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On April 27, 2011, the United States Supreme Court issued a decision in AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011), which will have significant impacts on the prevalence of class-based claims arising out of contracts with consumers. In Concepcion, the plaintiffs brought a putative class action against AT&T, asserting claims for false advertising and fraud in connection with a cellular telephone agreement. The telephone services contract between the parties provided that all disputes arising out of the contract be brought by individual arbitration and explicitly banned class actions. The plaintiffs argued that the arbitration provision's ban on class-wide proceedings was unconscionable and, thus, unenforceable under California law. The Supreme Court disagreed and, in a 5-4 decision, held that the Federal Arbitration Act (FAA) preempts state laws that void class-action waivers for reasons of state public policy concerns, including unconscionability.
In the months since Concepcion, the majority of courts that have confronted arbitration provisions in consumer contracts that prohibit class actions have upheld them. However, a few decisions distinguished Concepcion and placed restrictions on its application. We examine the post-Concepcion landscape and offer guidance on how best to take advantage of the protections afforded by the Supreme Court's ruling.
The Post-Concepcion Landscape
Nearly every federal court that has addressed arbitration provisions that restrict class-based claims since Concepcion has enforced them. In so doing, the courts have rejected a range of arguments attempting to distinguish the Supreme Court's decision. For example, in Cruz v. Cingular Wireless LLC, 2011 U.S. App. LEXIS 16811 (11th Cir. Aug. 11, 2011), the U.S. Court of Appeals for the Eleventh Circuit affirmed an order compelling the arbitration of claims pertaining to the same wireless service agreement that was at issue in Concepcion. 2011 U.S. App. LEXIS 16811 at *17'18. The Cruz plaintiffs attempted to escape Concepcion's application by presenting testimony from three attorneys who stated that they would not represent the plaintiffs on an individual basis because it would not be cost-effective. Id. at *27'*28. In addition, the plaintiffs submitted statistical evidence purporting to show that an “infinitesimal percentage” of AT&T's customers sought to arbitrate disputes against AT&T. Id. On that basis, the Cruz plaintiffs argued that enforcement of the arbitration provision effectively prohibited their ability to pursue valid claims in violation of Florida law. Id.
While the Eleventh Circuit noted that the additional evidence adduced by the Cruz plaintiffs presented a record different from what was presented in Concepcion, the court nevertheless found the substance of the plaintiffs' arguments to be the same as those rejected by the Supreme Court. Id. at *28. The court stated, in particular, that, “[t]he Plaintiffs' evidence goes only to substantiating the very public policy arguments that were expressly rejected by the Supreme Court in Concepcion ' namely, that the class-action waiver will be exculpatory, because most of these small-value claims will go undetected and unprosecuted.” Id. The Eleventh Circuit further noted that “the Plaintiffs here do not allege any defects in the formation of the contract, aside from its generally adhesive nature, which alone is insufficient to invalidate a consumer contract.” Id. at *31.
Similarly, in Day v. Persels Assoc. LLC, 2011 U.S. Dist. LEXIS 49231 (M.D. Fla. May 9, 2011) the United States District Court for the Middle District of Florida enforced an arbitration provision, despite arguments from the plaintiffs that they had attempted to cancel the agreement shortly after entering into it and that the agreement language was filled with “legal jargon” that did not explain what the arbitration process entailed. 2011 U.S. Dist. LEXIS 49231 at *19-*20. The court concluded that the plaintiffs' cancellation of the agreement did not alter the effect of the arbitration provision. In addition, the court found that the arbitration “provision explains, among other things, that any claim or dispute must be resolved by binding arbitration; that the arbitrator will only resolve claims or disputes between the plaintiff and the company and its representatives; and that '[t]he arbitrator's findings, reasoning, decision, and award must be in writing and must be based upon and consistent with the law of the jurisdiction that applies to the agreement,' which is the jurisdiction where the plaintiff lives. These details sufficiently inform the plaintiff of the nature of arbitration. Consequently, it is not good enough simply to say in general that the language was not clear and she did not understand it.” Id. at *20; see also Zarandi v. Alliance Data Systems Corp., 2011 U.S. Dist. LEXIS 54602 (May 9, 2011 C.D. Cal.) (upholding an arbitration provision and finding no merit to the plaintiff's argument that she had not read the contract terms and conditions upon entering into it).
