Consumer Contracts and Class Actions: U.S. Supreme Court to Decide Whether State Unconscionability Law Bars Mandatory Individual Arbitration of Claims


While class actions continue to grow in importance as a means of resolving consumer disputes with U.S. businesses that provide credit cards, consumer lending, wireless telephones and other services, such providers customarily rely upon consumer agreements that include arbitration provisions that expressly waive the parties’ right to bring class actions and instead require individual arbitration of all disputes.

Consumers seeking recovery of damages for alleged violations of their consumer agreements often seek to join together to redress their grievances in the form of class actions, notwithstanding the language in their agreements waiving their right to bring any claims in court and their election of individual arbitration.

Relying upon the Federal Arbitration Act1 (FAA) and the supremacy clause of the United States Constitution, in New Jersey, California and many other states, consumer class actions in such situations are greeted with motions to compel individual arbitration and stay all court proceedings. A number of state and federal courts, applying state law to such class action waivers, notwithstanding the fact they are engrafted to provisions that require arbitration of all disputes arising out of the consumer agreement in which they reside, have nevertheless refused to enforce class action waivers because they are deemed unconscionable under state law. Thus, the Ninth Circuit, in Laster v. AT&T Mobility LLC2 (commonly known by the title of a related case Concepcion v. AT&T Mobility LLC),3 applying California law; the New Jersey Supreme Court, in Muhammed v. County Bank of Rehoboth Beach, Delaware;4 and the Third Circuit in Homa v. American Express Co.,5 applying New Jersey law, all relying upon the California Supreme Court’s 2005 decision in Discover Bank v. Superior Court of Los Angeles,6 have declared consumer contracts with class action waivers contained within their arbitration provisions unconscionable under California and New Jersey law, respectively, and have held the FAA does not preempt the application of the law of those states to preclude enforcement of a class-wide arbitration waiver.

Concepcion has been appealed to the United States Supreme Court by AT&T Mobility, the wireless provider to the Concepcions. It was argued on Nov. 9, 2010, and is presently awaiting decision. This appeal has been closely watched by the business press and could “profoundly” shape American class action law.7 Many federal courts have stayed putative consumer class actions with similar class action waivers in arbitration provisions to await guidance that the Supreme Court may offer when it decides Concepcion. Before Concepcion and its potential implications are discussed, it is important to understand the FAA and its genesis.

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Published In: Alternative Dispute Resolution (ADR) Updates, Civil Procedure Updates, General Business Updates, Conflict of Laws Updates, Constitutional Law Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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