By Seamus C. Duffy and Michael P. Daly
Frequent targets of class actions have increasingly turned to arbitration agreements with class action waivers as a way to avoid the cost of class litigation and manage the risk of aggregate liability. Although certain states (California, New Jersey and Pennsylvania chiefly among them) have been openly hostile to such agreements, recent Supreme Court decisions bless using them and suggest some best practices for drafting them. We summarize these decisions and a few of those best practices here.
Enforcing Arbitration Agreements
One longstanding objection to class action waivers had been that they were unconscionable because no rational person would pursue a claim of so little value that a full recovery would not cover the cost of prosecution. And so the view was that class action waivers operated to allow businesses to cheat large amounts of people out of small amounts of money with impunity. Indeed, that was the gist of the so-called “Discover Bank rule,” which effectively precluded consumer arbitration in California until the Supreme Court rejected its reasoning in AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011). Although the crux of Concepcion was that the Discover Bank rule was preempted by the FAA, the majority also addressed the argument that “class proceedings are necessary to prosecute small-dollar claims.” Id. at 1753. The majority rejected that for two reasons: first, because AT&T’s consumer-friendly agreement made it unlikely that claims would slip through the cracks; and second because, even if they did, states “cannot require a procedure that is inconsistent with the FAA, even if it is desirable for unrelated reasons.” Id. at 1753. In short, the value of a claim in and of itself is no longer a barrier to arbitration.
The recent decision in American Express Co. v. Italian Colors Restaurant, No. 12-133, 2013 WL 3064410 (June 20, 2013) presented a variation on this theme. In that case, the plaintiff’s antitrust claim was worth much more than the claim in Concepcion ($38,549 versus $30.22) but was still worth much less than what it would cost to prosecute ($38,549 versus hundreds of thousands dollars) because antitrust law requires complex expert proof. A majority of the Court was unmoved by the argument that the plaintiff could not “effectively vindicate” its claim, finding that courts must enforce arbitration agreements “according to their terms” even if they require individual arbitration, and that the antitrust laws contain “no contrary congressional command” because they “do not guarantee an affordable procedural path to the vindication of every claim.” Id. at *1. In its view, its decision was preordained by Concepcion, which “established … that the FAA’s command to enforce arbitration agreements trumps any interest in ensuring the prosecution of low-value claims.” Id. at *6 & n.5.
Drafting Arbitration Agreements
It would be tempting to read Concepcion and Amex as dooming any unconscionability argument mounted to defeat an arbitration clause, but the reality is that generally applicable contract defenses are still available under the FAA, threshold barriers to arbitration may still trigger the “effective vindication” doctrine discussed inAmex, and courts—especially those with a history of hostility to arbitration—may now give heightened scrutiny to procedural provisions other than class action waivers, for example those governing fees, venue, appeals, etc. See, e.g., Vargas v. SAI Monrovia B, Inc., No. B237257, 2013 WL 2419044, at *6 (Cal. Ct. App. June 4, 2013). Businesses would be well-advised to review their agreements with an eye toward removing unnecessary barriers to arbitration, and to think twice before erecting any. Indeed, the AT&T arbitration clause in Concepcion was carefully crafted to ensure that consumers could vindicate even small claims: it committed to covering the costs of arbitration, arbitrating in the consumer’s locale, and reimbursing attorneys’ fees in appropriate cases. The clause at issue in Amex shared many of these consumer-friendly characteristics. Counsel drafting arbitration agreements in the wake of these decisions should consider including similar provisions, for example making venue convenient for the consumer, offering to pay the base costs of arbitration, reimbursing attorneys’ and/or expert fees where appropriate, and making arbitration easy and accessible. And counsel should think twice about provisions (often found in outdated forms) limiting remedies or imposing special limitations periods and the like.
Consumer-friendly provisions will protect your arbitration agreement from attack under generally applicable state unconscionability principles in courts hostile to arbitration, and, conversely, provisions making arbitration less accessible or less attractive to consumers will provide fodder for attacking your agreement and thus limiting the benefits of Concepcion and its progeny.