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Friday, June 17, 2011

When Can You Contract Out of Procedure?

I'm sorry it has been a long time since I last rapped at ya.  As I mentioned in my previous post, I will focus on four class action cases before the Supreme Court this term - (1) AT&T Mobility LLC v. Concepcion; (2) Erica P. John Fund, Inc. v. Halliburton Co., No. 09-1403; (3) Smith v. Bayer, 09-1205; (4) Wal-Mart Stores, Inc. v. Dukes, No. 10-277.   Since my last post the Court has decided Erica P. John Fund, Inc. v. Halliburton Co. and Smith v. Bayer, in an apparent conspiracy to ruin my vacation. Moreover, this past April the Court decided AT&T Mobility LLC v. Concepcion.   Sometime before the end of month the Court will decide the Wal-Mart case, and there is already speculation as to how it will be decided.

I have much to say about all four cases, so I will start in chronological order and discuss AT&T Mobility LLC v. Concepcion.  Here I want try to come at the case from a different angle, and suggest a link to the Erie doctrine.

At issue in AT&T was the enforceability of an arbitration clause that had been invalidated under state contract law, in this case California state law.  Under Section 2 of the Federal Arbitration Act ("FAA"), arbitration clauses are presumptively "valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for revocation of a contract."   The Act was passed primarily to curb judicial hostility to arbitration clauses, but Section 2 contemplates that state contract law may permissibly revoke an arbitration clause "upon such grounds as exist at law."  The big question in AT&T was when state law goes too far, in effect discriminating against arbitration clauses in contravention of the FAA's purpose.

Further complicating things is the actual arbitration clause in this case, which was contained in a cell phone contract (and I advise all of you to read your contracts).  The arbitration clause not only compelled the parties to arbitrate any dispute arising out of the contract, but prohibited the parties from bringing any claims "in any purported class or representative proceeding."  So not only must the parties arbitrate, but they waive all rights to class actions or class arbitration.  California courts previously held that  class waivers in consumer contexts were unconscionable, at least with respect to fraud claims, since such clauses cannot adequately substitute for the deterrent effect of the class action.  The Court disagreed, holding that the application of the California unconscionability doctrine here conflicted with the FAA.

Such an arbitration clause suggests the near-total demise of the consumer class action, as some had predicted even before AT&T, and most of the commenatary on the casehas concerned whether AT&T really killed of the consumer class action.  

But, to play devil's advocate, suppose that such clauses in fact destroy the class action.  In fact, suppose that, despite the supposed consumer-friendly provisions of the arbitration clause in the AT&T contract, that the arbitration clause was nothing other than a total limitation of remedy clause, with no one in their right mind opting to arbitrate a claim.  In other words, cell phone services are purchased strictly "as-is," with no realistic recourse to arbitration or the judicial system.  

Now, is this necessarily a bad thing?  There are a number of consumer contexts where individuals buy things "as-is," such as garage sales, Craiglist, or street vendors.  Granted, you may still have certain rights in these contexts, but for the most part people understand that the relevant rule is "caveat emptor," and it has not lead to consumer dystopia (well, excluding certain sections of Craigslist).  I mean, there are such things as quit claim deeds

Now, if you do add the prospect of liability, one could imagine that in a competitive market the seller will estimate its expected liability and pass it on to the consumers, with consumers in a sense buying tort insurance.    And maybe some or all consumers don't want it!  Maybe you are already insured, and/or you just want the lower price.  So here the "deterrent effect" of liability, let alone the class action, is not altogether a good thing, particularly when sellers are already incentivized to produce good, safe products because they don't want to lose business

Now you might say that the market for cell phone services is different, since it is not the quintessential competitive market.  And fraud is different - how can you assume the risk of a deliberate, fraudulent statements (even though I avoid shady business establishments all the time).  Finally, we are talking about contexts in which there are a few sellers and numerous consumers, and the consumers, all else being equal, will need class-type procedures to level the playing field, as I have previously argued.  Fair enough, but these considerations only complicate the analysis.  It would require a court to conduct an almost rule-of-reason like determination of the costs and benefits of prohibiting parties from contracting out of certain procedural mechanisms like the class action.

Here is the link to Erie.  In most cases the underlying entitlements, such as an entitlement to avoid fraudulent conduct, are protected by state law.  It would stand to reason that states should also have some say on how those substantive entitlements are procedurally protected, since, as John Dingell knows all too well, an entitlement is only as good as how it is protected.  Accordingly, California should have a lot of leeway in how its substantive entitlements are procedurally protected, including prohibiting class waivers for certain state law claims.  But it also stands to reason that the federal government, via its Commerce Clause powers, can also regulate interstate activity to further the protection of important entitlements.  So to what extent can California define procedure for its entitlements without conflicting with federal objectives?  And how are courts supposed to sort out these disputes in any given case?

That, in a nutshell, is not only the issue at the heart of AT&T, but also at the heart of the Erie doctrine.  I plan to write a great deal about this issue this summer in a current project, and I am curious to hear your thoughts. 

 

 

Posted by Sergio Campos on June 17, 2011 at 02:03 PM | Permalink

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Why does Erie stand for the proposition that states "should have a lot of leeway in how [their] substantive entitlements are procedurally protected"? I thought Erie and the Rules of Decision Act required only that federal courts should apply state law when there's no relevant federal law. Here, there seems to be relevant federal law. So, shouldn't we ask about the FAA's preemptive scope? Are you arguing that courts should be less willing to preempt state procedural rules than they are to preempt state substantive law? Do you find such solicitude for state procedure in Erie and its progeny? What about Byrd and Gasperini, in particular?

Posted by: cmdeats | Jun 17, 2011 7:30:26 PM

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