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Arbitration agreements permeate many kinds of contracts, including agreements between consumers on the one hand and hospitals, banks, and utilities on the other. Arbitration agreements are often subject to challenges for unconscionability because of the consumer's lack of bargaining power. Arbitration agreements may also be subject to federal preemption, which means they are interpreted and enforced under federal law rather than state law standards. In the recent supreme court case of In AT&T Mobility LLC v Concepcion (2011) ___ US ___, 179 L Ed 2d 742, 131 S Ct 1740, the unconscionability analysis under state law was met headon by federal preemption rules.
For many years in California court decisions, there appeared to be a bright line between the procedural enforcement of arbitration agreements governed by the Federal Arbitration Act (FAA) (9 USC §§1-16) and the application of general contract defenses under state law, such as unconscionability. See, e.g., Discover Bank v Superior Court (2005) 36 C4th 148, 153, 30 CR3d 76, which concluded that "class action waivers in consumer contracts of adhesion are unenforceable, whether the consumer is being asked to waive the right to class action litigation or the right to classwide arbitration" when the disputes are likely to involve small amounts of damages and the party with inferior bargaining power alleges that the party with superior bargaining power has engaged in a deliberate scheme to defraud.
The United States Supreme Court, however, recently held that, at least for class action waivers in arbitration clauses, the FAA preempts an independent unconscionability analysis under state law. In AT&T Mobility LLC v Concepcion (2011) ___ US ___, 179 L Ed 2d 742, 131 S Ct 1740, the court upheld the class action waiver provision in a cell phone arbitration agreement because applying the rule in Discover bank stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congressional desire to encourage arbitration of disputes.
Justice Breyer's dissenting opinion (joined by Justices Ginsberg, Sotomayor, and Kagan) would uphold the Discover Bank rule because it puts agreements to arbitrate and agreements to litigate on the same footing. Non-class arbitration over small sums such as in this case ($30) often effectively deprives claimants of any claim, which in turn allows bad behavior that cheats large numbers of consumers out of individually small sums of money. Justice Breyer would permit states to decide whether class proceedings must be allowed to rectify that scenario.
For more on this topic, see CEB's book California Real Property Remedies and Damages, chap 14 (2d ed Cal CEB 2002).
© The Regents of the University of California, 2011. Unauthorized use and/or duplication of this material without express and written permission is strictly prohibited.
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