• Supreme Court Upholds Waiver of Right to Pursue Class Arbitration
  • May 5, 2011 | Authors: Catherine A. Armentano; James V. Masella; Stephen M. Orlofsky
  • Law Firms: Blank Rome LLP - New York Office ; Blank Rome LLP - Princeton Office
  •  On April 27, 2011, in AT&T Mobility LLC v. Concepcion, No. 09-893 (U.S. April, 27, 2011), the Supreme Court of the United States determined that the Federal Arbitration Act ("FAA") preempted a California law "classifying most collective-arbitration waivers in consumer [adhesion] contracts as unconscionable" and, therefore, unenforceable (the "Discover Bank rule"). In a 5-4 ruling, the Court upheld the class arbitration waiver and ruled that because the Discover Bank rule disproportionately affected arbitrations and negatively affected potential defendants, the rule was not within the scope of the saving clause of the FAA and was not protected from preemption.

    Section Two of the FAA provides that an arbitration provision "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. Any state law prohibiting outright the arbitration of a certain type of claim or defense that applies only to arbitration is preempted by the FAA.

    However, the last phrase of Section Two, the saving clause, permits arbitration agreements to be invalidated by "generally applicable contract defenses, such as fraud, duress, or unconscionability," and state laws grounded in such doctrines require review to determine whether they are applied "in a fashion that disfavors arbitration" or stand as obstacles "to the accomplishment of the FAA's objectives."

    The contract between plaintiffs/respondents and AT&T Mobility LLC for the sale and servicing of cellular phones "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.'" In March 2006, plaintiffs filed a complaint, which was later consolidated with a putative class action, alleging false advertising and fraud because AT&T charged sales tax on phones it advertised as free. AT&T moved to compel arbitration pursuant to its agreement with plaintiffs. The District Court denied AT&T's motion and held that the arbitration provision was unconscionable because "AT&T had not shown that bilateral arbitration adequately substituted for the deterrent effects of class actions." The Ninth Circuit affirmed and ruled that the FAA did not preempt the Discover Bank rule because the rule "was simply 'a refinement of the unconscionability analysis applicable to contracts generally in California'" and "placed arbitration agreements with class action waivers on the exact same footing as contracts that bar class action litigation outside the context of arbitration."

    The Court determined that the overarching, principal purpose of the FAA is "to ensure the enforcement of arbitration agreements according to their terms so as to facilitate streamlined proceedings," including agreed-upon limitations regarding issues subject to arbitration and with whom a party will arbitrate. The Discover Bank rule, which essentially required the availability of class arbitration, interfered with the purpose of the FAA and, thus, is preempted.

    This decision is likely to have far reaching consequences. Now, companies can rely with greater certainty on class arbitration waivers in their contracts with consumers and, therefore, waivers may become more prevalent. Concurrently, consumers may be deterred from bringing claims for bilateral or class arbitration because, as Justice Breyer noted in his dissent, very few lawyers might be willing to take on such a case for nominal fees.