A Federal Appeals Court in New York Breathes New Life into the Debate while Balestriere Fariello Looks for Similar Treatment from the Ninth Circuit

Last year, the Supreme Court of the United States issued a decision in Concepcion which examined whether a state could have a rule prohibiting businesses from including class waivers in their arbitration (private dispute resolution) agreements with consumers. Some courts, since that time, have interpreted the case broadly, creating a virtual blanket ban on all challenges to arbitration agreements.1  Other courts have stood their ground against these blanket bans, interpreting Concepcion for its sole finding: The Federal Arbitration Act (FAA) preempts state-law decisions holding that class arbitration waivers in consumer contracts are unconscionable and therefore unenforceable. See AT&T Mobility LLC v. Concepcion, 131 S.Ct. 1740 (2011). In the most recent and most notable of these decisions, the Second Circuit Court of Appeals (which hears appeals from federal trial courts in New York, Connecticut, and Vermont) rejected a petition for an en banc review (a review by the entire court concerning one of its own recent decisions rendered by a panel of usually three judges) of its decision in In re American Exp. Merchants’ Litigation, 667 F.3d 204 (2d Cir. 2012) (“Amex”).

The Second Circuit decision marks the third time Second Circuit judges have agreed with plaintiffs that American Express’s “honor all cards” provision in its credit card acceptance agreement constitutes an illegal tying arrangement under the Sherman Antitrust Act. In accordance with their arbitration agreement with merchants, American Express attempted to compel individual arbitration, but, even after review post-Concepcion, the Second Circuit found that “[t]he evidence presented by plaintiffs here establishes, as a matter of law, that the cost of plaintiffs’ individually arbitrating their dispute with Amex would be prohibitive, effectively depriving plaintiffs of the statutory protections of the antitrust laws.” In re American Exp. Merchants’ Litigation, 667 F.3d at 217. Plaintiffs used expert testimony to demonstrate it would be cost prohibitive to proceed individually in an arbitral forum.

Somewhat surprisingly, the Second Circuit relied almost solely on Supreme Court precedent to reach its conclusion. The Supreme Court’s decisions in Green Tree Financial Corp.-Alabama v. Randolph, 531 U.S. 79, 90-92 (2000) (noting “large arbitration costs could preclude a litigant . . . from effectively vindicating her federal statutory rights . . .” and thus the party must show the “likelihood of incurring such costs”) and Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 637 (1985) (statutory claims may be arbitrated as long as a party can vindicate her substantive rights) were relied upon to deny American Express’s petition for en banc review by the Second Circuit.

Balestriere Fariello is petitioning the Ninth Circuit Court of Appeals (which hears appeals from federal trial courts in California and other western states) to adopt the same logic as the Second Circuit: there is life for class actions after Concepcion. The Supreme Court found that California’s statewide ban of class waivers in arbitration agreements was pre-empted by the FAA. This statewide ban by California was extremely broad and did not take into account whether the arbitration agreements at issue were pro-consumer, prohibitively costly, or defensible under common law contract formation defenses such as fraud. But Concepcion left the door open for both vindication of statutory rights arguments as well as general contract formation defenses such as fraud, duress, and mutual mistake. By using these doors left open, Balestriere Fariello, on behalf of a perspective class of consumers suing ConsumerInfo.com (owned by Experian, PLC, and which ran the widely popular FreeCreditReport.com website), has argued to the Ninth Circuit that its case should not proceed to individual arbitration even in a post-Concepcion world. ConsumerInfo.com’s arbitration agreement was fraudulently executed, a general contract formation defense that even the conservative Supreme Court Associate Justice Clarence Thomas agrees survives Concepcion. Moreover, the arbitration agreement is so one-sided that individual arbitration would prevent the class’ vindication of statutory rights.

It seems the Supreme Court has not dealt consumer class actions their final blow, as many legal professionals and policymakers believed Concepcion would. As this next round of cases representing consumer class actions approaches the Supreme Court, the conservative justices, Roberts, Scalia, Kennedy, Thomas, and Alito, must decide whether they are willing to seek to elevate arbitration agreements above other contracts and ignore the High Court’s previous decisions in Green Tree and Mitsubishi.

 


1 See Swift v. Zynga Game Network, Inc., 805 F.Supp.2d 904 (N.D. Cal. 2011) (fraud and unconscionability defenses did not differentiate the action from Concepcion); Nakano v. ServiceMaster Global Holding Inc., 2011 WL 3206592 (N.D. Cal. July 27, 2011) (holding that Concepcion overrules the Gentry factors of unconscionability); Cruz v. Cingular Wireless, LLC, 648 F.3d 1205, 1213 (11th Cir. 2011) (interpreting Concepcion broadly, refusing the argument that the decision applied only to “inflexible, categorical state laws that mechanically invalidate class waiver provisions in a generic category”); Litman v. Cellco Partnership, 655 F.3d 225, 231 (3d Cir. 2011) (“[w]e understand the holding of Concepcion to be . . . broad”).