Segal McCambridge Legal Blog

Taken in part from the Wall Street Journal
WASHINGTON—On April 27, 2011, the Supreme Court handed business a powerful shield against consumer class actions, ruling that state laws can’t override contract clauses requiring customers to present complaints individually to a private arbitrator.

In a 5-4 ruling, split along its usual conservative-liberal divide, the court held that a “national policy favoring arbitration” pre-empted California law intended to protect consumers from widespread fraud.

California consumers had sued AT&T Inc. for allegedly defrauding them by charging $30.22 in sales tax on cellphones it advertised as free.

AT&T invoked the arbitration clause of its form contract, which required complaints to be resolved through private arbitration in an “individual capacity” and barred “any purported class or representative proceeding.”

California courts had found such provisions “unconscionable,” legal parlance for a contract term so unfair it is void. In a 2005 opinion, the California Supreme Court said that when a company schemes “to deliberately cheat large numbers of consumers out of individually small sums of money,” class actions may be the only effective form of redress. While the fraud might reap a windfall, the court’s reasoning went, each individual’s loss would be too small to dispute unless grouped into a single claim.

The 1925 Federal Arbitration Act, adopted to force states to honor arbitration clauses, says arbitration clauses can’t be set aside unless they violate the laws governing contracts in general. The question before the Supreme Court was whether the California rule simply applied general fairness principles to arbitration clauses or specifically targeted arbitration.

Writing for the majority, Justice Antonin Scalia said that class actions inherently conflicted with arbitration’s goals of speed and efficiency.

“The switch from bilateral to class arbitration sacrifices the principal advantage of arbitration—its informality—and makes the process slower, more costly, and more likely to generate procedural morass than final judgment,” he wrote in an opinion joined by Chief Justice John Roberts and Justices Anthony Kennedy, Clarence Thomas and Samuel Alito.

Justice Scalia cited statistics showing that the average individual arbitration was resolved in six months or less, while class arbitrations could drag on for years. Moreover, “class arbitration greatly increases risks” for business, he wrote. “Faced with even a small chance of a devastating loss, defendants will be pressured into settling questionable claims.”

In a dissent joined by Justices Ruth Bader Ginsburg, Sonia Sotomayor and Elena Kagan, Justice Stephen Breyer wrote that since the California rule applied equally to class litigation and class arbitration, it can’t “fairly be characterized as a targeted attack on arbitration.”

The Federal Arbitration Act, Justice Breyer wrote, intended to preserve the states’ traditional authority over contract law, insisting only that arbitration receive equal footing with other contracts.

“California is free to define unconscionability as it sees fit, and its common law is of no federal concern so long as the state does not adopt a special rule that disfavors arbitration,” he added.

Wednesday’s decision was the latest in a series that has given arbitration clauses nearly ironclad protection.

In a statement, AT&T said that individual arbitration “often benefits consumers” because claims can be resolved faster than a more complicated class action. “We value our customers, and AT&T’s arbitration program is free, fair, fast, easy to use, and consumer friendly,” the company said.

Some lawmakers, however, say consumers are powerless when banks, software makers and others condition their products on form contracts whose fine print locks them into arbitration.

“In arbitration, there is no transparency, nor is there an independent arbitrator,” said Senate Judiciary Committee Chairman Patrick Leahy, a Vermont Democrat who has held hearings on consumer arbitration.

After Wednesday’s decision, “Congress needs to respond with legislation to clarify the original intent of the Federal Arbitration Act,” Mr. Leahy said.

The full Wall Street Journal article is here

The Wall Street Journal Law Blog post, “After AT&T Ruling, Should We Say Goodbye to Consumer Class Actions?” can be found here

The SCOTUS opinion, AT&T MOBILITY LLC v. CONCEPCION ET UX, 09-893 can be found here

Shareholder Jason Kennedy assisted by Associate Jill Felkins recently argued before the Indiana Court of Appeals in the case of Connie Brumley, et al v. Commonwealth Business College Education Corp., d/b/a Brown Mackie College. Segal McCambridge represents the Appellee, Brown Mackie College.  A link to the video of the oral argument can be found here

A summary of the case: Two sets of plaintiffs sued Commonwealth Business College Education Corporation d/b/a Brown Mackie College in two different Lake Superior Courts alleging, among other things, that Brown Mackie fraudulently represented that its surgical technology program was accredited, thereby inducing them to join the program. The Complaint stated that because Brown Mackie allegedly lacked accreditation, students completing the program were ineligible to sit for the NBSTSA certification exam. The cases were eventually consolidated before Judge Gerald N. Svetanoff. Brown Mackie filed a motion to compel arbitration, arguing that plaintiffs executed an Enrollment Agreement containing a provision requiring that any dispute be submitted to arbitration. A hearing was held, at which evidence was presented that all plaintiffs except one also executed an Arbitration Agreement separate from the Enrollment Agreement. Unlike the Enrollment Agreement, the Arbitration Agreement did not contain any representations concerning Brown Mackie’s accreditation. Judge Svetanoff reasoned that although Brown Mackie’s alleged fraud may have affected the enforceability of the arbitration provision in the Enrollment Agreement, it did not affect the enforceability of the separate Arbitration Agreement because that agreement did not contain any of the representations at issue. Accordingly, Judge Svetanoff granted the motion to compel arbitration as to all plaintiffs except the one who did not execute the separate Arbitration Agreement. Plaintiffs appeal arguing that they should be entitled to seek relief through a court of law and not through arbitration.

Here is a link to the video of the oral argument

In a 4-3 opinion, the Missouri Supreme Court affirmed a trial court decision which declined to compel arbitration in a complaint which sought class action status and damages for unauthorized practice of law and its deceptive practices connected with the sale of merchandise under the Missouri merchandising practices act (MPA).

The Defendant, Lee’s Summit Honda, claimed that the trial court erred in failing to compel arbitration because the claims were within scope of the parties’ arbitration agreement, the unauthorized practice of law claim was subject to arbitration and the arbitration agreement was valid. The trial court overruled Honda’s motion to compel, finding that the claim of unauthorized practice of law is not subject to arbitration because the courts exclusively decide what constitutes the unauthorized practice of law. The trial court also found the arbitration agreement to be procedurally and substantively unconscionable.

On appeal, Honda asserted that the trial court erred in determining that the Plaintiff’s claims are beyond the scope of the arbitration agreement, that the Plaintiff’s unauthorized practice of law claim is subject to arbitration and that the class arbitration waiver was not unconscionable. The Missouri Supreme Court in a 4-3 decision disagreed.

The opinion can be found here

Justice Scalia authored an opinion (5-4 with Justice Stevens in dissent) that relied principally on a 1967 decision called Prima Paint Corp. v. Flood & Concklin Mfg., Co., the Court held that if the employee had raised a challenge that was specific to the second part alone – that is, to the agreement to arbitrate validity – then a court would have had to decide the challenge. But because the employee’s grounds for unconscionability applied equally to the initial agreement to arbitrate all employment disputes, the general unconscionability question should be decided by an arbitrator.

This is a new rule for determining who decides challenges to the validity of an agreement to arbitrate the validity of an arbitration agreement. The Court held that, depending on what kind of challenge to the arbitration agreement is made, that determines who (e.g. either the judge or an arbitrator) can hear the question. If the party resisting arbitration does so on grounds that go to the validity of the entire agreement, then the validity question goes to the arbitrator. But if the challenge is specific to the arbitration provision at issue in the case, then a court must decide that challenge.

The SCOTUS wiki page for his case is here
The SCOTUS opinion is here