Marc J. Goldstein Arbitrator & Mediator NYC
July 17, 2013

FAA Pre-Emption of State Law Limits on Arbitration: The Ninth Circuit Grapples with Concepcion

In the Concepcion case in 2011 [AT&T Mobility LLC v. Concepcion, 131 S.Ct. 1740], five Justices of the Supreme Court of the United States agreed that the FAA pre-empts a rule of state law that makes an arbitration agreement unconscionable if the agreement prohibits class arbitration.  The actual implications of Concepcion for class arbitration remain murky, as the Supreme Court’s other recent decisions relating to class arbitration have been context-specific. Thus in Stolt-Nielsen the Court’s decision (5-3) was “anti-” class arbitration [Stolt-Nielsen S.A. v. Animalfeeds International Corp., 559 U.S. 662 (2010)], because the tribunal had no basis in the contract to order it (the parties having stipulated that they had no agreement about class arbitration). But in Oxford Health Plans (8-0) [Oxford Health Plans LLC v. Sutter, 133 S.Ct. 2064 (Jun. 10, 2013)] the Court’s decision was “pro-” class arbitration because the arbitrator was, rightly or wrongly, construing the contract in deciding that it permitted class arbitration. And in American Express (5-4) [American Express Co. v. Italian Colors Restaurant, 133 S.Ct. 2304 (Jun. 20, 2013)], once more the decision was “anti-” class arbitration, this time because the majority was unconvinced that a class proceedings waiver so seriously inhibited private civil enforcement of the antitrust laws as be a violation of public policy.

Into this summer stew we must now blend a new decision of a panel in the U.S. Ninth Circuit Court of Appeals (including, sitting by designation, the trial judge in the Stolt-Nielsen case), concerning FAA pre-emption (or not) of state law rules that treat as unconscionable clauses in consumer contracts that purport to waive “fundamental” rights including, but not limited to, the right to a trial by jury. (Mortensen v. Bresnan Communications LLC, 2013 WL 3491415 (9th Cir., July 15, 2013)).  At issue in Mortensen was the arbitration clause in a consumer contract for broadband internet service. The clause required all claimants to be named, and prohibited both class proceedings or consolidation. But plaintiffs’ challenge to the clause was not specific to the class and consolidation barriers.  Instead, plaintiffs invoked a Montana state law doctrine of the unconscionability of consumer contracts of adhesion. The essence of the Montana doctrine was that any clause in an adhesive consumer contract that purports to deprive a consumer of a fundamental right or a reasonable expectation will be ineffective unless the proposed deprivation is separately and fully explained before the contract is signed.

The U.S. District Court in Montana denied the motion to compel arbitration, holding that application of Montana’s rule was within the “savings” clause of FAA Section 2 (i.e. that arbitration agreements shall be valid “save upon such grounds as exist in law or in equity for the revocation of any contract”). In this decision, the Ninth Circuit held that Concepcion‘s reasoning required enforcement of the arbitration clause and federal pre-emption of the Montana rule. The Mortensen Court’s distillation of the holding in Concepcion is that when a state law unconscionability rule has a negative impact on enforceability of arbitration agreements, and that impact is disproportionate to the impact on other agreements, the rule is pre-empted by the FAA even if it is facially neutral in its application to arbitration agreements and other agreements. The Ninth Circuit panel’s interpretation of Concepcion — reading that decision as an extension of FAA pre-emption to state law rules of unconscionability that have a disproportionate anti-enforcement impact on arbitration agreements —  was seen by the panel as critical to the outcome. That is so because the panel did not think the Montana rule depended on the unique nature of arbitration agreements. In the panel’s view, the Montana rule as stated by Montana’s courts might apply to a wide variety of matters about which a consumer might have “reasonable expectations,” but in fact the Montana rule had evolved in cases where parties challenged arbitration clauses. So another look at what Concepcion actually held seems in order, having in mind that there are at least four judges on the Court, the dissenters, who may have an interest in taking up Mortensen or a case like it to define more precisely the border between FAA pre-emption and state law unconscionability/public policy in a consumer contract setting.

The Mortensen panel focused its attention on a passage in Concepcion wherein the Supreme Court had (i) posited that Section 2’s “savings” clause does not “save” state law unconscionability rules that “rely on the uniqueness of an arbitration agreement,” (ii) illustrated this point by reference to hypothetical state rules treating as unconscionable those arbitration agreements that do not provide for judicially monitored discovery or use of the Federal Rules of Evidence, and (iii) observed that such rules could not be defended as an application of a general policy against exculpatory clauses, because “[i]n practice…the rule would have a disproportionate impact on arbitration agreements.” 131 S. Ct. at 1747. The critical sentence in Concepcion, however, and arguably the essence of its holding, comes a few paragraphs later, when the Court states: “Requiring the availability of classwide arbitration interferes with fundamental attributes of arbitration and thus creates a scheme inconsistent with the FAA.” Id. at 1748. And the most sensible reading of Concepcion, despite the majority’s much-criticized attacks on the competence of arbitrators to manage and efficiently resolve complex high-value class actions, is that the “fundamental attribute” interfered with by California’s unconscionability rule was not bi-lateral arbitration between two contracting parties, but the ability of the parties to decide whether or not to arbitrate only according to that bi-lateral model.  “Disproportionate impact” does not appear to be the guiding principle in the Concepcion decision.

So viewing Concepcion, one might ask two questions about the Ninth Circuit’s decision in Mortensen? Was the outcome mandated by Concepcion, as the panel believed it was? And was the outcome correct in any event? On the first question, it is significant that the Montana rule had nothing to do with the design of the arbitration process. The Montana rule was only about the indicia of contractual consent in adhesive consumer contracts. As such, it seems that Concepcion was not directly on point. The problem with the Montana rule, however, is that it was what one might call a wolf in sheep’s clothing. Montana’s courts, motivated by antagonism to take-it-or-leave-it arbitration clauses in adhesive contracts between companies and consumers, fashioned a common law rule about contractual assent that was facially neutral as between arbitration and other “fundamental rights” or “reasonable expectations,” but had as its specific objective to eradicate the formation of an arbitration agreement through a consumer’s giving assent merely by accepting the purchased product or service. The undressed wolf, i.e. the Montana rule, is the sort of traditional anti-arbitration state law rule that the Supreme Court has found pre-empted in many pre-Concepcion cases. It was little more than a thinly-veiled rule that arbitration is unconscionable because it deprives consumers of the right to a trial by jury. Thus, it appears that the outcome in Mortensen is correct.


New York lawyers reading this post should be alerted to a similar issue that may eventually come before New York’s courts. Part 137 of the Rules of the Chief Administrator of the New York Courts provide for arbitration of attorney-client fee disputes mainly at the election of the client and subject to judicial de novo review if the client is unsatisfied with the outcome. Part 137 also purports to specify disclosure requirements imposed upon an attorney if the attorney wishes to make an agreement with the client for binding arbitration of fee disputes other than Part 137 arbitration. In particular the attorney must specifically inform the client of the right to arbitrate under Part 137 and provide to the client a copy of the Part 137 arbitration procedures. If the FAA applies to the attorney-client engagement agreement’s arbitration clause, does Part 137 (like the Montana rule) establish a special anti-arbitration rule for client assent that is pre-empted by the FAA?  Arguably it does, as it constitutes an unacceptable interference with the rights of attorney and client to agree to resolve fee disputes through ordinary commercial arbitration.

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