FEDERAL ARBITRATION ACT PREEMPTION: AN IMMACULATE CONCEPCION ?

William Hopkins, 2012

INTRODUCTION

In April 27, 2011, the huge gasping sound heard from consumer advocates1,

some members of Congress2, members of several state legislatures3, several state

courts4 and many legal scholars5, came from their collective reaction to the Supreme

Court’s opinion in AT&T Mobility LLC v. Concepcion (Concepcion).6 However, those

who lost their breath, gnashed their teeth and predicted an apocalyptic collision

between federal and state law should have seen the writing on the wall – or at least

seen the written word of the U.S. Supreme Court prior to the Concepcion decision.

Just how did a 1925 federal statute designed to allow enforcement of arbitration

agreements between commercial parties engaged in interstate commerce who had

voluntarily entered into an arbitration agreement during an arms-length transaction

lead to such a seemingly monumental decision ninety years later?7 The following

paper will trace the road taken by the U.S. Supreme Court to Concepcion, and the

road that likely lies ahead.

I

THE BIRTH OF THE FEDERAL ARBITRATION ACT OF 1925 8

The use of arbitration as a vehicle to resolve disputes has been used for

centuries. Legal historians trace the use of a variety of arbitral devices between

merchants dating back to medieval Venice and the Italian city-states.9 In the United

States the use of voluntary arbitration dates back to Colonial times.10 At common

law, the enforcement of arbitration agreements or arbitration awards was

determined to be procedural or remedial, and it was the law of the forum under

which arbitration cases were decided.11

However, despite a party’s agreement to enter into a pre-dispute arbitration

agreement, it was common practice prior to the enactment of the FAA for either of

the contracting parties to revoke such agreements without reason any time prior to

the entry of an award thereby making the agreements useless and leaving the non-

revoking party without the remedy for which he had bargained.12 Furthermore,

most courts refused to enforce arbitration agreements, often ignoring their

existence and ordering the parties to litigate. Due to this “judicial hostility” 13 to

such agreements, and because the business community14 believed that the

arbitration of disputes was more expedient, less costly, and more advantageous

than litigation15 and desired a “procedurally streamlined [and] informal”

alternative16, the State of New York legislature passed the New York Arbitration Law

in 1920.17 The New York law sought to end judicial hostility toward arbitration

agreements and put an end to the random, unpredictable and cavalier revocation of

such agreements by making those made voluntarily in writing, enforceable and

irrevocable except “save on such grounds as exist at law or in equity for the

revocation of any contract.”18

The New York drafters of their arbitration law pushed for a similar federal

law so that New York citizens could enforce arbitration agreements in federal

diversity cases.19 Therefore, Julius Cohen, General Counsel for the New York State

Chamber of Commerce and the drafter of the New York arbitration law, began an

effort, with the overseeing offices of the American Bar Association (ABA), to draft a

2

federal arbitration law. The first draft was submitted to the ABA in 1921. However,

because the ABA believed the draft lacked procedural provisions, Cohen redrafted

the bill the following year. After the ABA approved the 1922 draft, a bill was

submitted to both the House and Senate of the U.S. Congress. After stalling in the

judiciary committees, Cohen reworked the bill, and after the ABA’s approval,

hearings were held before the joint judiciary committees and the bill, which is now

known as the Federal Arbitration Act, 20 passed in 1925 and was signed into law by

President Coolidge in 1926.21

The FAA can be classified into three basic parts. Sections 1, 2 and 14 define

the scope of the Act, Sections 3-8 provides for procedures for the initiation of

arbitration, service of process and compelling arbitration, and section 9-13, 15 and

16 regard enforcement the decisions rendered in arbitration.22

Section 2 of the FAA provides:

“A written provision in any maritime transaction or a contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction, or the refusal to perform the whole or any part thereof, or an agreement in writing to submit to arbitration an existing controversy arising out of such a contract, transaction, or refusal, shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.”23 (emphasis added).

The “savings clause” preserved the ability of any party to challenge the

enforceability or deny the validity of an arbitration agreement on the basis of

traditional defenses to “any contract.” The FAA did not define what “grounds” or

defenses it contemplated, however during the time the FAA was debated between

1922 and 1924 there were approximately 1,000 reported cases that involved claims

that a contract was invalid under one or more common law defenses; and, in cases

3

between June and December, 1923 the defenses invoked, in order of most numerous

to least numerous, were fraud, public policy, statute of frauds, consideration, duress

and mistake.24 From this historical context it would be safe to assume that the

drafters of the Act and Congress contemplated these specific contract defenses, and

perhaps others not so common but otherwise recognized by the common law, as

being the type of defenses to arbitration enforcement contemplated by the Section

2’s “savings clause.”

The preservation of contract defenses in the “savings clause” of Section 2 was

not the only exception to the scope of the FAA. Section 1 exempted “contracts of

employment of seamen, railroad employees, or any other class of workers engaged in

foreign or interstate commerce.”25 (emphasis added) As will be discussed below,

both of these two exceptions in the Act have generated the most contentious and

acrimonious post-enactment judicial wrangling and scholarly debate.

Although the intent, purpose and scope of the FAA has long been debated and

its legislative history subject to differing result-based viewpoints,26 most scholars

and commentators agree the focus, intent and purpose of the FAA is clear from the

Act’s legislative history and the context from which it came into law.

First, it was obvious that the FAA was enacted to address the business

community’s concerns that arbitration agreements which were negotiated and

agreed to between merchants were often revoked by one of the parties, or ignored

by the courts,27 thereby denying what they believed to be the advantages arbitration

could provide of expediency, cost efficiency and informality, leaving it to the courts

to handle matters such as deciding points of law and the application of statutes.28

4

The Act was designed to stop the practice of one party unilaterally revoking an

arbitration agreement, leaving the non-revoking party with a remedy to which he

had not agreed. 29

Second the FAA was enacted to provide arbitration agreements that were

voluntary. During the House debate, Congressman Graham from Pennsylvania

assured Congress of the limited scope and purpose of the FAA.

“This bill simply provides for one thing, and that is to give an opportunity to enforce an agreement in commercial contracts and admiralty contacts – an agreement to arbitrate when voluntarily placed in the document by the parties to it.”30

Third, it was clear that the FAA was enacted to place arbitration agreements

“upon the same footing as other contracts,” but to not give arbitration agreements

any superior priority over other contracts. 31

Fourth, it was clear from a plain reading of the statute that the Act was not

without limitations. Section 2 of the Act provided a “savings clause” to allow courts

to refuse to enforcement arbitration agreements deemed either void or voidable

under general equitable defenses or defenses at law.

Fifth, the FAA was created to apply to agreements between parties of

relatively equal bargaining power.32 This is nothing in the legislative history that

remotely suggests that the FAA would be applicable to a contract of adhesion.33

Sixth, the Act was clearly enacted to provide a procedural framework for the

enforcement of arbitration agreements in the federal courts, and not enacted to

provide substantive rights that would give the FAA preemptive power over the

states. The Act’s drafter, Julius Cohen, assured Congress of the limited scope of the

FAA:

5

“The proposed Federal Act is no infringement upon the right of each state to decide for itself what contracts shall or shall not exist under its laws. To be sure, whether or not a contract exists is a question of the substantive law of the jurisdiction wherein the contract was made. But whether or not an arbitration agreement is to be enforced is a question of the law of procedure and its determined by the law the jurisdiction wherein the remedy is sought.”34

Mr. Cohen also assured Congress that the FAA was not created to become a device to

“bludgeon” states into bowing to the new federal statute.35

An examination of the entire act itself provides evidence of the Congressional

intent to limit the scope of the FAA to the destruction of the ouster and revocability

doctrines and practices of parties and courts and provide procedural streamlining of

arbitration practices in the federal courts.

Section 3 provides for a stay of proceedings applicable “in any of the courts of

the United States;36” Section 4 provides procedures for petitions filed in “any United

States District Court” and provides for notice shall be governed “in the manner of

the Federal Rules of Evidence;37” Section 5 provides for the appointment of

arbitrators and umpires in agreements silent on the matter;38 Section 6 provides a

procedure for applications as heard as motions;39 Section 7 provides for procedures

for witness fees and compelling attendance of witnesses before the arbitrators “in

the courts of the United States;40” Section 8 provides procedure for proceedings

begun by libel and the seizure of property;41 Section 9 provides for a procedure for

confirmation of an award and jurisdiction procedure;42 Section 10 provides

procedures for vacation and grounds of rehearing in “cases in the United States

Courts” and in the “United States District Courts.”43 These implementation and

6

procedural sections were integral parts of the Act and directed to federal, not state

practice.44

Some commentators posit that because the Act was passed unanimously the

lack of oppositional debate provides powerful circumstantial evidence that the Act

was never intended to create a substantive law that would have a preemptive effect

over state enforcement laws.45 Furthermore, the drafts of the Act were reviewed

and approved by the American Bar Association, an organization with constituents in

each State and logically would be expected, as they prepared the federal statute, to

have jealously protected matters of state substantive law.

Furthermore, at the time FAA draftsman Cohen and his contemporaries were

drafting the FAA, they were also working with the National Conference of

Committees on Uniform State Laws to develop a uniform act that states could adopt

which would recognize and enforce arbitration agreements in state courts. In fact,

through the efforts of Cohen and his contemporaries, the Uniform Arbitration Act

was enacted in 1924.46 One noted commentator posed the question that if the

efforts of the drafters of the FAA believed that the federal act would create a

preemptive substantive law why were they wasting their time trying to develop a

parallel act for the states?47

Justice Stevens addressed the question regarding whether Congress intended

to preempt state enforcement laws in his dissent in Southland Corp. v. Keating

(Southland)48 case. He addressed the issue this way:

“[I]t is by no means clear that Congress intended to entirely displace state authority in this field. Indeed, while it is an understatement to say that ‘the legislative history of the…Act…reveals little awareness on the part of Congress that state law might be affected,’ it must surely be true that given

7

the lack of a ‘clear mandate from Congress as to the extent to which state statutes and decisions are to be superseded, we must be cautious in construing the act lest we excessively encroach on the powers which Congressional policy, if not, the Constitution, would reserve to the states.’ (internal citation omitted)49 [¶] The existence of a federal statute enunciating a substantive federal policy does not necessarily require the inexorable application of a uniform federal rule of decision notwithstanding the differing conditions which may exist in the several States and regardless of the decisions of the States to exert policy powers as they deem best for the welfare of their citizens. 50 [¶] Surely the general language of the Arbitration Act that arbitration agreements are valid does not mean that all such agreements are valid irrespective of their purpose or effect. (citation omitted) [¶]We should not refuse to exercise independent judgment concerning the conditions under which an arbitration agreement, generally enforceable under the Act, can be held invalid as contrary to public policy simply because the source of the substantive law to which the arbitration agreement attaches is a State rather than the Federal apply, and I would not lightly impute such an persuaded that Congress intended the pre-emptive effect of [the Federal legislation]…has decided should be left to judicial enforcement.”51

Prior to the Concepcion decision, the development of the Supreme Court’s

expansion of the FAA from what was clearly intended as a procedural statute in

federal courts to one with preemptive trumping of state substantive law began

slowly, but over time built into a crescendo of decisions criticized by some

commentators as “mysterious”52 and “strained…[and]…absurd”53 and “poorly

reasoned.”54

II

THE IMPACT OF ERIE v. THOMPSON

The FAA was born of need to address a problem that existed for the business

community when otherwise valid arbitration agreements were revocable and/or

courts refused to be ousted from their jurisdiction by such agreements and forced

the parties into litigation. Once the problem was addressed in 1925, the fledgling

Act seemed to stand on its own two feet for decades without a controversy involving

8

a conflict between the FAA and state law.55

The backdrop to the conflict between the FAA and state law can be traced to

a body of law set forth by the Supreme Court in 1842 in a case that had nothing to

do with arbitration, but everything to do with the manner in which federal courts

decided diversity cases. Justice Story, in Swift v. Tyson, was faced with a diversity

dispute involving a commercial transaction and, although there was an applicable

New York statute, Justice Story ruled that the federal courts were not bound by state

law and could apply general principles of the common law - the nature and extent of

which the federal courts were free to determine and interpret.56 As Justice

Frankfurter explained in Guaranty Trust Co. v. York,57 the rule in Swift v. Tyson

“summed up prior attitudes and expressions in cases that had come before this

Court and lower federal courts for at least thirty years, at law as well in equity” and

when boiled down to its bare essence the attitude of the federal courts had been

“[s]tate court decisions were not ‘the law’ but merely someone’s opinion.”58

Ninety-six years and hundreds of court decisions later, Swift v. Tyson was

struck down in 1938 in Erie R.R. Co. v. Thompson59, a decision U.S. Solicitor General

Robert Jackson called “one of the most dramatic episodes in the history of the

Supreme Court.”60 In Erie R. R. Co. v. Thompson, without the issue being raised by

either of the litigants, the Court required federal courts to apply state substantive

law in diversity cases61 and denied the Federal Government “the power to create

substantive law solely by virtue of the Art. III power to control federal-court

jurisdiction.”62 Because the FAA was considered applicable to procedure in the

9

federal courts, and not substantive law, the FAA was not dependent on the validity

of Swift v. Tyson and therefore the Erie decision had no immediate impact on the

FAA.63

In 1945, in Guaranty Trust, the Court found the Erie distinctions between a

“substantive” and/or a “procedural” state law to be “immaterial” to the issue of

whether federal courts would apply state law or federal common law to a diversity

dispute.64

“[Erie] expressed a policy that touches vitally the proper distribution of judicial power between State and federal courts. In essence, the intent of that decision was to insure that, in all cases where a federal court is exercising jurisdiction solely because of the diversity of citizenship of the parties, the outcome of the litigation in the federal court should be substantially the same, so far as legal rules determine the outcome of a litigation, as it would be if tried in a State court.”65

One commentator posited that the “outcome determinative” test in Guaranty

Trust “raised the question of whether compelling arbitration under the Act could be

outcome-determinative.”66

In 1956 the FAA and its relationship to state law was the focal point in

Bernhardt v. Polygraphic Co. of America, Inc. (Bernhardt).67 In Bernhardt, the parties

to an agreement that contained an arbitration clause that was enforceable in New

York; however, one of the parties moved to Vermont where the common law rule

allowed a party to revoke an arbitration agreement. A suit filed in Vermont was

removed to federal court on diversity grounds and the New York resident, under

FAA Section 3, moved to stay the case. The majority held that the stay provisions of

Section 3 only applied to maritime transactions and agreements involving foreign or

10

interstate commerce and found the agreement at issue didn’t qualify under Sections

1 or 2 of the FAA. In reversing the district court’s decision to apply Section 3 and

stay the proceedings to allow for arbitration, the majority, relying on Guaranty

Trust, found the federal court did not have the power to substantially affect the

enforcement of the right as given by the State.68 Bernhardt thus held that the duty

to arbitrate a contract dispute is “outcome-determinative – i.e. ‘substantive’ - and

therefore a matter normally governed by state law in federal diversity cases.” 69

Of particular significance to the FAA-preemption debate was Justice

Frankfurter’s concurring opinion in which he opined that the federal act was not

contemplated by Congress to apply in diversity cases and any attempt to do so

would face a Constitutional barrier.70

III

JUDICIAL REVISIONISM AND THE PRELUDE TO PREEMPTION: ROBERT LAWRENCE & PRIMA PAINT

After Erie, if one of the contracting parties raised a defense to an arbitration

agreement under state law by asserting the entire underlying agreement was void,

and therefore all clauses therein void as well, the court would rule on the

contractual defense first, and if the underlying contract was void, then so was the

arbitration clause. Prior to 1967, courts found that attacks leveled at the formation

of the underlying agreement, or the “making” of the arbitration agreement were

within the court’s jurisdiction under Section 4 of the FAA.

However, in 1967, that long-standing view of the breadth of jurisdiction of

11

the court was stood on its head, beginning with an opinion rendered by the Second

Court of Appeals in Robert Lawrence Co. v. Devonshire Fabrics, Inc. (Robert

Lawrence).71 Robert Lawrence was a diversity case involving an underlying

agreement that contained an arbitration clause that provided arbitration would

apply to “any complaint, controversy or question that may arise with respect to this

contract” wherein the party who had instigated the litigation fought a motion to stay

pursuant to Section 3 of the Federal Arbitration Act. The litigant claimed the entire

contract, including the arbitration clause, should be voided because the contract was

fraudulently induced. The district court denied the motion to stay but was reversed

by the Second Circuit.

