AT&T Mobility v. Concepcion: Trouble for Pre-Dispute Arbitration Clauses in California?

Synopsis: Does Concepcion mean the end of California's Armendariz protections for employee pre-dispute arbitration clauses? There's reason to worry that after this Supreme Court decision, “justice” in the employment dispute context may be “just us employers.”

It’s no secret that we at Levine & Baker are not necessarily fans of pre-dispute arbitration clauses in employment agreements. As we’ve discussed before, in our experience such agreements are almost never freely negotiated (try negotiating them away!) and they are inherently unfair for a number of reasons. For example: the process is not public, arbitrators are often seeking to build books of business and individual employees (unlike large employers) are not “repeat customers”, and damage awards – even when they are issued – tend to be far smaller than damage awards in jury trials.

To its credit, the California Supreme Court has recognized the inherent unfairness of pre-dispute arbitration clauses in employment agreements and put in place a regime designed to mitigate that unfairness. That regime, the foundation of which is the Court’s decision in Armendariz v. Foundation
Health Psychcare Services, Inc.
, 24 Cal.4th 83 (2000)
, includes such fundamental elements as mutuality (i.e., if employees’ claims must be arbitrated, so must employers’ claims), minimally adequate discovery opportunities, no shortened statutes of limitations, and a requirement that employers pay process costs in excess of the modest amounts an employee would have to pay as a filing fee in court. This last element is crucial, and frequently gets lost in the conventional “wisdom” that claims arbitration is faster and cheaper than is the public judicial system. In fact, arbitrators can (and do) charge upwards of $1000 per hour, and arbitrations can last many days – or even weeks. Judges in courts do not charge by the hour. An employee pursuing, say, a $75,000 claim for unpaid commissions or bonus, would effectively be priced out of the arbitration arena if she had to bear half the cost of a multi-day JAMS arbitration.

But federal law trumps state law where the two conflict, and the U.S. Supreme Court’s recent decision in AT&T Mobility v. Concepcion, No. 09-893 (April 27, 2011), may have created just such a conflict with Armendariz. Concepcion concerned the arbitration clause in AT&T’s cell phone sale and service agreements. That clause required arbitration of any disputes – but precluded arbitration of class actions. The plaintiff purchased a service plan which, according to AT&T’s representations, included a free cell phone. After purchasing the plan, the plaintiff found that while the phone was free, they were billed $30 in “sales tax” based upon the phone’s “retail value.” The Concepcions filed a class action in federal district court in San Diego alleging false advertising and fraud. AT&T moved to compel arbitration pursuant to the arbitration agreement in the service contract. AT&T lost in the District Court which found the preclusion of class actions unconscionable and “exculpatory” (i.e., designed to avoid any effective relief against AT&T for its illegal practices), because the victims of the alleged fraud – each of whom would have damages of around $30 – could not effectively vindicate their rights in the absence of a class action procedure. The Ninth Circuit affirmed the District Court’s ruling. The U.S. Supreme Court reversed. The practical effect of its ruling was to deny the Concepcions the opportunity to bring a class action either in arbitration or in a court of law.

The Supreme Court’s ruling was based upon what strikes many critics (including us) as an extraordinarily strained reading of the Federal Arbitration Act. That act was intended to give agreements to arbitrate the same standing, subject to the same statutory and common law standards, as any other contract. Arbitration agreements were to be “valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” 9 USC sec. 2. The 5-4 (the usual line-up) conservative, Republican, pro-Chamber of Commerce majority, however, found an implicit federal policy behind the FAA. Congress was not simply intending to put arbitration agreements on equal footing with other contracts. In addition, the Court stated, the FAA evinced a “liberal policy favoring arbitration” and given that policy, any challenges to the enforceability of an arbitration agreement that “derive their meaning from the fact that an agreement to arbitrate is at issue” will be rejected, even if such challenges are based upon general legal principles applicable to all contracts (such as unconscionability due to such factors as unequal bargaining power and unfair substantive provisions). In other words, if the contract at issue is an agreement to arbitrate disputes, and that agreement is attacked as unconscionable due to factors unique to or inherent in the nature of the arbitration agreed to, general state law regarding the unenforceability of unconscionable contracts is trumped by the FAA’s “liberal federal policy favoring arbitration.”

Optimistic cynics have viewed Concepcion merely as part of the right wing’s attack on class actions (which it certainly is). Less optimistic cynics recognize it as part of the general out-sourcing of the justice system to private judging (read: arbitration). If general state law on the unenforceability of unconscionable contracts (whether the unconscionability finding is the result of generally applicable statue or generally applicable common law principles) is no longer permitted to invalidate arbitration agreements, there seems to be no reason why the Armendariz requirements — crucially including the requirement that the employer pay the administrative and arbitrators’ fees– can continue to be enforced to invalidate pre-dispute arbitration clauses in employment agreements. Indeed, there are already cases in the pipeline in which employment defense counsel are seeking to knock employment claims out of court and compel arbitration pursuant to non-Armendariz compliant arbitration clauses. If those motions are as successful as Concepcion suggests they will be, “justice” in the employment dispute contexts will increasingly mean “just us employers.”