CONEFF v. AT & T CORP.

OPINION

GRABER, Circuit Judge:

Plaintiffs are current and former customers of Defendants, New Cingular Wireless Services, Inc., and AT & T Mobility, LLC (collectively, "AT & T"). Plaintiffs filed a class action against AT & T, which responded by seeking to enforce an arbitration agreement contained in its contracts with Plaintiffs. The district court refused to enforce the arbitration agreement on state-law unconscionability grounds, relying primarily on the agreement's class-action waiver provision. AT & T appeals. We reverse the district court's substantive unconscionability ruling and remand for further proceedings related to Plaintiffs' procedural unconscionability claims.

FACTUAL AND PROCEDURAL HISTORY

In this putative class action, the named plaintiffs are residents of eight different states: California, Washington, Alabama, Arizona, Florida, Illinois, New Jersey, and Virginia. Plaintiffs initially filed several separate nationwide class actions, which were consolidated. Plaintiffs assert diversity jurisdiction under 28 U.S.C. § 1332(d) and allege unjust enrichment and breach of contract; they also allege violations of the Federal Communications Act and various state consumer-protection statutes.

Well before filing the lawsuits, each Plaintiff had entered into a service agreement, which included an arbitration clause, with AT & T. Plaintiffs acknowledge that a 2006 version of the arbitration provision applies. It requires individualized arbitration of "all disputes and claims," and it prohibits both class actions and class arbitrations. At the district court, the parties agreed that the relevant service agreements contained a choice-of-law clause that selected the law of the state in which an individual plaintiff's billing address is located.

Citing the arbitration provision, AT & T moved to compel arbitration. Plaintiffs argued that the arbitration provision was unenforceable due to both substantive and procedural unconscionability.

The district court denied AT & T's motion, applying Washington law and finding the class-action waiver substantively unconscionable and therefore unenforceable. Because it concluded that substantive unconscionability alone was a sufficient basis to void a contract under Washington law, the district court did not rule on Plaintiffs' alternative, procedural unconscionability argument. Because the arbitration provision stated that it would be unenforceable in its entirety if the class-action waiver were struck, the district court invalidated the entire arbitration agreement.

STANDARD OF REVIEW

The validity of an arbitration provision, like that of any contract, is subject to de novo review. Bridge Fund Capital Corp. v. Fastbucks Franchise Corp., 622 F.3d 996, 1000 (9th Cir.2010); Simula, Inc. v. Autoliv, Inc., 175 F.3d 716, 719 (9th Cir.1999). On choice-of-law matters, we also review de novo. Bridge Fund Capital, 622 F.3d at 1000.

DISCUSSION

A. Substantive Unconscionability and Preemption Under the Federal Arbitration Act

When the district court denied the motion to compel arbitration, this court had held that the Federal Arbitration Act ("FAA"),1 codified at 9 U.S.C. §§ 1-16, does not preempt state unconscionability law pertaining to class-action waivers in arbitration clauses. Laster v. AT & T Mobility LLC, 584 F.3d 849, 852 (9th Cir. 2009). The district court understandably followed our precedent. But the Supreme Court later reversed our holding, in AT&T Mobility LLC v. Concepcion, ___ U.S. ___, 131 S.Ct. 1740, 179 L.Ed.2d 742 (2011). There, the Court considered California's judge-made rule classifying "most collective-arbitration waivers in consumer contracts as unconscionable." Id. at 1746. The Supreme Court held that the FAA preempts the California rule. Id. at 1753.

Concepcion is broadly written. The Court framed the question as "whether the FAA prohibits States from conditioning the enforceability of certain arbitration agreements on the availability of classwide arbitration procedures." Id. at 1744. The Court answered that question in the affirmative. By requiring arbitration to maintain procedures fundamentally at odds with its very nature, a state court impermissibly relies on "the uniqueness of an agreement to arbitrate" to achieve a result that the state legislature cannot. Id. at 1747 (internal quotation marks omitted). The Court observed that individualized proceedings are an inherent and necessary element of arbitration, id. at 1750-52, and concluded that a rule banning class-action waivers is therefore impermissible: "Requiring the availability of classwide arbitration interferes with fundamental attributes of arbitration and thus creates a scheme inconsistent with the FAA." Id. at 1748.

In reaching that conclusion, the Court's majority expressly rejected the dissent's argument regarding the possible exculpatory effect of class-action waivers: "The dissent claims that class proceedings are necessary to prosecute small-dollar claims that might otherwise slip through the legal system. But States cannot require a procedure that is inconsistent with the FAA, even if it is desirable for unrelated reasons." Id. at 1753 (citation omitted) (emphasis added).