While Cruz and Day appear to be strong signals that Concepcion's protections will be applied broadly, a few recent decisions also demonstrate that Concepcion's application is not without limits. For example, in NAACP of Camden County East v. Foulke Management Corp., 2011 N.J. Super. LEXIS 151 (App. Div. Aug. 2, 2011), the plaintiff challenged several arbitration provisions contained in “various form documents” she signed in connection with the purchase of a car from an automobile dealership, at least one of which provided that the plaintiff waived her right to participate in any class action against the dealership. The trial court dismissed the plaintiff's lawsuit, holding that the arbitration clauses at-issue “did not violate public policy and were thus enforceable.” Id. at *24. Plaintiff appealed the trial court's decision while Concepcion was pending, and the New Jersey Appellate Division reversed. Id.
Relying heavily upon Justice Thomas's concurrence in Concepcion, the Appellate Division found that an arbitration clause must be viewed in its “totality” and, if the clause is “plagued” with confusing or inconsistent terms that fail “to put a reasonable consumer on fair notice of [its] intended meaning,” the clause should be found unenforceable. Ultimately, the Appellate Division concluded that the arbitration provision suffered from these infirmities and was unenforceable because the documents the plaintiff signed contained multiple arbitration provisions that were conflicting with respect to issues of “venue, arbitrators' credentials, time limitations, costs and class waivers.” Id. at *49.
The Northern District of California's decision in Arellano v. T-Mobile USA, 2011 U.S. Dist. LEXIS 52142 (N.D. Cal. May 16, 2011), is also noteworthy. There, the court enforced an arbitration provision based upon the tenets of Concepcion; however, it suggested in dicta that Concepcion's application may be limited to cases filed in federal court and may not bind state court judges. 2011 U.S. Dist. LEXIS 52142 at *6.
Crafting Arbitration Provisions: A Practical Guide
With the post-Concepcion decisions as a backdrop, several considerations are worth taking into account to best take advantage of Concepcion's protections. To mitigate any argument that Concepcion does not apply to state court proceedings, counsel should be careful to refer to the FAA when crafting an arbitration provision. Similarly, counsel should consider including a reference in the arbitration provision to a specific set of arbitration rules, which adds further credence to parties' intent to arbitrate any conflicts.
One such set of rules is that of the American Arbitration Association's (“AAA”) governing “Consumer-Related Disputes.” See Consumer-Related Disputes Supplementary Procedures, American Arbitration Association, www.adr.org/sp.asp?id=22014 (last visited Nov. 10, 2011). Notably, the Consumer Procedures, which are distinct from AAA's commercial arbitration procedures, seek to streamline the arbitration process and minimize litigation expenses with a combination of limited discovery and written submissions to the arbitrator without a requirement of live evidentiary hearings (although parties may request a hearing if they so desire). In addition, the Consumer Procedures require the company to subsidize some of the arbitration-related expenses. However, in consumer cases, the arbitrator and case administration fees tend to be substantially less than those in cases litigated under AAA's Commercial Rules. Moreover, the Consumer Procedures are much more aligned with the smaller amounts in controversy that are typically at issue in most consumer disputes.
If a party chooses to adopt the AAA Consumer Procedures, counsel should be aware that, before accepting a claim, the AAA performs an initial assessment of the arbitration provision to evaluate whether adequate “due process” has been afforded to the consumer under the AAA's “Consumer Due Process Protocol.” Consumer Due Process Protocol, American Arbitration Association, www.adr.org//index.asp (last visited Nov. 10, 2011). The Due Process Protocol sets forth 15 principles that AAA applies in making its assessment and includes tenets such as neutral and competent arbitrators; a right to representation; and a process that is “fundamentally fair,” imposes “reasonable costs,” and provides for the exchange of information between parties. Generally speaking, most of these criteria should be satisfied simply by adopting the AAA Consumer Procedures. In addition, the protocol requires that the company provide basic information to the consumer about the arbitration process, including the fact that:
the arbitration is binding and the parties give up their rights to pursue claims in a court of law; the arbitration process tends to be “simpler” and “more limited” than those of a court; and the arbitrator's decision is enforceable and that their opportunity for “appellate” review is limited.
