By Michael Hoenig - New York Law
Journal - February 17, 2016
In mid-December, the U.S. Supreme Court issued its decision in
DIRECTV v. Imburgia,1 upholding a class
arbitration waiver clause in a consumer service agreement and
reversing a California appellate court's decision in favor of
two consumers who sued over early termination fees they believed
to violate state law. As a result, the plaintiffs had to submit
to individual arbitration and not to pursue class proceedings.
DIRECTV is another high court ruling in a chain that
began with the now-famous Concepcion decision in 2011. This
article briefly surveys the court's pivotal rulings leading to
the DIRECTV decision and provides the pith and substance of this
AT&T Mobility v. Concepcion,2 a 5-4 ruling that
the Federal Arbitration Act (FAA) preempts state laws that make
specific categories of claims non-arbitrable, the U.S. Supreme
Court said: "[w]hen state law prohibits outright the arbitration
of a particular type of claim, the analysis is straightforward:
The conflicting rule is displaced by the FAA." This is a
forceful premise and can cut a wide swath. Thus, in
Marmet Health Care Center v. Brown3 the court
held that injury and death lawsuits against nursing homes could
be barred by an arbitration agreement. Let's look closer at
Concepcion, the seminal precedent in the cluster.
Section 2 of the FAA makes agreements to arbitrate "valid, irrevocable, and
enforceable, save upon such grounds as exist at law or in equity
for the revocation of any contract." That provision was held in
Concepcion to preempt a California Supreme Court rule
adopted in a case called Discover Bank v. Superior Court.4
The latter was widely interpreted as banning most consumer
arbitration agreements requiring arbitration to be conducted
only on an individual basis. In other words, California's rule
deemed "unconscionable" class action waivers in arbitration
agreements incorporated into consumer contracts of adhesion
where the damages claimed would be relatively small and one
party had superior bargaining power. The California approach
proved to be influential in other jurisdictions as mandatory
arbitration of certain kinds of consumer claims were deemed
against public policy.
Concepcion swept all that away. Because the California rule, as
applied to AT&T's arbitration provision, "stands as an obstacle
to the accomplishment and execution of the full purposes and
objectives of Congress," California's categorical
unconscionability approach was preempted. The underlying dispute
in Concepcion arose from a cell phone contract between
Vincent and Liza Concepcion and AT&T Mobility. By purchasing the
wireless service, they received two new cell phones as part of
the agreement. Although they did not have to pay for the phones,
they were charged $30.22 in sales tax for the devices. They sued
in a federal court that AT&T's advertisements for "free" phones
The case was later consolidated with a putative class action
against AT&T involving the same issues. AT&T then moved to
compel arbitration pursuant to the arbitration agreement between
the parties. The cell phone arbitration clause had a class
action waiver: "You and AT&T agree that each may bring claims
against the other only in your or its individual capacity, and
not as a plaintiff or class member in any purported class or
AT&T included "consumer-friendly," generous provisions. The
consumer would get at least a $7,500 payment if the arbitration
award exceeded the last written settlement offer the company
made prior to selecting an arbitrator; cost-free arbitration for
non-frivolous claims; double attorney fees if the arbitrator
awarded the customer more than AT&T's last settlement offer; and
the option of conducting the arbitration in person, over the
phone, or solely on the filed papers.
The district court denied AT&T's motion to compel arbitration
on the ground that the arbitration agreement was unconscionable
in California. The U.S. Court of Appeals for the Ninth Circuit
affirmed. It recognized that the AT&T arbitration agreement
"essentially guarantees" that customers will have relief that
makes them "whole." But the court held that California law made
the inability-to-arbitrate-on-behalf-of-a-class provision
The Supreme Court, however, reversed. It reasoned, in part,
that the Discover Bank rule "interfered with fundamental
attributes of arbitration." One of these was that class
arbitration "greatly increases the risks to defendants" because
class arbitration has the same high stakes of class actions in
court yet is subject to the sharply limited standard of judicial
review of arbitration awards.
Marmet,5 the nursing home injury case, involved three
negligence suits for injuries or harm filed against nursing
homes in West Virginia. In each of the three cases, a patient
requiring extensive nursing care died and a family member sued.
The agreements signed by family members with the nursing homes
included arbitration clauses requiring the parties to arbitrate
all disputes. The party filing the arbitration was responsible
for paying a filing fee in accordance with the Rules of the
American Arbitration Association fee schedules. A state trial
court dismissed the lawsuits based on the agreement to
The cases wound up in West Virginia's highest court which held that "as a
matter of public policy" an arbitration clause in a nursing home
admission agreement adopted prior to an occurrence of negligence
that results in personal injury or wrongful death, "shall not be
enforced to compel arbitration of a dispute concerning the
negligence." The West Virginia court called the U.S. Supreme
Court's interpretation of the FAA "tendentious" and "created
from whole cloth" and concluded that the FAA does not preempt
the state's public policy against pre-dispute arbitration
agreements that apply to nursing home injury or death claims.
