PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
_____________
No. 08-4103
_____________
KEITH LITMAN; ROBERT WACHTEL,
Individually and on behalf of all others
similarly situated,
Appellants,
v.
CELLCO PARTNERSHIP
d/b/a Verizon Wireless
_______________
On Appeal from the United States District Court
for the District of New Jersey
(D.C. No. 07-cv-4886)
District Judge: Honorable Freda L. Wolfson
_______________
Argued on November 5, 2009
Submitted Under Third Circuit LAR 34.1(a)
On June 6, 2011
On Remand From the United States Supreme Court
Before: SCIRICA, JORDAN and COWEN, Circuit Judges.
(Filed: August 24, 2011)
_______________
William R. Weinstein [ARGUED]
Sanford, Wittels & Heisler, LLP
950 Third Avenue - 10th Fl.
New York, NY 10022
Steven L. Wittels
Sanford, Wittels Heisler, LLP
440 West Street - 2nd Fl.
Fort Lee, NJ 07024
Counsel for Appellants
Philip R. Sellinger
Todd L. Schleifstein
Greenberg Traurig, LLP
200 Park Avenue
Florham Park, NJ 07932
Andrew G. McBride [ARGUED]
Elbert Lin
Wiley Rein LLP
1776 K Street NW
Washington, DC 20006
Counsel for Appellee
2
Alan S. Kaplinsky
Jeremy T. Rosenblum
Ballard Spahr Andrews & Ingersoll, LLP
1735 Market Street - 51st Fl.
Philadelphia, PA 19103
Counsel for Amicus Appellees
_______________
OPINION OF THE COURT
_______________
JORDAN, Circuit Judge.
This case is before us on remand from the United
States Supreme Court. Appellants Keith Litman and Robert
Wachtel had earlier asked us to reverse an order of the United
States District Court for the District of New Jersey
compelling them to arbitrate their contract dispute with
Cellco Partnership d/b/a Verizon Wireless (“Verizon”) on an
individual rather than a class-wide basis. In an unpublished
opinion and order filed May 21, 2010, we vacated the District
Court‟s order because a recent precedent of ours bound us to
conclude that class arbitration should have been available to
the appellants. Litman v. Cellco P’ship, 381 F. App‟x 140
(3d Cir. 2010) (citing Homa v. American Express Co., 558
F.3d 225 (3d Cir. 2009)). Verizon responded to our ruling by
seeking a stay of our mandate and filing a petition for a writ
of certiorari, both of which were granted. The Supreme
Court, shortly after issuing its opinion in AT&T Mobility v.
Concepcion, 131 S. Ct. 1740 (2011), vacated our decision and
remanded the case to us for further consideration. Cellco
P’ship v. Litman, 131 S. Ct. 2872 (2011) (table). On remand,
3
we asked for supplemental briefing to gain the parties‟
perspectives on how Concepcion applies to this case. Having
now reviewed the supplemental briefing and Concepcion, we
conclude that the New Jersey law at issue, which
“[r]equire[es] the availability of classwide arbitration ...[,]
creates a scheme inconsistent with the [Federal Arbitration
Act].” Concepcion, 131 S. Ct. at 1748. Accordingly, we will
affirm the District Court‟s order compelling individual
arbitration in accordance with the terms of Litman‟s and
Wachtel‟s contracts with Verizon.
I. Background
Verizon provides wireless telephone service to
millions of customers nationwide. Litman and Wachtel were
among that number. They each entered into a Customer
Agreement (the “Agreements”) pursuant to which Verizon
supplied them cell phone service for a fixed monthly price.
Beginning on or about September 30, 2005, Verizon
allegedly began to impose on its fixed-price customers a
“bogus, unlawful, and inequitable” monthly administrative
charge of forty cents. (App. at 26-27.) Later, in March 2007,
it allegedly charged fixed- price customers an improper
seventy-cent administrative charge. According to Litman and
Wachtel, the added charges amounted to a “unilateral price
increase for all of its customers,” in violation of Verizon‟s
contractual obligation to provide cell phone service at a fixed
price. (App. at 27, 35-37.) On that theory, Litman and
Wachtel filed this putative class action.
The complaint asserts three claims: breach of contract,
unjust enrichment, and violations of the New Jersey
4
Consumer Fraud Act, N.J. STAT. ANN. §§ 56:8-1, et seq.