The Second Circuit addressed what it termed “questions left open by the

Supreme Court in Bernhardt”72 in light of Justice Frankfurter’s concurring opinion

wherein he viewed the Erie doctrine as constitutionally restricting the application of

the federal arbitration act to diversity cases.73 The Second Circuit admitted that

Justice Frankfurter’s constitutional concerns would have been well taken if the Act

was “exclusively procedural in character,”74 however, in its own review of the

legislative history, which was limited to a single reference to the first page of the

House Report, the Second Circuit found Congress intended “to exercise as much of

its constitutional power as it could to make the new Arbitration Act as widely

effective as possible.”75 In holding its construction of Section 2 of Act as requiring

the arbitration clause to be viewed as “a separable part of the contract” the Second

Circuit ruled that the issue of fraud was for the arbitrator not the court.76

12

The Supreme Court had an opportunity to challenge the gymnastic distortion

of legislative history in Robert Lawrence two years later in Prima Paint Corporation

v. Flood & Conklin Mfg. Co., (Prima Paint)77 but it ducked the issue and “carefully

avoided any explicit endorsement of the view that the Arbitration Act embodied

substantive policies that were to be applied to all contracts within its scope,

whether sued on in state or federal court.”78 In Prima Paint, the Court, noting that

the lower court had relied on Robert Lawrence, indicated an agreement with the

Second Circuit’s decision, “albeit for somewhat different reasons.”79 The Court held

that when considering an application for a stay under Section 3 of the Act “a federal

court may consider only issues relating to the making and performance of the

agreement to arbitrate.”80 Prima Paint stood for the proposition that in order to

avoid arbitration, a party challenging the contract must attack the arbitration clause

specifically, not the contract generally.81

Avoiding the opportunity to make a direct response to the constitutional

concerns raised by Justice Frankfurter, and without endorsing the broad

pronouncement by the Second Circuit, the Court stated “it is clear beyond dispute

that the federal arbitration statute is based upon and confined to the incontestable

federal foundations of ‘control over interstate commerce and over admiralty,’”82

thus leaving the broad pronouncement in Robert Lawrence as mere dicta.83

Justice Black, in his dissent, read Prima Paint as holding the Arbitration Act

created federal substantive law, a conclusion which he found astounding and

“contrary to state law,” contrary to the legislative history of the Act,84 and a

13

“surprising departure from the Act’s clear statement which excepts from arbitration

‘such grounds as exist at law or in equity for the revocation of any contract.’”85

Furthermore, Justice Black reminded the Court of the repetitious assurances of the

drafters of the Act that the Act was “not intended to be ‘the source of *** substantive

law.”86 Justice Black wrote: “[T]he Act was not intended to make arbitration

agreements enforceable in state courts or to provide an independent federal-

question basis for jurisdiction in federal courts apart from diversity jurisdiction,”87

and lamented that “35 years after the passage of the Arbitration Act, the Second

Circuit completely rewrote [the Arbitration Act].”88

What is remarkable about Prima Paint is the fact that it attracted little

analysis and commentary in its time. However, as the Court has expanded the FAA

into a preemptive juggernaut, more recent scholars have found Justice Black’s four-

part dissent the correct view of the law.89

In cases that followed Prima Paint, the Supreme Court pronounced that the

“separability” rule applied to cases in both federal and state courts,90 although

formation defenses related to agency and assent could be decided by the court, not

the arbitrator,91 and whether an arbitration agreement did or did not provide for

class arbitration was an issue for the arbitrator, not the court, as the issue was not a

“gateway issue”, but one of contract interpretation.92

Despite Justice Black’s stirring rebuke of Robert Lawrence and the reluctance

of the majority of the Warren Court to address the expansion of the Arbitration Act

espoused by the Second Circuit, the Burger Court in Southland93 had no hesitancy to

14

use its judicial power to cloak the Arbitration Act with preemptive supremacy over

state law.

A closer look at the predisposition of the Chief Justice may shed some light on

why he and his Court turned a blind eye to the clear legislative history of the FAA

and used the Court’s decision in Southland as part of an overall agenda, not to

protect commercial litigants, but to protect the federal courts.94

IV

CHIEF JUSTICE BURGER, JUDICIAL PATERNALISM, REVISIONISM AND THE ROAD TO PREEMPTION

There is no question that by 1983, the year Chief Justice Berger delivered the

opinion of the Court in Southland, the nature of commercial business had changed

since the birth of the FAA. Between 1945 and 1960 the U.S. economy experienced a

post-war boom.95 Business entered a robust period of consolidation and

diversification.96 Improvements in communication, transportation and technology

opened up new markets both at home and abroad.97

But as the economy grew and society changed, so did matters and concerns

pertaining to the federal courts – matters and concerns which clearly influenced

Chief Justice Burger and led to his dispositive and default view that arbitration was

not only superior to litigation but a necessary alternative to protect the federal

courts.

The judicial and political climate that existed at the time Chief Justice Burger

wrote the majority opinion in Southland included the following significant events:

15

The Federal Rules of Civil Procedure (FRCP) were enacted in 1938 and provided a

procedural structure for cases filed in federal court, including the concept of “notice

pleading” which established a procedure allowing parties to briefly state the

elements of their causes of action, avoid the need for the laborious requirements of

fact pleading, and allow parties to develop their claims through discovery.

The nature and scope of discovery was expanded, including the expansion in

the controversial 1970 amendment.

Congress had enacted federal statutes which gave rise to statutory rights,

including those set forth in the Securities and Exchange Act of 1933; and, the social

liberalism of the 1960s and 1970s created additional federal statutory rights

including the Equal Pay Act of 1963 (EPA), the Civil Rights Act of 1964 (CRA), and

the Age Discrimination in Employment Act (ADEA) of 197698 - each which allowed

litigants to file claims in the federal courts.

In addition to a greater number of original federal court jurisdiction cases

that were being filed during the time of the Burger Court, federal courts also were

experiencing a greater number of diversity cases being filed, including personal

injury cases, a phenomenon Chief Justice Burger found very troubling.99

By the mid-1970’s Chief Justice Burger was so overwrought with what he

believed to be an attack on the courts he began to use the bully-pulpit of his office

through commentary in scholarly journals and speeches to ring the alarm bell that

the judiciary was in trouble. Chief Justice Burger even suggested that personal

16

injury cases should be made an “exception to federal diversity”100 and he openly

argued that disputants should simply try to “evade the legal system.”101

Chief Justice Burger went public in what some commentators referred to as

“lawyer bashing” where he openly expressed his disappointment in the deportment,

ethics and skills of lawyers, some of whom he characterized as “hungry locusts.”102 It

was widely known that the Chief Justice considered the lack of trial skills as a “major

failing of the profession.”103

In 1977, the Chief Justice wrote that he didn’t believe that “most people”

wanted their disputes settled by judges, lawyers or courtrooms, but wanted their

disputes settled “as quickly and inexpensively as possible.”104 He concluded by

stating this:

“The harsh truth is that unless we devise substitutes for the courtroom processes – and do so quickly – we may be well on our way to a society overrun by hordes of lawyers, hungry as locusts, and brigades of judges in numbers never before contemplated.”105

In 1976, Chief Justice Berger led an impressive lineup of lawyers, judges,

court administrators and scholars in Minneapolis, Minnesota to attend what has

commonly become known as the Pound Conference. The agenda at this national

symposium was to discuss what sponsors labeled as a widespread dissatisfaction

with the U.S. judicial system. Chief Justice Burger, Judge Robert Bork,, Judge Alvin B.

Rubin, and others all proclaimed the courts were in crisis, clogged with too many

cases,106 many of them unmeritorious and trivial,107 and argued that expanded

17

federal discovery rules, liberal pleading standards, and lawyer and litigant attitudes

toward their legal rights, made it nearly impossible for courts to function.108

The basis for the cries for judicial reform, some argued, were exaggerated109 or

motivated by conservative socio-political interests that sought to promote

alternative dispute resolution [ADR] as a method to deny litigants’ access to

juries.110

Dean Edward Dauer argued not only was the “litigation crisis” a gross

exaggeration of fact, but advanced the proposition that the ADR movement of the

mid-1970’s had been hijacked by tort reformers. Dean Dauer noted that many of the

tort reform measures, such as caps on damages, or loser pay rules, “were just too far

a departure to be politically viable and had been successfully resisted. Thus ADR

was widely introduced as part of the entire reform package. It was not introduced,

however, to achieve better resolutions, as the cognoscenti of the field would have

preferred. It was embraced instead as an alternative way to limit access to the

courts – a goal the reformers were unable to accomplish through substantive legal

changes alone.” 111

Eventually, even the most well respected ADR professionals realized they

had, in effect, taken the bait. Researchers Donna Stienstra and Thomas E. Willging,

wrote in 1995:

“Mandatory ADR amounts to tort reform under the guise of court reform and has the subtle effect of diminishing opportunities for jury trial for most litigants by reallocating court resources to alternatives.”112

Chief Justice Burger’s efforts at spearheading the Pound Conference resulted

in a pilot program in three federal district courts that utilized arbitration, but not

18

the brand favored by the Chief Justice – binding arbitration.113 The pilot program,

and several courts thereafter employed mandatory arbitration as an ADR technique,

but arbitration was non-binding arbitration and limited to only a few categories of

disputes which usually involved small claims. Chief Justice Burger’s passion for

binding arbitration continued even after he retired from the bench in 1989 when he

continued to argue that litigation was too pervasive, too costly and, like a father

scolding a misbehaving child, posed this rhetorical question: “Are we litigating when

we should be arbitrating?”114

V

SOUTHLAND CORP. V. KEATING : FAA PREEMPTION FINALLY ARRIVES

Before Chief Justice Burger in Southland stuck his judicial knife into the heart

of the Erie doctrine, which scholars believe should have applied to the FAA, his

Court in Moses H. Cone Memorial Hospital v. Mercury Construction Corp.(Moses)115 in

gratuitous dicta, said that Congress had created a “liberal federal policy favoring

arbitration agreements, notwithstanding any state substantive or procedural

policies to the contrary. The effect…is to create a body of federal substantive law of

arbitrability, applicable to any arbitration agreement within the coverage of the

Act.”116 Justice Black would have probably arisen from the grave had he read these

grossly result-based conclusions which were not supported by the legislative

history.117

The issue in Southland arose because the California Court of Appeals had

reversed a trial court’s refusal to compel arbitration of claims brought under the

California State Franchise Investment Law, construing the arbitration clause in

19

Keating’s franchise agreement which required arbitration of all disputes and

holding that the state law did not invalidate arbitration agreements and holding that

if it rendered such agreements involving commerce unenforceable it would conflict

with Section 2 of the FAA; however, the California Supreme Court reversed the

ruling that claims asserted under the state statute were arbitrable because a

provision in the state statute rendered void any provision that would have the effect

of waiving a franchisee’s right to bring claims under the state statute.

In reversing the California Supreme Court, Chief Justice Burger wrote the

opinion for the 6-3 majority.118 Before launching into his discussion of the

legislative history of the FAA, the Chief Justice could not resist the opportunity to

laud the virtues of arbitration. “Contracts to arbitrate are not to be avoided by

allowing one party to ignore the contract and resort to the courts. Such a course

could lead to prolonged litigation, one of the very risks the parties, by contraction

for arbitration, sought to eliminate.”119 Of course, Mr. Keating was not relying on the

doctrines of “ouster or revocability” to avoid enforcement of the arbitration clause,

but relying on a specific state statue which had been enacted to protect him from his

franchisor who used the arbitration clause in a franchise contract of adhesion that

would waive his rights and allow it to violate state law.120

The Chief Justice shamelessly bootstrapped the majority opinion with the

dicta from Prima Paint, ignoring its dearth of analysis, and embraced its conclusion

that the Act was born of the intent of Congress to create substantive rules under the

Commerce Clause.121 Chief Justice Burger then dragged out the dicta from the Moses

20

H. Cone case “reaffirming our view that the Arbitration Act ‘creates a body of federal

substantive law’ which he declared was “implicit” from Prima Paint.122

However, perhaps because the Chief Justice understood his decision would

be viewed in light of the legislative history of the Act so thoughtfully reviewed by

Justices Frankfurter, 123 Black124, Stevens125 and O’Connor126, the Chief Justice tried to

prop up the majority decision with his own interpretation of the Act’s legislative

history, allowing himself liberal license to do so because he found the history as “not

without ambiguities.”127

The Chief Justice admitted his conclusion that the intent of Congress was to

develop a preemptive national policy favoring arbitration had been “inferred from

the reality”128 of the history surrounding the act; however, the Chief Justice’s reality

apparently did not include the reality of the clear and unequivocal intent of

Congress which he conveniently ignored, sweeping it under the hem of his judicial

robe in order to reach the result he wanted.129

Whether or not Chief Justice Burger was behind the movement to

manufacture federal preemption became immaterial after Southland v Keating. The

doctrine of FAA preemption had landed squarely in the middle of the judicial

landscape and it would not be revisited, reconsidered, or modified by the Court.

Between 2000 and 2004 fifty different state laws had been preempted by the

Federal Arbitration Act and at least thirty states had one or more statutes

containing anti-waiver provisions of the kind preempted by Southland v. Keating.130

In the immediate post-Southland world, it appeared that the only way an

arbitration agreement signatory could avoid the enforcement of an agreement to

21

arbitrate governed by the FAA was to rely on the FAA’s escape clause in Section 2 of

the agreement challenging on the basis of general contract defenses. However, the

Court carved out a second defense not contained in any part of the FAA, but which

was created almost parenthetically two years after Southland.

VI

THE DEVELOPMENT OF THE VINDICATION OF STATUTORY RIGHTS RULE

As Congress expanded the scope of the FAA and as arbitration agreements

began to be used in a wider range of situations more than mere commercial

transactions, questions were raised regarding the scope of such agreements,

particularly in the area of employment contracts.

Congress long recognized the rights of unions to negotiate with management

on behalf of their union members to establish the rights, duties and obligations of

employment,131 including the use of arbitration clauses in such contracts, and the

courts acknowledged that right,132 and, in doing so recognized a distinction between

labor and commercial arbitration.133

By the mid 1950’s and early 1960’s union organizing and the protection of

employee rights under collective bargaining agreements was on the decline.134 The

1960’s were characterized by the enactment of new federal laws that provided

rights and provided remedies for statutory violations of the new federal statutes,

the enforcement of which was primarily through individual action not agency

action.135

Prior to the enactment of the multiple federal statutes that established

22

federal statutory rights,136 the Supreme Court, in 1953 in Wilco v. Swan (Wilco),137

refused to enforce an arbitration of securities claims holding that only the courts

can assure enforcement of the protection of statutory rights created under the

Securities Act of 1933. The essential rationale of the Wilco decision was the Court’s

recognition and belief that arbitration was inferior to litigation in protecting the

rights conferred by the federal statute.138

The Wilco view was buttressed by the views of some courts and

commentators that the advantages claimed by arbitration in commercial cases –

were actually disadvantages in cases involving claims to protect statutory rights.

Then Chief Judge, Harry T. Edwards of the U.S. Court of Appeals, District of

Columbia, noted a significant distinction between private claims created by private

agreements versus public statutory rights created and defined by Congress. Judge

Edwards found arbitration’s private process over public rights, characterized by

limited review of awards, limitations on discovery, limitations on relief, high

arbitration fees, and lack of experience of arbitrators simply insufficient, on due

process grounds, for the protection of federal statutory rights.139 In one study

regarding Article VII discrimination cases, Edwards noted 16% of the arbitrators

studied never read any judicial decisions regarding Article VII, 40% did not read

advance sheets regarding recent decisions, yet 50% of that same group believed

they were competent to render decisions under Article VII.140 As Edwards

concluded, “arbitrators unlike judges are neither publically chosen nor publically

accountable.”141

23

In 1974, in Alexander v. Gardner-Denver, (Gardner-Denver)142 an employee’s

claim of discharge was sent to arbitration under an arbitration clause in his

employment contract. However, before the arbitrator had entered his ruling, the

employee asserted a racial discrimination claim under Title VII of the Civil Rights

Act. The arbitrator ruled that the employee’s discharge was for cause and did not

specifically address the Title VII claim. The employee thereafter filed a Title VII

claim in federal court, but the court dismissed on the basis of the arbitrator’s

decision. The Supreme Court reversed and held there could be no “prospective

waiver of an employee’s rights under Title VII,”143 and held “an individual does not

forfeit his private cause of action if he first pursues his grievance to final arbitration

under the nondiscrimination clause of a collective-bargaining agreement.”144 Justice

Powell, writing for the majority, found that a collective bargaining agreement is the

sole source of an arbitrator’s power and authority, and as such the role of the labor

arbitrator is to give the effect to the parties’ agreement, but not to adjudicate

statutory claims.145 Furthermore, the Court rejected the proposition that “arbitral

processes are commensurate with judicial processes.”146 It was obvious that the

Court was concerned that the arbitration of public rights in a private forum

infringed on essential elements of due process only provided by the courts.147

The judicial view that federal statutory rights were best protected by the

courts and should not be waived by an arbitration agreement was dramatically

changed in 1985 the year after Southland. In the Court’s remarkable case of

Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc. (Mitsubishi),148 the Supreme

Court enforced an arbitration clause in a dispute involving claims brought under the

24

Sherman Act. After acknowledging a public “interest” in the enforcement of

provisions under the Sherman Act, including the provision for treble-damages, the

Court noted “by agreeing to arbitrate a statutory claim, a party does not forgo the

substantive rights afforded by the statute” but instead has agreed to “trade the

procedure and opportunity for review of the courtroom to the simplicity,

informality and expedition of arbitration.”149 Although it was clear Mr. Soler had not

specifically agreed to trade his statutory rights for arbitration in Japan overseen by

strangers who may not have had any knowledge or expertise in matters under the

Sherman Act, the Court nonetheless expressed confidence that Mr. Soler’s statutory

rights would be protected and enforced in the arbitral forum.

