Friday, April 29, 2011


Arbitration, Legal Fees and Class Actions
I don’t generally blog about arbitration cases and law; while arbitration is certainly an Alternative Dispute Resolution technique – one of the earlier and most successful forms of ADR in the US -- there is a lot of commentary about arbitration and I haven’t had much to add.
That changed with the recent decision by the Supreme Court in the AT&T Mobility v. Concepcion case (563 U. S. ____, April 27, 2011.
The Supreme Court, in a 5 to 4 decision by Justice Scalia, struck down as a violation of the Federal Arbitration Act (FAA) a California statute that, as interpreted by the California Supreme Court (the Discover Bank rule), prohibits consumer arbitration contracts that condition the enforceability of those contracts on the availability of class action arbitration procedures if those contracts are:
[1] found in a consumer contract of adhesion[1];
[2] in a setting in which disputes between the contracting parties predictably involve small amounts of damages, and
[3] when it is alleged that the party with the superior bargaining power has carried out a scheme to deliberately cheat large numbers of consumers out of individually small sums of money.
(See Discover Bank v. Superior Court, 30 Cal Rptr.3d 76 (2005))
I won’t go into all of the details of the case. The arbitration agreement under consideration provided that AT&T would arbitrate and pay the costs of the arbitration for any non-frivolous claim brought pursuant to the “agreement.” I put the word agreement in quotes because in this case it was really not an agreement between the parties, but a contract of adhesion. If consumers wished to do business with AT&T, they had to sign a contract that included the arbitration clause.
The dissent by Justice Breyer notes that, according to the FAA, an arbitration agreement “shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” 9 U. S. C. §2 (emphasis added), and that the Discover Bank rule in California establishes circumstances in which “class action waivers” in any contract are unenforceable. In the view of the dissenters, “…the Court is wrong to hold that the Federal Act pre-empts the rule of state law.” Id.
My problem with this case is that the dissent has the better arguments on the legal reasoning of the case while the majority has the better arguments on the economic merits of the case.
While the individual consumer claims are small, the AT&T dispute arbitration clause virtually guaranteed the claimants 100% of their claim, even on “iffy” claims. As Phil Loree points out in his analysis of the case in a post on the LinkedIn Commercial and Industry Arbitration and Mediation Group:
…class action arbitration/litigation virtually guarantees that the claimant will get but a few cents on the dollar on even reasonably good claims. As you know, most class action settlements are paid out to the lawyer for the class, and companies have a very large economic incentive to settle even "iffy" claims. Class counsel therefore have a very significant corresponding economic incentive to assert and litigate "iffy" claims. Some will argue that this economic advantage works a public good in that it provides a very powerful disincentive for companies to do anything that might be construed as a violation of consumer protection laws. The reality is that, no matter how hard companies may try, the risk they will nevertheless have to pay large settlements in "iffy" class actions outweighs -- and probably dilutes the value of -- the deterrence benefit. Class proceedings results increase the costs of doing business, which ultimately raises the costs of goods and services.
As Loree notes, these types of class action lawsuits are “really a transfer of wealth from consumers to large companies, who, in turn, transfer the bulk of it to another powerful (and understandably) wealthy group of individuals and firms: class action plaintiff's counsel. And…to another group of relatively wealthy and powerful individuals and firms: class action defense counsel. There, again, the transfer is from consumers to corporations to lawyers.”:
Any system that benefits both companies and consumers by reducing the transaction costs -- the fees paid to both plaintiff and defense lawyers -- makes a lot of sense.
Assuming Loree is correct, as I do, should not the majority have pointed out the economic facts of class-action arbitration and called on Congress to change the law?
Why did a conservative majority so willingly strike down a state statute even if the Court was right about the economic effect of the law?
Perhaps this is an example of the Court majority ignoring judicial restraint in order to achieve the desired result?

[1] i.e., a contract that that is overtly biased in one party’s favor to the disadvantage of the other party, suggesting that the terms were not freely bargained at arms’ length. A good example is the contract at the heart of Discover case, in that it is basically a “take it or leave it” proposition.


  1. Dan,

    Good article! Thanks for the mention.

    Perhaps I'll convince you yet that the majority also had the better side of the legal analysis! :)

    Phil Loree Jr.

  2. Phil – thanks for the kudos and comment about the article. I’m not sure how you can convince me about the legal argument, but as someone once wrote in a different context, “I’ll listen to your argument even when you’re wrong.”