Plaintiffs argue that Concepcion is distinguishable. None of their arguments is persuasive.

First, Plaintiffs argue that Supreme Court precedents require arbitration of statutory rights only if a prospective litigant "`"effectively may vindicate"'" those rights in the arbitral forum. Green Tree Fin. Corp.-Ala. v. Randolph, 531 U.S. 79, 90, 121 S.Ct. 513, 148 L.Ed.2d 373 (2000) (quoting Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20, 28, 111 S.Ct. 1647, 114 L.Ed.2d 26 (1991) (quoting Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 637, 105 S.Ct. 3346, 87 L.Ed.2d 444 (1985))). As Plaintiffs note, the Supreme Court in Green Tree went on to observe that "the existence of large arbitration costs could preclude a litigant ... from effectively vindicating her federal statutory rights in the arbitral forum." Id. Plaintiffs cite Green Tree and other similarly reasoned decisions as being in tension with Concepcion. They argue that this tension must be resolved by reading an implied exception into Concepcion; specifically, they suggest that Concepcion's rule permits state law to invalidate class-action waivers when such waivers preclude effective vindication of statutory rights.

We do not read Concepcion to be inconsistent with Green Tree and similar cases.2 Although Plaintiffs argue that the claims at issue in this case cannot be vindicated effectively because they are worth much less than the cost of litigating them, the Concepcion majority rejected that premise. Significantly, the arbitration agreement here has a number of fee-shifting and otherwise pro-consumer provisions, identical to those in Concepcion. As the Eleventh Circuit said in another case involving a nearly identical arbitration provision, "the Concepcion Court examined this very arbitration agreement" and concluded "`that aggrieved customers who filed claims would be essentially guaranteed to be made whole.'" Cruz v. Cingular Wireless, LLC, 648 F.3d 1205, 1215 (11th Cir. 2011) (emphasis omitted) (quoting Concepcion, 131 S.Ct. at 1753).

The dissent in Concepcion focused on a related but different concern—even if the arbitration agreements guaranteed (via fee-shifting provisions) that complaining customers would be made whole with respect to damages and counsel fees, most customers would not bother filing claims because the amounts are too small to be worth the trouble. See 131 S.Ct. at 1761 (Breyer, J., dissenting) (observing that small-value claims will not be made, for example, when they involve "waiting at great length while a call is placed on hold"). That is, the concern is not so much that customers have no effective means to vindicate their rights, but rather that customers have insufficient incentive to do so.3 That concern is, of course, a primary policy rationale for class actions, as discussed by the district court in terms of deterrence. Coneff v. AT & T Corp., 620 F.Supp.2d 1248, 1259 (W.D.Wash. 2009). But as the Supreme Court stated in Concepcion, such unrelated policy concerns, however worthwhile, cannot undermine the FAA. 131 S.Ct. at 1753.

Even if we could not square Concepcion with previous Supreme Court decisions, we would remain bound by Concepcion, which more directly and more recently addresses the issue on appeal in this case. Cf. Rodriguez de Quijas v. Shearson/Am. Express, Inc., 490 U.S. 477, 484, 109 S.Ct. 1917, 104 L.Ed.2d 526 (1989) ("If a precedent of this Court has direct application in a case, yet appears to rest on reasons rejected in some other line of decisions, the Court of Appeals should follow the case which directly controls, leaving to this Court the prerogative of overruling its own decisions.").

Next, Plaintiffs argue that the Washington Supreme Court's rule on unconscionability of class-action waivers, announced in Scott v. Cingular Wireless, 160 Wn.2d 843, 161 P.3d 1000 (2007), is meaningfully different from California's rule, announced in Discover Bank v. Superior Court, 36 Cal.4th 148, 30 Cal.Rptr.3d 76, 113 P.3d 1100 (2005), and rejected in Concepcion. But, as we have observed, the concerns underlying those two states' rules are "almost identical." Lowden v. T-Mobile USA, Inc., 512 F.3d 1213, 1221 (9th Cir. 2008). Indeed, Scott contains reasoning similar to the reasoning of Discover Bank, on which it relies heavily. See In re Apple, No. C-10-02553, 2011 WL 2886407, at *4 (N.D.Cal. July 19, 2011) (order) ("[T]he leading case in Washington on the enforceability of provisions that require individual arbitration borrowed heavily from Discover Bank. Because Concepcion overruled Discover Bank, it also overruled decisions based on Discover Bank." (citing Scott, 161 P.3d at 1006-08)). Thus, if California's substantive unconscionability rule is preempted by the FAA, then so is Washington's similarly reasoned rule.

