Mandatory Arbitration Clauses In Financial Service Contracts After Supreme Court’s Decision In AT&T v. Concepcion


In a decision issued on April 27, 2011 by a Supreme Court perceived (rightly or wrongly) as favoring the interests of businesses over consumers, the Court held in AT&T v. Concepcion that the Federal Arbitration Act preempted a judicially-created rule applied by the California courts to strike down mandatory arbitration provisions in consumer contracts that prohibited class actions. In a 5-4 decision (with Justice Kennedy again providing the swing vote), the Court reversed the Ninth Circuit Court of Appeals decision that had found an arbitration provision in an AT&T Mobility agreement for the sale and servicing of cellular telephones to be unconscionable under California law.

Reaction was swift. On the same day that the decision came down, Georgia Representative Hank Johnson and U.S. Senators Al Franken (D. Minn.) and Richard Blumenthal (D. Conn.) announced that they would re-introduce the Arbitration Fairness Act that would eliminate mandatory arbitration clauses in employment, consumer and civil rights cases. According to a press release issued by the three legislators, Rep. Johnson stated that “Forced arbitration agreements undermine our indelible Constitutional right to trial by jury, benefiting powerful businesses at the expense of American consumers and workers.”

Atlantic commentator Andrew Cohen pointedly observed as follows: “Suffice it to say that the Court’s decision completely defies the very Federalism principles which are so often articulated by the very conservative members who agreed Wednesday to strike down a state’s effort to level the consumer playing field for millions of its residents. This is as big a pro-business ruling as we’ve ever seen from the Roberts’ Court ? and it will take explicit Congressional action to overturn it.”

As Forbes columnist Daniel Fisher accurately pointed out in a recent article, “After Arbitration Ruling, Watch Warren’s Consumer Bureau,” Congress has already acted, at least with respect to consumer financial products and services. When President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act into law on July 21, 2010, he stated that it included “the strongest consumer financial protections in history.” Included within the Dodd-Frank Act are two provisions that may cause future changes to federal arbitration law.

First, Section 921 of the Act amends the Securities Exchange Act of 1934 and the Investment Adviser Act of 1940 to authorize the Securities and Exchange Commission to prohibit or impose conditions or limitations on the use of agreements that require clients of any broker/dealer or investment adviser to arbitrate future disputes if the SEC finds that such limitations are in the public interest and for the protection of investors. The SEC is therefore charged with the express authority to soften the effects of mandatory arbitration or to do away with it altogether. (In this regard, one can reasonably speculate that this grant of authority had something to do with the long-overdue change in FINRA arbitration practice that now allows investors to choose the option of having an arbitration panel composed of all “public” ? non-industry ? arbitrators).

Similarly, Section 1028 of the Act authorizes the Bureau of Consumer Financial Protection to conduct a study and provide a report to Congress concerning the use of agreements mandating arbitration of future disputes between consumers and “covered persons.” (A covered person is defined as someone providing a consumer financial product or service that includes several activities, including financial advisory services not related to securities).

While of no benefit to consumers entering into contracts with internet service providers or cell phone companies, financial services consumers should not give up all hope that one day the mandatory arbitration provisions presently found in new account forms required to be signed when opening accounts with money managers and Wall Street firms might disappear.