The most striking pronouncements of the Court involved a blueprint for

future attacks on arbitration. The Court, without being specific, laid down general

circumstances where it would deny enforcement of an arbitration agreement:

where the procedure would be “unreasonable or unjust” or where the proceedings

“will be so gravely difficult and inconvenient” that “for all practical purposes” the

litigant would be “denied his day in court.”150 The Court held that a waiver of

statutory rights would be enforced “so long as the prospective litigant effectively

may vindicate its statutory cause of action in the arbitral forum,”151 leading to an

argument that the converse of that proposition would provide the basis for a refusal

to enforce a waiver.

The “vindication of federal statutory rights” doctrine clearly was not a

creation of any of the provisions of the FAA, particularly the “savings clause” in

25

Section 2, but “was a creature of federal common law,”152 and continues to provide

the basis for some courts to deny enforcement of an arbitration clause – even after

Concepcion,153 a result I don’t believe the Court envisioned.

Furthermore, in a footnote, the Court also foreshadowed a potential avenue

of attack on arbitration clauses that would violate state public policy, when it

posited that if an agreement to arbitrate operated as a “prospective waiver of a

party’s right to pursue statutory remedies…we would have little hesitation in

condemning the agreement as against public policy.”154 However, the Court, after

Southland, has never invalidated an arbitration agreement based on a public policy

defense.155

In 1961, in Gilmer v. Interstate/Johnson Lane Corp.(Gilmer),156 a 62 year old

employer, who had signed a registration agreement with the New York Stock

Exchange to qualify for his position with his employer, and who filed a

discrimination claim under the ADEA in court, was denied access to a trial court on

the basis that the NYSE registration agreement contained an arbitration clause. The

Court, relying on Mitsubishi, held that parties who oppose arbitration agreements

have the burden of convincing the courts that Congress intended to preclude a

waiver of the judicial remedy for the statutory rights at issue; and, having no such

intent in the statute, found Gilmer had not met his burden.157 Furthermore, Justice

White, writing for the majority, rejected Gilmer’s claim that he could not “vindicate”

his statutory rights through arbitration and found that the arbitration was an

“adequate mechanism to further the public policy goals of the statute.”158 The Court

26

noted that Gilmer’s concerns about the procedural limitations of arbitration were

not substantiated because the arbitration would be conducted under the guidelines

and procedures of the NYSE.159 In rejecting Mr. Gilmer’s argument that agreement

was unenforceable because of the unequal bargaining power between him and his

employer, that “[m]ere inequality in bargaining power…is not a sufficient reason to

hold arbitration agreements are never enforceable in the employment context…This

claim of unequal bargaining power is best left for resolution in specific cases.”160

Thus, Gilmer stood for the proposition that arbitration agreements could be

enforceable even if the agreement itself, or the container contract, was a contract of

adhesion.

Gilmer did not squarely address the question of whether the FAA applied to

an arbitration agreement in an employee-employer pre-dispute contract, although

that issue was raised by those filing amicus briefs, and by the dissenting opinion

which viewed "arbitration clauses contained in employment agreements are

specifically exempt from coverage of the FAA.”161

The threshold question of whether the FAA applied to pre-dispute

agreements in all employment contracts was resolved in favor of expansion of the

FAA in 2000, in Circuit City Stores v. Adams (Circuit City)162 where the Court held that

the exclusion in Section 1 of the FAA extends solely to transportation workers, not

to all employees engaged in commerce, thereby holding that the FAA applied to all

employee contracts, with the specific exception to transportation workers. The

effect of Circuit City was to open the floodgates for the use of mandatory arbitration

agreements and gave the judicial green light for employers to adopt them en masses.

27

By the year 2000, the Supreme Court had given employers license to include

pre-dispute arbitration agreements in employment contracts, including agreements

to waive statutory rights, but litigants were beginning to realize that they could

attempt to block the enforcement of a waiver of their statutory rights under the

Court’s “vindication of federal statutory rights” rule.

In 2000, in Green Tree Financial Company-Alabama v. Randolph (Randolph),163

Randolph entered into a mobile home financing agreement that required her to buy

insurance that would protect the financier from the costs of a default by Randolph

and also provided that all disputes under the agreement would be resolved by

binding arbitration. Randolph filed suit alleging a violation of the Truth in Lending

Act (TILA) on the grounds that by failing to disclose the insurance requirement as a

finance charge and that by requiring arbitration, the agreement violated her

statutory rights under the Equal Credit Opportunity Act. The 11th Circuit of Appeals,

reversing the lower court, refused to enforce the arbitration agreement on the basis

that the agreement was silent regarding arbitration fees and it failed to provide

“minimum guarantees” for the protection of Randolph’s statutory rights that “would

be undone” by “steep” arbitration costs.164

The Supreme Court stated that in challenges to the validity of an arbitration

agreement, the Court first looks to determine if the parties agreed to arbitrate, and if

so, the second step in the analysis is to determine if the statute that created the

rights specifically prohibited a waiver of those rights. After satisfying that the TILA

did not prohibit waivers, the Court addressed Randolph’s claim that her statutory

28

rights could not be vindicated in arbitration because of the risk she might not be

able to afford the cost of arbitration. In rejecting the claim, the Court stated:

“It may well be that the existence of large arbitration costs could preclude a litigant such as Randolph from effectively vindicating her federal statutory rights in the arbitral forum. But the record does not show that Randolph will bear such costs if she goes to arbitration. Indeed, it contains hardly any information on the matter. * * * The record reveals only the arbitration agreement's silence on the subject, and that fact alone is plainly insufficient to render it unenforceable. The ‘risk’ that Randolph will be saddled with prohibitive costs is too speculative to justify the invalidation of an arbitration agreement.”165

Although the Court enforced the arbitration agreement, it did pronounce a

“cost-prohibitive” theory that could be argued, with sufficient evidence, to defeat an

arbitration agreement under the “vindication of federal statutory rights” doctrine.

The Court as late as 2009 continued to recognize the “vindication of federal

statutory rights doctrine” when it expanded preemption into collective bargaining

agreements which contained waivers of statutory rights in 14 Penn Plaza LLC v.

Pyett, (Pyett).166 The Court, in a 5-4 opinion, held that a union could bargain for its

members a pre-dispute arbitration clause that would waive the employees’

employment discrimination claims under the ADEA so long as the arbitration

agreement was unmistakably clear and specific regarding the intent to waive ADEA

claims.167

Although the majority in Pyett held the arbitration clause enforceable, Justice

Thomas acknowledged the “vindication of federal statutory rights” rule; but, relying

on Randolph, rejected application of the rule to cases where the argument for non-

enforcement is based upon speculation.168

29

VII

SECTION 2 CONTRACT DEFENSES, PUBLIC POLICY AND UNCONSCIONABILITY

Although the Supreme Court in Mitsubishi created the federal common law

“vindication of statutory rights” rule, it held fast to the principle that this rule

applied only to federal, not state, statutory rights. And, even though in Southland the

Supreme Court recognized that the savings clause of Section 2 created a “limitation

on the enforcement,”169 it also held the FAA applied to the states and in order to

effectuate the goals and purposes of the FAA it must be “unencumbered by state-law

restraints,”170 and, further held that any general contract defense under Section 2

must be applicable to all contracts, not just arbitration agreements, thus creating an

“anti-discrimination against arbitration” position. 171

It was inevitable that there would be conflicts between the FAA and state

laws, including in the areas of conflict between the FAA and state arbitration laws, 172

or in cases where the state had enacted laws born of strong state public policy

considerations. 173

As noted previously, at the time of the enactment of the FAA, of all cases

studied involving defenses to contract enforcement, “public policy” was the second

most commonly used contract defense.174 However, in discussing general contract

defenses in recent cases, the Court specifically recognized “fraud, duress and

30

unconscionabilty” and makes no reference to the “public policy” defense. 175

The “unconscionability” doctrine derives from common law,176 and generally,

unconscionability is viewed from both a procedural and substantive basis and if a

contract is found “unconscionable” it will not be enforced.177 In Missouri, for

example, “procedural unconscionability” relates to the formation of the contract,

including “fine print clauses, high pressure sales tactics or unequal bargaining

positions” and “substantive unconscionability” relates to “undue harshness in the

contract terms.”178 The analysis of “substantive unconscionability” necessarily

requires a case-by-case, fact specific, inquiry into whether the terms of the

agreement “are so one-sided as to be oppressive or there is an overall imbalance in

the rights and obligations imposed” and part of the analysis involves “the reasonable

expectation of the average person.”179

Professor Horton argues that the “unconscionability” doctrine is “shot-

through with state public policy concerns”, and opines “’a contract provision that

violates public policy can be subsumed under the theory of substantive

unconscionability.’”180 Horton also notes that some lower courts have extended the

vindication of rights theory to state claims “recognizing a violation of state public

policy defense under the savings clause”181 and notes that some lower courts

“refused to enforce terms in arbitration clauses that mandate confidentiality, select

distant venues, limit discovery, shorten statutes of limitations, saddle plaintiffs with

prohibitive costs, and eliminate the right to recover attorney’s fees or substantive

remedies.”182

31

In 2010, in Rent-a-Center v. Jackson (Rent-A-Center),183 Jackson signed an

arbitration agreement that contained a delegation clause that stated that all issues

arising from the dispute would be left to the arbitrator. The Court held that the

“delegation clause” would be treated as an antecedent agreement and governed by

the FAA, under the severability doctrine of Prima Paint. Jackson argued that the

agreement was unconscionable on several grounds based upon Section 2 of the FAA

which provided that arbitration agreements would be enforceable, except for

generally accepted defenses in equity or in law, and he argued the court should rule

on the issue of the unconscionability defenses before sending the matter to

arbitration. In a 5-4 decision, the Supreme Court reviewed its prior decisions that

had declared the FAA places arbitration agreements on an equal footing with other

contracts184 and required courts to enforce them according to their terms.185

Recognizing that the Court had found that Section 2 allowed arbitration agreements

to be unenforceable by general contract defenses, the Court noted a permissible

duality of challenges under Section 2; those relating to the contract as a whole and

those related to the arbitration agreement. Relying on the “severability doctrine” it

established in Prima Paint, the Court noted that attacks on the agreement to

arbitrate were within the province of the court, while attacks on the underlying

contract, or even attacks on provisions in the contract other than the arbitration

clause, were within the province of the arbitrator. However, the Court found that

Jackson’s claims of procedural and substantive unconscionability were directed, not

at the arbitration agreement and its delegation clause, but to the entire contract;

and therefore, there was nothing for the Court to do but enforce the delegation

32

clause and refer the case to arbitration. The Court noted that had Jackson directed

his unconscionability defenses to the delegation clause in the agreement, the court

would have considered them in that context, but gratuitously offered that had he

done so, he would not have prevailed.186

Judges Smith and Moye find the Rent-A-Center case significant for a number

of valid reasons. They note until Rent-A-Center the issue of whether an arbitration

agreement was unconscionable was determined by the court and not the arbitrator,

and posit by delegating to the arbitrator the discretion to determine “whether or not

he or she has the authority to perform a task that he or she will receive income for

completing” the court has permitted “an inherent and untenable conflict of

interest.”187 Furthermore, they argue that after Rent-A-Center, “it is not enough to

attack the arbitration clause directly [r]ather, the party must specifically attack the

validity of the delegation clause embedded in the arbitration clause in order to have

a chance of having a complaint heard by the court,”188 thereby making it more

difficult for “average employees and consumers to successfully challenge the

validity of mandatory arbitration clauses.”189

It would not be a stretch of the imagination to assume that employers and

commercial interests were closely watching developments from the Supreme Court

and tailoring their agreements with employees, consumers and potential

contracting parties to delegate to the arbitrators the power and authority to decide

all issues; and, to create arbitration agreements that would be intended to give them

unfair advantages. Perhaps this suspicion is derived from my own cynicism, but it is

shared by some scholars and commentators and appears to be born out in fact,190

33

particularly in the area of class actions.

VIII

FEDERAL ARBITRATION ACT PREEMPTION AND CLASS ACTION WAIVERS: THE ROAD TO THE DISCOVER BANK RULE 191

As Professor Myriam Gilles notes, in the late 1990s, articles in trade-journals

directed to corporate attorneys recommended “redrafting contracts to include

provisions requiring consumers and others to waive the right to participate in class

actions or even group arbitrations.”192 Professor Gilles illustrates her point by

reference to a business journal written by a corporate attorney urging clients to

“take full advantage of the favorable Supreme Court arbitration jurisprudence by

incorporating class action waivers into arbitration clauses whenever practical.”193

Gilles also notes that throughout the 1990s “[n]umerous reports of companies

implementing” arbitration class waivers began appearing in the “popular press.”194

In addition to campaigns by corporate counsel to redraft agreements to

include class action waivers, in 1999 the National Arbitration Forum (NAF), a for-

profit company that provided arbitration services to many large businesses

distributed marketing materials that advised corporate attorneys the only way to

protect their clients from class action liability was to “implement arbitration

provisions containing terms that expressly waive the right to class treatment.”195

Gilles writes that many companies that received the materials “were responsive to

the pitch” and, American Express sent notices to approximately two million small-

merchant accounts advising them that their merchant agreements would thereafter

34

include arbitration provisions with express class waivers.”196 In her 2005 work,

Gilles warned that class action waivers would become commonplace in a wide

variety of agreements, including those in credit card, telecom and e-commerce

transactions, and be included in point-of-sale purchase receipts or box-stuffer

notices. In her 2005 article, Professor Gilles opined that if class action waivers were

not included in all transactions, and if such provisions were not successfully

challenged, “transactional attorneys will someday face malpractice liability for not

including the waiver in contracts – as a sort of standard vaccine, like a rabies

shot.”197

At the outset of the “class waiver” movement, “some avarice drafters

included terms that excluded punitive damages and incident or consequential

damages, prohibited attorneys fees, required the arbitration to proceed to a location

far from the consumer’s home, required the consumer to pay half or sometimes all

of the arbitration fees, imposed mandatory confidentiality clauses, or gave the

drafter the sole capability of selecting the arbitrator.”198 However, some courts

invalidated such onerous provisions in class waiver agreements finding them

“unconscionable.”199

By 2004 at least thirteen decisions from federal or state courts had held a

class action waiver in an arbitration clause was either unconscionable or that the

provision should be severed from the arbitration agreement due to its unfairness,200

including Ting v. AT&T, (Ting)182 F. Supp. 2nd 902 (N.D. Cal. 2002), precursor to

Discover Bank v. Superior Court (Discover Bank),201 the 2005 California Supreme

35

Court case that was rejected by the U.S. Supreme Court in Concepcion.

Ting was the first in a line of California cases that fully embraced the defense

of unconscionabililty. Before ruling, the court reviewed various lawsuits filed

against AT&T and found that it would not have been economically feasible for the

plaintiffs to proceed against AT&T on an individual basis either in court or in

arbitration.202 AT&T argued that if consumers had a complaint their Legal Remedies

Clause provided a procedure where most claims could be resolved informally, and if

consumers were unhappy they could seek remedies from the Federal

Communications Commissioners. The court in Ting found these arguments

unpersuasive and held AT&T’s “Legal Remedies Clause” void, stating:

“Aware that the vast majority of service related disputes would be resolved informally, AT&T sought to shield itself from liability in the remaining disputes by imposing Legal Remedies Provisions that eliminate class actions, sharply curtail damages in cases of misrepresentation, fraud, and other intentional torts, cloak the arbitration process with secrecy and place significant financial hurdles in the path of a potential litigant. It wants to make it very difficult for anyone to effectively vindicate the rights, even in that forum. That is illegal and unconscionable and must be enjoined.”203

The Ninth Circuit Court of Appeals affirmed the District Court204, and noted

that prior to AT&T sending out its new consumer service agreement (CSA), it had

conducted research designed to determine how customers would respond to the

mailing that would include a cover letter that would contain a disclaimer that

customer service and billing would not change and “there’s nothing you need to

do.”205 The Court also noted that AT&T’s market study found that most customers

would read the letter and discard it after reading the disclaimer and AT&T

documents revealed that the cover letter was specifically intended “to make

36

customers less alert to the details of the arbitration class waiver.”206 The new CSA

and cover letter were sent to 18 million of AT&T’s residential, long-distance

customers and was included in the customer’s monthly bill; although AT&T mailed

the CSA to 42 million other customers in a separate envelop marked “ATTENTION:

Important information concerning your AT&T service enclosed.”207 The court noted

that “[a]ccording to AT&T's research, only 25 percent of its customers were likely to

open the separate mailing, approximately 10 percent would not even look at it, and

only 30 percent would actually read the entire contract.”208

In 2003, in Szetela v. Discover Bank (Szetela),209 a California resident sought a

class action suit against his credit card company for charging fees for exceeding the

credit limit arguing it was an unfair practice. The cardholder’s CSA contained an

arbitration clause that contained a class action waiver. The trial court granted

Discover’s motion to compel arbitration and at arbitration the cardholder won the

amount of the over-limit fee, or $29.00. Thereafter the cardholder appealed on the

basis that he was denied to bring class action.

