21 Pages Posted: 13 Jun 2011 Last revised: 26 Aug 2011
Date Written: June 12, 2011
It would be hard to exaggerate the importance of the unconscionability doctrine to federal arbitration law. In the last three decades, as the U.S. Supreme Court has expanded the scope of the Federal Arbitration Act (FAA), arbitration clauses have become a routine part of consumer, franchise, and employment contracts. Some companies have sought not just to funnel cases away from courts, but to tilt the scales of justice in their favor: stripping remedies, slashing discovery, selecting biased arbitrators, eliminating the right to bring a class action, and saddling adherents with prohibitive costs and fees. The unconscionability doctrine has emerged as the primary check on drafter overreaching. The Court has repeatedly acknowledged that lower courts can invoke unconscionability to invalidate one-sided arbitration provisions, and dozens (perhaps hundreds) of judges have done exactly that.
Recently, however, a rising chorus of voices has argued that the FAA allows arbitrators, but not judges, to strike down arbitration clauses as unconscionable. These critics make three main points. First, they argue that because the FAA limits judicial discretion, it would be absurd to allow judges to nullify arbitration clauses under the unconscionability doctrine: one of the most subjective and amorphous rules in all of law. Second, they assert that Congress recognized that the statute might allow powerful drafters to exploit weaker parties, but nevertheless concluded that its benefits outweighed these risks. Third, they seize upon a seeming discrepancy at the heart of the statute. Section 2 permits courts to invalidate arbitration clauses under “such grounds as exist at law or in equity for the revocation of any contract” - a phrase that arguably encompasses all contract defenses, including unconscionability. Yet section 4 only allows judges to hear challenges to the “making of the agreement to arbitrate.” Unconscionability revolves, in part, around substantive fairness, not the “making” of the arbitration clause. Thus, the argument proceeds, because unconscionability does not fall within section 4, judges cannot employ the rule. I will call this the “anti-court” theory.
The anti-court theory took on a new dimension in April 2011, when the U.S. Supreme Court held in AT&T Mobility v. Concepcion that the FAA preempts a California Supreme Court rule that deemed most class arbitration waivers in consumer contracts to be unconscionable. Justice Scalia’s majority opinion, which reasoned that California law is inconsistent with the “purposes and objectives” of the FAA, earned the support of only three other Justices. Justice Thomas wrote separately to explain that he believes that section 4 restricts section 2’s defenses to those that relate to the “making” of the arbitration clause. In other words, Justice Thomas adopts the anti-court theory’s premise, but arrives at a different, more drastic end-point: whereas the anti-court theory posits that judges cannot apply unconscionability to arbitration clauses, Justice Thomas implies that nobody can apply unconscionability to arbitration clauses. I will call this the “anti-unconscionability” theory. Because Justice Thomas provided the swing vote in Concepcion, and invited parties to address the link between sections 2 and 4 in the future, he ensured that unconscionability’s viability will become a flashpoint in the arbitration wars.
This Essay challenges the anti-court and anti-unconscionability theories. First, it shows that the anti-court theory would create an anomaly by requiring courts to uphold even flagrantly unconscionable (and thus unenforceable) arbitration clauses. This is exactly backward: the FAA predicates arbitration on the existence of an arbitration clause that satisfies section 2. Second, the Essay debunks the idea that section 4 restricts section 2’s defenses to those that relate to the “making” of the arbitration clause. Reading the statute as Justice Thomas purports to do - focusing exclusively on its text - section 2 preserves all contract doctrines that can be grounds for the rescission of an agreement. Although it excludes one variation of unconscionability, a rule I call “equitable” unconscionability, it embraces the modern unconscionability doctrine that courts actually apply to arbitration clauses. Thus, the statute neither strips judges of the power to apply unconscionability nor excludes unconscionability completely.
Keywords: arbitration, unconscionability, Federal Arbitration Act, FAA, AT&T Mobility LLC v. Concepcion
Suggested Citation: Suggested Citation
Horton, David, Unconscionability Wars (June 12, 2011). Northwestern University Law Review Colloquy, Vol. 106, 2011; Loyola-LA Legal Studies Paper No. 2011-19. Available at SSRN: https://ssrn.com/abstract=1863346
By Alan Rau