Concepcion And the Enforcability of Consumer Class Action Arbitration Waivers in Missouri
Are class action arbitration waiver provisions enforceable under Missouri law? In other words, can a company contract away a consumer’s right to proceed in arbitration on a classwide basis? In AT&T Mobility LLC. v. Concepcion, 131 S. Ct. 1740 (2011), the United States Supreme Court severely limited the ability of states to declare such class arbitration waivers unenforceable as contrary to public policy. Writing for the majority, Justice Scalia found that the Federal Arbitration Act preempts California’s judicial rule – the Discover Bank Rule — which classifies most consumer class action arbitration waivers as unconscionable. Because the purpose of the FAA is to ensure the enforceability of arbitration agreements according to their terms, the FAA’s savings clause permits states to invalidate consumer class action arbitration waivers only by “generally accepted contract defenses, such as fraud, duress, or unconscionabilty,” but not by defenses applicable only “because arbitration is at issue.” It’s important to note, although unclear what role it played in the majority’s analysis, that the arbitration provision at issue in Concepcion was an extremely consumer-friendly provision, with several cost-shifting provisions in the event the consumer prevailed in the arbitration.
The Missouri Supreme Court grappled with how to apply Concepcion in a pair of recent en banc decisions, Robinson v. Title Lenders, 364 S.W.3d 505 (2012) (en banc), and Brewer v. Missouri Title Loans, 364 S.W.3d 486 (2012) (en banc). Both cases involved consumer class action waivers asserted by payday lending companies. In both cases the trial court had found the class action waiver provision unenforceable and unconscionable. In Robinson, the Missouri Supreme Court recognized that, post-Concepcion, consumer class action arbitration waiver provisions are no longer per se unenforceable merely because they are contracts of adhesion where the parties lack equal bargaining power, because these are “the hallmarks of modern consumer contracts generally.” The Court held that the trial court had erred in invalidating the arbitration clause simply due to the class action waiver provision, which it found deprived the borrower of any meaningful remedy (by requiring only individual arbitration), and remanded the case to determine if the arbitration agreement was enforceable under Concepcion’s instructions.
Exactly what is and is not enforceable under Concepcion was addressed in Brewer, the companion case, in which the record was sufficiently developed for the Missouri Supreme Court to reach the issue of enforceability. Recognizing that the savings provision of the FAA allows state courts to apply state law defenses to the formation of the contract at issue, the Missouri Supreme Court addressed the issue of whether the arbitration agreement as a whole — not merely the class action waiver provision — was unenforceable as unconscionable under Missouri contract law. The majority concluded that it was indeed unenforceable as unconscionable under Missouri law because it was:
- Non-negotiable and hard for consumers to understand;
- The record showed it would be unlikely for the plaintiff to be able to retain counsel to proceed individually in arbitration;
- There was considerable disparity in bargaining power; and
- The substantive terms much were less fair to consumers than those of the agreement upheld in Concepcion
In a convincing dissent, Judge Price argued that the majority had applied Missouri contract law wrong by failing to find both procedural and substantive unconscionability as required by Missouri contract law. He went on to state his belief that the what majority was really doing was expressing its hostility for individual arbitration in the guise of unconscionability analysis, which is preempted by the FAA:
This case is nothing more than evidence of the majority’s refusal to abide by controlling federal law because it disfavors the use of individual arbitration clauses in consumer contracts and prefers class action litigation that dramatically increases the cost and risk to the business community.
What does Concepcion mean for Missouri cases? First, Concepcion proscribes the per se invalidation of arbitration agreements with class action waiver provisions, demanding instead a contract-specific application of Missouri class action law to determine whether the contract at issue is enforceable. Second, whether Justice Price is correct or not, businesses will have a hard time enforcing consumer-unfriendly arbitration provisions in Missouri, and would be well-advised to consider incorporating some of the consumer-friendly aspects of the arbitration agreement upheld in Concepcion.
Finally, this analysis begs a question with which other courts are currently grappling: is an arbitration agreement invalid if the requirement of individual arbitration operates so as to deny the consumer all practical ability to vindicate his or her state or federal rights by forcing them into a negative value proceeding? The Second Circuit says such arbitration agreements are invalid even in the wake of Concepcion when they foreclose the ability of a plaintiff to assert federal antitrust claims. In re Amex Merchants Litig. III, 667 F.3d 204 (2d. Cir. 2012). The Third Circuit reached the opposite conclusion in Homa v. American Express Co., No. 11-3600 (3rd Cir. August 22, 2012), holding that the FAA requires the enforcement of class arbitration waiver provisions even if it renders the ability of the plaintiff to pursue his or her state consumer protection claims “illusory.” While these two decisions indicate there may be a preemption distinction between the conflict between the FAA and federal vs. state-based rights, the Ninth Circuit in Coneff v. AT&T Corp., 673 F.3d 1155 (9th Cir. 2012), entirely rejected the argument that the FAA’s preemption provision shouldn’t apply when enforcement of the arbitration agreement would preclude effective vindication of either state or federal statutory rights. It will be interesting to see how this issue plays out in Missouri and elsewhere.