Alert: In the Wake of Concepcion, Courts Consider the Enforceability of Arbitration Agreements’ Fee- and Cost-shifting ProvisionsPrint PDFShare
On April 27 2011, the Supreme Court issued the AT&T Mobility LLC v. Concepcion opinion, rejecting California law holding that arbitration agreements containing class-action waivers were unconscionable and unenforceable. 131 S. Ct. 1740, 1753 (2011). Instead, the court held, much like a state law requiring jury trials, rules of evidence, and rules of procedure, the California state law that required the availability of a class action is contrary to the purposes of the Federal Arbitration Action (FAA) because it is inconsistent with arbitration. Id. at 1747-1753.
Since then, courts have grappled with the scope of the Concepcion decision. Today, it is still unclear how expansive the decision should be applied and what it means for traditional unconscionability tests. On one hand, the federal court of the Northern District of California opined that Concepcion “decided that states cannot refuse to enforce arbitration agreements based on public policy.” Arellano v. T-Mobile USA, Inc., No. C 10-05663, 2011 WL 1842712, at *2 (N.D. Cal. May 16, 2011).
On the other hand, when it comes to deciding the enforceability of an arbitration agreement’s fee- and cost-shifting provision, courts generally still regard such a decision as a matter of state law. The courts disagree, however, on how to proceed once it is determined that a fee- or cost-shifting provision is unconscionable.
For example, the federal court of the Southern District of Florida held that “Concepcion did not completely do away with unconscionability as a defense to the enforcement of arbitration agreements under the FAA.” In re Checking Account Overdraft Litig., MDL No. 2036 (S.D. Fla. Sept. 1, 2011). The court considered a class-action suit of bank account holders against their banks, alleging that the banks unlawfully charged them with excessive overdraft fees. The parties had signed account agreements, which contained arbitration agreements requiring individual (non class-action) arbitration. The agreements also included fee-shifting provisions, which became the focus of the decision. The mandatory fee-shifting provisions specified that the prevailing party was entitled to an award of the costs and expenses of arbitration, including attorneys’ fees, for any claims for which the party prevailed. The court held that these terms “place nearly all the risks of engaging in dispute resolution on Plaintiff.” Such a conclusion was fueled by the fact that, under the agreement, if the Defendant won, she could immediately take the award from the Plaintiff’s banking account, without notice, including garnishment or appeal. If the Plaintiff won, however, she would not be guaranteed the same immediate entitlement. The court held that, because the Plaintiff bore much more risk than the Defendant under the fee-shifting provisions, the agreements—in their entirety—were unconscionable and, accordingly, unenforceable.
Some courts have found a middle ground, holding that state law prohibits the enforcement of these fee- and cost-shifting provisions but that, otherwise, the arbitration agreements should be enforced. For example, in Wolf v. Nissan Motor Acceptance Corp., No. 10-cv-3338, 2011 WL 2490939, at *7 (D.N.J. June 22, 2011), the court considered the validity of an arbitration agreement containing a class-action waiver and a cost-shifting provision. The court held that, under New Jersey law, such a cost-shifting provision “endows an arbitrator with unfettered discretion to allocate the entire cost of arbitration to a consumer” and, thus, the provision was unconscionable. Id., referencing Delta Funding Corp. v. Harris, 912 A.2d 104, 112-13 (N.J. 2006). However, unlike In re Checking Account Overdraft Litig., the Wolf court severed the fee-shifting provision and held that the agreement should otherwise be enforced. Id. A Colorado court took a similar stand on fee-shifting provisions, citing their “chilling effect” and their establishment of “impermissible obstacles” to Plaintiffs’ ability to bring actions. Daugherty v. Encana Oil & Gas (USA), Inc., No. 10-cv-02272-WJM-KLM, 2011 WL 2791338, at *11-12 (D. Colo. July 15, 2011). Instead of refusing to enforce the arbitration agreement, however, the Daugherty court took the same step as Wolf and severed the agreement’s unenforceable fee-shifting provision. Id. at *12-13.
A decision from the federal district court of Connecticut makes clear that such a decision, even in light of Concepcion, boils down to a question of state law. In D’Antuono v. Serv. Road Corp., No. 3:11cv33, 2011 WL 2175932, at *31 (D. Conn. May 25, 2011), the court enforced an arbitration agreement with a class-action waiver and a fee-shifting provision after the Defendants agreed they would not seek fees and costs under the fee-shifting provision if they prevailed. While the decision was made easy by the Defendants’ agreement to waive the fee-shifting provision, the court held that, even without such a concession, the arbitration agreement would have been enforced in its entirety:
Plaintiffs have not shown that the arbitration clause is substantively unconscionable under Connecticut law. It is of course true that the arbitration clause contains a collective action and class-action waiver, a cost- and fee-shifting provision, and a provision shortening the statute of limitations. Defendants have now conceded that they will not enforce the latter two provisions, … , but even if they had not made that concession, this court could only say that the arbitration clause was substantively unconscionable if the clause was one that “no man in his senses, not under delusion would make, on the one hand, and which no fair and honest man would accept, on the other.” The court is not persuaded that the three features Plaintiffs object to—even taken together, and even assuming that Defendants had not agreed to waive enforcement of two of the three features—render the arbitration clause so unfair that no sensible person would make it and that no fair and honest person would accept it. (citation omitted)
Id. at *16, referencing Smith v. Mitsubishi Motors Cred. Of Am., Inc., 721 A.2d 1187, 1190 (Conn. 1998). According to the D’Antuono court, the enforceability of an arbitration’s fee-shifting provision is a question of state law: “Plaintiffs have not cited any cases in which the Connecticut Supreme Court, applying Connecticut law, has suggested that collective action or class action waivers, cost- or fee-shifting provisions, or provisions shortening the statute of limitations, whether or not they are part of an arbitration clause, might be substantively unconscionable.” Id. at *17.
As indicated by these decisions, the scope of Concepcion, and the effect state law has on the enforceability of arbitration agreements, is undefined. When read expansively, the Concepcion decision may lead to invalidation of all of these decisions, finding that each one allowed state law to interfere with the FAA’s liberal approach to arbitration. Even if Concepcion is not read to be that expansive, it could be argued that the In re Checking Account Overdraft Litig. court went too far and, even if state law finds such fee-shifting provisions unconscionable, a more prudent decision would have been to, like Wolf and Daugherty, sever such a provision and to otherwise enforce the agreement and encourage arbitration.
To protect against a finding of unconscionability and unenforceability, businesses may argue that, even under state public policy, it is often considered advantageous to include a fee- or cost-shifting provision because the explicit availability of attorneys’ fees will likely increase a plaintiff’s opportunity to have competitive representation in a non-class suit. This argument may be fruitful under various policy arguments initially addressed in opposition to the enforcement of the Concepcion agreement: that individual claimants would not be able to find counsel when their damages were, individually, quite low. 131 S. Ct. at 1746. Furthermore, in the event a court decides that state law stands as an obstacle to the enforcement of such provisions, the Daugherty court sets forth a standard for consideration as companies draft arbitration agreements in light of Concepcion: “where a contract contains a void arbitration provision, it must either be deemed unenforceable where there is no savings clause to the contract or, in keeping with the presumption in favor of arbitrability in the case of a contract with a savings clause, the void language may be stricken and the arbitration agreement otherwise enforced.” 2011 WL 2791338, at *12.
For more information, please contact your Briggs and Morgan attorney.