The California Court of Appeals found that the Discover CSA which contained

a class action waiver was procedurally unconscionable, in part, because the

agreement was a contract of adhesion: a take-it-or-leave-it agreement that gave the

cardholder no option but to either accept the new terms of the CSA or close the

account.210 The Court also found the arbitration agreement unconscionable

regarding the “manner in which arbitration is to occur” because enforcement of the

agreement would prove to be a “disincentive” to Discover to “avoid the conduct”

37

which lead to the class action and result in millions of customer being overcharged

without a true, effective remedy. 211

The Court of Appeals also found that the arbitration class waiver violated

public policy in a number of ways: first, by contradicting the California policy of

discouraging unfair and unlawful practices by allowing for class actions to seek

relief for the public acting as a “private attorney general;” second, by eliminating a

vehicle that promotes judicial economy and streamlined procedures for conflict

resolution; and, third, by giving a ‘get out of jail free card’ while compromising

important consumer rights.212

In 2005, the California Supreme Court, in Discover Bank,213 was faced with a

case where a credit card holder filed a class action complaint alleging deceptive

practices arising from a charge of a late fee on the credit card statement. The credit

card holder claimed that although the CSA said that there would be no late fee if

payments were received on a particular date, in fact, a late fee was charged if the

payment was made after 1:00 p.m. on that date. 214

In response to the lawsuit, the card company moved to dismiss the class

action on the basis of an arbitration clause that it sent to all existing customers. The

new CSA included, in bold type, the announcement that it contained an arbitration

clause, and a statement that the arbitration was authorized by the FAA.215 Customers

were told in the mailing if they did not want to agree to the arbitration clause, which

contained a class waiver, they were free to cancel their service, stop using the credit

38

card, and find another company, and also stated that if the cardholder continued to

use the card, Discover would consider the continued use as an acceptance to the

new CSA terms.216

In what was clearly a strategic move to avoid the preemption argument, the

plaintiff did not plead a violation of or seek a remedy under any specific California

statute as to which class action remedy was essential.217 Rather, the plaintiff argued

that class action or arbitration waivers in consumer contracts, in particular the

contract at issue, should be “invalidated as unconscionable under California law.”218

The California Supreme Court noted that class action waivers found in “mail

stuffers” were adhesion agreements, but recognized that not all adhesion

agreements were unconscionable, and held that such contracts could be

substantively unconscionable if they “operate effectively as exculpatory contract

clauses that are contrary to public policy.”219 The Court then noted that a section of

its Civil Code provided: "All contracts which have for their object, directly or

indirectly, to exempt anyone from responsibility for his own fraud, or willful injury to

the person or property of another, or violation of law, whether willful or negligent,

are against the policy of the law." (emphasis added in opinion of the Court). The

Court held that under California law, consumer adhesion agreements would be

unenforceable if they predictably involved “small amounts of money” and involved a

party that had “deliberately set out on a scheme to cheat” consumers, and the effect

of the agreement was to operate as an “exemption” from responsibility of its fraud

or willful injury” under its Civil Code.220

39

In turning to the issue of preemption under the FAA, the California Supreme

Court thoughtfully examined each of the most recent U.S. Supreme Court decisions

including Perry,221 Casarotte, Volt222, Gilmer and Bazzle,223 and found that nothing in

those decisions prohibited any state from determining that an arbitration

agreement was unenforceable if the state determined that the agreement violated

state public policy.

There was a “flood of state court decisions invalidating class action waivers

on grounds of unconscionability” after Discover Bank. State appellate courts, public

interest law firms such as Public Justice, lent their support to plaintiffs and won “a

surprising string of victories.”224

Whether it was the impact of Professor’s Gilles 2005 article, or the wake of

the Discover Bank opinion, companies began to develop more “consumer friendly”

arbitration agreements.225 Lampley notes that the new warm and fuzzy arbitration

agreements were calculated to preserve the goals of streamlining consumer

litigation, provide an avenue for consumers to recover claims and “vindicate

statutory rights, and provide “an avenue for deterrence through costly – although

not as costly – arbitration.”226

Regardless of the impetus for a change of tactics, it was obvious that in the

mid-2000s, consumer arbitration clauses were being drafted to avoid being stricken

as unconscionable.227

To further address the class waiver issue, the arbitration industry addressed

40

the unfairness issue by adopting rules and protocols that required “fundamental

fairness in the drafting and administration of arbitration claims involving the

consumer, including setting out minimum standards of fairness in arbitration

proceedings.”228

But despite the efforts of the industry to make arbitration more palatable,

and the arbitration industry’s efforts to provide some minimum standards, there

were still open questions regarding class action waivers, particularly regarding the

three factors that convinced the California Supreme Court such waivers violated

public policy: consumer adhesion contracts, involving small claims where

consumers would have no incentive to proceed {and where they would no doubt not

find legal counsel to handle the small claim); and, where the drafting party could use

the waiver as a tactic to cheat consumers but be insulated from unfair or illegal

practices.229

In 2010, the Supreme Court, in Stolt-Nielsen S.A. v. AnimalFeeds International

Corp.(Stolt-Nielson), 230 entered the fray. The case involved two sophisticated

commercial parties with relatively even bargaining power who had negotiated an

agreement.231 The petitioners were shipping companies operating under a maritime

contract that contained an arbitration clause that was silent regarding class action.

The Respondent, along with several others sued Stolt-Nielsen on price-fixing claims

and served a demand for class arbitration. The parties stipulated before the

arbitration panel that the arbitration clause was silent regarding class arbitration

and the panel concluded that the expert testimony did not establish an intent to

41

preclude arbitration, and determined that the issue was controlled by the Court’s

decision in Bazzle.232

The Supreme Court, seemingly departing from Bazzle, found that the panel

exceeded its power and “imposed its own policy choice” rather than “identifying and

applying a rule of decision derived from the FAA or either maritime or New York

law.”233 Shrugging off Bazzle as a plurality opinion, the Court found the differences

between individual and class arbitrations “too great for arbitrators to presume”234

and concluded “a party may not be compelled under the FAA to submit to class

arbitration unless there is a contractual basis for concluding that the party agreed to

do so.”235

Several commentators have suggested that after Stolt-Nielsen “[a] probable

consequence of the decision…[would be that] every business with an arbitration

clause will maintain silence on the issue of class action arbitration or, if its clause

permits class action arbitration, will amend it so that is silent on the issue.”236

However, Stolt-Nielson did not specifically rule out that under some circumstances

an arbitration clause that was silent regarding class arbitration could not be found

unconscionable.

Immediately after Stolt-Nielsen, the Supreme Court reviewed a Second Circuit

Court of Appeals decision in the case known as Amex I. 237 In that case, several

businesses claimed that American Express (Amex) had violated provisions of the

Sherman Act, however, an arbitration clause precluded a merchant from bringing a

42

class action and agreeing to not have any claim arbitrated other than on an

individual basis.

The district court found that the enforceability of the class action waiver was

a matter for the arbitrator and dismissed the case against Amex.238 However, the 2nd

Circuit decided the issue of the class waiver’s enforceability was for the court, not

the arbitrator, and held that based upon Randolph, and with the support of an

affidavit from an economist, that it would have been cost-prohibitive to arbitrate

under the class action waiver,239 and found that by enforcing the class waiver it

would “grant Amex de facto immunity from antitrust liability by removing the

plaintiff’s only reasonably feasible means of recovery.”240 The 2nd Circuit also stated

it believed these were “valid grounds” for the revocation of the class waiver under

Section 2 of the FAA.241

The Supreme Court granted certiorari, vacated the decision and remanded

for further consideration in light of Stolt-Nielsen.242

On remand, the Second Circuit, in Amex II, held that Stolt-Nielsen did not

require a departure from its original analysis because it held fast to the view that

the central issue in its case was whether the mandatory class waiver was

enforceable even if the plaintiffs were able to demonstrate the practical effect of the

enforcement was to preclude them from bringing their Sherman Act claims, and it

concluded that “the only economically feasible means for enforcing their statutory

rights is via a class action”, and therefore, remanded the case to the district court.243

43

Thus, at the doorstep of the Supreme Court’s landmark Concepcion decision,

there were cases that had refused to enforce an arbitration agreement that did not

allow class action under the “public policy” or “unconscionability” doctrine (i.e.

Discover Bank) and the “vindication of federal statutory rights” rule (i.e. Amex II). By

the time of the Concepcion decision “the trend was unmistakable: class action

waivers were being defeated in courts around the country.”244

IX

AT&T MOBILILTY v. CONCEPCION : THE FULLFILMENT OF CHIEF JUSTICE BURGER’S DREAM OR BIRTH OF THE END OF FAA PREEMPTION?

The issue before the U.S. Supreme Court in Concepcion began in California

state court. The Concepcions responded to a promotion for a “free” AT&T cell phone

with the purchase of a two-year contract. But, after they purchased the phone and

signed the contract they learned the phone was not “free” but required them to pay

a $30.22 sales tax; they initiated a class action lawsuit. AT&T moved to compel

arbitration under their Wireless Service Agreement (WSA) that contained a class

action waiver.245

The arbitration clause was the product of drafter’s care to void lower court

rulings that had struck down “first generation” arbitration agreements which not

only contained class waivers, but contained one-sided provisions that were grossly

unfair to consumers.246 Although the California Supreme Court viewed the

arbitration agreement as “quick, [and] easy to use,”247 “quite hospitable to small

claimants”248 and found the agreement provided a “substantial inducement for the

44

consumer to pursue the claim in arbitration if the dispute was not resolved

informally.”249 Determining it was bound by Discover Bank, the lower court found

the class waiver rendered this consumer friendly arbitration agreement

unenforceable under California law, and the Ninth Circuit affirmed, finding that the

agreement’s class action waiver did not stand as an obstacle to the purpose or

objectives of the FAA and, therefore, not impliedly preemptive and was simply “a

refinement of the unconscionability analysis applicable to contracts generally in

California.”250 Furthermore, the Ninth Circuit said that Discover Bank placed

“arbitration agreements with class action waivers on the exact same footing as

contracts that bar class action litigation outside the context of arbitration.’”251

In Concepcion, the Supreme Court, in a 5-4 opinion reversed the Ninth Circuit.

What is intriguing about Justice Scalia’s rambling and often inconsistent opinion is

that he virtually ignored and was dismissive of the California Supreme Court’s

excellent analysis in Discover Bank,252 based in part on Perry, that made clear that its

decision was focused at the exculpatory nature of the AT&T agreement against

consumers with small claims, a basis that would apply not only to arbitration

agreements, but to all contracts.

Instead of finding, which it could, that Discover Bank was consistent with

Perry, Justice Scalia seemed to be “taking the bait”253 dangled from AT&T’s newer,

more friendly arbitration agreement, and in searching for a theory upon which to

overturn the Discover Bank rule, supported the reversal this way:

45

“The Concepcions claim that the Discover Bank rule is a ground that “exist[s] at law or in equity for the revocation of any contract’ under FAA § 2. When state law prohibits outright the arbitration of a particular type of claim the FAA displaces the conflicting rule. But the inquiry is more complex when a generally applicable doctrine is alleged to have been applied in a fashion that disfavors or interferes with arbitration. Although § 2’s saving clause preserves generally applicable contract defenses, it does not suggest an intent to preserve state-law rules that stand as an obstacle to the accomplishment of the FAA’s objectives.”254

In a strange string of hypothetical scenarios, Justice Scalia argued that a state

court could conceivably find arbitration clauses exculpatory in a number of

situations and strike them down under the Discover Bank rule.255 Disagreeing with

Concepcion that these examples were merely “a parade of horribles,”256 Justice

Scalia argued that the FAA required the enforcement of arbitration agreements

according to their terms so as to facilitate streamlined proceedings, and requiring

the availability of class arbitrations “interferes with fundamental attributes of

arbitration and thus creates a scheme inconsistent with the FAA.”257 Justice Scalia,

of course, had to admit that the Discover Bank rule did not require class-wide

arbitration, but found the rule “interferes with arbitration” because “it allows any

party to a consumer contract to demand it ex post”258 and “class arbitration, to the

extent it is manufactured by Discover Bank rather than consensual, is inconsistent

with the FAA.”259

Although the majority opinion has a clear pro-business and pro-federal

versus state slant, Justice Scalia, in a footnote, tossed a bone to the Concepcions and

the many amicus parties arguing for affirmation of the Ninth Circuit, by reminding

them of this:

46

“States remain free to take steps addressing the concerns that attend adhesive arbitration agreements – for example, requiring class-action-waiver provisions in adhesive arbitration agreements to be highlighted. Such steps cannot, however, conflict with the FAA or frustrate its purpose to ensure that private arbitration agreements are enforced according to their terms.”260

However, this gratuitous parenthetical remark must have been news to the

State of Montana. In Doctor’s Associates, Inc., v. Casarotto, (Casarotto) 517 U.S. 681,

688 (1996) the Court preempted a Montana statute that conditioned enforcement of

arbitration agreements on compliance with a special notice that the arbitration

clause be printed on the first page in underlined capital letters. Therefore,

apparently “highlighting” may be fine with Justice Scalia; however, if “highlighting”

is done with “underlining in capital letters” it is offensive and frustrates the goals

and purposes of the FAA and the state law that requires this type of “highlighting” is

therefore preempted. Sarcasm aside, it seems impossible to reconcile Justice

Scalia’s footnoted reference to permissible state power with the Court’s holding in

Casarotto, which underscores the less than pristine reasoning of the Court.

Some commentators predicted Concepcion sounded the “death knell” of

consumer class actions,261 a “game-changing edict”262, or described the decision as

the “nail in the coffin on consumer’s ability to pursue class processes.”263

Professor Jean Sternlight found it “highly ironic but no less distressing that a

case with a name meaning ‘conception’ should come to signify death for the legal

claims of many potential plaintiffs,”264 and agrees with one attorney who she quotes

as saying Concepcion “’opens the door for companies to pickpocket $10 at a time

from millions of consumers.’”265 Proof in the validity of the point can be found in

47

the recent settlement of the class action case which alleged several unfair practices

against several credit card companies that awaits final approval this November.

Although the settlement involves millions of dollars, the individual shares for the

cardholders from the one-hundred million dollar settlement will be approximately

$25.00.266 Professor Sternlight has predicted that if businesses that deal with

consumers had not incorporated arbitration agreements with class waiver clauses

prior to Concepcion they soon would.267

The majority of cases, including Supreme Court cases268, since Concepcion

have enforced arbitration agreements challenged by consumers269, some of which

have interpreted Concepcion broadly, others enforcing similar agreements almost

apologetically.270 Yet, there are some courts that stubbornly rely on the

Mitsubishi/Randolph “vindication of statutory rights” rule, particularly the Second

Circuit Court of Appeals, or rely on the Section 2 general contract defense of

unconscionabilty, a ground that Concepcion did not declare inapplicable in every

case.271

With regard to the “vindication of rights” rule, the Second Circuit Court of

Appeals, in Amex III272 after a remand from the Supreme Court to reconsider Amex II

in light of Concepcion, determined that neither Concepcion nor Stolt-Nielsen required

that all class-action waivers were per se enforceable and left the open question

whether a mandatory class action waiver is enforceable if the plaintiff can

demonstrate that the practical effect would be to preclude the ability to vindicate

statutory rights under federal law. The Second Circuit held that neither Stolt-

48

Nielsen nor Concepcion overruled Mitsubishi and indicated it would continue to find

Randolph and its “cost-prohibitive method” still controlling.273 As it did in Amex I,

the court reversed the district court on the basis that with the evidence from the

expert witnesses it had met the burden required under Mitsubishi and Randolph

that the plaintiff could not effectively vindicate his statutory rights absent a class

arbitration.274 However, the last may not be heard of this case. According to

information recently available American Express has filed for a writ of cert and

there may be an Amex IV in the near future.

Some state courts have continued to resist a broad interpretation of

Concepcion, despite remands of their cases by the U.S. Supreme Court to reconsider

in light of Concepcion.

Of particular interest are cases from West Virginia and Missouri.

The West Virginia Supreme Court, prior to Concepcion, in a trio of cases

involving arbitration clauses contained in nursing home admission agreements

which waived claims for negligence or wrongful death and violated a state Nursing

Home statute, had ruled such agreements unenforceable on several grounds,

including public policy and unconscionability. However in February, 2012, the U.S.

Supreme Court, in Marmet Health Care Center v. Brown (Brown I), 565 U.S. -----2012,

reversed on the ground that one of the basis, the violation of public policy, was

categorically preempted because it discriminated, specifically, against arbitration

agreements. However, because the West Virginia decision was also based on

Section 2 “unconscionabililty” grounds, the U.S. Supreme Court reversed but

49

remanded for consideration of whether, absent the general public policy, the clauses

were unenforceable under state common law principles that were not specific to

arbitration and pre-empted by the FAA.275

The West Virginia Supreme Court reconsidered the remand in Brown II 276

and in June 2012, after detailing West Virginia unconscionability law, remanded the

case back to the lower court to conduct a full evidentiary proceeding to develop and

consider the arbitration agreements on unconscionability grounds.

The significance of the Brown/Marmet cases seems clear: a state statute

which categorically is preempted by the FAA, despite the fact that a state law

created the category out of public policy, the state statute may be unenforceable on

traditional contract grounds, including, but not limited to “unconscionabililty”

grounds.

