Coming Soon to a Consumer Contract Near You: Mandatory Individual Arbitration

The consumer class action pendulum swung back toward defendants last week with the Supreme Court's decision in AT&T Mobility LLC v. Concepcion. In Concepcion, the Court held that arbitration provisions prohibiting class-wide arbitrations are enforceable, and that Discover Bank v. Superior Court, a California Supreme Court decision finding such provisions unconscionable and unenforceable, is preempted by the Federal Arbitration Act. In an analysis reminiscent of the distinction between facial and "as applied" unconstitutionality, the Court reasoned (in a 5-4 decision written by Justice Scalia) that even though the FAA says arbitration agreements can invalidated by laws of general application (duress, fraud, etc.) "the inquiry becomes more complex when a doctrine normally thought to be generally applicable, such as . . . unconscionability, is alleged to have been applied in a fashion that disfavors arbitrations." It cannot be the case, the Court explained, that attributes such as reduced or nonexistent discovery, which are fundamentally why arbitration is different from litigation, can also be the reason why an arbitration agreement is unconscionable. Similarly, the court reasoned, because class-wide representation and arbitration are incompatible (the former raising the stakes while the latter streamlines the process and eliminates layers of review), a prohibition on class-wide representation cannot underpin a finding that an arbitration is unconscionable. The dissent argued that individual arbitrations provide no deterrence (i.e., that "the realistic alternative to a class action is not 17 million individual suits, but zero individual suits, as only a lunatic or a fanatic sues for $30"), and Justice Breyer, in that dissent, took the opportunity to play the federalist ("We do not honor federal principles in their breach."). The implications of Concepcion are uncertain and will doubtless be clarified by future decisions, the first of which is already in the offing. On May 2, 2011, the Supreme Court granted certiorari in CompuCredit Corp. v. Greenwood, to determine whether parties may agree to arbitrate claims under the Credit Repair Organization Act. The Compucredit decision may shed light on whether Concepcion will stand alone or be part of a broader interpretation of the FAA. For now, though, that pounding of feet and scratching of quill you hear is business lawyers furiously updating terms and conditions to prohibit class-wide arbitrations, so the day goes emphatically to the defense. For a more detailed analysis of the decision, click here. – Angel Garganta, Trent Norris, Eric Rubel, James Speyer, and George Langendorf

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