Federal Arbitration Act

  • June 20, 2013
    Guest Post

    by John Vail, Vice President and Senior Litigation Counsel, Center for Constitutional Litigation

    In a decision one justice called a “betrayal of our precedents,” the Supreme Court today ruled that corporations can use arbitration clauses to insulate themselves from liability.  

    The decision culminates a thirty year judicial effort by the Court to turn an innocuous 1920s statute, the Federal Arbitration Act, into a weapon used to thwart enforcement of rights by consumers, employees, and small businesses. 

    In American Express v. Italian Colors Restaurant, a restaurant filed a class action complaining that American Express had used monopoly power to force merchants to accept credit cards at rates approximately 30 percent higher than the fees for competing credit cards, in violation of antitrust statutes.  American Express moved to compel arbitration based on a clause in its agreement with the restaurant that provided, in part, “[t]here shall be no right or authority for any Claims to be arbitrated on a class action basis.”

    The restaurant -- invoking a line of Supreme Court cases that held open the possibility courts could invalidate arbitration clauses that effectively precluded vindication of federal statutory rights -- opposed arbitration.  It demonstrated that costs of litigating an individual claim were “’at least several hundred thousand dol­lars, and might exceed $1 million,’ while the maximum recovery for an individual plaintiff would be $12,850, or $38,549 when trebled,” and argued that preclusion class resolution effectively precluded it from vindicating its claim. 

    The Second Circuit agreed, having held that “the only economically feasible means for . . . enforcing [respondents’] statutory rights is via a class action.” The Supreme Court reversed.

    The Court, with Justice Scalia writing for a five person majority, first found nothing specific in the antitrust laws  - no “congressional command “ - requiring the Court  to reject the waiver of class arbitration.“The antitrust laws do not ‘evinc[e] an intention to pre­clude a waiver’ of class-action procedure.”

    The Court also found no “entitlement to class proceedings for the vindication of statutory rights” flowing from congressional approval of Rule 23, noting that in AT&T Mobility v. Concepcion it already had rejected the argument that “federal law secures a nonwaivable opportunity to vindicate federal policies by satisfying the procedural strictures of Rule 23 or invoking some other informal class mechanism in arbitration.”

  • January 17, 2012
    Guest Post

    By Ann C. Hodges, a professor of law at the University of Richmond

    In the past 20 years the Supreme Court has interpreted the Federal Arbitration Act broadly, allowing businesses to require consumers and employees to arbitrate, rather than litigate, many legal claims. Businesses frequently use arbitration agreements to bar class actions, which can be costly and time-consuming. Just last term, in AT&T v. Concepcion, the Court enhanced this business tool, striking down a California law that prevented businesses from barring class actions in cases involving small claims brought by less powerful parties bound to arbitrate by contracts of adhesion. Although the case involved consumers, it offered employers a vehicle to restrict employee class actions.

    The NLRB’s decision in D.R. Horton, issued in early January, significantly limited the effectiveness of this tool for employers by invalidating an arbitration agreement that banned class actions. This case is likely to generate significant controversy, provoking even more attacks on the agency by its vocal critics, but experienced labor lawyers will recognize the case as an unremarkable application of long-settled legal principles.

    Class claims frequently offer the only vehicle for consumers or employees to challenge unlawful actions that cause limited damages to each individual while often reaping millions for the business. For each person injured, the cost of litigating a claim outweighs the potential benefit.  Without class actions, these claims often go unremedied. In the workplace, Fair Labor Standards Act cases seeking minimum wage or overtime payments are most likely to be abandoned on this basis and Horton involved such a claim, alleging that the nonunion employer misclassified employees as exempt from overtime pay.

  • May 2, 2011
    Guest Post

    By Rochelle Bobroff, Directing Attorney, Herbert Semmel Federal Rights Project, National Senior Citizens Law Center

    While many have decried the result in AT&T v. Concepcion – the invalidation of a state law that rendered unenforceable the waiver of class action suits in arbitration – little attention has been paid to the method utilized by the Supreme Court majority of five Republican nominated Justices.  Professing to simply follow the “text” of the Federal Arbitration Act (“FAA”), the opinion for the Court written by Justice Scalia in effect took a black magic marker and crossed out the words of the text they didn’t like.  Without those words in the statute, the result would indeed be true to the text.  But just as aptly as the boy in the Hans Christian Andersen fable cried, “the Emperor has no clothes,” we must protest that ignoring the words of a statute is not a textual approach.

    Throughout his career on the federal bench, Justice Scalia has famously touted the necessity for courts to rely primarily or even solely on the text of statutory provisions and to disregard “vague” notions of statutory purpose. That approach has served him and his colleagues often and well to justify narrow readings of civil rights and other modern progressive laws.  Here, however, his professed “textualism” is fictitious. 

