In AT&T Mobility, LLC v. Concepcion, 131 S. Ct. 1740 (2011), the United States Supreme Court reaffirmed a valuable tool for defeating putative class actions, particularly consumer class actions under such statutes as the Fair Debt Collections Practices Act (“FDCPA”), the Fair Credit Reporting Act and New York’s General Business Law §§ 349 et seq. The Court ruled in Concepcion that a contract that includes an arbitration clause requiring consumers to waive their ability to pursue a class action law suit is not per se invalid, overruling a Ninth Circuit Court of Appeals decision to the contrary.
Concepcion addressed the “Discover Bank rule” from the California Supreme Court’s decision in Discover Bank v. Superior Court, 113 P.3d 1100 (Cal. 2005), which invalidated arbitration clauses in consumer contracts containing class action waivers. Under the Discover Bank rule, arbitration clauses in consumer contracts were enforceable only if they permitted classwide arbitration. The rules on the enforceability of such clauses in jurisdictions outside of California varied widely. For instance, in the courts of the Second Circuit, which includes New York State, the general rule has been that class waiver clauses are valid and enforceable unless a plaintiff could establish that individual litigation of the claims at issue would be cost-prohibitive. Reid v. Supershuttle Intern., Inc., No. 08-CV-4854 (JG)(VVP), 2010 WL 1049613, at *4 (E.D.N.Y. Mar. 22, 2010) (granting motion to dismiss and to compel arbitration and finding class action waiver in arbitration agreement valid). Concepcion makes it clear that the rule across the country is that state policies preventing an arbitration agreement from being enforced due to the presence of a class action waiver are preempted by the federal policy favoring arbitration.
Concepcion was brought by AT&T customers in California who objected to paying state sales tax on cell phones that were advertised as “free.” The form consumer contract contained an arbitration clause with an express class action waiver. When AT&T moved to compel arbitration, the motion was denied and the clause was struck down by the district court and the Ninth Circuit as being contrary to California’s policy favoring consumer class actions.
AT&T appealed the Ninth Circuit’s decision, and the Supreme Court held that the Federal Arbitration Act (“FAA”) preempted state jurisprudence, such as the Discover Bank rule, which was contrary to the federal policy favoring arbitration.
It should also be noted that the contracting parties are not the only ones that may avail themselves of the protection of an arbitration clause. Depending on the jurisdiction and the language of the clause, third parties and agents of contracting parties may assert the clause as a defense in favor of early dismissal of a putative consumer class action.
For instance, in Fedotov v. Peter T. Roach & Associates, P.C., No. 03 Civ 8823 (CSH), 2006 WL 692002, at *2-3 (S.D.N.Y. Mar. 16, 2006), a debtor brought a putative class action lawsuit against a debt collector. The debt collector moved to compel plaintiff to submit his claim, individually, to arbitration based on plaintiff’s card agreement with his creditor. The court granted the debt collector’s motion based on an arbitration clause which contained a class action waiver, finding the debt collector could avail itself of the provisions of the card agreement. Id. at *2.
A typical arbitration clause would require arbitration for “any past, present or future claim or dispute arising under the contract” concerning “agents, successors and assigns, as well as officers, directors, and employees.” While different language may result in a variety of outcomes, Supreme Court precedent should bar a class action against a third party or agent such as a debt collection agency facing FDCPA claims. For example, the clause in Fedotov encompassed “any dispute” “by or against anyone connected with [credit card company] or [the cardholder], including an agent or representative.” 2006 WL 692002 at *2 (internal quotation marks and citation omitted). Courts have also noted that cases where motions to compel by non-signatories have been granted “have tended to share a common feature in that the non-signatory party asserting estoppel has had some sort of corporate relationship to a signatory party.” Ross v. Am. Express Co., 547 F.3d 137, 143 (2d Cir. 2008). Thus, a clause concerning “agents, successors and assigns, as well as officers, directors, and employees,” should be held to bar a class action against a non-signatory that can demonstrate that it is an agent or assignee of a signatory.
Now that the roadblock of the Discover Bank rule has been removed by the Supreme Court, businesses should be accorded more protection against wasteful class actions when the consumer contract at issue contains a properly worded arbitration clause.
If you have a question about class action litigation, contact either Phillips Lytle Business & Commercial Litigation attorneys: John G. Schmidt Jr., Partner, at (716) 847-7095 or firstname.lastname@example.org or Andrew J. Wells, Associate, at (212) 508-0422 or email@example.com.