In addition, AAA also urges the company to provide contact information to consumers (either by way of a website address or a phone number for arbitration organizations, such as AAA) so the customer can obtain more information about the arbitration process. This information may be conveyed in the form of prominently displayed text within the agreement itself or in a separate notice provided to the customer. A suggested form appears in the Due Process Protocol. Consumer Due Process Protocol, at pp. 21-22.
Organizations such as JAMS, The Resolution Experts (formerly Judicial Arbitration and Mediation Services, Inc.) have also adopted standards for consumer cases that are similar to the AAA Consumer Protocol. Consumer Arbitration Minimum Standards, JAMS Arbitration, Mediation, and ADR Services, www.jamsadr.com/consumer-arbitration (last visited Sept. 1, 2011). Of course, the choice between AAA, JAMS, or another organization that provides arbitration administration services is often a function of a variety of factors and may come down to personal preference. Regardless of what organization one chooses, however, it is advisable to adhere to the principles stated in the AAA Consumer Protocol. Aside from ensuring that an administrative organization will accept a claim in which that protocol was used, compliance with these principles will mitigate against any arguments challenging the enforceability of the arbitration provision, such as those asserted in Foulke Management.
Conclusion
The last several decades have witnessed a steady increase in the number of consumer class actions, particularly those brought under state consumer protection statutes that allow for the recovery of attorneys' fees and double or treble damages. Litigation costs are often prohibitive and, very often, drive these cases toward settlement if early dispositive motions or oppositions to class certification are not successful.
Concepcion certainly has its dissenters, and separate bills have been introduced in the Senate and the House to make amendments to the FAA that would overturn the decision. So far, however, those bills have not gained traction and, while Concepcion is in effect, the decision affords an opportunity to avoid the class-action morass. To best take advantage of Concepcion's protections, counsel should be thoughtful and precise when drafting any arbitration provision, keeping in mind principles such as those stated in AAA's Consumer Due Process Protocol, to increase the likelihood of enforceability and avoid the deficiencies found in Foulke Management.
J. Christopher Allen, Jr., is a partner with Nixon Peabody LLP, resident in the firm's Boston office. Brian C. Avello is an associate in the Jericho, NY, office, and Sara E. Farber is an associate in Boston. All are with the Products: Class Action, Trade, & Industry Representation Group.
On April 27, 2011, the United States Supreme Court issued a decision in
In the months since Concepcion, the majority of courts that have confronted arbitration provisions in consumer contracts that prohibit class actions have upheld them. However, a few decisions distinguished Concepcion and placed restrictions on its application. We examine the post-Concepcion landscape and offer guidance on how best to take advantage of the protections afforded by the Supreme Court's ruling.
The Post-Concepcion Landscape
Nearly every federal court that has addressed arbitration provisions that restrict class-based claims since Concepcion has enforced them. In so doing, the courts have rejected a range of arguments attempting to distinguish the Supreme Court's decision. For example, in Cruz v. Cingular Wireless LLC, 2011 U.S. App. LEXIS 16811 (11th Cir. Aug. 11, 2011), the U.S. Court of Appeals for the Eleventh Circuit affirmed an order compelling the arbitration of claims pertaining to the same wireless service agreement that was at issue in Concepcion. 2011 U.S. App. LEXIS 16811 at *17'18. The Cruz plaintiffs attempted to escape Concepcion's application by presenting testimony from three attorneys who stated that they would not represent the plaintiffs on an individual basis because it would not be cost-effective. Id. at *27'*28. In addition, the plaintiffs submitted statistical evidence purporting to show that an “infinitesimal percentage” of
While the Eleventh Circuit noted that the additional evidence adduced by the Cruz plaintiffs presented a record different from what was presented in Concepcion, the court nevertheless found the substance of the plaintiffs' arguments to be the same as those rejected by the Supreme Court. Id. at *28. The court stated, in particular, that, “[t]he Plaintiffs' evidence goes only to substantiating the very public policy arguments that were expressly rejected by the Supreme Court in Concepcion ' namely, that the class-action waiver will be exculpatory, because most of these small-value claims will go undetected and unprosecuted.” Id. The Eleventh Circuit further noted that “the Plaintiffs here do not allege any defects in the formation of the contract, aside from its generally adhesive nature, which alone is insufficient to invalidate a consumer contract.” Id. at *31.