Verizon moved to compel individual arbitration pursuant to
the following clause in the Agreements:1
WE EACH AGREE TO SETTLE DISPUTES
… ONLY BY ARBITRATION …
***
(1) THE FEDERAL ARBITRATION ACT
APPLIES TO THIS AGREEMENT … ANY
CONTROVERSY OR CLAIM ARISING OUT
OF OR RELATING TO THIS AGREEMENT,
OR ANY PRIOR AGREEMENT FOR
WIRELESS SERVICE WITH [VERIZON] …
WILL BE SETTLED BY ONE OR MORE
NEUTRAL ARBITRATORS BEFORE THE
AMERICAN ARBITRATION ASSOCIATION
(“AAA”) OR BETTER BUSINESS BUREAU
(“BBB”).
***
(3) … THIS AGREEMENT DOESN‟T
PERMIT CLASS ARBITRATIONS EVEN IF
TH[E] PROCEDURES [OF THE AAA OR
BBB] WOULD.
***
1
Litman‟s relationship with Verizon was governed by
a November 2006 Agreement and Wachtel‟s by a September
2007 Agreement. The arbitration clause in each is identical.
5
(6) IF FOR SOME REASON THE
PROHIBITION ON CLASS ARBITRATIONS
SET FORTH IN SUBSECTION (3) … IS
DEEMED UNENFORCEABLE, THEN THE
AGREEMENT TO ARBITRATE WILL NOT
APPLY. FURTHER, IF FOR ANY REASON
A CLAIM PROCEEDS IN COURT RATHER
THAN THROUGH ARBITRATION, WE
EACH WAIVE ANY TRIAL BY JURY.
(App. at 54-55, 71-72.)
Litman and Wachtel opposed Verizon‟s motion to
compel individual arbitration, arguing that, pursuant to the
New Jersey Supreme Court‟s decision in Muhammad v.
County Bank of Rehoboth Beach, Delaware, 912 A.2d 88,
100 (N.J. 2006), the Agreements‟ arbitration clause –
specifically its class-arbitration waiver – was unconscionable
and therefore unenforceable under New Jersey law.2 For
2
In Muhammad, the New Jersey Supreme Court
examined a class arbitration waiver in a consumer contract of
adhesion, specifically a payday loan agreement, and held that
that waiver was unconscionable, and as such unenforceable,
because it deprived “Muhammad of the mechanism of a class-
wide action, whether in arbitration or in court litigation.” 912
A.2d at 101. In reaching its holding, the Muhammad Court
considered the “public interests affected by the contract.” Id.
at 99. It noted that, “when … found in a consumer contract of
adhesion in a setting in which disputes between the
contracting parties predictably involve small amounts of
damages,” class waivers are problematic since “„rational‟
consumers may decline to pursue individual consumer-fraud
lawsuits because it may not be worth the time spent
6
purposes of its motion, Verizon did not challenge the
applicability of Muhammad, but instead argued that the
Federal Arbitration Act (“FAA”) preempted Muhammad.
The District Court accepted that argument. Relying on our
decision in Gay v. CreditInform, 511 F.3d 369 (3d Cir. 2007),
which stated that Pennsylvania court decisions declaring
class-wide arbitration waivers unconscionable were
preempted by the FAA,3 the District Court held that the class
prosecuting the suit, even if competent counsel was willing to
take the case.” Id. (emphasis original). Thus, the court
opined, such class action waivers “functionally exculpate
wrongful conduct.” Id. at 100. As a result, the waivers
compromise “[t]he public interest at stake in … consumers
effectively … pursu[ing] their statutory rights under [New
Jersey‟s] consumer protection laws,” and that interest, the
court concluded, “overrides … enforcement of the class-
arbitration bar in th[e] agreement[s].” Id. at 101.
3
More precisely, Gay reviewed two Pennsylvania
Superior Court cases, Lytle v. CitiFinancial Services, Inc.,
810 A.2d 643 (Pa. Super. Ct. 2002), and Thibodeau v.
Comcast Corp., 912 A.2d 874 (Pa. Super. Ct. 2006). Lytle
indicated that a class arbitration waiver would be problematic
in small-stakes cases. See 810 A.2d at 666 (saying “the
record before us is devoid of any evidence that would
establish that the damages claimed by appellants are
insufficient to permit the Lytles to seek legal redress for their
injuries in the absence of a class action[,]” but going on to
hold that “upon remand, the trial court ... may also receive
and consider evidence relevant to the Lytles‟ argument that
the costs associated with individual versus class-based
litigation of their claim ... would, in light of the amount of
their damages, result in continuing immunity for [defendant]
7
arbitration waiver at issue here is valid. The Court thus
granted Verizon‟s motion to compel individual arbitration and
dismissed the case. Litman and Wachtel timely appealed.
