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January 19, 2012 Articles

Arbitration and Class Actions: A Bleak Future?

By Jacqueline A. Chamberlain

AT&T v. Concepcion
Under Discover Bank v. Supreme Court, 36 Cal. 4th 148, 113 P.3d 1100 (Cal. 2005), class action waivers in California are unconscionable when they are in a contract of adhesion; they govern disputes over small amounts of money; and they are allegedly part of a scheme to cheat consumers out of individually small amounts of money. In AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (Apr. 27, 2011), the plaintiffs were AT&T wireless customers who sued AT&T for deceptive advertising on behalf of a class, claiming that AT&T advertised discounted cell phones but charged sales tax on the full retail price. AT&T argued that class arbitration was outside the scope of the AT&T wireless contracts, which contained arbitration clauses requiring that claims be resolved only through individualized arbitrations, not as a class action. The California Supreme Court, in a decision affirmed by the Ninth Circuit, agreed with the plaintiffs and deemed the class action waivers unenforceable because AT&T could not prohibit class arbitration under the Discover Bank rule.

The U.S. Supreme Court reversed the Ninth Circuit's decision, ruling that the Federal Arbitration Act (FAA), 9 U.S.C. § 1, trumped California state contract law because the state law interfered with arbitration, and thereby the FAA, by requiring the availability of class proceedings in arbitration. The Court reasoned that allowing class arbitration would not only violate the terms of the contract but also undermine the FAA and the entire purpose of arbitration as an alternative to litigation. Therefore, the class waivers in AT&T's wireless agreements did not render them invalid and only individualized actions were permitted. In contrast, the minority in Concepcion was persuaded by principles of federalism. They argued that the ruling violated public policy by imposing on California the majority's view that class arbitration had none of the benefits or advantages of traditional arbitration due to its potential procedural deficiencies—a decision they felt the state of California alone should have been entitled to make.

AT&T Mobility, LLC v. Gonnello
Although the main issue in Concepcion differs, federal district courts around the nation have since used its ruling to block AT&T Mobility customers from using arbitration to challenge the proposed $39 billion merger between AT&T and T-Mobile. In a novel case decided this past October concerning the issue of class arbitration and injunctive relief against mergers, the Southern District of New York cited Concepcion as authority to enforce arbitration agreements according to their terms in AT&T Mobility, LLC v. Gonnello, No. 11 Civ. 5636 (S.D.N.Y. Oct. 7, 2011).

Relief Sought
In Gonnello, five defendants were part of a class of 972 AT&T customers who demanded arbitration with AT&T pursuant to their wireless agreements. The class sought a declaration that the proposed AT&T/T-Mobile merger violated section 7 the Clayton Act, 15 U.S.C. § 18, and an injunction against the merger, or in the alternative, the imposition of certain business divestitures and other conditions on the closing of the merger, including divestiture of all T-Mobile spectrum licenses for any local market where the post-merger Herfindahl-Hirschman Index would increase by 100 points or more and would exceed 2,500; imposition of fair access rates; and a requirement that AT&T make significant spectrum divestitures to existing wireless carriers. The individual defendants sought no damages or relief specific to their customer agreements with AT&T, but they asserted that the relief sought fell within the scope of their AT&T wireless agreements. Their demand for relief argued that the proposed merger would greatly increase concentration in the wireless industry, thereby harming competition in the local and national markets. AT&T moved to enjoin the arbitrations on the basis that they fell outside the scope of the wireless agreement between AT&T and its customers.

Scope of the AT&T Arbitration Agreement
The arbitration clause in AT&T's wireless agreement both limits customer claims against AT&T to their individual capacities and not as class members and allows the arbitrator to award relief in favor of an individual party only and only to the extent necessary to provide relief warranted by that party's individual claim.

The Court's Ruling
The parties did not dispute that the question of arbitrability is one for the court to decide but rather whether the defendants' demands for arbitration (the injunction against the merger or, alternatively, the imposition of conditions if the merger went through) fell within the scope of the parties' arbitration agreement. The essence of the dispute centered on the fact that the relief sought was not individually tailored to each particular defendant. Instead, if granted, the injunction against the proposed merger would have necessarily affected the rights of all entities and persons having an interest in, or against, the proposed merger. The fact that the injunction against the merger would have affected AT&T and T-Mobile wireless customers, labor unions, private businesses, and the general public precluded injunctive relief because it would have affected entities other than the individual claimant. The court agreed with AT&T and denied the defendants' motion to compel arbitration. Emphasizing the agreement's language precluding any type of class proceedings, the court stated that "there is nothing to arbitrate which is not foreclosed by the contractual limitation on the relief that may be awarded." The defendants argued that an injunction against the merger could fairly be viewed as granting "individual relief." But the court disagreed, persuaded instead by the plain meaning of the text that provided a necessary limitation on the power of the arbitrator. Otherwise, the court explained, an injunction against the merger would effectively give the arbitrator the power to decide questions that would affect the rights of parties' outside the dispute through the granting of declaratory or injunctive relief—a power that would extend beyond those given to arbitrators under the FAA.

Citing Concepcion, the Gonnello court denied the defendants' motion for an injunction against the proposed AT&T/T-Mobile merger because it was beyond the scope of the disputes that the parties had contractually agreed to arbitrate. Although it would certainly be an interesting issue for the court to address, the court's ruling on the arbitration clause spared it from having to address the question of whether arbitrators are able to prevent a merger potentially beneficial to the national economy. Although nothing in the FAA or the Sherman Act prohibits the enforcement of a provision requiring arbitration of a claim for treble damages under the Sherman Act, the court has yet to touch on the arbitrability of a claim for injunctive relief based on a violation of section 7 of the Clayton Act.

Keywords: arbitration, class action, AT&T, antitrust, merger, injunction