Congress’ decades-old federal arbitration law cannot be set aside by a trial-lawyer-friendly rule in states like California, the Supreme Court said in a decision last week with big implications for the future of American litigation.
Litigation can be cumbersome and tedious. It’s often drawn out and exasperatingly slow. And with so many lawyers billing by the hour, litigation can be very, very expensive.
The predictable frustration arising from this reality leads many to seek alternative forms of dispute resolution. While there are several alternatives, arbitration is one commonly written into a contract as a way to settle disagreements without a full-blown court case.
Many judges prefer the strict rules and procedures of litigation. As a result of many court rulings pushing people into litigation, as far back as 1925, Congress passed the Federal Arbitration Act.
That law provides that arbitration clauses in contracts must be upheld by courts unless there is some factor present in a given situation (such as fraud or duress) that would invalidate any contract made under those circumstances.
In AT&T Mobile v. Concepcion, two customers got a “free phone,” but then sued when they were required to pay sales tax on it. Their cellphone contract required arbitration and also for the customers to sue as individuals, not large class actions. The customers argued that the arbitration clause was invalid because California law doesn’t allow contracts where individuals cannot bring class actions.
A federal district judge in California agreed with Concepcion, as did the 9th U.S. Circuit Court of Appeals. But on April 27, the Supreme Court reversed the 9th Circuit in a 5-4 decision.
Writing for the majority, Justice Antonin Scalia quoted previous Supreme Court precedent holding that a primary objective of the FAA “is to achieve streamlined proceedings and expeditious results.”
That is, Congress wanted to make it faster and cheaper for parties to be able to resolve disputes. Arbitration achieves this through allowing parties to forego much of the rigidity of the court system by mutually agreeing on an expert on the issue to help settle it, as opposed to a judge and jury.
Trial lawyers don’t like the FAA. They weighed in on this case because they love class-action lawsuits. As Scalia continued, “There is little incentive for lawyers to arbitrate on behalf of individuals when they may do so for a class and reap far higher fees in the process.”
California is a liberal state (and businesses are fleeing it every day). It’s no surprise to find a state-law rule there that doesn’t allow people to voluntarily contract to forego class actions. But as the Supreme Court held here, California’s rule cannot overcome Congress’ law.
The dissent was interesting. Justice Stephen Breyer wrote it, joined by justices Ginsburg, Sotomayor and Kagan. Breyer discovered his inner federalist, and led his liberal colleagues in a lengthy plea for respecting state autonomy. If a state wishes by law to invalidate contracts that waive class actions, then who is the federal government to disagree, he asked.
The answer is that the Constitution empowers Congress to disagree. Under the Supremacy Clause, so long as a federal law is constitutional, it trumps (“pre-empts”) any state law to the contrary. That is clearly true here.
This case was a textbook example of business versus trial lawyers. This time the trial lawyers lost because that’s what a business-friendly Congress in 1925 designed this federal law to do. The Supreme Court majority upheld the plain meaning of Congress’ statute.
Given that businesses create jobs but most lawyers do not, in today’s economy the Supreme Court’s decision is welcome news.
Examiner legal contributor Ken Klukowski is a research fellow with Liberty University School of Law and a senior legal analyst with the American Civil Rights Union.