After the opening and answering briefs had been
submitted, we decided Homa v. American Express Co., 558
F.3d 225 (3d Cir. 2009), in which we specifically addressed
whether the conclusion expressed by the New Jersey Supreme
Court in Muhammad was preempted by the FAA. We held
that it was not preempted, and we distinguished our earlier
decision in Gay by noting that the Pennsylvania cases
considered there, “„though … written ostensibly to apply
general principles of contract law, … hold that an agreement
to arbitrate may be unconscionable simply because it is an
agreement to arbitrate,‟” id. at 229 (quoting Gay, 511 F.3d at
395), whereas the New Jersey Supreme Court in Muhammad
was, we thought, at pains to say that a waiver of class-wide
dispute resolution would be improper in the context of either
litigation or arbitration. We thus concluded that Muhammad
“plainly [did] not hold that an agreement to arbitrate may be
unconscionable simply because it is an agreement to
arbitrate.” Homa, 558 F.3d at 229-30 (internal quotation
marks and citations omitted). Rather, we said, because
Muhammad provides a defense against “all waivers of class-
wide actions, not simply those that also compel arbitration,” it
was not preempted by the FAA. 558 F.3d at 230 (emphasis
added).
for its wrongful acts”). Thibodeau later characterized the
holding of Lytle as being that “mandatory individual
arbitration [is] unconscionable when it actually prohibits
consumer claims.” 912 A.2d at 883.
8
Not surprisingly, Litman and Wachtel moved for
summary reversal in this case, based on our decision in
Homa. We agreed that reversal was required.4 See Litman,
381 F. App‟x at 142. We recognized that Gay‟s discussion of
the FAA‟s preemptive effect on Pennsylvania law was only
dicta.5 Id. In contrast, we noted, Homa was precedent
4
Before we reached that decision, Verizon moved to
stay the appeal pending our en banc consideration of Puleo v.
Chase Bank USA, in which we addressed whether the
question of arbitrability, specifically the contention that a
class action waiver was unconscionable and therefore
unenforceable, was for a court or arbitrator to decide. 605
F.3d 172, 175 (3d Cir. 2010) (en banc). In Puleo we
concluded, among other things, “that when a contractual party
challenges the validity of an arbitration agreement by
contending that one or more of its terms is unconscionable
and unenforceable, a question of arbitrability is presented,”
which is “a gateway matter for judicial determination.” Id. at
180. We explained that a challenge to a class arbitration ban
“necessarily calls into question the very authority of the
arbitrator to preside over the dispute, and, by extension, the
validity of the [arbitration agreement] itself” which
necessarily makes it a question “for the court to resolve.” Id.
at 183.
5
That discussion was dicta because “our holding in
Gay was that Virginia law governed the parties‟ arbitration
agreement.” Puleo, 605 F.3d at 177 n.2 (citing Gay, 511 F.3d
at 390). In our earlier opinion in this case, we noted that,
even if the commentary about preemption were the holding of
Gay, it could still be reconciled with Homa. Litman, 381 F.
App‟x at 142-43. We reasoned that, under Pennsylvania case
law, “„an agreement to arbitrate may be unconscionable
9
“directly on point and binding on us,” so we were required to
“conclude[] that the FAA does not preempt Muhammad.” Id.
at 143. Accordingly, we vacated the District Court‟s order
compelling individual arbitration and remanded the case for
further proceedings, which might have involved some class-
wide dispute resolution. Id.
Verizon filed a motion to stay our mandate pending the
filing of a petition for writ of certiorari. We allowed the stay,
and Verizon filed its petition. On May 2, 2011, the Supreme
Court granted Verizon‟s petition, vacated our May 2010
opinion and order, and remanded the case for our review in
light of its newly issued opinion in AT&T Mobility v.
Concepcion. See Cellco P’ship, 131 S. Ct. at 2872.
simply because it is an agreement to arbitrate,‟” id. at 142
(quoting Gay, 511 F.3d at 395), whereas the holding in Homa
rested on the conclusion that, in invalidating the class-
arbitration waiver, Muhammad applied general principles of
contract and, importantly, “did not evince hostility toward
arbitration clauses” in general, id. at 143 (citing Homa, 558
F.3d at 230, and Puleo, 605 F.3d at 177 n.2 (“[T]he New
Jersey case law at issue in Homa did not evince hostility
toward arbitration clauses, which was the concern about
Pennsylvania law expressed in Gay.”)).