This is precisely the interpretation of Concepcion that was rendered by the

Missouri Supreme Court in May, 2012, in Brewer v. Missouri Title Loans, (Brewer II),

364 S.W. 3d 486 (Mo. banc 2012). In Brewer I 277, Missouri Title Loans appealed a

judgment finding that a class arbitration waiver in a loan agreement, promissory

note and security agreement was unenforceable. The Missouri Supreme Court in

Brewer I had affirmed the lower court’s judgment that a class action waiver was

unconscionable and reversed the part of the judgment ordering the claim submitted

to an arbitrator to determine suitability for class arbitration, holding that the proper

remedy was to strike the entire agreement.278

50

The U.S. Supreme Court granted certiorari and vacated Brewer I279 and

remanded the case to the Missouri Supreme Court for further consideration in light

of Concepcion.

In Brewer II the court went into detail to explain the basis of the plaintiff’s

claim: that plaintiff borrowed money from the title company that was secured by

the plaintiff’s car; that the annual loan percentage was 300 percent; that the loan

agreement provided that while Brewer must resolve any claims in arbitration, the

title company retained the right to reposes the car through litigation or self-help;

that the agreement further provided that each side was responsible for their own

fees and expenses. The Court also noted that no claimant had ever filed an

individual claim for arbitration against the title company.280

The Missouri Supreme Court began its analysis with an examination of

Concepcion. The Court carefully examined the facts in Concepcion and found that

there was no argument made by the plaintiffs that the terms of the arbitration

agreement were onerous or unfair. The Court, therefore, concluded that the impact

of Discover Bank was to invalidate class arbitration waivers in most consumer

contracts “even if traditional factors of unconscionability are absent.”281 The Court

also noted that the U.S. Supreme Court’s concern about the Discover Bank rule was

that it created an essentially categorical requirement of class arbitration, which

resulted in a non-consensual class arbitration being ‘manufactured’ which had the

effect of disadvantaging defendants who did not agree to class arbitration, but also

disadvantaged consumers by mandating a court to find individual arbitration

51

unconscionable, even if the arbitration agreement provides the consumer with

favorable terms for individual arbitration.282 Justice Richard B. Teitelman concluded

that the issue in Concepcion was expressly limited to a specific finding that the

Discover Bank rule was preempted by federal law:

“The net result of applying Discover Bank is that class arbitration waivers are rarely enforced. Instead, defendants are required to submit to procedures to which they did not consent, and consumers may be required to participate in class arbitration even if individual arbitration is more favorable to their interests. Consequently, the majority opinion held that the act preempted California’s Discover Bank rule ‘[b]ecause it “stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress….” (citations omitted) [¶] Although the majority held that the Discover Bank rule was preempted by the federal act, it does not follow, as the title company contends, that all state law unconscionability defenses are preempted by the federal act in all cases.” Id.

Justice Teitelman also read the Concepcion majority as recognizing a case-by-

case, approach as the “appropriate analytical approach for assessing the

applicability of state law contract defenses pursuant to the §2 savings clause.”283

And, that approach, Justice Teitelman argued, would include an “unconscionability”

analysis regarding the formation of the agreement, a view he posited which the U.S.

Supreme Court endorsed in Marmet.284 After discussing the specific onerous and

unfair provisions of the title company’s agreement,285 Justice Teitelman found the

title company’s arbitration agreement to be unconscionable and unenforceable.286

Would the result in Brewer II had been different had the arbitration clause

contained a delegation clause - for example, a clause that would have delegated any

issue to arbitration in accordance with the rules and regulations of the AAA? The

most recent case from the U.S. District Court for the Eastern District of Missouri

52

would seem to say so. Relying on Rent-A-Center, the Eastern District held that the

issue of “unconscionablity” was for the arbitrator.287

Is there any turning back from Concepcion? Has the preemptive power of the

FAA gone too far? Is there anything that can resurrect an aggrieved party’s right to

a jury or preserve his class action rights - or has Chief Justice Burger’s agenda of

funneling the resolution of public wrongs into private forums finally found

immortality?

Some commentators suggest the courts are now powerless to reverse the

pro-class action mandatory-waiver stance of the Supreme Court suggesting only

Congress has the power to do so.288 As noted above, within days after the

Concepcion decision, the Arbitration Fairness Act of 2011 (AFA 2011) was

introduced in both the Senate and the House.289 The AFA 2011 proposes an

amendment to the FAA invalidating pre-dispute arbitration agreements covering

employment, consumer or civil rights disputes. In addition, the amendments would

require a court, rather than an arbitrator, to decide any dispute regarding the

applicability of the FAA to an arbitration agreement as amended by the AFA 2011.

The AFA 2011 has generated its own brand of controversy. Some

commentators argue the proposed legislation goes too far.290 Perhaps the best

evidence that a legislative solution to the overreaching of the FAA’s preemptive

power is found in the past efforts to cobble a Congressional solution. Even before

the Rent-A-Center decision, “reform advocates had started seeking Congressional

relief against companies that mandated arbitration. “291 Between 1995 and July

53

2010, 135 bills were introduced by members of Congress that attempted to

eliminate mandatory arbitration from some types of disputes, yet only five passed

both houses of Congress.292 Earlier versions of the AFA died in committee in 2007

and 2009.293 Observers appear uniform in their assessment that the AFA 2011 has

little chance of passage in the current political environment,294 however, some

believe that the best chance at a solution might be found in Title X of the Dodd-

Frank Wall Street Reform and Consumer Protection Act of 2010 that established the

Consumer Financial Protection Bureau (CFPB), created by newly-elected Senator

Elizabeth Warren.295 Section 1028 requires the CFPB to conduct a study and submit

a report to Congress on the use of arbitration in consumer transactions and

“prohibit or impose conditions or limitations on the use of…arbitration of any future

dispute between the parties, if the Bureau finds that such a prohibition or

imposition of conditions or limitations is in the public interest and for the protection

of consumers.”296 Under Dodd-Frank, it may be possible for challenges to the FAA to

take place without the necessity of the cooperation of both houses of Congress.

CONCLUSION

The road from the birth of the FAA to Concepcion was hardly an immaculate

pathway. The convergence of the judicial/political agenda of Chief Justice Burger

and the tort reform movement may have been merely coincidental, yet it was clear

that it was the Burger court that conceived the giant leap over the true legislative

history of the FAA and transformed the Act into a preemption juggernaut that led to

the Concepcion decision. And, while some federal and state courts continue to try to

54

find cracks and creases in FAA preemption, the expansive rulings of the Supreme

Court have dictated that arbitration agreements can stand unassailable to

challenges no matter how strong a state’s public policy that all common law contract

defenses can be delegated to arbitration leaving the states literally powerless to

challenge such agreements on any basis.

Yet it may be the ultimate irony that Chief Justice Burger’s judicially-created,

invasively preemptive, “national policy favoring arbitration” may soon come full

circle as a result of its ultimate expansion in Concepcion; and, its demise, or at least a

modification thereof, may ultimately come from the very Congress that created the

FAA nearly ninety-years ago.

`

55

56

1 “Public Citizen believes that the current state of arbitration law has resulted in a corruption of citizens' fundamental rights to equal justice under the law. We have suggested a comprehensive legislative initiative to resolve the problem. [T]he Federal Arbitration Act should be amended to remove the judicially-imposed federal preemption of state regulation of arbitration agreements so that the states may protect consumers and employees from unfair arbitration clauses.” Remarks of Joan Claybrook, President, Public Citizen’s Congress Watch before the Subcommittee on Commercial and Administrative Law of the House of Representatives, 106th Congress, 2nd Session, 158-181 at 180 concerning H.R. 534, “Fairness and Voluntary Act” (short title), June 8, 2000.

2 Within days following the Concepcion decision, on May 12, 2011, Senators Franken and Blumenthal and Representative Johnson introduced S.987 and H.R. 1873, respectively, commonly referred to as the “Arbitration Fairness Act.”

3 Several state legislatures, including West Virginia, had adopted statutes declaring certain types of arbitration void as against public policy. West Virginia Nursing Home Act, Section 15(c) (W.Va.Code, 16-5C-15(c), 1997) provided that “any waiver by a resident or his or her legal representative of the right to commence an action under this section, whether oral or in writing, shall be null and void as contrary to public policy.” Challenge to the West Virginia act was pending at the time of Concepcion. See infra page for the current status of the West Virginia Act.

4 By the time of the Concepcion decision sixteen state and federal courts, between 2005 and 2010, had refused to enforce class arbitration waivers, finding them “unconscionable” under state law. [For case citations, see Smith and Moye, supra, note 5, at 633, n.33, for cases involving the following states: Arizona, California, Delaware, Georgia, Illinois, Kentucky, Massachusetts, Missouri, New Mexico, New Jersey, North Carolina, Ohio, Oregon, Pennsylvania, South Carolina, Washington and Wisconsin] The Missouri Supreme Court, for example, months prior to the Concepcion decision had refused to enforce a class arbitration waiver in a loan agreement, promissory note and security agreement opinion finding that the waiver was “unconscionable.” Brewer v. Missouri Title Co. 364 S.W. 3d 486. See infra pp. 48-49 for the current status of the case.

5 For example, Judge Craig Smith & Judge Eric V. Moye posited that Concepcion “sounds a death knell for consumer class actions” in their article, “Outsourcing American Civil Justice: Mandatory Arbitration Clauses In Consumer and Employment Contracts,” 44 Tex. Tech L. Rev. 281, 295 (2011); Myriam Giles and Gary Friedman, referred to Concepcion as a “game-changing edict“ and predicted “[M]ost class cases will not survive the impending tsunami of class action waivers. And as this great mass of consumer protection, antitrust, employment, and other cases is swept out to sea, the question arises: What or who can fill the resulting enforcement gap?” *** [T]he Supreme Court’s ruling suggests that many – indeed, most – of the companies that touch consumers’ day-to-day lives can and will now place themselves beyond the reach of aggregate litigation. These companies include telephone companies, internet service providers, credit card issuers, payday lenders, mortgage lenders, health clubs, nursing homes, retail banks, investment banks, mutual funds, and the sellers of all manner of goods and services. And that is just consumers. Employees, too will find themselves unable to band together and seek legal redress.” Giles and Friendman, After Class: Aggregate Litigation in the Wake of AT&T Mobility v. Concepcion, 79 U. Chi. L. Rev. 623, 627 (2012).

6 131 S. Ct 1740 (2011).

7 As of November 6, 2012, a Westlaw search of “Federal Arbitration Act” in “all cases” reveals 16,734 reported decisions in all state and federal courts that contain the search term.

8 Federal Arbitration Act, Publ. L. No. 68-401, 43 Stat. 883 (1925) (codified as amended at 9 U.S. C. §§ 1-14 (2008).

9 Jeffrey Stempel, Arbitration, Unconscionability, and Equilibrium: The Return of Unconscionability Analysis as a Counterweight to Arbitration Formalism, 19 Ohio St. J. on Disp. Resol. 757, 768 (2003-2004), relying on several sources which discuss a “variety of arbitral mechanisms historically and currently,” including Sarah R. Cole, Uniform Arbitration: “One Size Fits all” Does not Fit, 16 Ohio. St. J. on Dis. Resol. 759, 760-67 (2001).

10 Roger S. Haydock & Jennifer D. Henderson, Arbitration and Judicial Civil Justice: An American Historical Review and a Proposal for a Private/Arbitral and Public/Judicial Partnership, 2 PEPP. DISP. RESOL. L.J. 141, 144 (2002).

11 Zhanodong Jiang, Federal Arbitration and State Court Proceedings, 23 Loyoloa of Los Angeles Law Review 473, 476 (1990).

12 Debate on the House floor, Congressional Record, 1924, p. 1931.

13 Stephen Friedman, Arbitration Provisions: Little Darlings and Little Monsters,” 79 Fordham L. Rev. 2035, 2038 (2010-2011).

14 “The legislative history of the Act focuses on commercial dealings and the perceived problem of courts failing to enforce arbitration provisions in commercial contracts. The Act was clearly the pet project of the nation’s business community, which focused on arbitration between commercial firms, not between employer and employee.” Jeffrey Stempel, Reconsidering The Employment Contract Exclusion in Section 1 of The Federal Arbitration Act: Correcting The Judiciary’s Failure of Statutory Vision, 1991 J. Disp. Resol. 259, 294-95 (1991) (discussing statutory construction theories regarding the “employment contract exception” to Section 1 of the FAA). Stempel reviews the Joint Hearings on S. 1005 and H.R. 646 and points out the bills were supported by 67 business organizations. Id at n.187.

15 It is not the purpose or scope of this paper to discuss the advantages or disadvantages of arbitration as compared to litigation or make an attempt to establish that arbitration does or does not provide the “holy trinity” advantages of a cheaper, faster and more satisfying alternative advocates of ADR modalities claims. See William Hopkins, Pound Wise: Pound Foolish – It’s Time To Weigh The Factors That Led To Mandated Mediation in our Civil Courts, Spring 2011 at 9, 22. Many scholars have tried to address the comparative advantages/disadvantages of arbitration versus litigation (i.e. Theodore Eisenberg, Geoffrey P. Miller, & Emily Sherwin, Arbitration’s Summer Soldiers: An Empirical Study of Arbitration Clauses inConsumer and Nonconsumer Contracts, 41 U. Mich. J. L. Reform 871 (2007-2008); Nancy S. Kim & Chii-Dean Lin, Arbitration’s Summer Soldiers Marching into Fall: Another Look At Eisenberg, Miller, and Sherin’s Empirical Study of Arbitration Clauses in Consumer and Nonconsumer Contracts, 34 Vt. L. Rev. 597 (2009-2010); Christopher R. Drahozal & Samantha Zyontz, An Empirical Study of AAA Consumer Arbitrations, 25 Ohio St. J. on Disp. Resol. 843 (2010); Christopher R. Drahozal & Stephen J. Ware, Why Do Businesses Use (or Not Use) Arbitration Clauses?, 25 Ohio St. J. on Disp. Resol. 433 (2010)). However, just like the studies that tried to establish, but failed, to empirically prove mandated mediation provided the “holy trinity” advantages, there are simply too many independent variables from one dispute to another that permits any reliable conclusion and therefore this issue will not be discussed in this paper. See, Hopkins, at 20-22. And although this writer has strong philosophical opinions regarding the clash between mandatory arbitration and “the most fundamental democratic virtues: individual liberty, the rule of law, and fundamental fairness” (see Richard C. Reuben, Democracy and Dispute Resolution: The Problem of Arbitration, 67 Law & Contemp. Probs. 279, 281 (2004)) this paper will not discuss those issues in detail.

16 David Clancy & Matthew M.K. Stein, An Uninvited Guest: Class Arbitration and the Federal Arbitration Act’s Legislative History, The Business Lawyer, Vol. 43, November, 2007, 58-60 (discussing the legislative history of the FAA).

17 See Julius Henry Cohen, The Law of Commercial Arbitration and the New York Statute, 31 Yale L. J. 147, 147-148 (1921) wherein he describes what led to the passage of the New York statute ch. 275 NY Laws 803, April 19, 1920.

18 Friedman, supra at note 13, at 2038-39, quoting what has been known as the “savings” clause of both the New York law and the FAA that use “savings clause” language to allow an exception to the statutory mandate. See 9. U.S.C. §2 (2006).

19Margaret L. Moses, Statutory Misconstruction: How the Supreme Court Created a Federal Arbitration Law Never Enacted by Congress, 34 Fla. St. U. L. Rev. 99, 102 (2006).

20Title 9, US Code, Section 1-14, was first enacted February 12, 1925 (43 Stat. 883), codified July 30, 1947 (61 Stat. 669), and amended September 3, 1954 (68 Stat. 1233). Chapter 2 was added July 31, 1970 (84 Stat. 692), two new Sections were passed by the Congress in October of 1988 and renumbered on December 1, 1990 (PL 669 and 702); Chapter 3 was added on August 15, 1990 (PL 101-369); and Section 10 was amended on November 15.

21 Ian R. McNeil, AMERICAN ARBITRATION LAW: RE, NATIONALIZATION INTERNATIONALIZATION, 85-92, 100-01 (1992).

22 Jonathan A. Marcantel, The Crumbled Difference Between Legal and Illegal Arbitration Awards: Hall Street Associates and the Waning Public Policy Exception, 14 Fordham J. of Corp. & Fin. L., 597, 603-4 (2009)

23 9 U.S.C. §2 (2006).

24 David Horton, Federal Arbitration Act Preemption, Purposivism, and State Public Policy, 10/28/12, submission copy, 46-48.

25 9 U.S.C. §1 (2006).