The U.S. Supreme Court acted swiftly to grant certiorari, vacate the West
Virginia ruling and remand for proceedings not inconsistent with
the court's opinion. This time the Supreme Court did not act
5-4, but unanimously, in a "per curiam" opinion. The FAA says 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." The statute's text, said
the court, "includes no exception for personal-injury or
wrongful-death claims." It "requires courts to enforce the
bargain of the parties to arbitrate" and it "reflects an
emphatic federal policy in favor of arbitral dispute
Citing Concepcion, the court emphasized that when
state law "prohibits outright" arbitration of a particular type
of claim, the conflicting state rule is displaced and preempted
by the FAA. West Virginia's prohibition against pre-dispute
agreements to arbitrate nursing home injury or death claims was
a "categorical rule prohibiting arbitration of a particular type
of claim" and thus was "contrary to the terms and coverage of
The FAA Section 2's "savings clause" (arbitration agreements
are valid, irrevocable and enforceable, "save upon such grounds
as exist at law or equity for the revocation of any contract")
could, in a given case, put into play state law defenses that
are applicable to "any contract." Concepcion advised that
this could include state law defenses such as fraud, duress or
unconscionability. But a state's "general" contract defenses
aimed primarily at arbitration agreements or targeting or
applying to arbitration agreements disproportionately will be
In my June 2013 column6 I reported on the U.S. Supreme Court's
Oxford Health Plans v. Sutter,7 upholding an
arbitrator's decision to allow class arbitration, but only
because the parties there agreed that the arbitrator should
decide whether their contract authorized class arbitration. The
defendant's decision to challenge "arbitrability" of the issue
in court came too late. Thus, even though the underlying
agreement was "silent" on whether the parties had intended to
permit class arbitration, the arbitrator's construction "holds,
however good, bad or ugly."
Since contracts that are "silent" regarding class arbitration
have a measure of frailty in this regard—indeed, the court in Oxford said
in footnote 2: "this Court has not yet decided whether the
availability of class arbitration is a question of arbitrability"—my
column advised those firms electing to arbitrate disputes to
incorporate "class action waivers" in their contractual
Express Co. v. Italian Colors Restaurant,8 the
court held the FAA does not permit courts to invalidate a
contractual waiver of class arbitration on the ground that the
plaintiff's cost of individually arbitrating a federal statutory
claim exceeds the potential recovery. The Amex decision, as it
is popularly called, involved federal antitrust class action
claims by merchants alleging American Express violated the
Sherman and the Clayton Acts by forcing merchants to accept its
credit cards at rates some 30 percent higher than fees for
competing credit cards. Amex fought the court class action
proceedings by moving to compel individual arbitration in
accordance with the class waiver provision.
In resisting Amex's motion, the plaintiffs submitted an
economist's declaration that estimated the costs of an expert's
analysis needed to prove the individual antitrust claims would
be at least several hundred thousand dollars, and "might exceed
$1 million." Compared to the individual plaintiff's maximum
antitrust recovery of some $12,850 (or $38,549 when trebled),
such costs were deemed "prohibitive." The district court,
nonetheless, granted the defense motion to compel individual
arbitration, but the U.S. Court of Appeals for the Second
Circuit reversed holding that the class waiver was unenforceable
since Concepcion involved FAA preemption of a state
statute. In Amex, however, the federal statutes were not
intended to be preempted. A petition for rehearing en banc was
denied with five judges dissenting.
The Supreme Court's 5-4 decision in Amex was emphatic
confirmation of Concepcion's strength. The court held
that the FAA does not permit courts to invalidate a contractual
class action waiver on the ground that a plaintiff's cost of
individually arbitrating a federal statutory claim exceeds the
potential recovery. The expense of litigation is not a
determinative factor: "[T]he antitrust laws do not guarantee an
affordable procedural path to the vindication of every claim."
The fact that "it is not worth the expense involved in proving a
statutory remedy does not constitute the elimination of the right
to pursue that remedy." (Emphasis by court.)
Justice Antonin Scalia, writing for the five-justice
majority, confirmed the vitality of Concepcion: "Truth to
tell, our decision in AT&T Mobility all but resolves this
case. There we invalidated a law conditioning enforcement of
arbitration on the availability of class procedure because that
law 'interfere[d] with fundamental attributes of arbitration.'"
Class arbitration "sacrifices the principal advantage of
arbitration—its informality—and makes the process slower, more
costly, and more likely to generate procedural morass than final
judgment." And, in its footnote 5, the court reminded us that
"the FAA's command to enforce arbitration agreements trumps any
interest in ensuring the prosecution of low-value claims."
