California law favors class actions. So much so that Golden State courts have struck down class-action bans that show up in consumer contracts whether they apply to lawsuits, Discover Bank v. Superior Court of Los Angeles, 113 P.2d 1100 (Cal. 2005), or arbitration cases, America Online v. Superior Court, 108 Cal. Rptr. 2d 699 (Cal. App. 2001). And federal courts applying California law in the Ninth Circuit have followed suit.
But it may not last. The biggest threat to California's stance took center stage at the the U.S. Supreme Court on November 9. The Court heard argument that morning in AT&T Mobility, LLC v. Concepcion, No. 09-893 (U.S.), a case from the Ninth Circuit, where AT&T lost. The company hopes to beat the court of appeals ruling by claiming that California's distaste for bans on class actions tilts the playing field against arbitration. That, AT&T asserts, defeats section 2 of the federal Arbitration Act, which section states that courts must enforce arbitration agreements "save upon such grounds as exist at law or in equity for the revocation of any contract". Section 2, in the AT&T view, preempts the California rule.
The UCL Practitioner's Kimberly Kralowec posted links to news reports and scholarly-esque reactions to the argument in Concepcion the day after. Most opiners -- make that all opiners -- opined that the hour went better for the class action favorers than they'd expected and that the Concepcions stand a decent chance of winning.
Blawgletters sees more cause for doubt.
The transcript of the argument suggests to us four justices in favor of upholding California's approach and three against. Justices Breyer, Ginsburg, Kagan, and Sotomayor all asked questions that imply a simple view of the main issue: California's rule that both lawsuits and arbitrations must make class actions an option proves the absence of bias against arbitration. Questions by Chief Justice Roberts and Justices Alito and Scalia, on the other hand, suggest that they believe California only pretends at using neutral rules, which in fact stack the deck against arbitration.
Justice Thomas, who said nothing, as he always does, may go for the Concepcion's federalism tack, which asserts that the Court should avoid holding that federal law preempts state law. Our friend Paul Bland watched the session live and said that in his silent way Justice Thomas seemed downright lively. Bland added that, despite his conservative bent, Justice Thomas just might supply the fifth vote in favor of keeping the California rule.
That leaves Justice Kennedy. What does he think? He said these things:
[During the argument of AT&T's lawyer]
But it seems to me that all State -- most State statutes pertaining to contracts pertain to a class that is not entirely universal. Suppose that a State had a statute referring to banks, contracts with banks. That doesn't apply to all contracts. It doesn't apply to railroads. But we know that it applies to a class that generally includes both arbitration and non-arbitration. And that's this case, because there can be a class action rule with respect to litigation and class action rules with respect to arbitration. So you have to have some rule that recognizes that you don't have to have the entire universe of contracts. And I'm not quite sure what your test is. You have a few of them in your brief.
[During the argument of the Concepcions' lawyer]
Suppose that this doesn't have what's called a blowout clause. Suppose that that kind of clause was not in there. And the consumer opts out of the arbitration [and chooses to try his or her claim on a class basis]. Arbitration [on a class basis] doesn't -- doesn't go well. Anyway, can the consumer then insist on the arbitration that the consumer bargained for, the individual arbitration that the consumer bargained for?
So then the bank has to have -- liability exposure for two different proceedings?
* * * *
But you are saying then California can say it's unconscionable to allow the parties to agree that there will be just the single arbitration proceedings? I don't see how the third parties are necessarily protected. If you say that the consumer still has the election, that certainly isn't what they bargained for. Maybe I'm -- maybe that's just a quarrel with the content of the unconscionability standard.
Rather than the FAA [federal Arbitration Act], but I think it does bear on at least section 4 of the FAA. [Section 4 provides that a party to an arbitration agreement has the right to ask a court to order arbitration "in the manner provided for" in the parties' contract.]
* * * *
If you stick with the theory that the test is whether or not the law in question is inconsistent with the idea of arbitration -- whose idea of arbitration? What about, suppose it's the bank's idea of arbitration, that we -- we want this settlement, say; we do not want that; that's the bank's idea of arbitration that the parties agreed on.
If you think Justice Kennedy's remarks leave you guessing at how he views the case, we join you. But he did question the Concepcions' lawyer more, and the questions he posed did seem hostile to the simple view that the neutrality of the California rule -- no class-action bans in court or in arbitration -- resolves the case.
The outcome may pivot, as outcomes so often do in this Court, on Justice Kennedy's thoughts. We can't read them and will likely have to wait for at least a few months, maybe even until the end of the Court's term in June 2011.
And yet this time Justice Thomas may become the spoiler. We look forward to the Court's ruling.
Let's not forget who to blame first: Congress. Courts were and are rightly biased against arbitration, since the vast majority of arbitration clauses are tucked into consumer contracts of adhesion, not in arm's-length bargaining. Congress should kill the FAA and get out of state contract law.
The odds of that happening? Zero. But let's not forget who caused this mess.
Posted by: Max Kennerly | November 14, 2010 at 01:11 PM