26 Justice O’Conner, in her dissent in Southland, took issue with what Justice Berger characterized as “legislative … ambiguities” surrounding the enactment of the FAA and his conclusion therefrom that Congress intended a “broader purpose” for the Act to be more than a merely procedural statute. Justice O’Connor stated: “One rarely finds a legislative history as unambiguous as the FAA’s.” Southland at 25. After citing detailed references to the House Report, transcripts from the Joint Hearings, and opinions from the drafters of the Act, Justice O’Connor explained her disagreement with the majority this way: “The foregoing cannot be dismissed as ‘ambiguities’ in the legislative history. It is accurate to say that the entire history contains only one ambiguity, and that appears in the single sentence of the House Report cited by the Court ante, at 12-13. That ambiguity, however, is definitively resolved elsewhere in the same House report, see supra, at 27, and throughout the rest of the legislative history.” Id. at 29. “That history establishes conclusively that the 1925 Congress viewed the FAA as a procedural statute, applied only in federal courts….” Id at 25

27 “Prior to the act, the law was well settled that agreements for arbitration would not be allowed to oust the jurisdiction of the federal courts. Therefore no effect was given to them, even though they might be recognized as valid.” Danielsen v. Entre Rios Ry. Co., 22 F.2d 326 (D. Md. 1927)(citing several early reported cases including U. S. Asphalt Co. v. Trinidad Lake Petroleum Co. (D. C.) 222 F. 1006; Aktieselskabet-Korn-Og, etc., v. Rederiaktiebolaget (D. C.) 232 F. 403; The Eros (C. C. A.) 251 F. 45; The Atlanten, 252 U.S. 313, 40 S.Ct. 332, 64 L. Ed. 586.) Professor David Horton explained that the doctrine of ouster was developed by the English courts in the 18 th century and the practice carried over into twentieth century jurisprudence, Horton, supra note 24 at 444-445.

28 Burch, infra note 63 http://articles.latimes.com/2012/may/01/business/la-fi-lazarus-20120501at 11, n. 57-58, referencing comments made by the drafter of the Act, Julius Cohen, that such issues were best left to “skilled judges” and “established systems of law.”

29 Senate Report. NO. 5326, 68TH Congress, 1ST Session, p. 2 (1924)

30 Debate on the House floor, Congressional Record, 1924, p. 1931.

31 House Report. No. 96, 68th Congress, 1st Session, p. 1 (1924).

32 “When Congress passed the FAA in 1925, it intended only to require federal courts to accept arbitration agreements that had been voluntarily entered into by two parties of relatively equal bargaining power in arms‟ length transactions.” Jean R. Sternlight, Panacea or Corporate Tool?: Debunking the Supreme Court’s Preference For Binding Arbitration, 74 Wash. U. L. Rev. 637, 641 (1996).

33 The Missouri Supreme Court, in State ex rel Vincent v. Schneider, 194 S.W. 3d 853, 857 (Mo banc 2006) provided a definition of an adhesion contracts as follows: “A contract of adhesion, as opposed to a negotiated contract, is a form contract that is created and imposed by the party with greater bargaining power. The ‘stronger party’ has more bargaining power than the ‘weaker party,’ often because the ‘weaker party’ is unable to look elsewhere for more attractive contracts. The ‘stronger party’ offers the contract on a ‘take this or nothing’ basis. The terms of the contract are imposed on the weaker party and unexpectedly or unconscionably limit the obligations and liabilities of the stronger party.”

34 Joint Hearings on S. 1005 and H.R. 646 Before the Subcommittee of the Committee on the Judiciary, 68th Congress, 1st Session, p. 37 (1924). Also see Justice O’Connor’s dissent in Southland discussed supra at note 26.

35 “There is no disposition therefore by means of the Federal bludgeon to force an individual State into an unwilling submission to arbitration enforcement. The statute cannot have that effect.” Brief of Julius Cohen, Joint Hearings on S. 1005 and H.R. 646 Before the Subcommittee of the Committee on the Judiciary, 68th Congress (1924).

36 “If any suit or proceeding be brought in any of the courts of the United States upon any issue referable to arbitration under an agreement in writing for such arbitration, the court in which such suit is pending, upon being satisfied that the issue involved in such suit or proceeding is referable to arbitration under such an agreement, shall on application of one of the parties stay the trial of the action until such arbitration has been had in accordance with the terms of the agreement, providing the applicant for the stay is not in default in proceeding with such arbitration.” 9 U.S.C. §3 (emphasis added).

37 “A party aggrieved by the alleged failure, neglect, or refusal of another to arbitrate under a written agreement for arbitration may petition any United States district court which, save for such agreement, would have jurisdiction under Title 28, in a civil action or in admiralty of the subject matter of a suit arising out of the controversy between the parties, for an order directing that such arbitration proceed in the manner provided for in such agreement. Five days'' notice in writing of such application shall be served upon the party in default. Service thereof shall be made in the manner provided by the Federal Rules of Civil Procedure.” 9 U.S.C. §4 (emphasis added).

38 9. U.S.C. §5

39 9 U.S.C. §6

40 9 U.S.C. §7

41 9 U.S.C. §8

42 9 U.S.C. §9

43 §(a) In any of the following cases the United States court in and for the district wherein the award was made may make an order vacating the award upon the application of any party to the arbitration· (1) Where the award was procured by corruption, fraud, or undue means.· (2) Where there was evident partiality or corruption in the arbitrators, or either of them.· (3) Where the arbitrators were guilty of misconduct in refusing to postpone the hearing, upon sufficient cause shown, or in refusing to hear evidence pertinent and material to the controversy; or of any other misbehavior by which the rights of any party have been prejudiced.· (4) Where the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not made.· (5) Where an award is vacated and the time within which the agreement required the award to be made has not expired the court may, in its discretion, direct a rehearing by the arbitrators.§ (b) The United States district court for the district wherein an award was made that was issued pursuant to section 590 of title 5 may make an order vacating the award upon the application of a person, other than a party to the arbitration, who is adversely affected or aggrieved by the award, if the use of arbitration or the award is clearly inconsistent with the factors set forth in section 582 of Title 5. 9 U.S.C. §10 (emphasis added).

44 In her dissent in Southland, Justice O’Connor not only relied on her review of the legislative history of the FAA, but examined the implementing provisions of the Act to support her view that the FAA’s application was only to the federal courts, and evidenced no intent to relied upon sections of the FAA to substantiate her dissent in the Southland case. “Sections 3 and 4 are the implementing provisions of the Act, and they expressly apply to federal courts.” O’Connor, J. dissenting, Southland Corp. v. Keating, 465 U.S. 1, 29. Also see, Horton, who also points to the provisions of Sections 3 and 4 as applying “only to federal courts” and concludes “[b]ecause the aspects of the statute neither apply in state court nor preempt state rules, they simply do not speak to the relationship between the FAA and state law.” Horton, supra note 24 at 44. Horton also footnotes Volt Info. Scis., Inc. v. Bd. Of Trs. Of The Leland Stanford Junior Univ., 489 U.S. 468, 477 n.6 (1989) for this: “[w]e have never held that §§ 3 and 4, which by their terms appear to apply only to proceedings in federal court, are nonetheless applicable in state court.”

45 Horton, supra note 24 at 446 (citing Ian R. McNeil, AMERICAN ARBITRATION LAW, pp. 115-16.)

46 Moses, supra note 19 at 102.

47 The fact that the same groups that sought passage of the FAA were working simultaneously on state laws that would have been superfluous if the FAA were truly intended to govern the state forum….” Sternlight, supra note 32 at 641.

48 Infra note 49.

49 Stevens, J., dissenting, Southland Corp. v. Keating, 465 U.S. 1, 18-19.

50 Id.

51 Id. at 20-21.

52 Alan Scott Rau, The Arbitrability Question Itself, 10 Am. Rev. Int’l Arb. 287, 287-88 (1999)

53Joshua R. Welsh, Has Expansion of the Federal Arbitration Act Gone Too Far? Enforcing Arbitration Agreements in Void Ab Inito Contracts, 86 Marquette L. Rev. 581, 582-83. (2002).

54 David S. Schwartz, State Judges as Guardians of Federalism: Resisting the Federal Arbitration Act’s Encroachment on State Law, 16. J. of Law and Policy 129 (2004)

55 The Silverbrook, 18 F. 2d 144, 145 (D.C. La. 1927). Many of the early post-enactment cases involved maritime cases.

56 42 U.S. 1 (1842)

57 326 U.S. 99 (1945).

58 Frankfurter, J., Guaranty Trust Co. v. York, 326 U.S. at 103.

59 304 U.S. 64 (1938)

60 Robert H. Jackson, The Rise and Fall of Swift v. Tyson, 24 ABAJ 609 (1938). Jackson wrote the following: “In [striking down Swift v. Tyson]… the Court in effect has declared that thousands of decisions of Federal courts, no longer subject to correction, have done what, in the case of legislative action, is called usurping the powers of the states and taking the property of A and giving it to B without constitutional authority. The Court in effect has declared that hundreds of judges have done daily what, in the case of administrative officers, is called exercising an unlawful discretion, having no regard to the standards which must confine their judgment. In the face of an acknowledgment so bold in its frankness and so breath-taking in its implications, perhaps the highest tribute that can be paid to the overruling of Swift v. Tyson is that which was offered up by the usually sedate Harvard Law Review, which saluted "the gratuitous courage of the Court and the fluidity of the Constitution."(citation omitted).

61 304 U.S. 64, 78 (1938).

62 O’Connor, J. dissenting, Southland Corp, supra note 26 at 23.

63 Thomas V. Burch, PRAGMATIC LIBERALISM IN MANDATORY ARBITATION, September, 2010, p. 12, n65.

64 326 U.S. 99, 109 (1945).

65 Id.

66 Burch, supra note 63 at 12.

67 350 U.S. 198 (1956)

68 “If the federal court allows arbitration where the state court would disallow it, the outcome of the litigation might depend on the courthouse where suit is brought. *** There would in our judgment be a resultant discrimination if the parties suing on a Vermont cause of action in the federal court were remitted to arbitration, while those suing in the Vermont court could not be.” Id at 204

69O’Connor, J. dissenting, Southland, supra note 26 at 23.

70 “In view of the ground that was taken in that case [Erie] for its decision, it would raise a serious question of constitutional law whether Congress could subject to arbitration litigation in the federal courts which is there solely because it is ‘between Citizens of different States,’ U.S. Const. Art. III §2, in disregard of the law of the State in which a federal court is sitting. Since the United States Arbitration Act of 1925 does not obviously apply to

diversity cases, in light of its terms and the relevant interpretive materials, avoidance of the constitutional question is for me sufficiently compelling to lead to a construction of the Act as not applicable to diversity cases. [footnote reference omitted] Of course, this implies no opinion on the constitutional question that would be presented were Congress specifically to make the Arbitration Act applicable in such cases.” 350 U.S. 198, 208 (1956).71 271 F. 2d 402 (C.A. 2d Cir. 1959), cert. granted, 362 U.S. 909, dismissed under Rule 60, 364 U.S. 901 (1960).

72 Id. at 404.

73 Id.

74 Id. at 405-406.

75 Id. at 406, referencing H.R. Rep. 96, 68th Cong., 1st Sess., p. 1. The Court also stated “we think the text of the Act and the legislative history demonstrate that the Congress based the Arbitration Act in part on its undisputed substantive powers over commerce and maritime matters.” Id at 407. The Court also held the Act “created national substantive law clearly constitutional under the maritime and commerce powers of the Congress and that the rights thus created are to be adjudicated by the federal courts whenever such courts have subject matter jurisdiction, including diversity cases, just as the federal courts adjudicate controversies affecting other substantive rights when subject matter jurisdiction over the litigation exits. We hold that the body of law thus created is substantive not procedural in character and that I encompasses questions of interpretation and construction as well as questions of validity, revocability and enforceability of arbitration agreements affecting interstate commerce or maritime affairs, since those two types of legal questions are inextricably intertwined.” Id. at 409.

76 Id. at 410.

77 388 U.S. 395 (1967).

78 P. Bator, P. Mishkin, D. Shapiro, & H. Wechsler, Hart and Wechsler, THE FEDERAL COUFTS AND THE FEDERAL SYSTEM 731-732 (2d ed. 1973) cited by O’Connor, dissenting, Southland, supra note 26 at 24.

79 Id. at 6.

80 Id. at 10.

81 Id. at 403-404.

82 Id. at 11.

83 “In Robert Lawrence…the Second Circuit had flatly announced – in dictum, of course – that the FAA was a ‘declaration of national law equally applicable in state or federal courts.’ 271 F. 2d, at 407. One Justice in Prima Paint was prepared to adopt wholesale the Second Circuit’s more broadly written opinion. 388 U.S., at 407 (Harlan, J. concurring). But the Prima Paint majority opinion did not do so. In there circumstances, the majority opinion speaks loudly by its complete silence regarding the act’s applicability to state courts.” O’Connon, J. dissenting, Southland p. 26, n6.

84 Black, J. dissenting, Prima Paint, supra pp. 13-14.

85 Id. at 21.

86 Id.

87 Id.

88 Id. at 26.

89 “To support its conclusion the [Prima Paint] Court said: ‘[I]t is clear beyond dispute that the federal arbitration statute is based upon and confined to the incontestable federal foundations of “control over interstate commerce and over admiralty.” But nothing in the Act’s legislative history supports this. And, because the Court didn’t specify that Congress never intended the Act to apply in state courts, its reliance on the Commerce Clause invented a basis for arguing that the Act created substantive rights that would preempt

conflicting state laws. This made it ‘logically inescapable’ that the Act would eventually apply in state, not just federal courts.” Burch, supra note 63, at 14 (internal footnotes omitted).

90 “It is true, as respondents assert, that the Prima Paint rule permits a court to enforce an arbitration agreement in a contract that the arbitrator later finds to be void. But it is equally true that respondents’ approach permits a court to deny effect to an arbitration provision in a contract that the court later finds to be perfectly enforceable. Prima Paint resolved this conundrum--and resolved it in favor of the separate enforceability of arbitration provisions. We reaffirm today that, regardless of whether the challenge is brought in federal or state court, a challenge to the validity of the contract as a whole, and not specifically to the arbitration clause, must go to the arbitrator.” Buckeye Check Cashing v. Cardegna, 126 S. Ct. 1204, 1210 (2006).

91 First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938 (1995); Howsam v. Dean Whitter Reynolds, Inc., 537 U.S. 79 (2002).

92 Green Tree Financial Corp. v. Bazzle (Bazzle), 539 U.S. 444, 450 (2003).

93 465 U.S. 3 (1986).

94 Arguing that the Supreme Court “began to rewrite” the FAA in Prima Paint, David E. Fuller wrote: “The motivation for this judicial reversal, through never expressed, was the Court’s desire to clear not only to its dockets, but the dockets of all courts.” David E. Fuller, Fender Bender of Train Wreck?: The Collision Between Statutory Protection of Individual Employee Rights and the Judicial Revision of the Federal Arbitration Act, 41 St. Louis U. L. J. 561, 565 (1997).

95 The fears that the U.S. would dive into a depression due to reduced military spending after World War II were not well founded. Instead, suppressed consumer demand sparked extraordinarily strong economic growth. The automobile industry converted back to producing cars, and new industries such as aviation and electronics were growing rapidly. Because affordable mortgages were offered to returning veterans the U.S. experienced a housing boom. The nation's gross national product rose from about $200,000 million in 1940 to $300,000 million in 1950 and to more than $500,000 million in 1960. U.S. Depart of State, The Post-War Economy 1945-1960. economics.about.com/od/useconomichistory/a/post_war.htm

96 “Businesses merged to create huge, diversified conglomerates. International Telephone and Telegraph, for instance, bought Sheraton Hotels, Continental Banking, Hartford Fire Insurance, Avis Rent-a-Car, and other companies.” Id.

97 “Technology made it easier than ever before for companies to move people, knowledge, and goods around the world. There were new waves of innovations in transport and communications. In 1958 the first commercial jet made an Atlantic crossing. This was followed by a phenomenal increase in air traffic. The development of telex was a considerable advance over telephones in facilitating international communications and coordinating multinational business. In 1965 the first satellite for commercial telecommunications was launched. During the 1970s the use of the facsimile machine took off. The movement of goods across the world was facilitated by the development of larger ocean-going ships, or super-freighters, and the growth of containerization.” Geoffrey Jones, Restoring the Global Economy, 1950-1980, Working Knowledge Newsletter, Harvard Business School, August 22, 2005.

98 “Due in part to the unprecedented increase in statutory employment rights in the 1960s and the subsequent increase in employment-related litigation judicial efficiency has become an oft-cited rationale behind the courts’ acceptance and endorsement of arbitration. Perhaps as a response to this increase in litigation, the courts expanded the use of arbitration under the FAA to apply to transactions between parties of unequal bargaining power.” Smith & Moye, supra note 5 at 291, referencing Vicki Zick, comment, Reshaping The Constitution To Meet The Practical Needs of the Day: The Judicial Preference for Binding Arbitration, 82 Marq. L. Rev. 247, 250 (1998).

99 Warren E. Burger, Bringing The Judicial Machinery Up To The Demands Made On It,” 42 Pa. B. Ass’n Q. 262, 265 where the Chief Justice suggested that if anyone was an “advocate that automobile cases be removed from all courts and juries or at least that they be tried by judges without juries thus speeding up and reducing the cost of the process” Justice Berger would not accused the advocate of being “radical or subversive.”

100 Id.

101 Jeffrey Stempel, supra note 14 at 315.

102 See note 96, infra.

103 Id. at 313, referencing Warren E. Burger, The Special Skills of Advocacy: Are Specialized Training and Certification of Advocates Essential to Our System of Justice, 42 Fordam L. Rev. 227 (1973).

104 Warren E. Burger, Let’s Stop Building Major Cases Out Of Minor Disputes, 3 B. Leader 1, 3 September-October (1977-78).

