U.S. Supreme Court Issues Long-Awaited Ruling Upholding Class Arbitration Waivers

May 6, 2011

On April 27, 2011, the U.S. Supreme Court held in AT&T Mobility, LLC v. Concepcion that the Federal Arbitration Act (FAA) preempts the California Supreme Court’s 2005 decision in Discover Bank v. Superior Court, which had held that arbitration agreements banning class arbitration could be found to be unenforceable as unconscionable contracts under California law. The court found that the Discover Bank decision is preempted by the FAA because the ruling “stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress.”

Concepcion Decision Background

In Concepcion, the plaintiffs sued AT&T for charging $30.22 in sales tax for a “free” cell phone. Their cell phone contract with AT&T provided for arbitration of “all disputes,” and required that claims be brought only in the parties’ “individual capacity, and not as a plaintiff or class member in any purported class or representative proceeding.” AT&T moved to compel arbitration of the plaintiffs’ individual claims. However, relying on Discover Bank, the trial court denied the motion on grounds that the plaintiffs’ arbitration agreements disallowed class-wide proceedings and were thus unconscionable and unenforceable under California law. The 9th Circuit affirmed that ruling, holding that the FAA did not preempt the California Supreme Court’s unconscionability rubric on class arbitration waivers.

In Discover Bank, the California Supreme Court held that class action waivers in consumer arbitration agreements can be found unconscionable and not enforced if the agreement is in an adhesion contract (i.e., an agreement where one side has all the bargaining power), disputes between the parties are likely to involve small amounts of damages, and the party with inferior bargaining power alleges a deliberate scheme to defraud.

Although the arbitration agreement in Discover Bank was consumer friendly and did not impose any arbitration costs on the consumer, the court nevertheless held that it was unconscionable and unlawfully exculpatory under California law because it disallowed class-wide procedures. The California Supreme Court opined that its holding was permitted under Section 2 of the FAA, which provides that arbitration agreements “shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.”

U.S. Supreme Court Ruling

The Concepcion plaintiffs argued to the U.S. Supreme Court that the Discover Bank decision does not interfere with arbitration agreements in violation of the FAA. Rather, they asserted the decision merely applied California’s unconscionability doctrine and public policy against exculpation, which they argued are generally applicable defenses to all contracts that, in the words of the FAA, “exist at law or in equity for the revocation of any contract.”

In a 5-4 decision, the U.S. Supreme Court disagreed and reversed the 9th Circuit. The court held that the California Supreme Court’s Discover Bank decision is preempted by the FAA, which displaces all state laws that prohibit outright the arbitration of a particular type of claim. The court reasoned that the Discover Bank decision could effectively require that the speed and informality that is the principal purpose of arbitration agreements under the FAA be substituted with slower, more costly class arbitration procedures. This, the court noted, impermissibly “interferes with arbitration” because “[a]lthough [it] does not require class wide arbitration, it allows any party to a consumer contract to demand it ex post.”

On that basis, the court found the Discover Bank decision to be in effect an outright ban on class arbitration waivers and an impermissible obstacle to the FAA’s liberal policy favoring arbitration:

The 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. Requiring the availability of class wide arbitration [as a condition precedent to enforcement of the arbitration agreement] interferes with fundamental attributes of arbitration and thus creates a scheme inconsistent with the FAA.

Employer Take-Aways

The Concepcion decision is great news for employers. Although Concepcion arose in the context of a consumer class action, it will likely have a significant impact in the employment arena, where the validity of class arbitration waivers has been challenged frequently and for many years. To that end, it will make it much harder for consumers who are parties to arbitration agreements containing class arbitration waivers to bring class action lawsuits.

Of course, it remains to be seen whether Congress will react with legislation attempting to abrogate the Supreme Court’s decision. However, in the meantime, the Concepcion decision provides a compelling reason for employers who were previously reluctant to implement arbitration agreements with their employees – either at all or with class arbitration waiver provisions – to revisit the potential benefits of such an option. This is particularly true when used as a tool for managing the risk of wage and hour class actions.

For more information regarding effective strategies in defending collective actions and the implementation of enforceable employee arbitration agreements, please contact the authors or any other member of the McGuireWoods Labor and Employment Group.