Earlier this year, we published a bulletin on the decision of the Supreme Court of Canada in Seidel v TELUS Communications.1 In that case, the Court considered the relationship between arbitration and class actions in the context of consumer protection law in British Columbia. The Court concluded, by a 5-4 majority, that claims under the BC Consumer Protection Act could not be waived by an arbitration clause, noting, among other things, that "private arbitral justice, because of its contractual origins, is necessarily limited."
A mere three months later, the United States Supreme Court was asked to consider similar issues in Re AT&T Mobility LLC v Concepcion.2 In that case, the Court concluded, also by a 5-4 majority, that a California state rule deeming arbitration clauses which preclude collective proceedings to be unconscionable was pre-empted by the Federal Arbitration Act (FAA).
At first blush, Seidel suggests the possibility of waning enthusiasm for arbitration in Canada, while AT&T suggests unbridled enthusiasm for arbitration immediately south of the 49th parallel. However, just as the true meaning and impact of Seidel is likely far more nuanced than it appears on the surface, so too is there more to AT&T than first meets the eye. Indeed, the enthusiasm for arbitration expressed by the majority of the US Supreme Court could actually be said to ignore the reality and growing complexity of arbitral disputes – especially international disputes.
Vincent and Liza Concepcion purchased mobile telephone service from AT&T. Although the service was advertised as including "free" phones, the Concepcions were charged sales tax on their phones (calculated on the basis of the phones' retail value). They filed a complaint against AT&T in the Federal Court for the Southern District of California. Their complaint was consolidated with a putative class action alleging, among other things, that AT&T had engaged in false advertising and fraud. The mobile phone service contract between the Concepcions and AT&T provided for arbitration of all disputes and precluded class proceedings. AT&T accordingly moved to compel the Concepcions to submit their claims to individual arbitration in accordance with the terms of the arbitration clause.
The District Court denied AT&T's motion, relying on a rule set out by the California Supreme Court in Discover Bank v Superior Court,3 which held that a class action waiver is unconscionable when:
[it is] found in a consumer contract of adhesion in a setting in which disputes [...] predictably involve small amounts of damages, and when it is alleged that the party with superior bargaining power has carried out a scheme to deliberately cheat large numbers of consumers out of individually small sums of money.
Under the US doctrine of pre-emption, a state law has no effect if it is contrary to federal law validly enacted within the scope of federal authority. Section 2 of the FAA provides that agreements to arbitrate are "valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract" (emphasis added). The question to be resolved in AT&T was therefore whether the rule in Discover Bank constituted a ground "as exist[s] at law or in equity for the revocation of any contract" within the meaning of the FAA. If it did not, then the rule under California law as articulated in Discover Bank was pre-empted by section 2 of the FAA. The District Court found that the class arbitration waiver in the contract between AT&T and the Concepcions was unconscionable, and that California law in the matter was not pre-empted by the FAA. On appeal, the Ninth Circuit affirmed that decision.
The decision of the US Supreme Court
In the US Supreme Court, Justice Scalia held, for the majority, that section 2 of the FAA pre-empts the Discover Bank rule. He found that the saving clause in section 2 of the FAA permits generally applicable contract defences – such as fraud, duress or unconscionability – but nothing like the Discover Bank rule, which derives its significance "from the fact that an agreement to arbitrate is at issue." Justice Scalia explained as follows:
An obvious illustration of this point would be a case finding unconscionable or unenforceable as against public policy consumer arbitration agreements that fail to provide for judicially monitored discovery. The rationalizations for such a holding are neither difficult to imagine nor different in kind from those articulated in Discover Bank. A court might reason that no consumer would knowingly waive his right to full discovery, as this would enable companies to hide their wrongdoing. Or the court might simply say that such agreements are exculpatory—restricting discovery would be of greater benefit to the company than the consumer, since the former is more likely to be sued than to sue. See Discover Bank, supra, at 161, 113 P. 3d, at 1109 (arguing that class waivers are similarly one-sided). And, the reasoning would continue, because such a rule applies the general principle of unconscionability or public-policy disapproval of exculpatory agreements, it is applicable to "any" contract and thus preserved by §2 of the FAA. In practice, of course, the rule would have a disproportionate impact on arbitration agreements; but it would presumably apply to contracts purporting to restrict discovery in litigation as well.
[...] Such examples are not fanciful, since the judicial hostility towards arbitration that prompted the FAA had manifested itself in "a great variety" of "devices and formulas" declaring arbitration against public policy.
