Divided Supreme Court Endorses Use of Class Arbitration Waivers

On April 27, 2011, a divided U.S. Supreme Court held that the Federal Arbitration Act (FAA) protects an employer’s right to include a class action waiver in its arbitration agreement even though a state law bars such provisions as unconscionable. In a 5-4 decision, the Court found that “[s]tates cannot require a procedure that is inconsistent with the FAA, even if it is desirable for unrelated reasons.” AT&T Mobility LLC v. Concepcion, No. 09-893, U.S. Supreme Court (April 27, 2011).

Factual Background

In 2002, Vincent and Liza Concepcion signed a wireless service agreement with AT&T Mobility. As part of the agreement, the Concepcions were provided with free cell phones. However, AT&T charged them sales tax based on the retail value of the phones. The agreement provided for arbitration of all disputes between the parties, but required that any claims be brought in the parties’ “individual capacity, and not as a plaintiff or class member in any purported class or representative proceeding.”

The Concepcions sued AT&T, claiming that the company’s practice of charging sales tax on a cell phone advertised as “free” was fraudulent. The trial judge consolidated the case with a putative class action addressing the same issues. AT&T filed a motion to compel the Concepcions to submit their individual claims to arbitration. The trial judge denied AT&T’s motion, holding that the arbitration agreement was “unconscionable and unlawfully exculpatory under California law because it disallowed classwide procedures.”

The Ninth Circuit Court of Appeals upheld the trial judge’s decision, finding that AT&T’s class action waiver was unconscionable under California law, and thus unenforceable. AT&T appealed this ruling and the case eventually reached the U.S. Supreme Court. The issue before the high court was whether the FAA preempts states from conditioning the enforcement of an arbitration agreement on the availability of particular procedures – here, classwide arbitration – when those procedures are not necessary to ensure that the parties to the arbitration agreement are able to vindicate their claims.

Legal Analysis

Section 2 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.” The question before the U.S. Supreme Court was whether a rule established by the California Supreme Court in Discover Bank v. Superior Court is a “groun[d] for the revocation of any contract.” Under the Discover Bank rule, “[w]hen the waiver is found in a consumer contract of adhesion in a setting in which disputes between the contracting parties predictably involve small amounts of damages, and when it is alleged that the party with the superior bargaining power has carried out a scheme to deliberately cheat large numbers of consumers out of individually small sums of money, then … the waiver becomes in practice the exemption of the party ‘from responsibility for [its] own fraud, or willful injury to the person or property of another.’”

In the plurality opinion authored by Justice Antonin Scalia, the high court rejected the lower courts’ ruling and application of the Discover Bank rule. The Court held that “[w]hen state law prohibits outright the arbitration of a particular type of claim, the analysis is straightforward: The conflicting rule is displaced by the FAA.” This holding stands, the Court continued, even in light of Section 2’s savings clause (which preserves generally applicable contract defenses such as fraud, duress and unconscionability). According to the Court, “nothing in [the savings clause] suggests an intent to preserve state-law rules that stand as an obstacle to the accomplishment of the FAA’s objectives [to promote arbitration].”

The high court also reiterated the principle that courts must place arbitration agreements on equal footing with other contracts and enforce them based on their terms. “The overreaching purpose of the FAA,” the Court wrote, “is to ensure the enforcement of arbitration agreements according to their terms so as to facilitate streamlined proceedings.” Because allowing the case to proceed as a class action would undermine the purpose of the FAA, the Court overturned the Ninth Circuit’s decision and remanded the case to the lower court for further proceedings consistent with this ruling.

Practical Impact

According to a shareholder in Ogletree Deakins’ Atlanta office: “Although this decision arose in the context of a consumer contract, it confirms the significant financial benefits of arbitration agreements for both employers and employees and protects employers from being forced to submit to class-based arbitration procedures which may lack due process. To the extent employers have removed class action waivers from their arbitration agreements in the more than 20 states that prevent or restrict class action waivers, they will likely be revisiting that decision.” An of counsel attorney in Ogletree Deakins’ San Francisco office, agrees, noting: “This U.S. Supreme Court opinion calls into serious question the continuing viability of the California Supreme Court’s 2007 decision in Gentry v. Superior Court, which is routinely relied upon by courts in California to strike down class action waivers in employment contracts.”

Barbaree continued: “As an aside, employers awaiting the Supreme Court’s decision in Wal-Mart Stores, Inc. v. Dukes will be attempting to predict the Court’s decision there through language in this ruling. The Court’s language recognizes the ‘higher stakes of class litigation’ where ‘[f]aced with even a small chance of a devastating loss, defendants will be pressured into settling questionable claims.’ In contrast, Justice Stephen Breyer’s dissent notes, ‘a single class proceeding is surely more efficient than thousands of separate proceedings for identical claims.’” Ogletree Deakins will keep you informed as soon as this key decision involving high-stakes employment discrimination class actions is issued. Stay tuned!