Preview: The Federal Arbitration Act, The Preemption Doctrine, and the Impact of AT&T Mobility L.L.C. v. Concepcion

Kristopher Kleiner[1]

In April of 2011, the Supreme Court’s decision in AT&T Mobility L.L.C. v. Concepcion added to a line of jurisprudence, dating back to its 1984 decision in Southland Corp. v. Keating, in which the Court has repeatedly held that the Federal Arbitration Act (“FAA”) preempts state laws invalidating arbitration agreements.

In Concepcion, the Court’s decision invalidated the Ninth Circuit’s “Discover Bank Rule,” which states that a class action waiver in a consumer contract having the effect of exculpating a party with superior bargaining power is unconscionable and unenforceable.

The Concepcion case involved the challenge of an arbitration clause in a consumer cellular telephone contract that required claims to be brought in an individual capacity and not in a class proceeding. The Concepcions argued that the arbitration clause was unconscionable and unlawfully exculpatory under the Discover Bank rule because it disallowed the type of class proceeding that would make such a case financially viable.

The Ninth Circuit upheld the district court’s decision that the arbitration clause was unconscionable and further stated that the Discover Bank rule was not preempted by the FAA because the Discover Bank rule is simply an extension of the same unconscionability analysis that apply to any contract. Accordingly, as the Ninth Circuit explained, the Discover Bank rule comports with the plain language of Section 2 of the FAA, which requires that contracts containing arbitration clauses be placed on an equal footing with other contracts.

The Supreme Court reversed the decision of the Ninth Circuit and held that the Discover Bank rule was preempted by the FAA because “it stands as an obstacle to the accomplishment and execution of the full objectives of Congress . . . .”

The Concepcion majority disregarded the traditional presumption against federal preemption of state laws governing subject areas that are traditionally governed by the states. The Court, instead, decided this case in accordance with its previous FAA jurisprudence, in which state laws invalidating arbitration agreements have routinely been held preempted by the FAA.  The Court did so despite the “saving clause” of the FAA, which has been interpreted by the Supreme Court to allow the invalidation of arbitration agreements by generally applicable contract defenses, including unconscionability.

Although the Concepcion decision is consistent with its previous FAA jurisprudence, the decision represents a continuing departure from the principle of state sovereignty in the federalist system of government. Furthermore, the decision advanced the business and commercial interest at the expense of consumer protection.  By eliminating one of the principal ways by which arbitration clauses can be invalidated, the Concepcion decision will likely encourage businesses to incorporate arbitration provisions into a greater number and broader range of consumer contracts. This places consumers at a greater risk of having contract disputes with businesses that are virtually immune from legal resolution based on the economics of the potential arbitration or litigation.

For further explanation and analysis, including a detailed history of FAA preemption case law and extensive analysis of the potential effects of and possible cures for the Conception decision, see Kristopher Kleiner, AT&T Mobility L.L.C. v. Concepcion: The Disappearance of the Presumption Against Preemption in the Context of the FAA, 89 Denv. U. L. Rev. __ (forthcoming 2012).

[1] J.D. Candidate, 2013, University of Denver Sturm College of Law.