Guest Post Part I | AT&T Mobility LLC v. Concepcion: Can Discover Bank Withstand Stolt-Nielsen Scrutiny?

by Philip J. Loree Jr.

Part I: Introduction

Virtually every year the United States Supreme Court’s docket features a number of politically-charged, controversial cases, plus some run-of-the-mill ones that do not inspire much in the way of intensive, ideological debate. Generally the Court’s arbitration-related cases fall into this latter category, though last term saw the Court decide 5-3 and 5-4 along ideological lines two politically controversial ones: Stolt-Nielsen, S.A. v. AnimalFeeds, Inc., 559 U.S. ___, 130 S. Ct. 1758 (2010); and Rent-A-Center West v. Jackson, 561 U.S. ___, 130 S. Ct. 2772 (2010).

This Tuesday the Court will hear oral argument in the one Federal-Arbitration-Act-related case it has thus far agreed to hear this term: AT&T Mobility LLC v. Concepcion, No. 09-893. And while AT&T Mobility may be the only Federal Arbitration Act case before the Court this term, it is probably more controversial than Stolt-Nielsen and Rent-A-Center combined.

The question before the Court is whether the Federal Arbitration Act preempts California’s Discover Bank rule, which renders a class-action or class-arbitration waiver unenforceable on unconscionability grounds if it:

[1]. . . [Is] found in a consumer contract of adhesion

[2] in a setting in which disputes between the contracting parties predictably involve small amounts of damages, and

[3] when it is alleged that the party with the superior bargaining power has carried out a scheme to deliberately cheat large numbers of consumers out of individually small sums of money.

Discover Bank v. Superior Ct., 36 Cal.4^th 148, 162-63 (2005).

The preemption question before the Supreme Court raises two subissues: (1) whether Section 2 of the Federal Arbitration Act expressly preempts the Discover Bank rule; and (2) whether the Federal Arbitration Act impliedly preempts the rule. The express preemption question turns on the language of Section 2, which declares all arbitration agreements within its scope to be “valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” 9 U.S.C. § 2. Section 2 establishes substantive federal law that expressly preempts all conflicting state law, except for state law that permits “the revocation of any contract” or governs the formation, interpretation, or construction of contracts generally. State laws that discriminate against arbitration agreements are preempted by Section 2.

If the Supreme Court finds that the Discover Bank rule is simply an application of California law on unconscionability and exculpatory contracts, then it will hold that the Discover Bank rule is not expressly preempted by Section 2. But if it finds that the Discover Bank rule is not really a rule that applies to all contracts generally, but principally to arbitration agreements, then it will find that the rule discriminates against arbitration agreements in violation of Section 2.

But if the Supreme Court finds that the Federal Arbitration Act does not expressly preempt the Discover Bank rule, it must also consider whether the Federal Arbitration Act impliedly preempts the rule. One type of implied preemption is known as “conflict preemption,” which “exists if compliance with both state and federal law is impossible or where state law stands as an obstacle to the accomplishment and execution of the full purposes of Congress.” Shroyer v. New Cingular Wireless Serv., Inc., 498 F.3d 976, 988 (9^th Cir. 2007) (citations and quotations omitted). State laws or policies that undermine “the goals and policies of the FAA” are thus preempted by the Act. Volt Info. Sciences, Inc. v. Board of Trustees of Leland Stanford Univ., 489 U.S. 468, 477-78 (1990). If the Court finds that the compliance with both the Federal Arbitration Act and the Discover Bank rule is impossible, or application of the rule would frustrate the purposes and intent of the Federal Arbitration Act, then it will find that the Act impliedly preempts Discover Bank.

Our focus in this multi-part guest post will be on the extent to which Stolt-Nielsen bears on the preemption questions before the Court, and in particular, what (if anything) we can glean from the upcoming oral argument about those questions. If you are an arbitration fanatic (thankfully, a rare breed), then you are surely planning to download and read the oral argument transcript as soon as it becomes available (usually about 4:00 p.m. on the day of argument, here). But whether or not you’re planning to do that, reflect on this:

Stolt-Nielsen was the product of a sharply divided Court. Associate Justice Samuel J. Alito, Jr. wrote the majority opinion, which was joined in by Chief Justice John G. Roberts, Jr. and Associate Justices Antonin G. Scalia, Anthony M. Kennedy and Clarence Thomas. Associate Justice Ruth Bader Ginsburg, joined by Associate Justices John Paul Stevens and Steven G. Breyer, dissented. Associate Justice Sonia M. Sotomayor did not participate in the decision, and Associate Justice Elena Kagan has, of course, replaced the now-retired Justice Stevens.

The five Justices that formed the majority in Stolt-Nielsen are presumably the ones most likely to vote for reversal of the Ninth Circuit in AT&T Mobility. Stolt-Nielsen dissenters Justices Ginsburg and Breyer are unlikely to accord that decision much, if any, weight. And even though we cannot predict with any reasonable certainty whether Associate Justices Sotomayor and Kagan are likely to consider Stolt-Nielsen as controlling the outcome in AT&T Mobility, we suspect that they are probably more likely to favor allowing California apply its Discover Bank rule in Federal Arbitration Act cases.

