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Case Watch: For Arbitrators

The Feds v. The States: Whose Arbitration Policy Wins ?

The Federal Arbitration Act, passed by Congress in 1925, established the federal policy favoring contract clauses that mandated arbitration of contract disputes.  The FAA was passed in part to overcome state judicial hostility at the time toward arbitration.  Recently, however, the number of state legal challenges to this federal policy has been increasing, particularly in consumer and employment arbitration cases.    

The most significant legal challenge to the FAA to date is a California consumer case that is pending before the U.S. Supreme Court (Concepcion v. AT&T Mobility, No. 08-56394 (9th Cir. 2010)).  The court’s decision in this case has the potential to redefine the federal government’s policy favoring arbitration and may affect state arbitration policies and laws throughout the country.      

In Concepcion, the California courts and the 9th U.S. Circuit Court of Appeals held that arbitration agreements whose provisions prohibited consumers from bringing class action lawsuits against companies were unconscionable and thus unenforceable under California law.  California public policy is based on the notion that consumer class action lawsuits are needed to prevent companies from “insulating [themselves] from wrongdoing,” according to the California Supreme Court.           

The Concepcion case highlights the growing conflict between federal and state policies around arbitration.  The legal questions posed to the U.S. Supreme Court in Concepcion are: (1) Does the FAA preempt conflicting state contract laws that comply with Section 2 of the FAA; and (2) Can state contract law on unconscionability be applied for purposes of furthering California public policy to foster class actions in order to deter commercial behavior where the ability of the parties to contract for arbitration is affected?  The overarching policy question before the Supreme Court is: whose arbitration law should prevail and why?           

Federalism and Preemption    
Federalism is a political system in which governing authority is shared between a national government and constituent states, like we have in the U.S.  Preemption occurs when federal law trumps a conflicting state law.  An issue in Concepcion is whose law trumps whose when the FAA conflicts with state law and policy.

In supporting the California policy favoring class-action lawsuits over the federal policy favoring arbitration agreements, the Concepcion courts cited the FAA itself; Section 2 states that arbitration agreements generally should be enforced, except “upon such grounds as exist at law or in equity for the revocation of any contract.”  The grounds in Concepcion were that the arbitration clause at issue violated California contract law because: 1) the clause was part of an adhesion (“take it or leave it”) contract; 2) any dispute under the contract would have involved small amounts of damages, making it difficult for consumers to hire attorneys; and (3) the company, which had the superior bargaining power, had a scheme to cheat large numbers of consumers out of small sums of money.           

The Supreme Court, on the other hand, has ruled that the federal policy favoring arbitration is to be liberally construed.  Where states have attempted to burden the right of parties to enter into arbitration agreements, the Supreme Court has ruled in a number of cases that such state actions are preempted by the FAA. See Southland Corp. v. Keating, 465 U.S. 1 (1984); Doctor’s Associates, Inc. v. Casarotto, 517 U.S. 681 (1996).  Part of the federal policy favoring arbitration is to allow parties to contract with whomever they choose about the issues they choose to submit to arbitration, including whether class actions are permitted.  See Stolt-Nielsen S.A. v. Animal Feeds Corp., 130 S. Ct. 1758 (2010).            

Several state and federal courts have confronted this conflict between federal policy on arbitration agreements and state policy on class action lawsuits.  One approach courts have taken is to balance enforcement of class action waivers against the need of consumers to obtain reasonable rights and remedies.  Where the potential size of a consumer’s recovery is small and may not include attorney fees or costs, and where it is likely that a consumer will be unable to effectively seek remedies without a class action, courts have found such waiver provisions unconscionable.  They have struck down the waiver provisions or they have declined to enforce arbitration agreements where arbitration is unlikely to yield a fair outcome.     

In the absence of the determination about fairness of outcome, however, courts have not found that class action waiver clauses in arbitration agreements are per se unconscionable.  In Georgia for example, class action waivers are not automatically deemed procedurally or substantively unconscionable.  Caley v. Gulfstream Aerospace Corp. 428 F.3d 1359 (11th Cir. 2005).  Instead the court’s focus is on whether a “remedy was effectively foreclosed because of the negligible amount of recovery when compared to the cost of bringing an arbitration action.”  Dale v. Comcast Corp., 498 F.3d 1216 (11th Cir. 2007).   In cases where a statute includes a provision for recovery of fees and costs as part of an individual’s remedy, courts have ruled that class action waivers should not be prohibited in arbitration agreements.    

Georgia Arbitrators     
While there is no statutory definition of “unconscionability” in Georgia, the term usually focuses on the making of the contract where the parties are of unequal bargaining power and the factors call into question the integrity of the process. See Yarn, Alternative Dispute Resolution , 232-235 (3rd ed. 2006).  Again, class action waivers in consumer cases are not automatically found to be unconscionable and unenforceable.  Nor is there a requirement that only courts may decide the issue.          

Georgia arbitrators who must determine the fairness or conscionability of class action waivers in consumer arbitration agreements should look to the express terms of the agreement, applicable arbitration provider rules that incorporate the most recent consumer due-process standards, and the standards outlined in the Georgia-related court cases above.    

For arbitration agreement challenges based not on fairness but on state contract law, Georgia arbitrators in consumer cases should also look to the standards found in the Consumer Due Process Protocol, originally issued in 1998 and reviewed in October 2010 under the auspices of the American Arbitration Association and the National Task Force of the Arbitration of Consumer Debt Collection Disputes.  Many ADR providers who have consumer arbitration rules have adopted the Consumer Protocol.         

Who Will Win?
The outcome of Concepcion is likely to provide further interpretation guidance on the interplay of Section 2 and the application of preemption under federal policy.  If the Supreme Court’s decision supports California’s intervention in the contracting and arbitration process, that may be a signal of a significant shift in the federal policy favoring arbitration.  It may also signal the court’s recognition that state policies designed to deter bad commercial conduct have a legitimate role in determining if an arbitration clause is conscionable and enforceable or not.  The decision is due shortly.   


John Allgood is of counsel at Ford & Harrison.  For more than 20 years he has arbitrated and mediated cases in commercial, employment, construction and securities law, as well as in real estate and anti-trust matters.  An adjunct professor of ADR at Emory University School of Law, he was a member of the U.S. Olympic Committee panel of arbitrators during the 1996 and 1998 Olympic Games.

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