a finding of unconscionability in arbitration than they do in litigation.
“Justice Scalia seemed very wary of adopting broad preemption regarding the interpretation of state law by state courts,” Schneider said. “It would open up a hornet’s nest if the Supreme Court said state courts can’t find contracts unconscionable.”
But, according to attorney Lisa Lawless, who represented Wisconsin Auto Title before the Wisconsin Supreme Court, in order for the court to affirm the lower courts, it would have a hard time reconciling its holding with recent precedent.
In Stolt-Neilsen S.A. v. AnimalFeeds International Corp., 130 S.Ct. 1758 (2010), the Court held that where an arbitration agreement was silent as to whether a class action can proceed in arbitration, a class-wide arbitration cannot be imposed on the parties.
During oral argument, Lawless said, Concepcion acknowledged that a state law that effectively prevented arbitration would be preempted by the FAA.
“It is difficult to understand how class-wide arbitration can be effectively required by state law for the enforceability of an arbitration clause, when Stolt-Nielsen held that a class-wide arbitration is inconsistent with the inherent purposes and goals of arbitration,” said Lawless, of Whyte Hirschboeck Dudek SC, Milwaukee. “California has, effectively, exalted the procedure of a class action over arbitration as a dispute resolution mechanism.”
Whatever the U.S. Supreme Court does, the law in Wisconsin won’t be settled. Lawless noted the Wisconsin Supreme Court has never held that a class action waiver violates the Consumer Act, but only the Court of Appeals in Cottonwood.
Thus, even if the U.S. Supreme Court holds that the FAA does not preempt state law, the Wisconsin Supreme Court could still hold, contrary to what the Court of Appeals has said, that a class action waiver is not grounds in and of itself to find a consumer contract unconscionable.