30 Jun 2011

US Supreme Court upholds arbitration clause waiving right to class actions in consumer contracts

by Paul Jammy

The US Supreme Court has held that a class-action waiver in a consumer contract's arbitration clause is enforceable

The US Supreme Court has recently determined that class-action waivers in arbitration agreements are not necessarily unconscionable and hence unenforceable (AT& T Mobility LLC v Concepcion 563 U.S. (2011)).

The consumer contract and the arbitration clause

The Concepcions sued AT&T for false advertising and fraud when the company sought to charge them $30.22 in sales tax on the retail value of a phone that had been offered for "free".

When they joined their claim to a putative class action, AT&T sought to enforce an arbitration clause in the contract between the parties, which prohibited arbitrations in a class or representative capacity.

Both the Federal District Court of Southern California and the Ninth Circuit Court refused the relief sought by AT&T. Both Courts relied on a rule developed in Discover Bank v Superior Court 36 Cal. 4th 148, 113 P. 3d 1100 (2005), which held that, in defined circumstances, class-action waivers in arbitration agreements were unconscionable, and thus unenforceable under Californian law.

AT&T appealed to the Supreme Court on the grounds that the arbitration agreement between the parties should be enforced as would any other contract, as none of the grounds for non-enforcement listed in the (California) Federal Arbitration Act (including unconscionability) were present.

The Supreme Court allowed the appeal and ruled that the Concepcions were bound by the terms of the arbitration agreement.

Conflicting public policy considerations

The Supreme Court was confronted with an apparent conflict between the public policy favouring participation in class suits on the one hand, and what the Court described as "a liberal federal policy favouring arbitration" on the other.

The former found support in Californian decisions in which contracts disallowing classwide procedures had been held to be unconscionable (see America Online Inc v Superior Ct., 90 Cal. App. 4th 1, 17-18, 108 Cal. Rptr. 2d 699, 711-713 (2001)), while the latter was reflected in the provisions of the Federal Arbitration Act (FAA).

This conflict had been resolved in favour of class suits in the Discover Bank decision and in the decisions that were the subject of the AT&T's appeal. In those decisions the courts had reasoned that §2 of the FAA recognised that arbitration agreements could be declared to be unenforceable "upon such grounds as exist at law or in equity for the revocation of any contract" - a phrase which had been interpreted by the Supreme Court in previous decisions to include unconscionability as a ground.

Arbitration clauses that had the effect of preventing class suits were unconscionable, the courts had found, because bilateral arbitration had not been shown to be an adequate substitute for the deterrent effects of class actions.

Was the term in the AT&T contract unconscionable?

The Supreme Court took no issue with the premise that unconscionable arbitration agreements should not be enforced. Its point of departure concerned whether the agreement in question (or similar prohibitions in other arbitration agreements) suffered from this defect.

Justice Scalia, writing for the majority (Chief Justice Roberts, and Justices Kennedy, Thomas and Alito, with Justice Thomas concurring), elected to base his conclusion on a comparison between bilateral arbitrations and classwide arbitrations, describing the shift from the one to the other as fundamental. He found that "[C]lasswide arbitration includes absent parties, necessitating additional and different procedures and involving higher stakes. Confidentiality becomes more difficult. And while it is theoretically possible to select an arbitrator with some expertise relevant to the class-certification question, arbitrators are not generally knowledgeable in the often-dominant procedural aspects of certification, such as the protection of absent parties."

In essence, the Court held that the principle advantages of arbitration (which were the basis for the policy behind its protection) – informality, speed, cost-efficiency and procedural simplicity – were sacrificed in class proceedings. Procedural formality was a necessity; the Court noted that the American Arbitration Association's class arbitration rules mimicked their Civil Procedure equivalents.

Lastly, the Court held that class arbitration increased the defendant's risks greatly – erroneous arbitration awards were subject to limited challenge, and while a defendant may be prepared to take that risk in a bilateral arbitration for a (comparatively) small amount, the risk was magnified in class procedures – possibly resulting in unfair pressure on defendants to settle class claims.

The Court concluded that forcing a party to accept and participate in such proceedings destroyed the consensual nature of arbitration, and was at odds with the FAA.

The minority approach

Writing for the minority of the Court (Justices Ginsburg, Sotomayor and Kagan), Justice Beyer took a different approach. The correct comparison, he wrote, was not with class arbitration, but with class litigation. The latter had clear advantages, principally in its deterrent effect, but also in that it provided a remedy for individuals such as the Concepcions, where the quantum of the claim ($30.22) meant that individual arbitrations were unfeasible.

Justice Beyer defended the Discover Bank rule, emphasising that it did not provide that all classwide proceeding waivers were unconscionable, but only those involving standard term contracts, small amounts of damages, and where the waiver clause was inserted by the party with the greater power with the deliberate intent of frustrating the claims of consumers.

Implications of the Concepcion case in the US and Australia

An equivalent of article 8 of the UNCITRAL Model Law is to be found in each of the Commercial Arbitration Acts in force throughout Australia. That article obliges a court, when faced with a dispute that is subject to an arbitration agreement, to refer the parties to arbitration unless it finds that the agreement is null and void, inoperative or incapable of being performed (see, for example, section 8 of the Commercial Arbitration Act (NSW)).

An arbitration clause restricting the parties' right to participate in class proceedings would not immediately seem to fall within any of these grounds for disqualification.

The restrictions on the inclusion of arbitration clauses in consumer (standard term) contracts that are found in certain jurisdictions (eg. EEC Directive 1993/13, which provides that the imposition of an arbitration clause may be held to invalid as an unfair term, or the Art. R132-1 of the French Consumer Code, which provides for an irrebuttable presumption that arbitration clauses in standard term contracts are abusive terms) find no ready equivalents in Australian law.

However, consumer (standard term) contracts in Australia are now subject to a statutory test for unfairness, governed by Part 2-3 of the Australian Consumer Law (ACL). Under this regime, a term in a standard form contract will be unfair if it causes a significant imbalance in the rights and obligations of the parties, is not reasonably necessary to protect the legitimate interests of a party who would be disadvantaged by the term, and it would cause detriment to a party if it was relied on or enforced (section 24). One of the examples of a term that may be unfair is a term that limits, or has the effect of limiting, one party's right to sue another party (section 25(k)).

The structure of sections 24 and 25 suggest that they are intended to apply to terms with asymmetrical effect only. It may be well be argued that the prohibition of participation in class proceedings is such a term: only the consumer is affected, the supplier will always be the respondent in such proceedings. If a challenge of the nature of that brought by the Concepcions arises under Australian law, it may be anticipated that it is these provisions that will be relied on.


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