July 6, 2011 – Love it or hate it, the U.S. Supreme Court’s recent decision in AT&T Mobility LLC v. Concepcion¹ will dramatically affect class action litigation in Wisconsin and across the country. The Court resolved an important circuit split and held that the Federal Arbitration Act² (FAA), preempts certain state laws and court rulings that have been used to invalidate class action waivers in arbitration agreements.

Many companies include arbitration agreements in standard form consumer contracts. Those agreements frequently waive the consumer’s right to pursue a class action. Courts in many jurisdictions, however, have invalidated class action waivers based on unconscionability principles and state public policy.

The FAA permits arbitration agreements to be challenged, based on any grounds that “exist at law or in equity for the revocation of any contract.”³ Based on this language, the lower courts in Concepcion refused to enforce the arbitration agreement following the California Supreme Court’s decision in Discover Bank v. Superior Court.⁴ Discover Bank held that the generally applicable state law of unconscionability could be the basis for invalidating class action waivers in adhesion contracts with consumers.⁵

Appellate court decisions in Wisconsin have similarly held that arbitration agreements in standard form consumer contracts that waive any right to a class action may be unconscionable, or against public policy, and therefore unenforceable.⁶

The Court’s 5-4 decision in Concepcion changes the landscape. The majority focused on the Court’s long recognition that the FAA reflects a “liberal federal policy favoring arbitration.”⁷ The Court also noted that arbitration agreements are to be enforced on “equal footing with other contracts,”⁸ and that the FAA should be interpreted based on the “fundamental principle that arbitration is a matter of contract.”⁹

In the majority’s view, these concepts are at odds with the Discover Bank rule. The Court therefore held that the rule is “preempted by the FAA” because it “‘stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress.’”¹⁰ In other words, going forward, throughout the country, class action waiver provisions in most adhesion contracts with consumers will be enforceable.

Not the death for class actions

That said, Concepcion is not a death knell for class actions. First, the Dodd-Frank Act of 2010 requires the Consumer Financial Protection Bureau (CFBP) to conduct a study and report to Congress regarding the use of arbitration agreements in connection with consumer financial products and services. The Dodd-Frank Act provides that the CFBP may issue regulations to prohibit or limit the use of such arbitration agreements by covered entities if it finds that it would be in the public interest to do so.¹¹

Second, even the majority opinion in Concepcion recognized that “States remain free to take steps addressing the concerns that attend contracts of adhesion – for example, requiring class-action-waiver provisions in adhesive arbitration agreements to be highlighted.”¹² There also may be room to argue that arbitration agreements with less favorable terms than AT&T’s could still be subject to limited unconscionability challenges.

Third, many consumer claims arise from transactions that do not involve written agreements, and thus will not be covered by an enforceable arbitration agreement. In other cases, privity between the plaintiff and the defendant may be lacking, which could make enforcement of some written arbitration agreements problematic.

Fourth, U.S. Courts of Appeal are split over whether certain federal statutes (as opposed to state laws in Concepcion) confer an unwaivable right to sue in court, and are thus not subject to FAA preemption. The U.S. Supreme Court has granted certiorari to consider this issue.¹³

Finally, there could be a legislative change to effectively roll back Concepcion. There is proposed legislation that would do just that.¹⁴

In the meantime, class actions will continue, but lawyers and consumers should expect a lot more potential class actions to be shepherded into arbitrations, without class action procedures.

About the author

Michael D. Leffel, Michigan 1997, is partner in the Madison office of Foley & Lardner LLP and practices in consumer financial services, appellate, and business litigation and dispute resolution. He is cochair of the firm’s class action working group. Contact him at (608) 258-4216. 

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