WASHINGTON (CN) - The Supreme Court heard arguments Tuesday on whether federal arbitration law preempts California's decision that a class-action ban in an arbitration clause is unconscionable.
Vincent and Liza Concepcion brought a class action against AT&T Mobility for allegedly fraudulent taxes on their cell phone contract. The district court held that AT&T's arbitration clause blocking class actions was unconscionable, and thus unenforceable. The 9th Circuit affirmed, finding that the Federal Arbitration Act did not preempt California's law on unconscionability.
The justices seemed reluctant to step in and tell California what's unconscionable.
"Are we going to tell the state of California what it has to consider unconscionable?" Justice Sonia Sotomayor asked AT&T's attorney, Andrew Pincus.
Justice Ruth Bader Ginsburg accused Pincus of failing to show where California had said it was applying a different concept of unconscionability to the cell phone contract than it did for other contracts.
Pincus replied that although the state hasn't said so, it was applying a different standard. He argued that the California statute defining unconscionability states that the determination should be made at the time of the contract, and in this case, the determination was made when the dispute arose.
Pincus said language in the state law, stating that the determination apply to "any contract," means the law has to apply generally to contracts.
Justice Antonin Scalia argued that some elements of unconscionability can only arise in a litigation or arbitration context, such as requiring the party to arbitrate in a distant location, and cannot possibly apply to other contracts.
Pincus said the principles California applied in order to find unconscionability were different in the Concepcion case than principles applied in other contexts.
Justice Stephen Breyer, trying to illustrate where California drew the line, compared it to Switzerland having a law saying it would only buy milk from cows in pastures higher than 9,000 feet, which clearly discriminates, but if it said it wants cows that passed the tuberculin test, that doesn't discriminate.
"Here ... the class arbitration exists. ... So where is the 9,000-foot cow?" Breyer asked. "Where is the discrimination?"
Pincus said the "9,000-foot meadow" fit the case, because the statute requires full use of discovery procedures in court and in arbitration.
Justice Elena Kagan asked why Pincus said it was okay for a state to determine that a provision barring certain kinds of attorney's fees or a law prohibiting certain kinds of discovery provisions was unconscionable, but it could not do the same for a class arbitration provision.
"What separates the two?" she asked.
Pincus argued that the state was working against its own "traditional unconscionability doctrine," focusing on unfairness to third parties instead of distinctly on the party who filed suit.
Kagan pointed out that the state was allowed to change its mind and start taking into account third parties.
"It's the state's unconscionability doctrine," she said.
"But it is not the state's general unconscionability doctrine, Justice Kagan," Pincus said, adding that the state has failed to adopt a general statute concerning third parties.
"[S]o what if they've never done this before?" Breyer asked. "They sure have done it now. And what's the basis for saying that the Arbitration Act or any other part of federal law forbids California from doing that?"
Chief Justice John Roberts said considering the Concepcions as third parties was a "different mode of analysis" than general contract law, which construes third parties as the general public, not the specific party bringing the case.
Deepak Gupta, arguing for the Concepcions, said they were third parties because they did not know the point at which they would detect the fraud when they signed up for the cell phone contract.
When Justice Samuel Alito asked why the Concepcions were "better off" with a class adjudication, Gupta replied that when they enter into the contract, it's not reasonable for them to give up the benefits they would get from a class action. A class action motivates lawyers and others to find fraud, Gupta said.
Kagan asked Gupta what he thought of AT&T's claim that a ruling for the Concepcions would effectively "kill off" class arbitration because it includes all the procedures and liability but no judicial review.
Gupta argued that class arbitrations have existed for 25 years, citing examples of their use.
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