    The majority stated: “The overarching purpose of the FAA, evident in the text of §§ 2, 3, and 4, is to ensure the enforcement of arbitration agreements.”  The Court conceded that § 2 includes an exception to this general policy, known as a savings clause, which “preserves generally applicable contract defenses.”  But the Court completely ignored the savings clause when determining that the “objectives” of the FAA were thwarted by state law.    

    In plain English, the FAA seeks to ensure enforcement of arbitration agreements except when there are contract defenses, but the Supreme Court stated that the statute seeks to ensure enforcement of arbitration agreements when there are contract defenses.  The Court read the exception out of the text and then concluded that the state law was an obstacle to federal law.  This complete disregard of words in the text should not be paraded as a textual approach.

  • April 27, 2011

    The Supreme Court led by its conservative wing issued an opinion limiting states’ ability to nullify contracts that prohibit class action arbitration.

    In AT&T Mobility v. Concepcion, Justice Antonin Scalia writing for the 5-4 majority concluded that a provision of the Federal Arbitration Act (FAA) bars enforcement of a California law that nullifies contracts that prohibit class-action arbitration. Scalia was joined by Chief Justice John Roberts, Anthony Kennedy, Clarence Thomas and Samuel Alito. The opinion overturns a ruling by the U.S. Court of Appeals for the Ninth Circuit, which found that the FAA provision did not preempt the California law.

    Scalia wrote that the “overarching purpose of the FAA … is to ensure the enforcement of arbitration agreements according to their terms so as to facilitate streamlined proceedings. Requiring the availability of classwide arbitration interferes with fundamental attributes of arbitration and thus creates a scheme inconsistent with the FAA.”

    Justice Stephen Breyer, joined by Justices Ginsburg, Sotomayor and Kagan, lodged a dissent, arguing that California’s law “is consistent with the federal Act’s language and primary objective.”

    Breyer added, “California is free to define unconscionability as it sees fit, and its common law is of no federal concern so long as the state does not adopt a special rule that disfavors arbitration.”

    The Associated Press says today’s opinion “could greatly restrict the use of class actions, in which a party represents a much larger group, in disputes over contracts.”

    In a guest post for ACSblog, Public Justice’s Paul Bland Jr. charged that the “corporatist idea that the FAA preempts all state law limiting class-action bans hasn’t caught on in the lower courts because there is no serious legal or intellectual basis for it. If the Supreme Court decides to completely federalize the law in this area, it will have to invent from whole cloth new federal law that is not supported by anything in the language of the FAA or in its history.”

    Bland also participated in an ACS briefing on the AT&T Mobility v. Concepcion case. Video of the briefing, which included a panel discussion, is available here.

    Update: Senate Judiciary Chairman Patrick Leahy, in a statement on the opinion, said, "The opinion of five Supreme Court Justices in AT&T v. Concepcion will further weaken protections for consumers. The divided court decided that state laws which would protect consumers' rights to band together are preempted by Federal law. This is the latest in a series of cases where five conservative justices have hampered the rights of consumers to be protected by state laws. Class actions are an effective way to ensure consumer protection, but today's opinion by the Roberts Court continued to move in a direction that undermines this access to justice for hardworking Americans."


  • November 10, 2010

    by Jeremy Leaming

    Even a narrow ruling in favor of AT&T Mobility in a case before the Supreme Court regarding class action waiver in a contract clause could create more difficulty for class action proceedings, Professor Nina Pillard tells ACSblog.

    Following an ACS event on AT&T Mobility v. Concepcion, which the high court heard oral argument in yesterday, Pillard, a professor of law at Georgetown, explained why the case was before the Supreme Court - as The New York Times' Adam Liptak notes the case involves legal action over a "$30 charge for what was said to be a free mobile phone" - and why it may have an impact on class action lawsuits.

    Pillard described the case as a "class action ban case in arbitration clothing." Specifically, AT&T Mobility is arguing that California's law banning waiver of class actions in contracts, including arbitration clauses, is preempted by the Federal Arbitration Act, which as Liptak notes "generally overrides state laws unfavorable to arbitration and requires courts to enforce arbitration agreements unless state law limitation applies to all kinds of contracts."

    Pillard noted that, not surprisingly, many American businesses are not "fans of class action," and AT&T Mobility in its mobile phone contract clause, which is being challenged by Vincent and Liza Concepcion of California, included a waiver of class action rights. But, Pillard said, California and many other states have laws that say companies cannot exculpate themselves in such a manner.

    If the high court does find that California's law is preempted by the Federal Arbitration Act, even in narrow manner, a "presumption against class actions could be created," Pillard said. Watch her interview here or below. Video of the entire panel discussion about the case is here.