• Supreme Court Holds Arbitration Clauses Barring Class Actions Not Unconscionable
  • May 17, 2011
  • Law Firm: Hinshaw & Culbertson LLP - Chicago Office
  • Plaintiff customers purchased services from defendant telephone company. The services were advertised as including free phones. A dispute arose when the customers were charged sales tax based on the phones’ retail value. The customers sued, and their complaint was later consolidated with a putative class action alleging that the telephone company had engaged in false advertising and fraud by charging sales tax on phones they had advertised as free. In March 2008, the telephone company moved to compel arbitration. The customers argued that the arbitration agreement was unconscionable and unlawful under California law because it disallowed class action proceedings. The U.S. District Court for the Southern District of California denied the telephone company’s motion, and the U.S. Court of Appeals for the Ninth Circuit affirmed, stating that under Discover Bank v. Superior Court, 36 Cal. 4th 148, 113 P. 3d 1100 (2005), the arbitration agreement was unconscionable because it disallowed class actions.

    The Supreme Court, in a 5-4 decision, reversed, holding “[a]rbitration is a matter of contract, and the FAA requires courts to honor parties’ expectations.” The Court further held that, “[t]he overarching purpose of the FAA, evident in the text of §§2, 3, and 4, is to ensure the enforcement of arbitration agreements according to their terms so as to facilitate streamlined proceedings.” The Court concluded that because California’s Discover Bank rule “stands as an obstacle to the accomplishment and execution of the full purpose and objectives of Congress,” it is “preempted by the FAA.”

    This case is an important victory for those seeking to enforce arbitration clauses. The Court firmly decided that disallowing class actions under an arbitration agreement does not make the agreement unconscionable. However, the fight is likely not over yet. U.S. Sens. Al Franken (D-Minn.), Richard Blumenthal (D-Conn.) and Rep. Hank Johnson (D-Ga.) have stated their intention to introduce legislation that would “restore consumers’ rights to seek justice in the courts.”