The Feds v. The States:
Whose Arbitration Policy Wins ?
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
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
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.
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
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
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.
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.
Phone: 404-888-3832; fax: