By Lisa M. Lawless
On April 27, 2011, the U.S. Supreme Court issued (PDF) its much-awaited decision in AT&T Mobility, LLC v. Concepcion, No. 09-893. In Concepcion, AT&T’s contract provided for arbitration and required claims to proceed on an individual basis. The lower courts held the agreement unconscionable under Discover Bank v. Superior Court, 113 P.3d 1100 (Cal. 2005). Under Discover Bank, California law invalidates certain arbitration agreements in consumer contracts that contain class action waivers. It requires arbitration agreements to allow class actions in the arbitration forum or the clause is unenforceable.
Concepcion has been hotly anticipated because a minority of courts, including Wisconsin’s, have ruled arbitration agreements unenforceable on the ground that they contain a class action waiver. Such waivers are relatively common, because class action procedures are regarded as inconsistent with the purpose of arbitration, which is to resolve claims in an efficient and streamlined manner.
The Supreme Court granted certiorari to decide whether the Discover Bank rule is preempted by the Federal Arbitration Act (FAA). FAA § 2 makes agreements to arbitrate “valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” 9 U.S.C. § 2.
It is well settled that the FAA invalidates statutes that attempt to undercut the enforceability of arbitration agreements. (Slip Op. at 6-7). Concepcion’s wrinkle is that a state statute is not at issue, but rather common law unconscionability. As the Court explained, “The inquiry is more complicated when a doctrine normally thought of as generally applicable, such as unconscionability, is alleged to have been applied in a fashion that disfavors arbitration.” (Slip Op. at 7).
Concepcion holds that the FAA preempts the application of state common law in a manner that disfavors arbitration. FAA § 2 permits arbitration agreements to be invalidated “by ‘generally applicable contract defenses, such as fraud, duress, or unconscionability,” but not by defenses that apply only to arbitration or that derive their meaning from the fact that an agreement to arbitrate is at issue.’ ” (Slip Op. at 5)(citation omitted). “[A] court may not ‘rely on the uniqueness of an agreement to arbitrate as a basis for a state-law holding that enforcement would be unconscionable, for this would enable the court to effect what . . . the state legislature cannot.’ ” (Slip Op. at 7) (citation omitted).
The Court explained that the FAA preempts a court finding of unconscionability on the ground that arbitration offends state public policy or that it fails to provide the procedures available in a judicial forum (such as full discovery, a jury trial, evidence rules, or class actions). These bases for finding an arbitration agreement unconscionable “would have a disproportionate impact on arbitration agreements . . .” (Slip Op. at 7-8).
FAA § 2’s savings clause does not “preserve state-law rules that stand as an obstacle to the accomplishment of the FAA’s objectives.” (Slip Op. at 9). The Court held: “Because it ‘stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress,” California’s Discover Bank rule is preempted by the FAA.” (Slip Op. at 18)(citation omitted).
Effect of Concepcion
Concepcion reaffirms the mandate that arbitration agreements are presumed valid, and that they cannot be invalidated on the ground that arbitration violates state public policy or due to inherent features of arbitration. The states are not free to exalt other policies over arbitration and hold arbitration to be unconscionable under those policies.
Concepcion will have a significant effect on the enforcement of arbitration agreements throughout the country. It effectively overrules the minority of states holding that a class action waiver renders an arbitration agreement unconscionable. Concepcion overrules Cottonwood Fin., Ltd. v. Estes, 2010 WI App 75, 325 Wis. 2d 749, 784 N.W.2d 726, which held an arbitration agreement substantively unconscionable on the ground that it contained a class action waiver. Now that Concepcion has issued, the Wisconsin Supreme Court is considering the petition for review in Cottonwood and it has requested supplemental briefing on Concepcion.
Concepcion also effectively overrules the portion of Coady v. Cross Country Bank, Inc., 2007 WI App 26, ¶ 46, 299 Wis. 2d 420, 729 N.W.2d 732, holding that a class action waiver “contributes” to the unconscionability of the arbitration agreement. For that part of its decision, Coady relied upon Discover Bank. 2007 WI App 26, ¶ 48. Concepcion also undercuts the dicta in Wisconsin Auto Title Loans, Inc. v. Jones, 2006 WI 53, ¶ 73, n.61, 290 Wis. 2d 514, 714 N.W.2d 155, favorably citing case law from California and other states to note that some courts have found class action waivers unconscionable.
The underlying requirements for proving unconscionability remain under Wisconsin law. Both substantive and procedural unconscionability must be established by the party challenging the contract. Jones, 2006 WI 53, ¶¶ 33, 34. These factors are considered on a case-by-case basis. Id., 2006 WI 53, ¶ 33. And, in light of Concepcion, these factors should not simply be presumed as a matter of public policy based on the nature of the contract, such as an arbitration clause contained in a consumer contract.
Lisa Lawless is a Senior Attorney in the Business Litigation Practice Group at Whyte Hirschboeck Dudek S.C. in Milwaukee. Her practice emphasizes representation of merchants and lenders in consumer actions; it also includes intellectual property litigation and a substantial appellate practice. She can be reached at email@example.com.