The Stolt-Nielsen majority, however, does not speak with one voice when it comes to implied preemption. Justice Thomas does not believe that the judicial doctrine of implied preemption is constitutional. According to his concurring opinion in Wyeth v. Levine, 555 U.S. ___, 129 S. Ct. 1187 (2009), “implied pre-emption doctrines that wander far from the statutory text are inconsistent with the Constitution. . . .” 129 S. Ct. at 1205 (Thomas, J., concurring). Moreover, he believes that the Federal Arbitration Act does not apply in state court, and, while AT&T Mobility was brought in federal court, that suggests he favors a more deferential approach to state law in Federal Arbitration Act cases. See, e.g., Buckeye Check Cashing, Inc. v. Cardegna, 546 US 440 (2006) (Thomas, J., dissenting) (“[I]n state-court proceedings, the FAA cannot be the basis for displacing a state law that prohibits enforcement of an arbitration clause contained in a contract that is unenforceable under state law.”).

All of this means that it is doubtful whether five Justices will support reversal of the Ninth Circuit on implied preemption grounds. But, as we shall see, Stolt-Nielsen supports not only an implied preemption finding, but also one based on express preemption.

One final thought pending Tuesday’s oral argument: If I were representing the Concepcions in this case, I would make sure, among other things, that I could respond intelligently to questions like these:

1. Suppose there was no class waiver in this case and the arbitration agreement was silent on whether the parties agreed to class arbitration. And suppose also that the District Court had compelled bilateral arbitration. Would you have any argument that AT&T Mobility’s arbitration agreement was unconscionable under those facts, and, if so what would that argument be?

2. [If answer to No. 1. is “yes.”]

a. Am I correct, then, that Discover Bank rule applies not only to class waivers, but also to arbitration agreements that do not contain class waivers and are silent on class arbitration?

b. So the Discover Bank rule requires parties to affirmatively consent to class arbitration if they wish to arbitrate cases where a consumer alleges small-dollar, but widespread fraud?

c. If the Federal Arbitration Act governs, and Discover Bank does not, then a district court could not compel class arbitration where, as in our hypothetical here, the contract is silent on class proceedings, correct?

3. [If answer to No. 1 is “no.”]

a. Assume that AT&T Mobility’s agreement did not have a non-severability provision. If that were the case, and the Court ruled that the Federal Arbitration Act does not preempt the Discover Bank rule, then that means the class waiver is excised from the contract, right?

b. And we’re left with an arbitration agreement that’s silent, correct?

c. That means the Court cannot compel class arbitration, correct?

d. So if the Court is going to implement the purpose of the Discover Bank rule, then it has to throw out the whole arbitration agreement, correct?

e. [Ask questions No. 2.a. and 2.b.]

4. Suppose there was no arbitration agreement in the parties’ contract, but there was a forum selection clause that required the dispute to be resolved in the courts of State X under the laws of State X. The contract is silent as respects class proceedings.

a. Would the forum selection clause be enforceable under the Discover Bank rule on those facts?

b. So in this scenario the Discover Bank rule would not require the parties to affirmatively consent to class proceedings, correct?

These are just samples of the types of questions that might come up at the AT&T Mobility oral argument. I believe they are difficult to answer in a forthright manner without conceding some of the key weaknesses in the Concepcions’ case. So it will be interesting to see if any of the Justices ask questions similar to any of these, and, if so, how the Concepcions’ counsel responds.

Stay tuned to Disputing for the next installment of this multi-part post, which will follow Tuesday’s oral argument…

Disputing has been watching the AT&T Mobility, LLC v. Concepcion case closely. You may read previous posts about the upcoming case here, here, here and here.

Technorati Tags: law, ADR, arbitration

Philip J. Loree Jr. is a partner in the Manhasset, New York based firm of Loree & Loree, which focuses its practice on commercial litigation, arbitration, and insurance- and reinsurance-related matters. Prior to forming Loree & Loree, Mr. Loree was a partner in the Litigation Department of New York City’s Cadwalader, Wickersham & Taft LLP, the oldest continuous law partnership in the United States. He was also a partner in the Insurance and Reinsurance Department of Rosenman & Colin LLP (now Katten Muchin Rosenman LLP), and a shareholder in the Litigation Department of Stevens & Lee, P.C.

He frequently comments on arbitration and reinsurance law at his firm’s blog, the Loree Reinsurance and Arbitration Law Forum, and in various trade and legal publications. He is owner and co-founder of LinkedIn’s Commercial and Industry Arbitration and Mediation Group, which provides an open forum for the discussion of commercial, industry and consumer ADR. He also owns and co-manages with other reinsurance professionals LinkedIn’s Reinsurance Claims group.