In Schnuerle v. Insight Communications (pdf), the Kentucky Supreme Court joins a number of other courts in rejecting a key argument that the plaintiffs’ bar has been making in the wake of AT&T Mobility LLC v. Concepcion (pdf)—that arbitration agreements with class waivers should not be enforced whenever the plaintiff is able to persuade a court that it would not be feasible to vindicate his or her statutory claims on an individual basis because of the alleged cost of proving those claims.

Ever since Concepcion, in which the U.S. Supreme Court held that the Federal Arbitration Act bars states from refusing to enforce arbitration agreements that forbid class proceedings, plaintiffs have been searching for a rule-swallowing exception to that decision. They appear to have settled on the so-called “vindication of statutory rights” theory: Based on out-of-context dicta in a number of Supreme Court decisions involving the arbitrability of federal claims, plaintiffs argue that the Supreme Court has a long-standing rule that courts need not enforce arbitration agreements when they are persuaded that the plaintiff would be unable to vindicate his or her claims under the arbitration clause at issue and that Concepcion left that rule undisturbed.

The courts are divided as to the viability of the vindication-of-statutory-rights theory when the plaintiff has raised federal claims. So far, my colleagues and I have won this fight in the Ninth Circuit in Coneff v. AT&T Corp. (pdf), 673 F.3d 1155 (9th Cir. 2012). The Second Circuit came to a different conclusion in In re American Express Merchants Litigation, 667 F.3d 204 (2d Cir. 2012) (pdf). (We’ve previously reported (pdf) on the Second Circuit’s decision and its denial of a petition for rehearing en banc.) But virtually all courts have rejected the notion that the vindication-of-statutory-rights theory has any validity when the plaintiff raises only state-law claims.  The Kentucky Supreme Court joined the club in Schnuerle.  See more below the fold.

In Schnuerle—a false-advertising class action against a broadband Internet provider—the plaintiffs contended that their agreements to arbitrate on an individual basis are unconscionable under Kentucky law. The trial court had compelled arbitration, and the Kentucky Court of Appeals had affirmed. The Kentucky Supreme Court then granted review and initially reversed, but granted rehearing after Concepcion and has now held that the arbitration provision is enforceable.

The Internet provider had relied upon pro-arbitration New York law and the New York choice-of-law clause in the agreement to defend the enforceability of the arbitration provision. The Kentucky Supreme Court held that the choice-of-law clause was unenforceable and that Kentucky law applied to plaintiffs’ attack on their arbitration provision. But the court went on to hold that the arbitration provision was enforceable no matter what state law applies, because Concepcion establishes that the Federal Arbitration Act would trump any contrary state law.

As have many others in the wake of Concepcion, plaintiffs argued that the court could still refuse to compel arbitration if a class action is needed to vindicate their rights under Kentucky consumer-protection laws. The Kentucky Supreme Court disagreed, noting that it was “unconvinced that simply re-characterizing the same basic idea” preempted in Concepcion “as an individualized determination based upon the facts of each case is sufficient to evade the Concepcion holding.”

The court also concluded that Concepcion could not be distinguished “by virtue of the relatively more consumer-friendly [AT&T Mobility] arbitration clause . . . in comparison with the clause contained in this case,” because “[a] careful reading of Concepcion discloses that the unusually consumer-friendly terms of the AT&T agreement were not particularly relevant to the Supreme Court’s holding”; “[t]hat factor simply was not central” to Concepcion.

At the same time, the court recognized that Concepcion does not preclude all attacks on the fairness of arbitration provisions. Such clauses “may continue to be struck down as unconscionable if their terms strip claimants of a statutory right, which cannot be vindicated by arbitration, because, for example, the arbitration costs on the plaintiff are prohibitively high; or the location of the arbitration is designated as a remote location.” But the court reiterated that “simply the impracticality of pursuing a single, small dollar claim is not regarded as an impediment to vindicating one’s rights,” and therefore arbitration clauses cannot be challenged on the ground that they waive class actions.

The plaintiffs also challenged the requirement in the contract that arbitration be kept confidential. Although the court agreed that the confidentiality clause was unconscionable, the court concluded that it could simply be severed from the arbitration provision and the remainder enforced.