Beyond the Class Arbitration Waiver: The 9th Circuit View of Concepcion as Broadly Outlawing State Discrimination Against Arbitration

            The U.S. Supreme Court’s decision in AT&T Mobility v. Concepcion, 131 S.Ct. 1740 (2011) has been the cornerstone of recent jurisprudence validating the use of class arbitration waivers in arbitration agreements to insulate companies from exposure to class action litigation.  Concepcion also has served to bolster the overall strength of arbitration agreements and to illuminate the scope of the preemptive power of the Federal Arbitration Act (“FAA”).  The recent decision by the Ninth Circuit Court of Appeals in Mortensen v. Bresnan Comm’n, LLC, No. 11-35823, 2013 U.S. App. LEXIS 14211 (9th Cir. Jul. 15, 2013) makes a statement regarding the breadth of Concepcion that takes the impact of the case to another level.  In Mortensen, plaintiffs filed a class action against Bresnan Communications alleging violations of the Electronic Communications Privacy Act, 18 U.S.C. §§ 2520-21, the Computer Fraud and Abuse Act, 18 U.S.C. § 1030, and Montana state law for invasion of privacy and trespass to chattels based on targeted advertising that they received while using the defendant’s internet service.  The internet service agreement that arrived in a “welcome kit” after the plaintiffs subscribed to the service contained an arbitration clause that included a class arbitration waiver which prohibited any class or consolidated actions against the company.  The lower court held that the arbitration agreement was not unconscionable and that the class arbitration waiver was not invalid based on Concepcion; however, it denied the company’s motion to compel arbitration anyway based on the Montana state public policy known as the reasonable expectations/fundamental rights rule under which contract provisions that were “not in the reasonable expectations of both parties when contracting” are void.  The lower court concluded that the arbitration agreement was invalid because it constituted an unknowing waiver of the fundamental constitutional rights to trial by jury and access to courts. Reversing the lower court and invalidating the Montana public policy, the Ninth Circuit declared that “the Supreme Court in Concepcion told us to hold that the FAA preempts all laws that have a disproportionate impact on arbitration agreements.”  The Ninth Circuit recognized that “[s]ome might argue that our interpretation of Concepcion goes too far,” but it felt bound by the Supreme Court’s new directive.  We will look at the Ninth Circuit’s reasoning in Mortensen, which used Concepcion to invalidate a generally applicable state law because it was disproportionately applied to invalidate arbitration agreements.

            The FAA has a provision known as the “savings clause,” 9 U.S.C. § 2, which provides that arbitration agreements can be held unenforceable on the basis of “such grounds as exist at law or in equity for the revocation of any contract,” including “generally applicable contract defenses, such as fraud, duress, or unconscionability.”  The Supreme Court confirmed in Concepcion that arbitration agreements cannot be invalidated “by defenses that apply only to arbitration or that derive their meaning from the fact that an agreement to arbitrate is at issue.”  The Montana reasonable expectations/fundamental rights rule is not a defense that applies only to arbitration.  In fact, the defendant in Mortensen argued that the rule “is not preserved by the FAA’s savings clause because it is not generally applicable given that it depends on the unique nature of arbitration agreements,” and that “even without Concepcion, the rule is preempted.”  But, the Ninth Circuit rejected that argument because “the rule does not invalidate only those agreements.”  So, where did the Montana reasonable expectations/fundamental rights rule go wrong?

            The Ninth Circuit held that even though the Montana doctrine is one of general applicability, it disproportionally affects arbitration agreements and is preempted by the FAA based on Concepcion.  The Ninth Circuit interpreted Concepcion as further limiting the FAA’s savings clause, explaining that the Supreme Court “concluded for the first time that even generally applicable state-law rules are preempted if in practice they have a ‘disproportionate impact’ on arbitration or ‘interfere with fundamental attributes of arbitration and thus create a scheme inconsistent with the FAA.’”  Under the Montana rule, only arbitration agreements explained to and initialed by consumers are valid and enforceable because the Montana Supreme Court has held that arbitration agreements constitute a waiver of a party’s fundamental constitutional rights to trial by jury and access to courts, and all arbitration agreements where waiver is not “voluntarily, knowingly, and intelligently” made are void.  The Ninth Circuit explained that although the Montana rule is generally applicable, it was born from state court consideration of adhesive arbitration agreements, most of the rule’s applications have been to adhesive arbitration provisions, and courts that have considered the policy repeatedly refer to it in arbitration-specific terms. The Ninth Circuit “conclude[d] that the reasonable expectations/fundamental rights rule runs contrary to the FAA as interpreted by Concepcion because it disproportionally applies to arbitration agreements, invalidating them at a higher rate than other contract provisions,” and it held “that the FAA preempts the Montana reasonable expectations/fundamental rights rule as that rule is currently employed.”

            The Ninth Circuit relied upon its view that Concepcion interprets the FAA to require the preeminence of arbitration agreements and has broad applicability:

We interpret Concepcion’s holding to be broader than a restriction on the use of unconscionability to end-run FAA preemption. We take Concepcion to mean what its plain language says: Any general state-law contract defense, based in unconscionability or otherwise, that has a disproportionate effect on arbitration is displaced by the FAA. We find support for this reading from the illustration in Concepcion involving a case “finding unconscionable or unenforceable as against public policy consumer arbitration agreements that fail to provide for judicially monitored discovery.”

….

In our view, Concepcion crystalized the directive, touched on in Volt, 489 U.S. at 474, that the FAA’s purpose is to give preference (instead of mere equality) to arbitration provisions. Concepcion outlaws discrimination in state policy that is unfavorable to arbitration by further limiting the savings clause. We are bound by our duty to apply Concepcion and do so here.

(citations omitted).

            Should states have the power to require that arbitration agreements are entered into knowingly and voluntarily? The Ninth Circuit viewed Mortensen as a difficult case, given the state’s interest in protecting its consumers from unfair agreements that force waiver of fundamental rights without notice:  “But the Supreme Court in Concepcion told us to hold that the FAA preempts all laws that have a disproportionate impact on arbitration agreements.  Given this directive, we hold that the Montana reasonable expectations/fundamental rights rule is preempted by the FAA.”  The Montana rule does not declare adhesive arbitration agreements per se invalid, but rather it seeks to require that an arbitration agreement is in fact an agreement between the parties.  Is this somehow distinguishable from the impact of rules like the Discover Bank rule which was invalidated in Concepcion, given the Supreme Court’s recognition of “the “fundamental principle that arbitration is a matter of contract” and the FAA’s initial purpose to place arbitration provisions on “the same footing” as other contract provisions?  The Supreme Court may be called upon to clarify whether such a distinction can be made and whether Concepcion in fact requires a disparate impact analysis to be applied to generally applicable state laws to determine whether they disproportionately burden arbitration.

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