10
II. Discussion6
The specific question before us remains whether the
FAA preempts the New Jersey Supreme Court‟s ruling in
Muhammad. As noted above, we had previously held that,
pursuant to Homa, it did not. We now examine that decision
anew and hold that Homa has been abrogated by Concepcion
and that Muhammad is preempted by the FAA.
Section 2 of the FAA, the “primary substantive
provision of the Act,” Moses H. Cone Mem’l Hosp. v.
Mercury Constr. Corp., 460 U.S. 1, 24 (1983), provides that
[a] written provision in any … contract
evidencing a transaction involving commerce to
settle by arbitration a controversy thereafter
arising out of such contract or transaction …
shall be valid, irrevocable, and enforceable,
save upon such grounds as exist at law or in
equity for the revocation of any contract.
9 U.S.C. § 2 (emphasis added.) Thus, consistent with § 2,
“generally applicable contract defenses, such as fraud, duress,
or unconscionability, may be applied to invalidate arbitration
agreements.” Doctor’s Assocs., Inc. v. Casarotto, 517 U.S.
681, 687 (1996). In considering an arbitration agreement, we
6
The District Court had jurisdiction pursuant to 28
U.S.C. § 1332(d). We have jurisdiction pursuant to 9 U.S.C.
§ 16(a)(3). “We exercise plenary review over [a] District
Court‟s decision to compel arbitration.” Trippe Mfg. Co. v.
Niles Audio Corp., 401 F.3d 529, 531 (3d Cir. 2005).
11
may use the law “of the involved state or territory” as an
interpretive guide, Gay, 511 F.3d at 388, but the “liberal
federal policy favoring arbitration,” Moses H. Cone, 460 U.S.
at 24, which gave birth to the FAA, requires that “arbitration
agreements [be] on an equal footing with other contracts and
[that they be] enforce[d] … according to their terms,”
Concepcion, 131 S. Ct. at 1745 (internal citations omitted).
As is obvious from our decisions in Gay and Homa,
this case is not our first effort to reconcile waivers of class
arbitration with state court decisions reflecting public policies
against such waivers. In our initial ruling in this case, we
discussed the tension between Gay and Homa and decided we
had to follow Homa, since it addressed precisely the question
at issue here, namely whether New Jersey‟s Muhammad
decision forbidding class arbitration waivers could withstand
the preemptive sweep of the FAA. “We are bound by
precedential opinions of our Court[,]” we observed, “unless
they have been reversed by an en banc proceeding or have
been adversely affected by an opinion of the Supreme Court.”
Litman, 381 F. App‟x at 143 (internal quotation marks and
citation omitted).
The Supreme Court‟s more recent opinion in
Concepcion works just such a change in the law. The Court
addressed “whether the FAA prohibits States from
conditioning the enforceability of certain arbitration
agreements on the availability of classwide arbitration
procedures.” 131 S. Ct. at 1744. The Concepcions had
purchased AT&T cell phone service, which was advertised to
include free phones. Id. at 1744. They were charged sales
tax on the phones and, believing that to be inconsistent with
the promise that the phones were “free,” they brought a
12
putative class action against AT&T. Id. AT&T moved to
compel arbitration under the terms of its contract with the
Concepcions, which “provided for arbitration of all disputes
between the parties, but required that claims be brought in the
parties‟ individual capacity, and not as a plaintiff or class
member in any purported class or representative proceeding.”
Id. at 1744 (internal quotation marks and citations omitted).
The district court ruled that, pursuant to the California
Supreme Court‟s decision in Discover Bank v. Superior
Court, 113 P.3d 1100 (Cal. 2005),7 the governing contract‟s
arbitration provision was unconscionable. Concepcion, 131
S. Ct. at 1745. AT&T appealed, but the United States Court
of Appeals for the Ninth Circuit affirmed, concluding that the
Discover Bank rule was not preempted by the FAA because it
was simply “a refinement of the unconscionability analysis
applicable to contracts generally.” Id. The Supreme Court
saw it differently.
