By Michael Hoenig - New York Law Journal -
April 9, 2012
For many litigants and lawyers it is, or soon will be, a "brave
new world" in the universe of torts, class actions, and
commercial litigation of all kinds—only many litigators may not
know it yet. Some will be surprised, some shocked. An old,
familiar word, the "A" word, now has a new, profound, forceful
impact as a result of two U.S. Supreme Court decisions issued,
respectively, in April 2011 and February 2012. The "A" word that
has zoomed afresh onto the litigation scene with the thunderous
roar and whoosh of a powerful tornado is "Arbitration." Under
these and other developments, can consumer class actions be
waived via binding arbitration clauses? Yes! Can personal injury
and death lawsuits be tossed because a form agreement to
arbitrate was signed? Yes! Can the New York General Business Law
prohibiting mandatory arbitration clauses in consumer goods
transactions be preempted? Yes!
The earlier Supreme Court decision is
AT&T Mobility LLC v. Concepcion,1 a 5-4
ruling that the Federal Arbitration Act (FAA) preempts state
laws that make specific categories of claims non-arbitrable.
Said the Court: "[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."2
And less than two months ago, in
Marmet Health Care Center, Inc. v. Brown,3
the court held that injury and death lawsuits against nursing
homes could be barred by an arbitration agreement. These
developments led New York’s Appellate Division, First
Department, on March 29, to order arbitration and stay a
personal injury lawsuit. Let's home in on these issues.
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."4
That provision was held in Concepcion to preempt a
California Supreme Court rule adopted in a case called
Discover Bank v. Superior Court.5 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 Discover Bank
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.
swept all that away. Because the Discover Bank 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
under Discover Bank. 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
unconscionable. 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.
Lest the reader view Concepcion as some exotic ruling
applicable to class action waivers in low-cost utility service
contracts only, and having nothing to do with personal injury
litigation, he or she should consider the hot-off-the-press
March 29 ruling by New York's Appellate Division, First
Ayzenberg v. Bronx House Emanuel Campus Inc.6
Plaintiff wife and her husband were guests at defendant's camp
facility. She was injured and sued. Defendant moved to stay the
lawsuit and to compel arbitration based on an arbitration clause
contained in the application for defendant's camp program. The
document was filled out by plaintiff's husband, bore his
signature and provided for arbitration of "any dispute"
resulting from their stay at defendant's facility.
opposition to defendant's motion, plaintiff argued she did not
sign the agreement. Moreover, she contended that New York
General Business Law §399-c prohibited such an arbitration
clause. Further, she urged that a "language barrier" precluded
her and her husband from understanding the content of the
application. The trial court denied the motion to stay and to
compel arbitration pending further discovery, but the Appellate
Division reversed, granted arbitration and stayed the action.
The fact that the husband signed the application was sufficient
to bind the wife. The application provided for the couple's
joint participation in defendant's program and the husband, at
the very least, had apparent authority to sign up for her. As
for the alleged language barrier, the husband and wife were
bound by the agreement's enforceable terms because, as stated in
a case cited by the Appellate Division,
Shklovsky v. Khan,7 persons who are
illiterate in the English language "are not automatically
excused from complying with the terms of a contract which they
sign simply because they could not read it. Such persons must
make a reasonable effort to have the contract read to them."
Finally, said the unanimous panel in Ayzenberg, General
Business Law, §399-c, which is titled "Mandatory arbitration
clauses in certain contracts prohibited," is "preempted by
federal law" to the extent that the statute may prohibit the
subject arbitration clause.8
Still not convinced that there's a "brave new world" out there?
Then consider another U.S. Supreme Court decision issued less
than two months ago on Feb. 21, Marmet Health Care Center
Inc. v. Brown,9 cited by the Appellate Division
in Ayzenberg. Marmet 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
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 from
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 resolution." 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."
The court in Marmet cited its prior cases in which the
FAA was held to preempt a state law granting a state
commissioner exclusive jurisdiction to decide an issue the
parties agreed to arbitrate; a state law requiring judicial
resolution of punitive damages; a state law requirement that
litigants be provided a judicial forum for wage disputes; and a
state financial investment statute's prohibition of arbitration
of claims brought under that statute.10 Concepcion
and Marmet reinforce this trend of FAA preemption.
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
preempted. New York's General Business Law §399-c prohibits
mandatory arbitration agreements in consumer contracts for the
sale or purchase of consumer goods and, so, is targeted at
arbitration categorically. Accordingly, it is displaced by FAA
preemption, as the Appellate Division held in Ayzenberg.
has been construed broadly by some courts to uphold class action
waivers and mandatory arbitration clauses. Thus, the FAA has
been held to preempt state statutes or case law that purport to
invalidate such contract provisions on grounds of public policy
or unconscionability.11 Some commentary agrees that
the judicial trend is toward broad application of Concepcion.12
The Supreme Court's Feb. 21 Marmet decision is
emphatic confirmation that Concepcion is meant to apply
broadly and vigorously, not only to foreclose class actions but
even personal injury and death litigation.
