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Supreme Court Holds That Arbitration Agreements Prohibiting Consumer Class Arbitrations Are Enforceable

April 28, 2011

The U.S. Supreme Court on Wednesday issued a decision important to every business with consumer contracts that agree to resolve disputes by arbitration. Such contracts commonly include provisions that bar consumers from bringing class actions in arbitration. Under such clauses‚ each consumer’s claim must be arbitrated individually‚ and the relief in any given arbitration is limited to the particular consumer. In AT&T Mobility LLC v. Concepcion‚ the Supreme Court held that the Federal Arbitration Act (“FAA”) nullifies state laws that bar such class-action waivers. Its ruling also calls into question court decisions limiting arbitration clauses in other settings‚ such as employment.

Background

In Concepcion‚ consumers sued AT&T Mobility for false advertising and fraud‚ claiming it wrongly charged them the sales tax on the retail value of phones that came “free” with their services contract. Plaintiffs’ contract with AT&T Mobility contained a provision requiring disputes to be arbitrated‚ but barring class arbitrations.

The question in Concepcion was the validity of the agreement’s bar on class arbitrations. The FAA makes agreements to arbitrate “valid‚ irrevocable‚ and enforceable‚ save upon such grounds as exist at law or in equity for the revocation of any contract.” In California‚ where the lawsuit was brought‚ state law invalidates contract provisions that are deemed “unconscionable.” The California Supreme Court had previously ruled that class-action waivers in many consumer arbitration contracts were unconscionable‚ and so invalid. Discover Bank v. Superior Court‚ 36 Cal.4th 148 (2005). The lower federal courts in Concepcion applied this California law and held that AT&T Mobility’s class-arbitration waiver was invalid under California law. The U.S. Supreme Court then granted review.

Supreme Court Holds That All Class-Waiver Provisions Are Enforceable

The Supreme Court ruled 5-4 that the FAA preempts (invalidates) the Discover Bank rule. State law is preempted by federal law when‚ among other things‚ it “stands as an obstacle to the accomplishment and execution of the full purposes” of a federal law. The Court held that a state law barring class-arbitration waivers stands as an obstacle to the FAA.

The Court held that the FAA was designed to ensure that private arbitration agreements “are enforced according to their terms‚” and “promote arbitration.” It ruled that these purposes are frustrated by state law barring class-arbitration waivers‚ for several reasons.

First‚ “class arbitration sacrifices the principal advantage of arbitration” — namely informality — and “makes the process slower‚ more costly‚ and more likely to generate procedural morass than final judgment.” Second‚ class actions cannot bind people who do not personally participate unless the procedures are formal‚ and that very formality destroys one of the main benefits of arbitration. And third‚ the Court ruled, class arbitration “greatly increases the risks to defendants” by grouping countless claims into a single winner-take-all proceeding. For all these reasons‚ the Court held, when an arbitration agreement precludes class-actions, state law invalidating that limit is preempted as an obstacle to the FAA. The Court went out of its way, however, to make clear that states can require clear disclosure of arbitration provisions‚ to ensure consumers know what they are agreeing to.

Implications for Companies

If the Supreme Court had stopped there, its opinion would be momentous enough. Many kinds of businesses, ranging from banks to telecommunications companies, have consumer contracts containing arbitration agreements. Many of these agreements contain class-action waivers. Assuming other legal requirements are met‚ the Court’s decision likely protects such class-action waivers from being invalidated under state law. It helps these companies maintain arbitration as a speedy and inexpensive way to resolve consumer disputes, minimizing costs for both business and consumers.

But the Court’s opinion goes further, and could lay the groundwork for challenges to a broader array of court decisions governing arbitration. The Supreme Court’s opinion in Concepcion seemingly goes out of its way to criticize using a “doctrine normally thought to be generally applicable, such as…unconscionability” in a way that “disfavors arbitration.” It details how a court might wrongly turn such general rules into specific requirements such as “judicially monitored discovery,” court rules of evidence, or a jury trial. It notes that California courts have apparently “been more likely to hold contracts to arbitrate unconscionable than other contracts.” The Court does not directly hold that such judicially imposed requirements are preempted. However, its statements could invite challenges to other decisions that, like Discover Bank, have fashioned general contract rules into specific requirements for arbitration. See, e.g., Armendariz v. Foundation Health Psychare Services, 24 Cal.4th 83 (2000) (imposing detailed requirements on employment-related arbitration contracts under the rubric of unconscionability) and, more recently, Trivedi v. Curexo Technology Corporation, 189 Cal.App.4th (2010) (holding arbitration clause unenforceable largely because it was a take-it-or-leave-it part of the executive employment agreement and because the employer failed to provide the employee with a copy of the arbitration forum rules). Only time will tell whether Discover Bank engenders such challenges, and whether they succeed.

For more information about the subject matter of this alert, please contact the lawyers listed below:

Jonathan M. Albano, Co-chair, Litigation Area
jonathan.albano@bingham.com, 617.951.8360

Robert M. Dombroff, Co-chair, Litigation Area
robert.dombroff@bingham.com, 212.705.7757

Debra L. Fischer, Deputy Chair, Litigation Area
debra.fischer@bingham.com, 213.680.6418

Donn P. Pickett, Co-chair, Litigation Area
donn.pickett@bingham.com, 415.393.2082

David Salmons, Practice Group Leader, Appellate
david.salmons@bingham.com, 202.373.6283

Robert A. Brundage, Of Counsel, Appellate
robert.brundage@bingham.com, 415-393-2134

Authored by: Robert A. Brundage

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