In the court's newest decision in this chain, DIRECTV,
the service agreement had a provision that "any Claim either of
us asserts will be resolved only by binding arbitration." The
agreement also set forth a waiver of class arbitration. However,
it also provided that, if the "law of your state" makes the
waiver of class arbitration unenforceable, then the entire
arbitration provision "is unenforceable." The California courts
held the arbitration provision unenforceable since the words
"law of your state" made California law determinative even if
that law were inconsistent with Concepcion. The Supreme
Court, however, reversed.
The contract's reference to "state law," absent any indication to the
contrary, is governed by its ordinary meaning, namely "valid"
state law.9 The court emphasized that, while
Concepcion was a "closely divided" holding (5-4 decision)
and lower court judges can note their disagreement with the
decision, "[n]o one denies that lower courts must follow"
Concepcion. The FAA "is a law of the United States, and
Concepcion is an authoritative interpretation of that Act.
Consequently, the judges of every State must follow it."10
Since Concepcion issued in 2011, there has been a great deal of
commentary, much of it extremely critical and some of it quite
strident.11 In particular, the "doomsday" kind of
commentary seemed to impart an emotional, "over-the-top" message
in the face of a rather generous legal system. Then, too, the
Concepcion arbitration provision enforced by the court there was
A more detailed examination of the topic appears in a law
review article I co-authored with Linda Brown, an appellate
specialist at my firm. What were the competing rationales? The
exceptions? How "bad" was the Concepcion aftermath? Since the
article literally was at the printer in December when DIRECTV
issued, we could only include minimal discussion of the new
The article—"Arbitration and Class Action Waivers Under Concepcion: Reason
and Reasonableness Deflect Strident Attacks"—examines the roots
of the Concepcion decision and the considerations that support
it.12 It also reviews judicial developments post-Concepcion
as well as "exceptions" to the rule.13 The attempts
by claimants to mount additional theories or defenses to defeat
enforcement of class waivers, with varying success, are
surveyed.14 In the latter section we discuss
challenges on "unconscionability" grounds and the features
courts look at to decide the issue; challenges on contract
formation grounds; failure to give assent and "illusoriness" of
the agreement; issues of waiver and estoppel; and the effect of
excessive arbitration and administrative fees. We also discuss
judicial developments where the agreement is silent about class
arbitration;15 and, too, whether arbitration
agreements can be enforced by and against non-signatories.16
Arbitration and class action waiver provisions are a fact of
life. The Supreme Court says they are enforceable. There are
complex considerations affecting the ability of lawyers to
challenge as well as to enforce such provisions. The chain of
decisions and our law review article discussed above can be
useful resources in the lawyer's quest to defend or defeat such
1. 136 S. Ct. 463, 2015 U.S. LEXIS 7999 (Dec. 14, 2015).
2. 563 U.S. 333 (2011).
3. 132 S. Ct. 1201 (2012).
4. 113 P. 3d 1100 (Cal. 2005).
5. Supra n. 3.
6. M. Hoenig, "U.S. Supreme Court Issues Incomplete
Clarification on Class Arbitration," NYLJ, June 17, 2013, p. 3.
7. 2013 U.S. LEXIS 4358 (Sup. Ct. June 10, 2013).
8. 2013 U.S. LEXIS 4700 (Sup. Ct. June 20, 2013).
9. DIRECTV, 2015 U.S. LEXIS 7999, at *13.
10. Id. LEXIS at *9-*10. For a recent, informative article on
the impact of DIRECTV and Concepcion and the potential to
challenge the effect of these precedents, see Thomas A.
Dickerson and Cheryl E. Chambers, "Challenging 'Concepcion'
in New York State Courts," NYLJ, Dec. 29, 2015, pp. 4, 7. The
authors are associate justices of the Appellate Division, Second
Department. Justice Dickerson is the author of "Class Actions:
The Law of 50 States" (Law Journal Press 2016).
11. See e.g., M. Hoenig & L. Brown, "Arbitration and Class
Action Waivers Under Concepcion: Reason and Reasonableness
Deflect Strident Attacks," 68 Ark. L. Rev. 669 n. 4 (No. 3,
December 2015) (e.g., one law review article referred to the
court's rulings as a "tool to insulate corporations from facing
meaningful accountability for cheating large numbers of
12. Id., 68 Ark. L. Rev. at 669-687.
13. Id. at 687-699.
14. Id. at 699-717.
15. Id. at 718-723.
16. Id. at 724-730.
Printer Friendly Version
Back to Archive
125 Broad Street, New York, New York, 10004 - Phone: 212-471-8500 - Fax: 212-344-3333©2004 -2014 Herzfeld & Rubin, P.C.