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The Supreme Court Review 2011
By Dennis J. Hutchinson, David A. Strauss, Geoffrey R. Stone
The University of Chicago PressCopyright © 2012 The University of Chicago
All rights reserved.
HOGS GET SLAUGHTERED AT THE SUPREME COURT
Suzanna Sherry is Herman O. Loewenstein Professor of Law, Vanderbilt University Law School.
Author's note: I thank Lisa Bressman, Brian Fitzpatrick, Maria Glover, and Jay Tidmarsh for their helpful comments. Matt Meltzer provided excellent research assistance. This article was inspired by my late colleague, Richard Nagareda, from whom I learned so much. He will be missed.
Class action plaintiffs lost two major five-to-four cases last Term. Both will potentially have a significant negative impact on future litigation. The tragedy is that the impact of each of these cases might well have been avoided had the plaintiffs' lawyers, the lower courts, and the dissenting Justices not overreached. In this article, I show that the losing side insisted on broad and untenable positions and thereby set itself up for an equally broad defeat. Whether described in the poker vernacular of this essay's title or, in a more cultured phrasing, as hubris—in its original meaning of tempting the gods—the losing side got greedy and suffered the inevitable consequences. Unfortunately, in these cases, the consequences will redound to the detriment of many other potential litigants.
And these two cases are not isolated tragedies; they provide a window into a larger problem. Rule 23 turns class counsel into powerful private attorneys general and tempts them to raise the stakes. It allows plaintiffs' lawyers to chart a course not only for their own clients, but for future litigants. If that course is ill-advised—as it is when the lawyers have incentives, as they often do, to frame issues broadly for the "big win"—the consequences can be disastrous for those future litigants. What this Term's cases demonstrate is that because we are unlikely to change the incentives of class counsel, we must instead focus on their ability to frame the issues. It is up to the courts, and especially to the judges most sympathetic to the interests of current and future class-action plaintiffs, to avoid the costs of lawyers' overreaching. That is exactly what the dissenting Justices (and the judges below) failed to do.
I begin with a discussion of AT&T Mobility LLC v Concepcion, in which the Court reversed the Ninth Circuit and upheld the enforceability of a contract in which consumers simultaneously agreed to arbitration and waived classwide arbitration. It seems likely that most consumer contracts will now contain such a clause, and classwide consumer actions—whether litigation or arbitration—will all but disappear. I then turn to Wal-Mart Stores, Inc. v Dukes, in which the Court again reversed the Ninth Circuit, finding that a class consisting of all current and former female Wal-Mart employees should not have been certified. The likely effect of Wal-Mart is not as certain as that of AT&T Mobility, but there is a good possibility that the case will result in a ratcheting up of requirements for class certification and thus in fewer class actions, especially in the context of employment discrimination. I conclude by returning to the larger question of the appropriate judicial response to lawyers' overreaching.
I. AT&T Mobility V Concepcion
In AT&T Mobility, the majority reached the right result but for the wrong reasons. In this section, I suggest that different decisions by the plaintiffs' lawyers, the Ninth Circuit judges, or the dissenting Justices might have led to a narrower and less harmful opinion. I begin by describing and criticizing the majority's broad approach, and then turn to justifying the outcome of the case on narrower grounds.
a. the majority's broad approach
Both the facts and the law in AT&T Mobility made the plaintiffs' case unappealing. The Concepcions bought a phone from the defendant that had been advertised as "free," but were then charged about $30 in taxes that state law required defendants to collect. The Concepcions challenged this as fraudulent advertising, a claim that in itself evokes images of litigation run amok—it is not as if AT&T Mobility (ATTM) could have declined to collect the tax. Nevertheless, they were entitled to make the claim, and to force ATTM to respond.
But it is how the plaintiffs went about making the claim that led to the disastrous Supreme Court decision. The standard ATTM contract, signed by all phone purchasers, provided for arbitration of all disputes and mandated individual rather than classwide arbitration. The plaintiffs nevertheless filed a putative class action in federal court—on behalf of all consumers who had purchased a "free" or discounted phone as part of a "bundled" transaction—against ATTM, raising various statutory and common-law California claims. The defendant moved to compel individual arbitration under the contract.
Plaintiffs' response to the motion to compel arbitration is the crux of the case: They argued that the class-arbitration waiver was unconscionable under California law and therefore unenforceable. If (but only if) the waiver provision was unconscionable, then the courts had to decide whether the Federal Arbitration Act (FAA) preempts state-law doctrines of unconscionability.
