This Topic discusses recent arbitration-related rulemaking activities, federal arbitration laws, and the types of arbitration clauses that may be stricken by courts as unconscionable and unenforceable in the aftermath of the Concepcion decision.
Indeed, there are three key rulings, actions, and changes that have reshaped or promise to revise the approach to arbitration and mediation. They are:
- Section 1028 of the 2010 Dodd-Frank Act: The guidance from the Dodd-Frank Act directed the Consumer Financial Protection Bureau (CFPB) to conduct a study on consumer arbitration and report to the U.S. Congress concerning the use of mandatory pre-dispute arbitration in contracts for consumer financial products, including retail installment credit agreements.
- AT&T Mobility v. Concepcion, 563 U.S. 333 (2011): This ruling pre-empted state laws prohibiting contracts from disallowing class action remedies.
- American Arbitration Association (AAA): AAA now requires you to annually register your arbitration language for approval by the AAA for compliance with its “Consumer Due Process Protocol,” and pay a fee. Each dealer must make its own filing and pay its own fees.
Section 1028 of the Consumer Financial Protection Act of 2010, aka, the Dodd-Frank Act
AT&T Mobility v. Concepcion, 563 U.S. 333 (2011)
In the 2011 case AT&T Mobility, LLC v. Concepcion, the U.S. Supreme Court ruled in a 5-4 decision that arbitration agreements in standard form consumer financial services contracts that waive the right to pursue a class action are enforceable, and that the Federal Arbitration Act (FAA) preempted a California court ruling to the contrary. The case involved a large number of consumers, each of whom had been overcharged by a small amount of money (approximately $30) so that it was unattractive for any consumer to bring an individual action. Each consumer’s contract provided for mandatory arbitration and a waiver of any right to bring or participate in a class action. Based on these circumstances, the Federal Ninth Circuit Court of Appeals in California had ruled the class action waiver as unconscionable under the law of California and thereby unenforceable. Under these facts, the class action waiver had been ruled to undermine California consumer protection statutes which rely on private causes of action for enforcement.
The FAA provides that arbitration agreements are “valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” Even so, the Supreme Court reversed the Ninth Circuit’s decision, noting that California’s law stood as obstacles to the intent of Congress, as expressed in the FAA, of favoring arbitration where the parties have agreed to it as part of a contract. The Court also held that class action waivers are not inconsistent with the intent of Congress or the FAA, noting that “[a]rbitration is a matter of contract, and the FAA requires courts to honor parties’ expectations.” The Supreme Court further ruled that “States cannot require a procedure that is inconsistent with the FAA, even if it is desirable for unrelated reasons.” After the Concepcion decision, in an employment case, the Supreme Court affirmed that class action waivers in arbitration clauses are valid and enforceable. See Epic Systems Corp. v. Lewis 138 S. Ct. 1612 (2018) (finding that arbitration agreements in employment contracts requiring individualized proceedings are enforceable).
Challenges to Arbitration Clauses Post-Concepcion
Unconscionability. In the aftermath of the Concepcion decision, plaintiff’s lawyers continued to attempt to invalidate arbitration clauses for unconscionability under state law with limited success. For example, in October 2012, both the Third and Eleventh Circuit Courts of Appeal affirmed district court orders granting defendant creditors’ motions to compel arbitration on an individual (rather than on a class-wide) basis over plaintiffs’ objections that Arbitration Clauses containing class waivers in credit card and wireless telephone service agreements were unconscionable and unenforceable. The circuit courts followed Supreme Court precedent from Concepcion. On the other hand, courts from Massachusetts to California have struggled to invalidate Arbitration Clauses on unconscionability grounds. One state court addressed the issue of whether the arbitration agreement as a whole was unenforceable as unconscionable under applicable state contract law. The majority concluded that it was indeed unenforceable as unconscionable because it was:
- Non-negotiable and difficult for consumers to understand;
- The record showed it would be unlikely for the plaintiff to be able to retain counsel to proceed individually in arbitration;
- There was considerable disparity in bargaining power;
- The substantive terms were much less fair to consumers than those of the agreement upheld in Concepcion.
Scope. Following Concepcion, Plaintiff’s lawyers continue to challenge the scope of arbitration clauses. If the arbitration clause does not encompass certain issues or individuals, then arbitration will not be compelled. White v. Sunoco, 870 F.3d 257 (3d Cir. 2017) (declining to compel arbitration when the defendant was not a signatory to an arbitration agreement).
Lack of Mutual Assent. A challenge to an arbitration provision may also arise based on a lack of assent to the provision. In order for an individual to be bound by an arbitration provision that individual must know, understand, and assent to the terms of the arbitration agreement. If an individual does not assent to the arbitration agreement, then the arbitration agreement will not be enforceable. Courts have applied this principle in a manner that is very consumer-friendly. For example, one court invalidated an arbitration provision contained in terms and conditions that could be accessed through a hyperlink. The court ruled that the hyperlink was not conspicuous because it was presented in a grey rectangular box with white text, not the commonly used blue color with underlining. Cullinane v. Uber Techs., Inc., 893 F.3d 53 (1st Cir. 2018).
In another case, a court found a lack of mutual assent when an individual was blind and could not physically read the arbitration clause. There was no evidence that the terms of the arbitration clause were read to the individual. National Federation of the Blind v. Container Store, 904 F.3d 70 (1st Cir. 2018). In sum, it is important that an individual to be aware of, and have easy access to, the arbitration agreement.
Waiver. Even if a court finds an arbitration agreement valid and binding, a party may waive its right to compel arbitration by proceeding with litigation in court. Filing a responsive pleading, engaging in discovery, and allowing a court to rule on significant issues in the case will lead a court to find the right to arbitration has been waived. Martin v. Yasuda, 829 F.3d 1118 (9th Cir. 2016) (ruling that a defendant waived arbitration by proceeding with litigation for 17 months); Forby v. One Technologies, No. 17-10883, 2018 U.S. App. LEXIS 33408 (5th Cir. Nov. 28, 2018) (finding the defendant waived arbitration by invoking arbitration after the court ruled on several key issues).
Questions of Arbitrability
When a challenge to an arbitration agreement arises, a question of who gets to resolve the challenge often arises as well. The Supreme Court determined, in Henry Schein Inc. v. White Sales, Inc., 139 S. Ct. 524 (2019), that questions of arbitrability may be resolved by an arbitrator. Therefore, it is best practice to state, in the arbitration provision, whether a judge or arbitrator decides questions of arbitrability.
Class Action Fairness Act
The federal Class Action Fairness Act of 2005 actually made it easier to file a class action if there are at least 100 class members and the total amount sued for exceeds $5 million. Jury members may have unfavorable opinions of auto dealers and may be sympathetic to the plaintiff class of consumers if the case gets to them for a decision. But the Concepcion case has made such cases more difficult to bring. If properly drafted by allowing the consumer reasonable access to a fair and inexpensive dispute resolution process and forum like the consumer-friendly clause in Concepcion, at least for now, most courts will enforce Arbitration Clauses.