Respecting the purposes of arbitration ...
Justice Scalia noted that the purpose of the FAA is to enforce arbitration agreements according to their terms, in order to facilitate streamlined proceedings. He stated that section 2 of the FAA reflects both a liberal federal policy favouring arbitration – which reduces costs and increases the speed of proceedings – and the fundamental principle that arbitration is a matter of contract. Justice Scalia explained:
The point of affording parties discretion in designing arbitration processes is to allow for efficient, streamlined procedures tailored to the type of dispute. It can be specified, for example, that the decisionmaker be a specialist in the relevant field, or that proceedings be kept confidential to protect trade secrets. And the informality of arbitral proceedings is itself desirable, reducing the cost and increasing the speed of dispute resolution.
He concluded that the FAA cannot be read as creating an exception that undermines its basic purpose.
... only for individual arbitral proceedings?
In order to better understand the majority's reasoning for concluding that the Discover Bank decision undermines the FAA's purpose, it is useful to consider the impact of the California rule. Recall that the judge-made rule deeming certain arbitration clauses to be unconscionable is predominantly concerned with the issue of a contractual waiver of collective, or class, proceedings. The implication of invoking the Discover Bank rule, therefore, is not necessarily that a class action will proceed in court. Instead the effect of the remedy will often be to allow any party to such consumer contracts to demand classwide arbitration, a procedure that has been referred to as "uniquely American."4
Justice Scalia stated that classwide arbitration is not, however, the sort of arbitration that the FAA seeks to encourage, and that a rule protecting such a procedure is therefore inconsistent with the federal statute. In the majority's opinion, class arbitration forfeits the principal advantage of arbitration — its informality — making the process slower, more costly, and more likely to generate procedural morass than final judgment. In the view of the majority, class arbitration is fundamentally different from, and less efficacious than, individual arbitration; simply put, it is not arbitration of the sort with which the FAA is concerned or that it seeks to promote.
The minority of the US Supreme Court disagreed with this assessment, noting as follows in a dissent penned by Justice Breyer:
The majority compares the complexity of class arbitration with that of bilateral arbitration. [...] And it finds the former more complex. [...] But, if incentives are at issue, the relevant comparison is not "arbitration with arbitration" but a comparison between class arbitration and judicial class actions. [...]
AAA statistics "suggest that class arbitration proceedings take more time than the average commercial arbitration, but may take less time than the average class action in court." AAA Amicus Brief 24 (emphasis added). Data from California courts confirm that class arbitrations can take considerably less time than in-court proceedings in which class certification is sought. Compare ante, at 14 (providing statistics for class arbitration), with Judicial Council of California, Administrative Office of the Courts, Class Certification in California: Second Interim Report from the Study of California Class Action Litigation 18 (2010) (providing statistics for class-action litigation in California courts). And a single class proceeding is surely more efficient than thousands of separate proceedings for identical claims. Thus, if speedy resolution of disputes were all that mattered, then the Discover Bank rule would reinforce, not obstruct, that objective of the Act. [emphasis in original]
As in Seidel, the dissent in AT&T shines a harsh light on the reasoning of the majority. Viewed in that light, it might seem that according to the majority of the US Supreme Court, the FAA harks back to a simpler time and is exclusively concerned with a type of arbitration that is at odds with modern commercial and legal realities. That type of arbitration, as articulated by the majority in AT&T, is arguably alien to the type of highly complex, often multi-party arbitral proceedings that are increasingly common today. Indeed, it is not unheard of, especially in the context of investor-State arbitration, for arbitral proceedings to resemble something like class proceedings.
That said, just like Seidel, the AT&T decision arose in the context of a domestic consumer contract of adhesion – a far cry from the world of commercial parties and transactions in which most commercial arbitration, especially international commercial arbitration, occurs. While both decisions provide insight into the courts' attitudes towards arbitration as a system of justice, it remains to be seen whether and how the decisions will actually affect judicial attitudes towards commercial arbitration in general, and international commercial arbitration in particular, in the two countries.
1. Seidel v TELUS Communications Inc., 2011 SCC 15
2. 563 U.S. ___ (2011)
3. 36 Cal. 4th 148, 113 P. 3d 1100 (2005)
4. See S.I. Strong, "From Class to Collective: The De-Americanization of Class Arbitration" Arbitration International (Kluwer Law International 2010) Vol. 26 Issue 4. 493-548.
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