In dispatching the reasoning and rule of Discover
Bank, the Supreme Court stated that the clause in § 2 of the
FAA that requires enforcement of an arbitration agreement
“save upon such grounds as exist at law or in equity for the
revocation of any contract[,]” does not “preserve state-law
7
Like the New Jersey Supreme Court‟s decision in
Muhammad, the California Supreme Court held in Discover
Bank that class arbitration waivers in consumer adhesion
contracts are unconscionable and contrary to public policy
when the “disputes between the contracting parties
predictably involve small amounts of damages, and when it is
alleged that the party with the superior bargaining power has
… deliberately cheat[ed] large numbers of consumers out of
individually small sums of money.” 113 P.3d at 1110.
13
rules that stand as an obstacle to the accomplishment of the
FAA‟s objectives.” Id. at 1748. In the Court‟s view,
“[r]equiring the availability of classwide arbitration interferes
with fundamental attributes of arbitration and thus creates a
scheme inconsistent with the FAA.” Id. More specifically,
the Court held that requiring the availability of class action
mechanisms undermines the “principal purpose of the FAA[,
which] is to ensure that private arbitration agreements are
enforced according to their terms.” Id. (internal quotation
marks and brackets omitted). Further, the Court determined
that the FAA‟s objective of “affording parties discretion in
designing arbitration processes … to allow for efficient,
streamlined[,]” tailored mechanisms to address a dispute, id.
at 1749, is compromised by state rules “[r]equiring the
availability of classwide arbitration,” id. at 1748. The Court
reasoned that “the switch from bilateral to class arbitration
sacrifices the principal advantage of arbitration – its
informality – and makes the process slower, more costly, and
more likely to generate procedural morass than final
judgment,” id. at 1751, not to mention that it increases the
“risks to defendants,” id. at 1752. Accordingly, the Supreme
Court held that California‟s Discovery Bank rule stood “as an
obstacle to the accomplishment and execution of the full
purposes and objectives of Congress … [and was] preempted
by the FAA.” Id. at 1753 (internal citations and quotation
marks omitted).
We understand the holding of Concepcion to be both
broad and clear: a state law that seeks to impose class
arbitration despite a contractual agreement for individualized
arbitration is inconsistent with, and therefore preempted by,
the FAA, irrespective of whether class arbitration “is
desirable for unrelated reasons.” Id. at 1753. Therefore, we
14
must hold that, contrary to our earlier decisions in Homa and
in this case, the rule established by the New Jersey Supreme
Court in Muhammad is preempted by the FAA. It follows
that the arbitration clause at issue here must be enforced
according to its terms, which requires individual arbitration
and forecloses class arbitration.8
8
Litman and Wachtel make two arguments against this
outcome, neither of which is compelling. First, they posit that
their Agreements with Verizon stipulate that New Jersey law
– most significantly Muhammad – applies, not federal law.
(Appellant Supp. Br. at 1.) The Agreements‟ choice of law
provision reads that, “[e]xcept to the extent we‟ve agreed
otherwise in the provision[] on … arbitration, or as required
by Federal law” disputes are to be “governed by the laws of
the state encompassing the area code assigned to [Litman and
Wachtel‟s] phone number[s] when [Litman and Wachtel]
accepted th[e] agreement[s].” (App. at 55, 72.) The
arbitration provision reads that the FAA applies to the
Agreements (App. at 72) and, independent of that, the FAA
governs the duty to honor arbitration agreements. See 9
U.S.C. §§ 1, et seq.; Invista S.À.R.L. v. Rhodia, S.A., 625
F.3d 75, 83 (3d. Cir. 2010) (“The Federal Arbitration Act …
creates a body of federal substantive law establishing and
governing the duty to honor agreements to arbitrate disputes.”
(internal citation and quotation marks omitted)). Thus, New
Jersey law applies only to the extent it is consistent with the
FAA, making Litman and Wachtel‟s first argument baseless.
Second, Litman and Wachtel argue that they should be
allowed to proceed to litigation because the Agreements‟ say
that “if for some reason the prohibition on class arbitrations
… is deemed unenforceable, then the agreement to arbitrate
will not apply.” (App. at 55, 72.) As Litman and Wachtel see
15
III. Conclusion
Because the United States Supreme Court‟s decision in
Concepcion holds that state law “[r]equiring the availability
of classwide arbitration … is inconsistent with the FAA[,]”
131 S. Ct. at 1748, we now endorse the District Court‟s
decision to reject New Jersey law holding that waivers of
class arbitration are unconscionable, and we will affirm the
District Court‟s order compelling individual arbitration of the
appellants‟ claims.
it, that provision was triggered by Muhammad. However,
because Muhammad is preempted by the FAA, it is
inapplicable here and cannot trigger that provision.
16