• U.S. Supreme Court Permits Waivers of Class Action Rights in Arbitration Agreements
  • May 16, 2011
  • Law Firm: Barnes Thornburg LLP - Indianapolis Office
  • A new U.S. Supreme Court decision holding that individuals can waive the right to be members of class actions in arbitration agreements has the potential to dramatically change the balance of power in large scale employment litigation. Employers not using arbitration agreements are advised to revisit the topic.

    In AT&T Mobility LLC v. Concepcion, the Court cited a “liberal federal policy favoring arbitration” and held that the Federal Arbitration Act preempts California court decisions holding that a waiver in an arbitration provision of an employee’s right to participate in a class action, requiring an individual arbitration rather than participation in the class action or a class arbitration, is unconscionable. Because class actions often provide the greatest economic incentive to plaintiffs’ lawyers to pursue what individually would be nuisance value claims, the possibility that employers can require employees to contractually give up their rights to be a part of such a class could bring a halt to the tide of class actions that has been increasing in recent years.

    The Concepcion case was brought by a couple who alleged that AT&T Mobility had engaged in false advertising when it offered “free” cellular telephones but then charged sales tax of about $30 on the full retail price of the telephones. The couple wanted to proceed with a class action on the issue and had argued that the provision in their consumer contract imposing arbitration and limiting the consumer to individual claims was unconscionable and therefore unenforceable under California law.

    The Supreme Court disagreed, stressing that the “over-arching purpose” of the Federal Arbitration Act is to ensure enforcement of arbitration agreements according to their terms to “facilitate streamlined proceedings.” And while bilateral arbitration of individual claims can provide reduced costs and increased speed of dispute resolution over court proceedings, the same does not hold true for arbitration of class claims, the court held. Requiring the availability of class-wide arbitration “interferes with fundamental attributes of arbitration and thus creates a scheme inconsistent with the FAA,” the Supreme Court reasoned.

    Although the Concepcion case involved a challenge to a class-action waiver in an arbitration provision in a consumer contract involving the purchase of cellular telephones rather than in an employment contract, the Court’s reasoning very possibly extends to the employment setting. As such, it certainly invites employers to strongly consider arbitration provisions including a waiver of class action rights to be able to take advantage of that possible legal argument.

    The Concepcion case not only divided the Supreme Court but also had drawn considerable attention in the lead-up to the case being argued and decided. Advocates for business interests and the defense bar had taken opposing views to groups representing consumers and employees, with a large number of interest groups on both sides of the issue filing “friend of the Court” briefs to express their disparate points of view. That division is expected to continue as some legislators who disagreed with the decision have indicated they will address the issue of arbitration agreements by introducing legislation in Congress.