Scalia's passing may change the ADR landscape

Conservative U.S. Supreme Court Justice Antonin Scalia's recent and unexpected death may change the alternative dispute resolution landscape, at least as to the enforceability of arbitration in California. After all, Scalia delivered the majority opinion in the closely divided and significant decision in AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011), a 5-4 decision holding that the Federal Arbitration Act preempted California law that rendered class-arbitration bans unenforceable and abrogating the California Supreme Court decision in Discover Bank v. Superior Court, 36 Cal. 4th 148 (2005).

Scalia's legal analysis in Concepcion led him to conclude that California's Discover Bank rule was "as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress," and therefore pre-empted by the FAA.

The dissent argued that class proceedings are necessary to prosecute small-dollar claims that might otherwise slip through the legal system (the case was over a $30.22 charge for sales tax on phones represented as "free"). In his characteristic candor, Scalia wrote that states may not enforce a procedure inconsistent with the FAA, even if it is desirable to allow a remedy for wrongs that may otherwise go unanswered because of their negligible value.

In answering the dissent's suggestion that his decision would result in a wrong with no remedy, he explained that the Concepcions did have a remedy as noted by the district court in San Diego where the case began. The arbitration agreement provided that AT&T would pay the Concepcions a minimum of $7,500 and twice their attorney fees if they obtained an arbitration award greater than AT&T's last settlement offer. The district court concluded that the Concepcions were better off under their arbitration agreement with AT&T than they would have been as participants in a class action, which "could take months, if not years, and which may merely yield an opportunity to submit a claim for recovery of a small percentage of a few dollars." The 9th U.S. Circuit Court of Appeals admitted that aggrieved customers who filed claims would be "essentially guarantee[d]" to be made whole.

The influence of Scalia's opinion in Concepcion cannot be overstated. In Iskanian v. CLS Transportation of Los Angeles LLC, 59 Cal. 4th 348 (2014), the California Supreme Court acknowledged Concepcion and held that the Federal Arbitration Act preempts California law. As a result, class action waivers in arbitration agreements are valid and enforceable. A class action may not be brought in California in the face of a valid arbitration agreement with a class action waiver.

However, Iskanian went on to hold that such waivers do not preclude representative actions under the Private Attorney General Act that allows employees to bring representative actions on behalf of themselves and others to recover civil penalties for Labor Code violations.

In Sakkab v. Luxottica Retail North America Inc., 803 F. 3d 425 (9th Cir. 2015), a divided 9th Circuit embraced the Iskanian rule that arbitration waivers do not preclude PAGA claims. In a strongly worded dissent, Justice N. Randy Smith relied upon Scalia's opinion in Concepcion. Allowing the claimant to proceed with PAGA claims denies the benefits of arbitration and frustrates the purposes of the FAA, according to the dissent. Because it stands as an obstacle to the purposes and objectives of the FAA, the dissent concluded that the Iskanian rule is preempted by the FAA and predicted reversal by the U.S. Supreme Court.

More recently, in DIRECTV Inc. v. Imburgia, 136 S. Ct. 463 (2015), in what is to be the last arbitration decision to include Scalia, the U.S. Supreme Court again reversed the 9th Circuit, and held that the class-arbitration waiver in DirecTV's arbitration agreement was enforceable. Justice Stephen Breyer delivered the DIRECTV opinion, and wrote for the majority that included Scalia. A written arbitration agreement is "valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract." Therefore, the state court's interpretation of the contract must be consistent with the FAA. In a twist of irony, it was Breyer who also wrote the dissent in Concepcion.

Justice Clarence Thomas dissented. He remains of the view that the FAA does not apply to state court proceedings. In her dissent, Justice Ruth Bader Ginsburg, joined by Justice Sonia Sotomayor, rejected the majority's "expanded" scope of the FAA and "harsh construction ... further degrading the rights of consumers and further insulating already powerful economic entities from liability for unlawful acts." In short, the DIRECTV opinion demonstrates that the future is less clear without the outsized personality of Scalia in the conservative camp.

How will the U.S. Supreme Court deal with the enforcement of arbitration agreements in the future? The dissenting views in DIRECTV suggest that the court will be less likely to grant certiorari in cases that decline to enforce arbitration agreements on the basis of state law. As predicted in the dissent in Sakkab, will the high court reverse the Iskanian rule that class action waivers do not apply to PAGA representative claims? Or is such action less likely now without the influence of Justice Scalia in the conservative camp?

And what will happen in MHN Government Services v. Zaborowski, 136 S. Ct. 27 (2015), a case in which the U.S. Supreme Court granted certiorari after the 9th Circuit invalidated a military contractor's arbitration agreement as unconscionable? The disposition of that case will be instructive of the court's future approach to the enforcement of arbitration agreements.

While many questions remain unanswered, what is clear is that Justice Scalia led a conservative renaissance on the court for three decades with his strong beliefs, keen intellect, powerful and sometimes funny writing, and larger-than-life personality. His death may very well alter the ADR landscape in California.

Steven H. Kruis has been a full-time mediator since 2002, and mediated well over 2,000 matters. He is with the San Diego Office of ADR Services Inc. You can reach him at skruis@adrservices.org.