105 Id.

106 Between 1970 and 1980 there was a rise in the number of cases filed in federal courts and the largest three categories of cases were contract disputes, civil rights actions, and federal prisoner petitions. By the time of the Pound Conference, Congress had addressed the issue regarding federal criminal cases by enacting the Speedy Trial Act in 1974 (18 U.S.C. §§3161-3174) and in 1968, Congress enacted the Federal Magistrates Act (amended in 1976 and 1979) which replaced U.S. Commissioners with Federal Magistrates that were given powers to try and dispose of minor criminal offenses, supervise pre-trial discovery, perform special master functions, and in the 1979 Amendment try and enter final judgments in any civil case). See, Mark Galanter, The Vanishing Trial: An Examination of Trials and Related Matters in Federal and State Courts, Journal of Empirical Legal Studies, Volume 1, Issue 3, 459–570, at 474, November 2004.

107 Stempel, supra, note 14 at 312, characterizes the Conference as “essentially a center-right dominated event decrying both excessive rights-based social engineering through litigation and attorney obsteporousness.” He provides as an example, Judge Bork’s article, Dealing With The Overload in Article III Courts, 70 F.R.D. 231 (1976), where Stempel characterizes Bork as “accusing litigants of childishly resorting to court over trivial slights or to assert far-fetched concepts of entitlement.” Chief Justice Burger, after the Pound Conference, but before his opinion in Southland v. Keating, publically shared Judge Bork’s sentiments: “One reason our courts have become overburdened is that Americans are increasingly turning to the courts for relief from a range of personal distresses and anxieties. Remedies for personal wrongs that once were considered the responsibility of institutions other than the courts are now boldly asserted as legal ‘entitlements.’ The courts have been expected to fill the void created by the decline of church, family, and neighborhood unity.” Warren E. Burger, Is There A Better Way? 68 A.B.A. J. 274, 275 (1982).

108 Stephen N. Subrin, Teaching Civil Procedure While You Watch It Disintegrate, 59 Brook. L. Rev. 1155, note ___, at 310.

109 Although Chief Justice Burger and others claimed the crisis in the courts was due to a “litigation explosion,” in fact the statistical basis of that claim was more than suspect. Prior to 1970, the federal courts had no real mechanism for accurately reflecting the number of cases that either had been filed or remained in the court system as an “active” case. There was no reliable database and all data came from paper cards kept by each district court. In deed, “in the 1970s, the Administrative Office and the Statistical Subcommittee of the Judicial Conference on Court Administration sought ways to more accurately represent pending cases. The Administrative Office concluded that many civil cases pending longer than three years were technically open, but no activity had taken place in some time the issues presented had been resolved, and all contemplated judicial action had been taken, although the cases could not be dismissed.” Federal Judicial Center, History of Federal Caseload Reporting, http://www.fjc.gov/history/caseload.nsf/page/caseloads_historical_overview.

110 Stempel, supra note 14at 320: “After the Pound Conference, the ascension of ADR was paralleled by decreasing confidence in adjudication….By the early 1980s, the words’ discovery abuse’ were on the lips of many lawyers and virtually all politically conservative litigation interest groups such as the defense bar, manufacturers, insurance companies, as well as political conservatives generally.” Stempel further notes, at 323: “It is no accident that the corporate community has embraced ADR not only as a means of controlling costs in disputes between commercial entities but also as a means of preventing individuals from placing claims before a jury.”

111 Edward A. Dauer, The Future of ADR, 1 Pepp. Disp. Resol. 5 (2001). 112 Donna Stienstra and Thomas Willging, Atlernatives To Litigation: Do They Have A Place in the Federal District Courts? (Federal Judicial Center 1995).

113 Zick, supra note 98 at 250.

114 Warren E. Burger, Reflections on The Adversary System, 27 Valparaiso U. L. Rev. 310, 311 (1993).

115 460 U.S. 1 (1983).

116 Id. at 24.

117 Burch supra note 63 at 14 n89.

118 Justice Stevens filed an opinion concurring in part and dissenting in part; Justice O’Connor filed a dissenting opinion in which Justice Rehnquist joined.

119 465 U.S. 1, 7 (1983).

120 The state franchise statute provided: “Any condition, stipulation or provision purporting to bind any person acquiring any franchise to waive compliance with any provision of this law or any rule or order hereunder is void.” Cal. Corp. Code Ann. § 315112 (1977).

121 465 U.S. 1, 12 (1983).

122 Id.

123 Supra p. 9.

124 Supra pp. 13-14.

125 Supra pp. 7-8.

126 Supra note 26.

127 465 U.S. 1, 12 (1983). But see, O’Connor, J. dissenting, taking issue with the Chief Justice’s characterization of the legislative history, supra note 26.

128 465 U.S. 1, 13 (1983).

129 “Southland…divorced the Act from its legislative history and freed the Court to create an Act of its choosing.” Burch, supra note 63 at 15-16. “[T]he caseload and ‘litigation explosion’ considerations…implicitly prompted the Court…to find in the FAA a broadly preemptive pro-arbitration sword….” Sameul Eistreicher, Predispute Agreements To Arbitrate Statutory Employment Claims, 46 New Y. U. L. Rev. 1344, 1372.

130 Schwartz, supra note 54 at 134, 154-61.

131 Wagner-Connery Labor Relations Act (The Wagner Act), ch. 372, 49 Stat. 449 (1935)[cites to subsequent and current version omitted]

132 In Textile Workers Union v. Lincoln Mills, 353 U.S. 448 (1957) the Supreme Court enforced an agreement to arbitrate in a labor contract negotiated between labor and management, finding that the parties were of equal bargaining power and had voluntarily entered the agreement, relying on the Labor Management Relations Act (LMRA); Fuller, supra note 94 at 566-567, outlines the history of arbitration provisions in labor contracts, noting that by 1960, the Supreme Court treated arbitration agreements under section 301 of the Taft-Hartley Act generously, accepting that an arbitration clause was a substitute for a strike rather than litigation and accepting the distinction that an arbitration over a grievance was not arbitrable if there was a no-strike clause in the agreement; and, given the purpose of federal labor law, arbitration clauses were to be broadly construed, and if there were doubts as to whether an arbitration provision was applicable, doubts were to be resolved in favor of arbitration; the essential “resolution of doubts in favor of arbitration” holding in the 1983 Moses H. Cone Memorial Hospital v. Mercury Construction Corporation, a commercial, not a labor, case (citations omitted).

133 Commercial arbitration is a substitute for litigation whereas labor arbitration is a substitute for “industrial strife” and is a form of “continuous bargaining” between unions and management and allows the relationship between them to continue without interruption. “The Supreme Court consistently has maintained this basic distinction.” Michael J. Gallaher, Statutory Rights and Predispute Agreements to Arbitrate in Contracts of Employment, 66 St. John’s L. Rev. 1070, 1067, n.16 (1993)

134 Fuller, supra note 94 at 362-564. Fuller posits Congress enacted statutory protection for employees as a result of the decline in collective bargaining as well of the fact that in some cases, unions were “active participants in the discrimination against women and minorities” and collective bargaining agreements provided no protection for such conduct. Id at 563. Fuller also notes that the various statutory protections afforded by the new wave of federal statutes “rely primarily on individual suits by employees claiming violation of the statutorily protected right for enforcement.” Id. at 564.

135 Id.

136 Fuller, supra note94 at 563, referencing the Equal Pay Act of 1963, Age Discrimination In Employment Act of 1967, Title VII of the Civil Rights Act, The Occupational Safety and Health Act of 1970, Title III of the Consumer Credit Protection Act, the Employment Retirement Income Security Act of 1974 as acts pre-dating the Prima Paint and Southland cases; and, also referencing the following post-Southland statutes: Americans with Disabilities Act of 11990, the Older Workers Benefit Protection Act of 1990, the Worker Adjustment and Retraining Notification Act of 1988, the Employee Polygraph Protection Act of 1988, and the Family and Medical Leave Act of 1993 (statutory citations omitted)

137 346 U.S. 427, 438 (1953).

138 Wilco was expressly overruled in Rodriguez de Quijas v. Shearson/American Express, Inc., 490 U.S. 477, 481 (1989) the Court stating that Wilco was based on the “outmoded presumption of disfavoring arbitration proceedings.”

139 Harry T. Edwards, Where Are We Heading with Mandatory Arbitrations of Statutory Claims in Employment, 16 Ga. L. Rev. 293, 297-299 (1999).

140 Harry T. Edwards, Arbitration in Employment Discrimination Cases, An Empirical Study, Proc. Of the 28th Ann. Meeting of the Nat’l Academy of Arb. 59, 71-72 (1976).

141 Edwards, supra, note 132 at 297.

142 415 U.S. 36 (1974).

143 Id. at 51.

144 Id. at 49.

145 Id. at 53.

146 Id. at 56.

147 “There is a long history of civil rights violations by both employers and unions in this country and that history speaks volumes about the danger of allowing employers and unions to voluntarily agree to channel public statutory rights to a private decision-making forum that, for all practical purposes, they control. What is lost is the importance of protecting the due process right of the individual to vindicate a public right in a public forum, with all the attendant circumstances of remedy, procedure, and transparency which a public forum would entail. Arbitration is a private forum, and, historically, private courts have been places where individual rights get violated. There is a phrase for these forums—they are called “kangaroo courts”—because privatization invites abuse and can lead to the denial of rights, procedure, and public transparency. We need the light of day that a federal forum can provide in resolving important civil rights violations occurring in the workplace.” Gary Minda & Douglas Klien, The New Arbitral Paradigm In The Law of Work: How The Proposed Employee Free Choice 1456 (2009), which held that an arbitration clause in a collective-bargaining agreement which waived the right to pursue statutory claims in court was enforceable, in effect, overturning the long-standing holding in Gardner-Denver.Act Reinforces Supreme Court Arbitration Decisions In Denying Free Choice In The Workplace, 2010 Mich. St. L. Rev. 51, 60 (2010) (citation to a footnote in text omitted), in which they decried the Supreme Court’s sharply divided 5-4 opinion in 14 Penn Plaza LLC v. Pyett, 129 S. Ct.

148 473 U.S. 614 (1985).

149 Id. at 628.

150 Id.

151 Id. at 653.

152 Horton, supra note 24 at 19.

153 Supra at p. 48.

154 473 U.S. at 637 n.19.

155 See discussion of Concepcion, infra at pp. 44-48.

156 500 U.S. 20 (1991).

157 The intent of Congress to except from the FAA state statutory restrictions on arbitration clauses can also be inferred from the nature of the federal statute. In Sturgeon v. Allied Professionals Insurance Co., 344 S.W 3d 205 (Mo. App. 2011), Missouri’s Arbitration Act, Section 435.350, prohibits mandatory arbitration provisions in insurance contracts and declares them invalid, unenforceable and revocable. In rejecting the argument that the FAA preempted this section of the Missouri statute, adopted to promote the public policy of the state in the exercise of its power to regulate insurance, the Missouri court found the passage of the McCarran-Ferguson Act in 1945, which essentially exempts the business of insurance from federal antitrust laws, explicitly recognized the rights of the states to regulate insurance, and “operates to bar the FAA’s preemption of the Missouri Arbitration Act’s exclusion of arbitration provisions from insurance contracts contained . Section 435.350.” Id. at 210.

158 500 U.S. 20 at 27-28.

159 Id. at 26.

160 Id. at 33.

161 Stevens, J. dissenting, Id. at 36 who argued that the exemption language of Section 1 of the Act, to wit: “contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce” applied to all employment contracts for all workers engaged in foreign or interstate commerce.

162 532 U.S. 105, 119 (2000).

163 531 U.S. 79 (2000).

164 Id. at 84.

165 Id. at 90.

166 556 U.S. 247 (2009).

167 Id. at 249.

168 Id. at 249-250.

169 465 U.S. 1 at 10-11.

170 Id. at 14.

171 “[S]tate law, whether of legislative or judicial origin, is applicable if that law arose to govern issues concerning the validity, revocability, and enforceability of contracts generally. A state-law principle that takes its meaning precisely from the fact that a contract to arbitrate is at issue does not comport with [the text of Section 2.]” Perry v. Thomas, (Perry) 482 U.S. 483, 492, n. 9 (2000) Also see, Allied-Bruce Terminix Cos v. Dobson, (Allied Bruce) 513 U.S. 265 (2010) “States may regulate contracts, including arbitration clauses, under general contract law principles and they may invalidate an arbitration clause ‘upon such grounds as exist at law or in equity for revocation of any contract.’ 9 U.S.C. §2 (emphasis added). What States may not do is decide that a contract is fair

enough to enforce all its basic terms (price, service, credit), but not fair enough to enforce its arbitration clause. The Act makes any such state policy unlawful, for that kind of policy would place arbitration clauses on an unequal ‘footing,’ directly contract to the Act’s language and Congress’s intent.”

172 See, supra note 175; Also see p. 47 accompanying text.

173 For example, West Virginia as a matter of state public policy enacted a statute that mandated that arbitration clauses in nursing home admission agreements adopted prior to the occurrence of a negligent act would not be enforceable to compel arbitration of a dispute regarding negligence. See, Marmet v. Brown, 565 U.S. ---- (2012).

174 Supra notes 24- 25 and accompanying text.

175 In Doctor’s Associates, Inc. v. Casarotto, (Casarotto) the Supreme Court held that contract defenses, including “fraud, duress or unconscionability, may be applied to invalidate arbitration agreement without contravening §2.” 517 U.S. 681, 687 (1996). It is interesting to note Justice Thomas’ concurring opinion in Concepcion where he distinguishes contract defenses “such as fraud, duress, or mutual mistake” which he states “go to the ‘making of the agreement to arbitrate’, and the “public policy” defense which he states is not related to contract formation and “could not be the basis for declining to enforce an arbitration clause.” AT&T Mobility v. Concepcion, 131 S. Ct. 1740, 1755 (2011) (citations omitted).

176 The Uniform Commercial Code (U.C.C.) 2-302 recognizes whether an agreement is unconscionable depends upon the circumstances at the time of the contract; comment 1 (2010) states: “The basic test is whether, in the light of the causes involved are so on-sided as to be unconscionable under the circumstances existing at the time of the making of the contract.”

177 See, Hume v. United States, 132 U.S. 406, 411 (1889), describing an unconscionable contract as one “such as no man in his senses and not under delusion would make.” Also see, Manfredi v. Blue Cross and Blue Shield of Kansas City, 340 S.W. 3d 126, 132 (Manfredi)(Mo. App. 2011). In Manfredi, the Missouri court of Appeals, found an arbitration agreement governed by the FAA to be unconscionable and affirmed a trial court’s denial of a motion to compel arbitration. The Court of Appeals found the arbitration agreement an adhesion, take-it-or-leave it agreement, and found the terms that allowed BCBS to unilaterally alter or avoid the arbitration procedures unfairly favored BCBS and had the “practical effect…to grant BCBS immunity for improper conduct….” Id at 134.

178 Id. at 133(citations omitted).

179 Id. (citation omitted).

180 Horton, supra note 24 at 21.

181 Id. at 19.

182 Id. at 20-21.

183 561 U.S. ----- (2010).

184 The Court relied upon its earlier decision in Buckeye Check Cashing v. Cardenga, (Buckeye) 546 U.S. 440, 444-445 (2002).

185 The Court relied upon its earlier decision in Volt Information Services, Inc., v. Board of Trustees Leland Stanford Junior Univ., (Volt) 489 U.S. 468, 478 (1989).

186 The Court indicated that had Jackson advanced his argument that the arbitration agreement itself was unconscionable, based upon his position that arbitration would impose limits on discovery and contained a fee-splitting provision, “the challenge should have been considered by the Court. Id. at 10.

187 Smith and Moye, supra note 5 at 293-94.

188 Id. at 294.

189 Id.

190 “[Rent-A-Center] may…result in an increase in the number of [delegation] clauses that assign ‘gateway’ issues, like unconscionability, to arbitrators in consumer and employment contracts.” Smith and Moye, Id. Also see, Daniel R. Higginbotham, Buyer Beware: Why the Class Arbitration Waiver Clause Presents A Gloomy Future For Consumers, 58 Duke L. J. 102 (2008), opining that the decisions of the Supreme Court transformed the “type” of arbitration agreements used in consumer transactions in the 1990s and 2000s when “drafters began incorporating into their standard arbitration agreements…’remedy-stripping’ clauses….[that included] clauses limiting the type or amount of damages available, the recoverability of attorney’s fees, and the length of statute of limitations periods…[to] make it either more difficult to assert claims in the first place or less likely that they will prevail on claims in arbitration. Either way, the drafters decrease the changes of their corporate client being held liable.” Id. at 110. And see, Myriam Gilles, Opting Out of Liability: The Forthcoming, Near-Total Demise of the Modern Class Action, 104 Mich. L. Rev. 373, 395-96 “Bouyed by the extraordinary judicial deference, corporate lawyers and business executives naturally sought ways to expand the reach of arbitration clauses sharing their tactical insights in trade journals, at conferences, and in high-level, top-secret planning sessions. Indeed, by the early 1990s an ADR cottage industry was in full bloom, fueled not by people interested in ‘alternative dispute resolution’ … but by corporations seeking ways to decrease their liability risks.” Note: It is no wonder then that The Wall Street Journal headlined the Rent-A-Center decision this way? “Court Sides With Business in Arbitration Case” (June 21, 2001). http://online.wsj.com/article/SB10001424052748704895204575321012682021520.html a “victory for big business.”

