AT&T Mobility v. Concepcion Unsettles State Arbitration Rules

Since the AT&T Mobility v. Concepcion case was issued last month, the legal community has been trying to decide what it means for employment class actions in California.  Is it the death of employment class actions? Or will it be limited to the consumer context?  Does it amount to a federal takeover of California arbitration and class action law? Or will California courts find a way to circumvent its preemptive effect in the employment context?  

Only time will tell, but in the meantime we will be doing a running series of posts on the fallout of the Concepcion case.   As a starting point this post will focus on what I think is the central doctrinal innovation of the majority opinion -- i.e., the re-interpretation of the federal arbitration act (FAA) as, in effect, preempting the field of state law contract formation and enforcement rules to the extent they involve arbitration contracts. 

The New FAA Preemption Paradigm Under Concepcion        

Section 2 of the FAA states that that arbitration agreements shall be enforceable "save upon such grounds as exist at law or in equity for the revocation of any contract."  Since its enactment in 1925 the FAA was thus held to only narrowly preempt state law only to the extent necessary to “place arbitration agreements on an equal footing with other contracts.”  But Concepcion abruptly reverses this 85 years of precedent. 

It does this by first holding that while "§ 2’s saving clause preserves generally applicable contract defenses, nothing in it suggests an intent to preserve state-law rules that stand as an obstacle to the accomplishment of the FAA's objectives."  And what is the "objective" which cannot be prevented by state law?  The Court's answer is simply that "The principal purpose of the FAA is to ensure that private arbitration arbitration agreements are enforced according to their terms."  (Emphasis added). 

In short, under Concepcion state law governing the enforceability of contracts cannot overrule  the parties' privately agreed terms about how the arbitration shall be conducted. (Which the Court notes may be unilaterally dictated in an adhesion contract.)   It is hard to see how this differs from a federal preemption of the entire field of arbitration law.

Thus, the Majority explicitly converts the FAA from a mere shield against state anti-arbitration rules into a potent sword for cutting away general rules of contract law that would otherwise stand in the way of a private agreement.

To invoke an employment law analogy, Concepcion effectively converts the FAA from a non-discrimination statute that protects arbitration contracts against differential treatment into an affirmative action plan that requires preferential treatment over other contracts.  

Under California law, for example, a non-arbitration contract that purports to waive a consumer’s right to file a class action is plainly unenforceable. But under Concepcion, that same illegal waiver provision must be enforced so long as it is incorporated into an arbitration agreement.

 

The Potential Effect on Existing Law and Agreements.

This new paradigm has the potential to unsettle the whole body of California case law relating to the enforceability of arbitration agreements and the conduct of arbitrations.   

For example, Concepcion could easily be read as completely overruling Armendariz v. Foundation Health Psychare Services, Inc., which has governed California arbitrations for over a decade.  Under Armendariz,employment arbitration agreements cannot impose excessive costs on employees, cannot deny adequate discovery, and cannot impose a one-way duty to arbitrate on the employee while allowing the employer to sue in court.  

The logic of Concepcion would seemingly dictate that none of these conditions can be judicially imposed as doing so would inevitably interfere with the FAA's prime objective of enforcing every private arbitration agreement "according to its terms." 

Employers may be tempted to take full advantage of Concepcion by drafting heavily one-sided arbitration agreements.  But if they go too far or the preemptive effect of Concepcion is somehow limited to non-employment agreements the resulting agreements will simply be unconscionable and unenforceable.  

We will explore some of these implications in our follow-up posts.