The relevant substantive provision of the FAA is § 2, which provides:
A written provision in any ... [commercial] contract ... to settle by arbitration a controversy thereafter arising out of such contract ... shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.
Section 2 effectively embodies an implied preemption directive and an explicit savings clause wrapped into one. The Court has frequently reiterated that the FAA manifests a "liberal federal policy favoring arbitration." To the extent that state law stands as an obstacle to this federal goal, it is preempted. But state laws that are generally applicable to all contracts—that is, grounds that "exist in law or equity for the revocation of any contract"—are saved from preemption.
Unconscionability, of course, is a general doctrine applicable to all contracts. The clear language of § 2 therefore suggests that the FAA does not preempt the invalidation of an arbitration clause found to be unconscionable, because the invalidation rests on grounds that exist for "the revocation of any contract." If contracts without arbitration clauses are sometimes found to be unconscionable—as of course they are—then unconscionability should fall within the savings clause. And, indeed, both the district court and the Ninth Circuit, after concluding that the class-arbitration waiver was unconscionable under California law, found no preemption.
A majority of the Supreme Court disagreed. To be fair, the Court was in something of a bind. If ATTM's carefully constructed arbitration clause is invalid, then no waiver of classwide arbitration will ever be valid. Given the strong pro-arbitration policy of the FAA—aggressively enforced by the Court in recent years—as well as the legitimate reasons for a company to prefer one-on-one arbitration even if it is not trying to escape liability, invalidating all waivers of classwide arbitration no matter the circumstances is probably not the right result. The majority, however, did more than simply uphold the particular arbitration clause. Adopting a breathtakingly broad view of implied preemption, the Court held that "requiring the availability of classwide arbitration interferes with the fundamental attributes of arbitration and thus creates a scheme inconsistent with the FAA."
The Court's analysis is vulnerable to several criticisms. First, the Court's reading of § 2 turns preemption doctrine on its head. In determining whether a federal statute preempts state law, the touchstone is always congressional intent. Moreover, federalism concerns dictate a presumption against preemption: "In all pre-emption cases, and particularly in those in which Congress has 'legislated ... in a field which the States have traditionally occupied,' we 'start with the assumption that the historic police powers of the States were not to be superseded by the Federal Act unless that was the clear and manifest purpose of Congress.'"
In the absence of either an express statutory statement preempting state law or unequivocal evidence that Congress intended to preempt state law, the Court looks at whether the state law in question would interfere with the purposes and objectives of the federal statute. That is a questionable endeavor, as several Justices have noted, because it is "potentially boundless." This type of implied preemption should therefore be cabined—and rare—even for statutes that contain no savings clause. But the AT&T Mobility majority went even further than ordinary purposes-and-objectives implied preemption: It found such preemption in the face of an express savings clause. Only once before—and in a much narrower context—has the Court ever overridden an express savings clause by finding implied preemption. Doing so is inconsistent with both the presumption against preemption and the goal of implementing congressional intent.
Second, the Court read into the FAA a particular approach to implied preemption that is inconsistent with the statutory language. The FAA saves from preemption "such grounds as exist ... for the revocation of any contract." The AT&T Mobility majority recognized that California unconscionability law applies equally to waivers of class arbitration and waivers of class litigation, and is thus "a doctrine normally thought to be generally applicable." It nevertheless concluded that even a generally applicable state-law doctrine is preempted if it is "applied in a fashion that disfavors arbitration."
The majority gave as examples of laws "applied in a fashion that disfavors arbitration" hypothetical state laws conditioning enforceability of arbitration clauses on the availability of judicially monitored discovery or on the application of the Federal Rules of Evidence, and found the availability of classwide arbitration to be similar. These examples—as well as the Court's analysis of how a requirement of class arbitration interferes with the purposes of arbitration—suggest that the majority did not mean to focus on instances in which state (or federal) courts apply the same doctrines differentially in cases that involve arbitration clauses and cases that do not, because all of the examples supplied by the majority (including the classwide arbitration at issue in AT&T Mobility) seem to assume that the doctrine will be applied equally in all cases.
Instead, the majority seems to have had in mind a concept analogous to disparate impact. Although unconscionability applies identically in all cases to invalidate certain limitations on classwide dispute resolution, it disproportionately invalidates arbitration contracts because they are inherently more likely to run afoul of the requirements. Similarly, a requirement that all enforceable contracts provide for the use of discovery or evidence rules will disproportionately invalidate arbitration contracts. Another way to put it is to suggest that these sorts of requirements will have a disparate impact on arbitration generally, by influencing contracting parties to prefer litigation.
