U.S. S. Ct. Issues Concepcion Decision; Holds that California’s Discover Bank rule is Pre-empted by the Federal Arbitration Act

The United States Supreme Court issued its 5-4 opinion in AT&T v. Concepcion today, holding that the Federal Arbitration Act pre-empts California’s Discover Bank rule.  Justice Scalia authored the opinion, joined by justices Roberts, Kennedy, Thomas, and Alito.  Justices Breyer, Ginsburg, Sotomayor, and Kagan dissented.  A copy of the opinion can be found here, but the syllabus summarizes the Court’s holding as follows [with citations omitted]:

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 pre-empted by the FAA.

(a)  Section 2 reflects a “liberal federal policy favoring arbitration,” and the “fundamental principle that arbitration is a matter of contract.”  Thus, courts must place arbitration agreements on an equal footing with other contracts, and enforce them according to their terms. Section 2’s saving clause permits agreements to be invalidated by “generally applicable contract defenses,” but not by defenses that apply only to arbitration or derive their meaning from the fact that an agreement to arbitrate is at issue.

(b) In Discover Bank, the California Supreme Court held that class waivers in consumer arbitration agreements are unconscionable if the agreement is in an adhesion contract, disputes between the par-ties are likely to involve small amounts of damages, and the party with inferior bargaining power alleges a deliberate scheme to defraud. 

(c) The Concepcions claim that the Discover Bank rule is a ground that “exist[s] at law or in equity for the revocation of any contract” under FAA §2. When state law prohibits outright the arbitration of a particular type of claim, the FAA displaces the conflicting rule. But the inquiry is more complex when a generally applicable doctrine is alleged to have been applied in a fashion that disfavors or interferes with arbitration. Although §2’s saving clause preserves generally applicable contract defenses, it does not suggest an intent to preserve state-law rules that stand as an obstacle to the accomplishment of the FAA’s objectives.  The FAA’s overarching purpose is to ensure the enforcement of arbitration agreements according to their terms so as to facilitate informal, streamlined proceedings. Parties may agree to limit the issues subject to arbitration, to arbitrate according to specific rules, and to limit with whom they will arbitrate, Stolt-Nielsen, supra. 

(d)  Class arbitration, to the extent it is manufactured by Discover Bank rather than consensual, interferes with fundamental attributes of arbitration. The switch from bilateral to class arbitration sacrifices arbitration’s informality and makes the process slower, more costly, and more likely to generate procedural morass than final judgment. And class arbitration greatly increases risks to defendants. The absence of multi-layered review makes it more likely that errors will go uncorrected. That risk of error may become unacceptable when damages allegedly owed to thousands of claimants are aggregated and decided at once. Arbitration is poorly suited to these higher stakes. In litigation, a defendant may appeal a certification decision and a final judgment, but 9 U. S. C. §10 limits the grounds on which courts can vacate arbitral awards. 

Reversed and remanded.

Commentary from the Plaintiffs’ bar and regulatory agencies was swift, as consumer arbitration moves into the regulatory arena following the passage of Dodd-Frank.

A Dodd-Frank provision permits the Consumer Financial Protection Bureau (CFPB) to revisit the issue, and potentially opt to restrict arbitration pacts in the future. “I think consumer advocates will certainly turn to the CFPB in the wake of the ruling,” says former deputy comptroller at the Office of the Comptroller of the Currency Jo Ann Barefoot. “Mandatory arbitration has been a top complaint of consumer groups for years and they clearly hope the bureau will curtail or regulate the practice.” Dodd-Frank mandates that the CFPB examine and supply to Congress a report on the use of mandatory arbitration agreements in association with consumer financial products. It also permits the CFPB to issue rules that may “prohibit or impose conditions” on the use of arbitration agreements if the study determines that it would be in the public interest and would protect consumers. Under the provision, the CFPB would be disallowed from barring or restricting a consumer from entering into a voluntary arbitration agreement with a business after a dispute has come up.