Submitted by Mike Appleton, Guest Blogger

“All animals are equal but some animals are more equal than others.”

-George Orwell, “Animal Farm”

The Supreme Court’s decision in the Walmart class action case has understandably generated controversy for its adverse impact on the litigation of workplace discrimination claims.  But the Walmart case is not nearly as far reaching in its implications as the decision issued by the Supreme Court on April 27, 2011 in AT&T Mobility, LLC v. Concepcion, 563 U.S. _____ (2011).  The opinion in Concepcion confirms two truths.  First, Justice Antonin Scalia is firmly committed to federalism except when he isn’t.  Second, corporate America is well on its way to usurping the common law and state statutory law intended to protect the interests of aggrieved consumers.
The issue in Concepcion was whether the Federal Arbitration Act (“FAA”) preempts California case law holding that arbitration provisions are unconscionable and unenforceable if they prohibit class action arbitration. The Supreme Court held that it does and that traditional common law unconscionability analysis may not be relied upon to invalidate class action waivers in arbitration provisions.

Much of the initial reaction to the ruling has been predictable. For example, Andrew McBride and Thomas McCarthy, commenting on the Washington Legal Foundation website on April 29, 2011, hailed the decision as “a resounding win for freedom of contract.” Writing in the Huffington Post on May 19, 2011, Lawrence W. Schonbrun concluded that the opinion does not harm consumers, but serves as a much needed brake on the predations of the class action bar. But the significance of the Concepcion ruling is neither its reaffirmation of the myth of freedom of contract nor its slap at the perceived avarice of class action lawyers. Concepcion actually represents the evisceration of legislative and common law remedies for millions of consumers.

The FAA was adopted in 1925 and provides that contractual arbitration provisions are deemed to be valid, irrevocable and enforceable, “save upon such grounds as exist in law or in equity for the revocation of any contract.” Although intended principally to promote the prompt and cost effective resolution of disputes between merchants, the statute’s construction in a series of Supreme Court decisions has resulted in the proliferation of mandatory arbitration provisions in a wide range of consumer contracts, including employment agreements, credit card contracts, motor vehicle sales agreements and agreements involving consumer products and services of every kind and description. More recently, arbitration provisions have incorporated express waivers of the right to participate in class ation arbitration.

In reliance upon the savings clause in the FAA, California and a number of other states had concluded that arbitration class action waivers are unconscionable under familiar principles of contract law. The Concepcion ruling renders the FAA savings clause virtually meaningless and sounds the death knell for the doctrine of unconscionability as applied to mandatory arbitration clauses in consumer contracts. Indeed, given Justice Scalia’s extremely broad preemption analysis, Concepcion likely sounds the death knell for any state law interest that “stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress.” (slip opinion, p. 18).

The ramifications of the Concepcion decision are harmful to both consumers and to the law itself for a number of reasons. Consider the following:
1. Arbitration is an extra-judicial process. The parties forfeit the right to a jury trial and the right to judicial review of legal errors. Except in the most unusual circumstances, the decision of an arbitrator is final, regardless of the extent to which the decision may contravene established statutory and case law.
2. Consumers are at a decided disadvantage in arbitrating claims. Businesses usually have extensive arbitration experience and intimate knowledge of those arbitrators who can be expected to favor their positions. Between 1998 and 2000, the National Arbitration Forum, a prominent arbitration agency popular with businesses, earned over $5 million in fees handling approximately 50,000 cases for a single financial services company, and ruled in favor of the company over 90% of the time.
3. The expense of arbitration frequently exceeds the amount of a consumer claim, thereby discouraging their pursuit. A consumer is highly unlikely to seek arbitration of a dispute over a questioned $25.00 credit card charge. And few lawyers can afford to provide representation for such claims.
4. The growth of arbitration threatens to undermine the development of the law. The strength of the common law historically has been its ability to respond to social and economic change, to provide new remedies for new wrongs within the tradition of stare decisis. Arbitration is private law privately adjudicated. It creates neither precedent nor guidance. It is a legal black hole.
5. Arbitration eliminates the role of the jury in bringing to bear the wisdom and values of the community in the resolution of consumer disputes. It is the function of the judge to protect the integrity of the law. It is the function of lawyers to protect the integrity of due process. It is the function of juries to protect the integrity of justice. The decline in the number of trials over the past thirty years has been astonishing. Between 1962 and 2002 the percentage of federal civil cases tried by the court or by a jury has dropped from 11.5% of filed cases to just 1.8%. Trials in state courts of general jurisdiction among the 75 largest counties in the United States declined by 47% between 1992 and 2001. It cannot be said that all of the decline is attributable to arbitration, but surely the impact of mandatory arbitration has been substantial.

The trend is clear. We are seeing what amounts to the elimination of consumer protection through the imposition of extra-legal dispute resolution procedures in contracts whose terms are beyond the power of consumers to negotiate. And proposed solutions are not promising. The newly enacted Dodd-Frank bill does ban the use of pre-dispute arbitration in consumer mortgages. It also grants the new Bureau of Consumer Financial Protection (the “CFPB”) broad authority to regulate arbitration clauses in financial services contracts. But it remains to be seen what the regulations will look like and the Obama administration has not even been able to secure confirmation of someone to run the CFPB. In addition, Sen. Franken of Minnesota has reintroduced the Arbitration Fairness Act, which would prohibit the mandatory arbitration of consumer, employment and civil rights claims. This legislation was first proposed in 2007, however, and does not appear to have picked up any momentum in Congress.

Sources:
Moritz, Terry F. and Fitch, Brandon J., “The Future of Consumer Arbitration In Light of Stolt-Nielsen,” 23 Loy. Consumer L. Rev. 265 (2011); Aragaki, Hiro N., “Arbitration’s Suspect Status,” 159 U. Pa. L. Rev. 1233 (2011); Horton, David, “Arbitration as Delegation,” 86 N.Y.U. L. Rev. 437 (2011); Rutledge, Peter B., “Who Can Be Against Fairness? The Case Against the Arbitration Fairness Act,” 9 Cardozo J. Confl. Res. 267 (2008); Sternlight, Jean R., “The Rise and Spread of Mandatory Arbitration as a Substitute for the Jury Trial,” 38 U.S.F. L. Rev. 17 (2004); Alderman, Richard M., “The Future of Consumer Law in the United States-Hello Arbitration, Bye-Bye Courts, So-Long Consumer Protection (Revised),” University of Houston Public Law and Legal Theory Series 2008-A-2009 (SSRN).