But neither the language nor the purpose of the FAA justifies importing a disparate impact principle into the savings clause. The unconscionability principle is a "ground ... for the revocation of any contract"; its application is not limited, in principle or in fact, to agreements to arbitrate. As for purposes, the FAA was enacted primarily to counter state (and federal) hostility to arbitration: "the basic purpose of the Federal Arbitration Act is to overcome courts' refusal to enforce agreements to arbitrate." It therefore should not be read to preempt a neutral state doctrine—like unconscionability—unless the purpose of that doctrine was to diminish the enforceability of arbitration clauses. The Court was mistaken to compare unconscionability to hypothetical state law requirements that juries be used, that judicially supervised discovery be allowed, or that the Federal Rules of Evidence be followed, because those requirements would be obvious pretexts, designed to prevent arbitration. But there is no evidence that California's doctrine of unconscionability was in any way motivated by hostility toward arbitration.
In fact, the first case in which a California court found the unavailability of classwide dispute resolution unconscionable was America Online, Inc. v Superior Court, which involved class actions rather than class arbitration. The court found the "unavailability of class action relief ... in and by itself sufficient to preclude enforcement" of a consumer contract. Four years later, the California Supreme Court relied in part on America Online when it held, in Discover Bank v Superior Court, that exculpatory waivers of either class actions or class arbitration are unconscionable. Other California courts have also applied the Discover Bank doctrine to class-action waivers in contracts without arbitration clauses. In light of the absence of any deliberate attempt to disadvantage or limit arbitration contracts, the majority's holding that the FAA preempts neutral, generally applicable California unconscionability doctrines because of their effect on arbitration clauses is a misreading of the federal statute.
Finally, the majority turns its back on a recent, directly relevant case, without so much as a citation to it. In the course of its purposes-and-objectives analysis, the majority suggested that classwide arbitration interferes with the goals of the FAA because of the "fundamental" differences between classwide and bilateral arbitration. In particular, the Court reasoned, "class arbitration greatly increases the risks to defendants" because the "higher stakes of class litigation" will cause defendants to be "pressured into settling questionable claims." But just the previous Term, in Shady Grove Orthopedic Associates v Allstate Insurance Co., a majority that included three members of the AT&T Mobility majority held that class litigation did not fundamentally differ from bilateral litigation. Rejecting the defendant's argument that allowing class litigation "transform[s] the dispute over a five hundred dollar penalty into a dispute over a five million dollar penalty," the Court in Shady Grove described the threat of greater liability as just an "incidental effect" of the availability of a class action. The class action in Shady Grove and class arbitration in AT&T Mobility both increased the stakes for the defendant in the same way, creating what the latter case labeled a "risk of 'in terrorem' settlements." One would therefore expect the AT&T Mobility Court to follow, or at least to distinguish explicitly, Shady Grove in its analysis of whether classwide and bilateral dispute resolution are so fundamentally different that class arbitration interferes with the purposes of arbitration. It did not do so.
b. the road not taken
On the preemption question, then, the dissent has the better of the argument: The FAA should not be interpreted to preempt California's neutral, generally applicable unconscionability doctrine. But that does not necessarily mean that the class-arbitration waiver in this case should have been invalidated. Indeed, given pragmatic concerns that I will address shortly, AT&T Mobility's waiver (but not all such waivers) should be enforceable. The problem is that once the issue was joined on preemption rather than enforceability vel non, the majority seemed unable to refrain from issuing broad pronouncements on preemption in general, and preemption of unconscionability doctrines in particular. But while the majority might have been a bit more restrained, more of the fault lies with the other side. The majority would not have addressed preemption at all, but for the insistence of the plaintiffs' lawyers, the lower federal courts, and the dissenting Justices that the class-arbitration waiver was unconscionable. It is that insistence, I contend, that constitutes the hubris (or the greediness for a big win) that ultimately led to the majority's broad ruling. We can blame the majority for its poor legal analysis and the unnecessary breadth of the opinion. But given the lawyers' arguments, the disastrous consequences of invalidating this class-arbitration waiver clause (one of the most consumer-friendly such clauses imaginable), and the Court's previous strong support for arbitration generally, it was the dissenters who had the last clear chance to rescue the situation.
Excerpted from The Supreme Court Review 2011 by Dennis J. Hutchinson, David A. Strauss, Geoffrey R. Stone. Copyright © 2012 The University of Chicago. Excerpted by permission of The University of Chicago Press.
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