Discover Bank Is Dead: The U.S. Supreme Court Rules That Federal Law Preempts State Laws That Obstruct The Enforcement Of Class Action Waivers In Arbitration Agreements

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On April 27, 2011, the Supreme Court held that the Federal Arbitration Act "preempts California's rule classifying most collective arbitration waivers in consumer contracts as unconscionable." AT&T v. Concepcion, 563 U.S. ____, majority at 5, 18 (2011). The Court referred to this rule as the "Discover Bank rule," after the California Supreme Court's decision in Discover Bank v. Superior Court, 36 Cal.4th 148 (2005), though variations of this public policy-based rule have been articulated by many other court decisions in California and elsewhere. Writing for the majority in a 5 to 4 opinion, Justice Scalia concluded that state laws that undermine the enforceability of class action waivers in consumer arbitration agreements improperly obstruct the FAA.

The plaintiff in Concepcion brought a class action against AT&T for false advertising in violation of California law for charging $30.22 in sales tax for a cell phone advertised as free. AT&T moved to compel arbitration and enforce a class action waiver. The federal trial court in San Diego denied the motion based on the three prongs of Discover Bank, finding that the class action waiver was unconscionable because 1) the contract was a non-negotiable contract of adhesion, 2) the damages at issue were small, and 3) the plaintiff alleged a scheme to cheat consumers of small sums of money. The Ninth Circuit affirmed, holding that the FAA did not preempt Discover Bank. The Supreme Court reversed.

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