191 The purpose of this this section of the paper is not to dive into the debate over the advantages or disadvantages of arbitration or explore, to use commentator Deborah Hensler’s words, the “new myths and realities of class actions,” but rather to focus on the conflict between federal and state law regarding the enforcement of arbitration agreements which contain waivers of class action waivers. [Deborah Hensler, Revisiting The Monster: New Myths and Realities of Class Actions and Other Large Scale Litigation, 11 Duke. J. of Comtemp. And Int’l. L. (2001)].

192 Gilles, supra note 190 at 396.

193 Id. at 397, referencing Kay O. Wilburn, A Clause You Don’t Want to Overlook, Bus. L. Today, Nov./Dec. 1996 at 55, 57-58.

194 Gilles, supra note190 at 397. In FN123, Professor Gilles refers to a number of examples, including an article which appeared in the Kansas City Star, May 1, 2000 which quoted Alan Kaplinsky, an attorney representing clients in the financial services industry as saying that “[a]rbitration is a powerful deterrent to class action lawsuits against lenders….Stripped of the threat of a class action, plaintiffs’ lawyers have much less incentive to sue.”

195 Id.

196 Id. (citation omitted).

197 Gilles and Friedman, supra note 5, at 631-632, referencing Gilles, supra note 190 at 425-427.

198 Ramona L. Lampley, Is Arbitration Under Attack?: Exploring The Recent Judicial Skepticism of the Class Arbitration Waiver and Innovative Solutions To The Unsettled Legal Landscape, 18 Cornell J. of Law and Publ. Pol. 477, 503-504 (2009)[referring to the early class action waivers as “First Generation Consumer Products Arbitration Clauses].

199 Jean R. Sternlight and Elizabeth Jensen, Using Arbitration To Eliminate Consumer Class Actions: Efficient Business Practice or Unconscionable Abuse? 67 Law and Comtemp. Prob. 75, 78 (2004).

200 Id. n.13. Also see, Lampley, supra note 198 noting seven court decisions finding certain provisions in class waivers unenforceable, including Swain v. Auto Services, Inc., 128 S.W. 3d 103, 108-109 (Mo. App. 2003) which found “unconscionably unfair” a forum selection clause in an arbitration agreement that would have required a Missouri resident to arbitration in Arkansas, holding “[a]n average consumer purchasing a car in Missouri would not reasonably expect that any disputes arising under the service plan accompanying the car would have to be resolved in another state (citation omitted). Our courts will not enforce clauses selecting a forum outside Missouri that are unfair or unreasonable (citation omitted). Again, the adhesive nature of this clause—as sufficiently proven by both the service plan itself and Swain’s affidavit—renders it unfair. It is unconscionably unfair because it limits Auto Service's obligations and is, on its face, comparatively harsh on any consumer outside of Arkansas (citation omitted). Unlike a clause providing for venue in the defendant's home state—which

the Supreme Court prefers because when either party initiates proceedings it ‘puts the lawsuit in the opponent's backyard’—this clause puts the resolution of all disputes in the corporation's backyard (citations omitted). Arkansas, therefore, is not a neutral or reciprocal site, and the clause selecting that state as the venue for all arbitrations is unfair. We will not enforce it.” Id.

201 113 P3d 1100 (Cal. 2005).

202 Ting v. AT&T, supra at 918.

203 Id. at 938-39.

204 319 F3d 1126 (2003), affirming the District Court’s finding that the arbitration clause was unconscionable on four specific grounds: (1) barring class actions, (2) requiring the consumer to split arbitration fees, (3) secrecy, and (4) the limitations on willful conduct.

205 Id. at 1134.

206 Id.

207 Id.

208 Id.

209 118 Cal. Rptr. 2d 862 (Ct. App. 2002), cert. denied, 537 U.S. 1226 (2003).

210 Id. at 867.

211 “Discover has essentially granted itself a license to push the boundaries of good business practices to their furthest limits, fully aware that relatively few, if any, customers will seek legal remedies, and that any remedies obtained will only pertain to that single customer without collateral estoppel effect. The potential for millions of customers to be overcharged small amounts without an effective method of redress cannot be ignored.

Therefore, the provision violates fundamental notions of fairness.” Id. at 867-68.

212 Id. at 868.

213 30 Cal. Rptr. 3d 76 (2005).

214 Id. at 78.

215 Id. at 79.

216 Id. at 80.

217 Id. at 85.

218 Id.

219 Id.

220 Id. at 86.

221 After accepting the holding in Perry which held that a state law that discriminated against arbitration agreements would be preempted by the FAA, the California Supreme Court stated: “In the present case, the principle that class action waivers are, under certain circumstances, unconscionable as unlawfully exculpatory is a principle of California law that does not specifically apply to arbitration agreements, but to contracts generally. In other words, it applies equally to class action litigation waivers in contracts without arbitration agreements as it does to class arbitration waivers in contracts with such agreements.” Id. at 89.

222 Nothing in Volt, nor any other Supreme Court case, however, suggests that state courts are obliged to enforce contractual terms even if those terms are found to be unconscionable or contrary to public policy under general contract law principles. As discussed, section 2 of the FAA and cases interpreting it make clear that state courts

have no such obligation. Agreements to arbitrate may not be used to ‘harbor terms, conditions and practices’ that undermine public policy. (citation omitted).

223 “Under California law… class arbitration may be authorized, even when a contract of adhesion forbids it, because a class arbitration waiver may be unconscionable. Bazzle does not call into question the principle that state courts may enforce general contract rules regarding unconscionability and public policy that preclude class action waivers. [¶] Nor did the court address the question whether that determination of unconscionability should be made by a court or an arbitrator. The court was in general agreement that courts should be left to decide certain "gateway matters" (Bazzle, supra, 539 U.S. at p. 452, 123 S.Ct. 2402 (plur. opn. of Breyer, J. ) ) or "fundamental" matters such as the validity and scope of the arbitration agreement (id. at pp. 456-457, 123 S.Ct. 2402 (dis. opn. of Rehnquist, C. J.)) Under California law, the question whether "grounds exist for the revocation of the [arbitration] agreement" (Code Civ. Proc. § 1281.2) based on "grounds as exist for the revocation of any contract" (id., § 1281) is for the courts to decide, not an arbitrator. See Engalla v. Permanente Medical Group, Inc. (1997) 15 Cal.4th 951, 973, 64 Cal.Rptr.2d 843, 938 P.2d 903.) This includes the determination of whether arbitration agreements or portions thereof are deemed to be unconscionable or contrary to public policy.Id. at 94.

224 Gilles and Friedman, supra note 5 at 633, noting that by 2011 “at least fourteen states had ruled class action waivers unenforceable on…broad public policy grounds.” Id.

225Lampley, supra note 198 at 503.

226 Id.

227 For example, the court in Scott v. Cingular Wireless, 161 P.3d 1000, 1003 (Wash. 2007) noted these elements that had found their way in Cingular’s arbitration clause: it would pay all filing, administrative and arbitration fees unless the consumer’s claim was found to be frivolous; and, pay the consumer’s reasonable attorney’s fees and expenses if the consumer recovered at least the amount demanded.

228Lampley, supra note 198 at 505-508 [discussing the American Arbitration Association’s 2007 “Consumer Due Process Protocol;” the 2007 adoption by the Judicial Arbitration and Mediation Service of its “Policy on Consumer Arbitrations Pursuant to Pre-Dispute Clauses Minimum Standards of Procedural Fairness;” and, the National Arbitration Forum’s 2007 “Arbitration Bill of Rights, Code of Procedure, and Fee Schedule].

229 In some cases, consumers offered affidavits from experts who opined that a consumer anti-trust plaintiff would not sue without an opportunity to proceed in a class action. Kristian v. Comcast Corp., 446 F. 3d 25, 58 (1st Cir. 2006).

230 130 S. Ct. 1758 (2010).

231 Sarah Rudolph, On Babies and Bathwater: The Arbitration Fairness Act and The Supreme Court’s Recent Arbitration Jurispurudence, 48 Hous. L. Rev. 457, 483 (2011-2012).

232 13 S. Ct. at 1775-66.

233 Id. at 1770.

234 Id. at 1776.

235 Id. at 1775 (original emphasis).

236 Lampley, supra note 1198 at 485 referencing, in n.124, Professor Paul Kirgis in a blog post where he stated: “So it is difficult to read the decision as anything but an attempt to single out and eliminate class arbitration, except in cases where the parties explicitly provide for class arbitration (which will be never),” and in n. 126, Professor Jean Sternlight who, in her blog suggested that Stolt-Nielsen would mean the end of class arbitration by being relied upon by some that the FAA preempts claims that class actions are unconscionable.

237 In re Am. Express Merchs. Litig., (Amex I) 2006 WL 662341 at *4.

238 Id. at *10.

239 554 F.3d. at 315-16.

240 Id. at 319.

241 Id.

242 Am. Express co. v. Italian Colors Rest.,------U.S.------, 130 S.Ct. 2410, L.Ed.2d 920 (2010)(Amex II).

243 In re American Express Merchants’ Litigation, 634 F.3d 187, 197-98 (2d Cir.2011)

244 Gilles and Friedman, supra note 5 at 633.

245 131 S. Ct. at 1744.

246 “After the first round of cases invalidating class arbitration waviers, corporate lawyers realized that they held the keys to their own salvation. If judges objected to the fact that class arbitrations waivers suppressed low-value claims, then drafters could fix this defect themselves. In a fit of ingenuity they began to create elaborate rewards for plaintiffs to arbitrate small grievances against them on an individual basis. The most proactive such company was AT&T….” Horton, supra note 24 at 24. Also see, Jacob Spenser, Arbitration, Class Waivers, And Statutory Rights, 35 Harvard J.L. & Pub. Pol’y 991, 993 (2012), referencing Richard A. Nagardea, The Ligitaion-Arbitration Dichotomy Meets the Class Action, 86 Notre Dame L. Rev. 1069, 1115-16 & n 203 (2011). Id. n.13.

247 131 S. Ct. at 1745.

248 The agreement stated that AT&T would pay to the consumer the value of the highest amount that could be sued for in state court should they not settle and an arbitrator awarded the consumer greater than AT&T’s last written offer to settle, and under that scenario AT&T would pay double the attorney’s fees. Id.

249 Id. at 1744.

250 Laster v. AT&T Mobililty LLC, 584 F.3d 855, 857 (9th Cir. 2009).

251 Id.

252 Justice Scalia gave short shrift to the three part test of Discover Bank by stating that while the rule was limited to adhesion contracts, contract involving small claims, and circumstances where party was using the waiver as a scheme to exculpate a scheme to cheat or defraud of cause willful or negligent injury, he found these “putative limitations illusory, observing that all consumer contracts nowadays are ‘adhesive,’ that the small damages factor is ‘toothless and malleable,’ and that a requirement of a mere ‘allegation’ of a scheme ‘has no limiting effect.’” Gilles and Friedman, supra note 5 at 639 (footnoted citations to Scalia’s opinion omitted).

253 Horton, supra note24 at 24-25, arguing that Justice Scalia, in AT&T Mobility, described FAA preemption “in a new way.”

254 131 S Ct. 1740 at 1742.

255 Id at 1747.

256 Id.

257 Id. at 1748

258 Id. at 1750.

259 Id. at 1751. Justice Scalia then described disadvantages from a “switch from bilateral to class arbitration”, including the sacrifice of arbitration’s principle advantage of informality, requirements of procedural formality, and a greater risk to defendants. Of course, these “disadvantages” are the mirror-opposite of the advantages of class arbitration for consumers.

260 Id. at 1750, FN6.

261 Smith and Moye, supra note 5 at 295.

262 Gilles and Friedman, supra note 5 at 627.

263 Cole, supra note 231 at 463.

264 Jean R. Sternlight, Tsunami: AT&T Mobility LLC v. Concepcion Impedes Access to Justice, 90 Oreg. L. Rev. 703 (2012).

265

266 http://www.lawyersandsettlements.com/settlements/16872/preliminary-100m-settlement-approved-in-chase-check.html#.UKpAOUI1ZFI

267 Sternlight, supra note 264 at 718.

268 Id.

269 “In light of Concepcion, a number of state and federal courts have enforced class action waivers in consumer arbitration contracts over objections that the waivers effectively immunize defendants from liability or violate state law standards of unconscionability or public policy.” Maureen A. Weston, The Death of Class Arbitration After Concepcion?, 60 U. Kan. L. Rev. 767 (May, 2012); Also see, Jean R. Sternlight, supra note 264 at 708.

270 “In response to the evidence the plaintiff had developed showing that enforcing the arbitration clause ‘would make it impossible for any person…to effectively vindicate his substantive statutory rights,’ the court was, but firm: ‘Even if [plaintiff] cannot effectively prosecute his claim in an individual arbitration that procedure is his only remedy, illusory or not.’  In a footnote, the court backpedaled a bit ‘We are not implying that we believe that we are reaching an unfair result…we merely are recognizing that other persons might think that we are doing so.’  The Third Circuit thus joined a growing number of courts who apologetically enforce SCOTUS’s arbitration decisions.” Liz Kramer, Individual Arbitration Is Plaintiff’s ‘Only Remedy, Illusory Or Not – Third Circuit, Arbitration Nation, August 30, 2012, discussing the Third Circuit Court of Appeals opinion in Homa v. American Express Co., 2012 WL 3594231 (3rd Cir. 8/22/12)

271 See supra note175 for a discussion regarding Justice Thomas’ concurring opinion in Concepcion.

272 667 F3d 204 (2012)

273 Id. at 216.

274 Id. at 218. The Southern District of New York in Chen-Oster v. Goldman Sachs & Co., No. 10 CIV 6950, 2011 WL 2671813, at *2-5 (S.D. N.Y. July 7, 2011) declined to apply Concepcion on similar grounds. However, there are decisions from other Courts of Appeals, however, that hold that Concepcion foreclosed the “vindication of rights” rule, refused to apply it, and held enforced an arbitration agreement. However, there may be an Amex IV, since the American Express has filed a writ for certiorari in Amex III.

275 563 U.S. at -----, 132 S. Ct. at 1204.

276 Brown v. Genesis Healthcare Corp., 729 S.E. 2d 217 (W.Va. 2012) (Brown II).

277 Brewer v. Missouri Title Loans, Inc. (Brewer I), 323 S.W. 3d 18 (Mo. banc 2010).

278 Brewer II , 364 S.W. 3d at 487.

279 131 S.Ct. 2875 (2011).

280 Brewer II, 364 S.W. 3d at 487-88.

281 Brewer II, 364 S.W. 3d at 489.

282 Brewer II, 364 S.W. 3d at 490.

283 Brewer II, 364 S.W. 3d at 491.

284 Brewer II, 364 S.W. 3d at 492.

285 The agreement was non-negotiable, it was difficult for the average consumer to understand, the title company was in a superior bargaining position, no consumer ever successfully had negotiated the terms of the title company’s contract, parties would bear their own costs, the title company didn’t waive its right to seek attorney’s fees, three consumer lawyers testified it was unlikely that a consumer could retain counsel to pursue an individual claim, the title company reserved its right for remedies outside of arbitration. Id. at 494-96.

286 Brewer II, 364 S.W. 3d at 498. The Court reversed the judgment, however to the extent that it severs the class arbitration waiver and requires an arbitrator to determine the propriety of class arbitration the case was remanded. It should be noted Brewer II was not an unanimous decision. Justices Pfeifer and Wolff concurred, however Justice Fischer dissented in a separate opinion, joined by Justice Breckenridge and Justice Price dissented in a separate opinion.

287 Randazzo v. Anchen Pharmaceuticals, 2012 WL 5051023 *7 (E.D. Mo. Oct. 18, 2012).

288  “[Concepcion] is as big a pro-business, pro-corporate ruling as we've ever seen from the Roberts' Court -- and it will take explicit Congressional action to overturn it.” Andrew Cohen, No Class: The Supreme Court’s Arbitration Ruling, The Atlantic, April 27, 2011. Also See, Smith and Moye, supra note 5 at 299: “It is obvious that the application of the FAA has expanded beyond its drafers’ intent and in the face of apparent deficiencies. The AT&T Court held that ‘[s]tates cannot require a procedure that is inconsistent with the FAA.’ So with the state legislatures made impotent, it is up to Congress to create a balance (citations omitted). Note: although

289 See supra note 2.

290 “”[A] closer examination of the proposed statute reveals that the legislation focuses on the wrong issues. Eliminating pre-dispute arbitration agreements signed by consumers and employees is excessively overbroad. Even predictably anti-arbitration groups have responded negatively to the proposed legislation.” Cole, supra note 231 at 493-494.

291 Burch, supra note 63 at 25.

292 Id. at 25-29.

293 Gilles and Friedman, supra note 5 at 652.

294 Id.

295 “Does the CFBP have the power to trump the United States Supreme Court? *** [L]awyers who follow arbitration matters say it looks like the language of Dodd-Frank does indeed empower the bureau to ban arbitration clauses for certain contracts, regardless of past Supreme Court rulings.” David Lazarus, Consumer Bureau May Have Final Say On Arbitration Clauses, Los Angeles Times, May 1, 2012, http://articles.latimes.com/2012/may/01/business/la-fi-lazarus-20120501

296 Dodd-Frank Act §1028(b), 12 U.S.C. §5518(b).