Undaunted, Plaintiffs argue that classaction waivers are unconscionable under Washington law only on a case-by-case, evidence-specific finding of exculpation. Essentially, Plaintiffs argue that Concepcion would not apply to a sufficiently narrow, fact-based state-law rule for voiding class-action waivers.

Concepcion, particularly the section responding to the dissent, forecloses this argument. 131 S.Ct. at 1753. The Eleventh Circuit agrees. See Cruz, 648 F.3d at 1214 (acknowledging a factual record regarding the cost-effectiveness of individual pursuit of claims, but concluding that such evidence "goes only to substantiating the very public policy arguments that were expressly rejected by the Supreme Court in Concepcion—namely, that the class action waiver will be exculpatory, because most of these small-value claims will go undetected and unprosecuted").

The Eleventh Circuit also easily rejected the same argument that Plaintiffs now make in a final attempt to distinguish Concepcion—Washington law would enforce the "blow-up" provision to invalidate the entire arbitration agreement, whereas Concepcion dealt with a state-law rule that would have forced parties into non-consensual class-wide arbitration. Id. at 1213. As the Eleventh Circuit stated:

Id. at 1213-14 (citations omitted). Pointedly, by invalidating arbitration agreements for lacking class-action provisions, a court would be doing precisely what the FAA and Concepcion prohibit—leveraging "the uniqueness of an agreement to arbitrate" to achieve a result that the state legislature cannot. 131 S.Ct. at 1747.

In conclusion, Concepcion controls, the FAA preempts the Washington state law invalidating the class-action waiver, and we reverse the district court's conclusions regarding pre-emption and substantive unconscionability.

B. Procedural Unconscionability and Choice of Law

As noted above, Plaintiffs also allege procedural unconscionability, an inquiry for which Concepcion gives little guidance beyond a recognition of the doctrine's continued vitality. See 131 S.Ct. at 1750 n. 6 ("States remain free to take steps addressing the concerns that attend contracts of adhesion—for example, requiring class-action-waiver provisions in adhesive arbitration agreements to be highlighted.").

Like substantive unconscionability, procedural unconscionability is a defense to contract formation, and so state law applies. See Marmet Health Care Ctr., Inc. v. Brown, ___ U.S. ___, 132 S.Ct. 1201, 1203-04, 182 L.Ed.2d 42 (2012) (per curiam) (remanding case for state court determination of whether an arbitration clause is unconscionable and "unenforceable under state common law principles that are not specific to arbitration"); Concepcion, 131 S.Ct. at 1746 (stating that 9 U.S.C. § 2 "permits agreements to arbitrate to be invalidated by generally applicable contract defenses, such as fraud, duress, or unconscionability" (internal quotation marks omitted)); see also Ferguson v. Countrywide Credit Indus., 298 F.3d 778, 782 (9th Cir.2002) ("In determining the validity of an agreement to arbitrate, federal courts should apply ordinary state-law principles that govern the formation of contracts." (internal quotation marks omitted)).

But Plaintiffs hail from different states,4 and the contracts contain choice-of-law provisions. Procedural unconscionability, then, presents a threshold choice-of-law question. When sitting in diversity, we apply the choice-of-law rules of the forum state. Love v. Associated Newspapers, Ltd., 611 F.3d 601, 610 (9th Cir.2010). Washington courts do not engage in a choice-of-law analysis unless there is "an actual conflict between the laws or interests of Washington and the laws or interests of another state." Erwin v. Cotter Health Ctrs., 161 Wn.2d 676, 167 P.3d 1112, 1120 (2007) (internal quotation marks omitted).

Thus, we remand to the district court to apply Washington choice-of-law rules to Plaintiffs' procedural unconscionability arguments. The first step of that analysis will be to determine whether an actual conflict exists among the laws of the various states involved in this case. That analysis requires the court first to determine whether any of the relevant states allow voiding a contract on grounds of freestanding procedural unconscionability.5 If the laws all require at least some showing of substantive unconscionability, then Plaintiffs' claim necessarily fails because of our holding that the arbitration clause at issue is not substantively unconscionable. But if a showing of procedural unconscionability would result in success for Plaintiffs under some of the relevant state precedents, the district court must complete the conflict-of-law analysis and decide which Plaintiffs, if any, may benefit.

REVERSED and REMANDED.