Similarly, in Day v. Persels Assoc. LLC, 2011 U.S. Dist. LEXIS 49231 (M.D. Fla. May 9, 2011) the United States District Court for the Middle District of Florida enforced an arbitration provision, despite arguments from the plaintiffs that they had attempted to cancel the agreement shortly after entering into it and that the agreement language was filled with “legal jargon” that did not explain what the arbitration process entailed. 2011 U.S. Dist. LEXIS 49231 at *19-*20. The court concluded that the plaintiffs' cancellation of the agreement did not alter the effect of the arbitration provision. In addition, the court found that the arbitration “provision explains, among other things, that any claim or dispute must be resolved by binding arbitration; that the arbitrator will only resolve claims or disputes between the plaintiff and the company and its representatives; and that '[t]he arbitrator's findings, reasoning, decision, and award must be in writing and must be based upon and consistent with the law of the jurisdiction that applies to the agreement,' which is the jurisdiction where the plaintiff lives. These details sufficiently inform the plaintiff of the nature of arbitration. Consequently, it is not good enough simply to say in general that the language was not clear and she did not understand it.” Id. at *20; see also Zarandi v.
While Cruz and Day appear to be strong signals that Concepcion's protections will be applied broadly, a few recent decisions also demonstrate that Concepcion's application is not without limits. For example, in NAACP of Camden County East v. Foulke Management Corp., 2011 N.J. Super. LEXIS 151 (App. Div. Aug. 2, 2011), the plaintiff challenged several arbitration provisions contained in “various form documents” she signed in connection with the purchase of a car from an automobile dealership, at least one of which provided that the plaintiff waived her right to participate in any class action against the dealership. The trial court dismissed the plaintiff's lawsuit, holding that the arbitration clauses at-issue “did not violate public policy and were thus enforceable.” Id. at *24. Plaintiff appealed the trial court's decision while Concepcion was pending, and the New Jersey Appellate Division reversed. Id.
Relying heavily upon Justice Thomas's concurrence in Concepcion, the Appellate Division found that an arbitration clause must be viewed in its “totality” and, if the clause is “plagued” with confusing or inconsistent terms that fail “to put a reasonable consumer on fair notice of [its] intended meaning,” the clause should be found unenforceable. Ultimately, the Appellate Division concluded that the arbitration provision suffered from these infirmities and was unenforceable because the documents the plaintiff signed contained multiple arbitration provisions that were conflicting with respect to issues of “venue, arbitrators' credentials, time limitations, costs and class waivers.” Id. at *49.
The Northern District of California's decision in Arellano v. T-Mobile USA, 2011 U.S. Dist. LEXIS 52142 (N.D. Cal. May 16, 2011), is also noteworthy. There, the court enforced an arbitration provision based upon the tenets of Concepcion; however, it suggested in dicta that Concepcion's application may be limited to cases filed in federal court and may not bind state court judges. 2011 U.S. Dist. LEXIS 52142 at *6.
Crafting Arbitration Provisions: A Practical Guide
With the post-Concepcion decisions as a backdrop, several considerations are worth taking into account to best take advantage of Concepcion's protections. To mitigate any argument that Concepcion does not apply to state court proceedings, counsel should be careful to refer to the FAA when crafting an arbitration provision. Similarly, counsel should consider including a reference in the arbitration provision to a specific set of arbitration rules, which adds further credence to parties' intent to arbitrate any conflicts.