In re American Express Merchants' Litigation13
that a class action waiver in an antitrust case was
unenforceable because it would deprive parties of their federal
statutory rights, the U.S. Court of Appeals for the Second
Circuit construed Concepcion narrowly so as to apply to
state laws limiting arbitration agreements but not displacing
federal statutory rights. The court emphasized, however, that it
was not declaring all antitrust-related class action waivers
unenforceable; rather, each waiver had to be analyzed
When it comes to federal Magnuson-Moss Warranty Act claims, the
circuit courts have split on whether arbitration clauses should
be enforced. The Ninth Circuit's Kolev decision held that
an old Federal Trade Commission rule prohibiting judicial
enforcement of arbitration clauses regarding consumer claims
filed under the act was a reasonable construction of the
warranty statute and, so, mandatory arbitration under an
automobile purchase contract was barred.15 On the
other hand, the Fifth and Eleventh circuit courts have held that
the Magnuson-Moss Act does not bar mandatory arbitration
clauses; rather, the FAA suggests they should be enforced.16
Of interest, in a "Lemon Law" lawsuit in Alabama, the importer
defendant successfully moved to compel plaintiff to arbitrate
his claim even though the automobile purchase agreement was with
the retail dealer and the defendant was not a signatory. The
appellate court held that the broad language "all disputes" was
sufficient to compel arbitration.17
Whether businesses should incorporate mandatory arbitration
clauses containing class action waivers is a "hot" topic post-Concepcion.
A trend toward including such provisions in consumer contracts
of all kinds is likely. For deep-pocket, target defendants such
clauses, when enforced by the courts, provide certain
advantages. But, then, arbitration itself is not necessarily a
cakewalk. Arbitrators, like jurors, can decide claims generating
huge awards but judicial appellate review of arbitration awards
is extremely limited. Much depends on the text of the
arbitration clause, on what it provides and on what it does not.
Arbitration agreements should be drafted carefully, and due
consideration should be given to unconscionability issues, both
procedural and substantive. Welcome to the brave new world of
Michael Hoenig is a
member of Herzfeld & Rubin.
131 S. Ct. 1740 (2011).
Concepcion, 131 S. Ct. at 1747.
132 S. Ct. 1201 (2012).
9 U.S.C. §2.
113 P.3d 1100 (Cal. Sup. Ct. 2005).
2012 NY Slip Op 2396 (1st Dept., March 29, 2012).
273 A.D.2d 371, 372 (2d Dept. 2000).
Ayzenberg, NY Slip Op 02396, at p. 2.
132 S. Ct. 1201 (2012).
10. Marmet, 132 S. Ct. at 1204-1205. The court was
suspicious that the West Virginia court's "alternative" holding
that the arbitration clause was "unconscionable" was influenced
by the "invalid, categorical rule" but remanded for the West
Virginia court to consider whether, absent the state's general
"public policy," the arbitration clauses were unenforceable
"under state common law principles that are not specific to
arbitration and preempted by the FAA."
11. See e.g.,
Litman v. Cellco Partnership, 655 F.3d 225, 231 (3d Cir.
2011) (recognizing "the holding of Concepcion to be both
broad and clear: a state law that seeks to impose class
arbitration despite a contractual agreement for individualized
arbitration is inconsistent with, and therefore preempted by,
the FAA, irrespective of whether class arbitration is desirable
for unrelated reasons"; New Jersey law preempted);
Green v. SuperShuttle Int'l Inc., 653 F.3d 766 (8th Cir.
2011) (challenge to class action waiver in arbitration agreement
under Minnesota law foreclosed by Concepcion);
Cruz v. Cingular Wireless LLC, 648 F.3d 1205, 1208 (11th
Cir. 2011) (class action waiver in arbitration agreements was
enforceable, even though Florida law would have invalidated
agreements as contrary to public policy); Giles v. GE Money
Bank, 2011 U.S. Dist. LEXIS 111018 (D. Nev. 2011) ("Several
courts have recognized that the holding in AT&T Mobility
is broadly applicable to state rules limiting the effect of
class action waivers, and not limited to the California rule it
was abrogating"; Brown v. Trueblue Inc., 2011 U.S. Dist.
LEXIS 134523 (M.D. Pa. 2011) (in light of Concepcion, FAA
preempts Pennsylvania's unconscionability doctrine); Arellano
v. T-Mobile USA Inc., 2011 U.S. Dist. LEXIS 52142 (N.D. Cal.
2011) (Concepcion "decided that states cannot refuse to
enforce arbitration agreements based on public policy").
12. See A.J. Trask, "Arbitration Strategy After 'AT&T Mobility
v. Concepcion,'" Bloomberg BNA, Class Action
Litigation Report, Dec. 23, 2011.
13. 667 F.3d 204 (2d Cir. 2012).
14. See Neal R. Stoll, "Class
Action Waivers of Antitrust Claims After 'Concepcion',"
New York Law Journal, March 13, 2012, p. 3, discussing the
impact of American-Express.
Kolev v. Euromoters West/The Auto Gallery, 658 F.3d 1024
(9th Cir. 2011).
Walton v. Rose Mobile Homes, LLC, 298 F.3d 470, 478 (5th
Davis v. Southern Energy Homes Inc., 305 F.3d 1268, 1280
(11th Cir. 2002).
Volkswagen Group of America Inc. v. Williams, 64 So. 3d
1062 (Ala. App. 2010).
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