Further Developments Regarding Arbitration Clauses and Class Action Waivers

Many considered the Supreme Court’s decision last year in AT&T Mobility LLC v. Concepcion as a potential death knell to consumer class actions. The Concepcion decision held that the Federal Arbitration Act (“FAA”) preempted a California law that would have invalidated, as unconscionable, an arbitration clause containing a class action waiver. 131 S.Ct. 1740 (2011). The arbitration clause inConcepcion was a fairly typical form clause utilized in mobile phone consumer contracts, and therefore the potential application of Concepcion has been considered quite broad.

However, over the past year, some federal appellate courts have had an opportunity to apply Concepcion, and concluded that it did not preclude those courts from invalidating the arbitration clauses that they were reviewing.

The Fifth Circuit affirmed the invalidation of an arbitration clause on the grounds that the clause was illusory, and thereby allowed a class action to proceed in court. The company seeking to compel arbitration had reserved the right to amend the contract, including the arbitration clause, at any time. The court found this included retroactive modification to the contract since there was no express limitation on the company’s right to modify. As such, the Fifth Circuit concluded that the arbitration clause was only enforceable by one side and therefore illusory. The court held that Concepcion did not reach to illusory contracts. Carey v. 24 Hour Fitness, USA, Inc., 669 F.3d 202 (5th Cir. 2012).

The Second Circuit invalidated an arbitration clause in a standard credit card agreement where it was shown that the clause would effectively preclude the plaintiffs from pursuing claims under the federal antitrust statutes. The court found that Concepcion addressed the relationship between the FAA and state law. It distinguished the case before it because the case concerned federal statutory claims. The court cited several cases invalidating arbitration clauses where it was shown that the plaintiffs would be economically precluded from individually pursuing federal statutory actions. The Second Circuit found that Concepcion did not overrule those decisions, and therefore they could be applied to invalidate the arbitration clause under review. In re Am. Express Merchants' Litig., 667 F.3d 204 (2d Cir. 2012)

The Ninth Circuit signaled its willingness to limit Concepcion in two recent decisions. The court acknowledged that Concepcion precluded the application of state law unconscionability doctrines that applied specifically to arbitration clauses. However, it also noted that “the [Concepcion] Court reaffirmed that the savings clause preserves generally applicable contract defenses such as unconscionability, so long as those doctrines are not applied in a fashion that disfavors arbitration.” Kilgore v. Keybank Nat’l Assoc., 673 F.3d 947 (9th Cir. 2012). The Ninth Circuit took another swipe at Concepcion in Coneff v. AT&T Corp., 673 F.3d 1155 (9th Cir. 2012). The Coneff panel conceded that although Concepcion precluded a finding of substantive unconscionability, a potential finding of procedural unconscionability remained. The case was remanded for the district court to apply Washington’s choice of law rules and determine whether the clause and waiver are procedurally unconscionable.

The Supreme Court stands by the Concepcion decision. It recently granted certiorari and vacated a West Virginia Supreme Court decision, which had invalidated an arbitration agreement on state public policy grounds, despite Concepcion’s mandate regarding FAA preemption. Marmet Health Care Center, Inc. v. Brown, 132 S.Ct. 1201 (2012). These post-Concepcion decisions highlight the broad reach of the FAA and the careful analysis any state or federal court must conduct before invalidating an arbitration clause.