One such set of rules is that of the American Arbitration Association's (“AAA”) governing “Consumer-Related Disputes.” See Consumer-Related Disputes Supplementary Procedures, American Arbitration Association, www.adr.org/sp.asp?id=22014 (last visited Nov. 10, 2011). Notably, the Consumer Procedures, which are distinct from AAA's commercial arbitration procedures, seek to streamline the arbitration process and minimize litigation expenses with a combination of limited discovery and written submissions to the arbitrator without a requirement of live evidentiary hearings (although parties may request a hearing if they so desire). In addition, the Consumer Procedures require the company to subsidize some of the arbitration-related expenses. However, in consumer cases, the arbitrator and case administration fees tend to be substantially less than those in cases litigated under AAA's Commercial Rules. Moreover, the Consumer Procedures are much more aligned with the smaller amounts in controversy that are typically at issue in most consumer disputes.
If a party chooses to adopt the AAA Consumer Procedures, counsel should be aware that, before accepting a claim, the AAA performs an initial assessment of the arbitration provision to evaluate whether adequate “due process” has been afforded to the consumer under the AAA's “Consumer Due Process Protocol.” Consumer Due Process Protocol, American Arbitration Association, www.adr.org//index.asp (last visited Nov. 10, 2011). The Due Process Protocol sets forth 15 principles that AAA applies in making its assessment and includes tenets such as neutral and competent arbitrators; a right to representation; and a process that is “fundamentally fair,” imposes “reasonable costs,” and provides for the exchange of information between parties. Generally speaking, most of these criteria should be satisfied simply by adopting the AAA Consumer Procedures. In addition, the protocol requires that the company provide basic information to the consumer about the arbitration process, including the fact that:
the arbitration is binding and the parties give up their rights to pursue claims in a court of law; the arbitration process tends to be “simpler” and “more limited” than those of a court; and the arbitrator's decision is enforceable and that their opportunity for “appellate” review is limited.
In addition, AAA also urges the company to provide contact information to consumers (either by way of a website address or a phone number for arbitration organizations, such as AAA) so the customer can obtain more information about the arbitration process. This information may be conveyed in the form of prominently displayed text within the agreement itself or in a separate notice provided to the customer. A suggested form appears in the Due Process Protocol. Consumer Due Process Protocol, at pp. 21-22.
Organizations such as JAMS, The Resolution Experts (formerly Judicial Arbitration and Mediation Services, Inc.) have also adopted standards for consumer cases that are similar to the AAA Consumer Protocol. Consumer Arbitration Minimum Standards, JAMS Arbitration, Mediation, and ADR Services, www.jamsadr.com/consumer-arbitration (last visited Sept. 1, 2011). Of course, the choice between AAA, JAMS, or another organization that provides arbitration administration services is often a function of a variety of factors and may come down to personal preference. Regardless of what organization one chooses, however, it is advisable to adhere to the principles stated in the AAA Consumer Protocol. Aside from ensuring that an administrative organization will accept a claim in which that protocol was used, compliance with these principles will mitigate against any arguments challenging the enforceability of the arbitration provision, such as those asserted in Foulke Management.
Conclusion
The last several decades have witnessed a steady increase in the number of consumer class actions, particularly those brought under state consumer protection statutes that allow for the recovery of attorneys' fees and double or treble damages. Litigation costs are often prohibitive and, very often, drive these cases toward settlement if early dispositive motions or oppositions to class certification are not successful.
Concepcion certainly has its dissenters, and separate bills have been introduced in the Senate and the House to make amendments to the FAA that would overturn the decision. So far, however, those bills have not gained traction and, while Concepcion is in effect, the decision affords an opportunity to avoid the class-action morass. To best take advantage of Concepcion's protections, counsel should be thoughtful and precise when drafting any arbitration provision, keeping in mind principles such as those stated in AAA's Consumer Due Process Protocol, to increase the likelihood of enforceability and avoid the deficiencies found in Foulke Management.
J. Christopher Allen, Jr., is a partner with
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