, ___ U.S. ___ (2011), Cause No. 09-893, that everyone representing businesses that sell goods or services to consumers should read. The Court held that California's rule finding class waivers in arbitration provisions in contracts of adhesion were unconscionable.
. That means that this case is important, even if it is outside of your practice area.
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Under California law, courts may refuse to enforce any unconscionable contract. In
Discover Bank v. Superior Court, 36 Cal.4th 148, 113 P.3d 1100 (2005), the California Supreme Court held as follows:
[W]hen the waiver is found in a consumer contract of adhesion in a setting in which disputes between the contracting parties predictably involve small amounts of damages, and 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, then the waiver becomes in practice the exemption of ... the party "from responsibility for [its] own fraud, or willful injury to the person or property of another." Under these circumstances, such waivers are unconscionable under California law and should not be enforced.
In contrast, the Federal Arbitration Act provides:
A written provision in any maritime transaction or a contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction ... shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.
The question before the Court was whether the
Discover Bank rule rested on "grounds as exist at law or in equity for the revocation of any contract." The Court held that it did not because it interfered with the FAA's purpose of promoting arbitration.
Although the rule does not require classwide arbitration, it allows any party to a consumer contract to demand it ex post. The rule is limited to adhesion contracts, but the times in which consumer contracts were anything other than adhesive are long past. The rule also requires that damages be predictably small, and that the consumer allege a scheme to cheat consumers. The former requirement, however, is toothless and malleable and the latter has no limiting effect, as all that is required is an allegation. Consumers remain free to bring and resolve their disputes on a bilateral basis under Discover Bank, and some may well do so; but there is little incentive for lawyers to arbitrate on behalf of individuals when they may do so for a class and reap far higher fees in the process. Also, faced with inevitable class arbitration, companies would have less incentive to continue resolving potentially duplicative claims on an individual basis.
Thus, when analyzing the situation, the Court focused on the practical effects of the
Discover Bank rule on the incentives for parties to arbitrate disputes.
The dissent's discussion contrasted with the majority's because it focused on the practical effect of the Court's decision on consumers. As Justice Breyer said in the portion of the dissent most often cited in media reports,
What rational lawyer would have signed on to represent the Concepcions in litigation for the possibility of fees stemming from a $30.22 claim? In California's perfectly rational view, nonclass arbitration over such sums will also sometimes have the effect of depriving claimants of their claims (say, for example, where claiming the $30.22 were to involve filling out many forms that require technical legal knowledge or waiting at great length while a call is placed on hold). Discover Bank sets forth circumstances in which the California courts believe that the terms of consumer contracts can be manipulated to insulate an agreement's author from liability for its own frauds by "deliberately cheat[ing] large numbers of consumers out of individually small sums of money." Why is this kind of decision — weighing the pros and cons of all class proceedings alike — not California's to make?
The majority gave an example of a step a state could take to protect consumers in this area that would not run afoul of the FAA.
Of course 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. Such steps cannot, however, conflict with the FAA or frustrate its purpose to ensure that private arbitration agreements are enforced according to their terms.
As I mentioned at the beginning, lawyers representing businesses that sell goods or services to consumers should read the Court's opinion immediately, so that they can advise their clients regarding whether they wish to include arbitration provisions and class waivers in their contracts of adhesion. However, I believe the hype concerning this decision being the death of consumer class actions is overblown. Many businesses will likely decide not to include arbitration clauses in their consumer contracts. Moreover, many consumers do not buy goods and services directly from the types of defendants that are defendants in many consumer class action suits. So, while this decision is important, its importance may currently be overblown.
