Enforcing Class Action Waivers: A "Major Change In California Law"

In Phillips v. Sprint PCS, __ Cal. App. 4th __, 2012 WL 4378199 (1st Dist., Sept. 26, 2012), the California Court of Appeal affirmed a trial court’s decision to reconsider its past order refusing to enforce an arbitration clause including a class action waiver. In doing so, the Court recognized the “major change in California law” wrought by the United States Supreme Court’s decision in AT&T Mobility LLC v. Concepcion, 131 S.Ct. 1740 (2011). Under Concepcion, class action waivers contained in arbitration provisions subject to the Federal Arbitration Act (the “FAA”) are enforceable. The FAA preempts contrary state law.

In Phillips, the trial court initially denied Sprint’s motion to compel arbitration in 2006, finding the class action waiver provision unconscionable under Discover Bank v. Superior Court, 36 Cal.4th 148 (2005). Sprint did not appeal, the case proceeded to litigation, and the plaintiffs eventually certified a class in 2008. Two years later, in 2010, the trial court stayed the action after the U.S. Supreme Court granted certiorari in Concepcion. In 2011, the U.S. Supreme Court issued its decision in Concepcion, holding that the FAA preempted the Discover Bank rule.

Sprint then renewed its motion to compel arbitration, which the trial court granted. The plaintiffs appealed, arguing that the trial court lacked the authority to reconsider its previous ruling, that Sprint waived any right to arbitration when it failed to appeal the initial order denying the motion to compel arbitration, and that the entire contract was unconscionable. The California Court of Appeal rejected these arguments. First, the Court held that Concepcion represented a “major change in California law” warranting reconsideration. Despite years of litigation, the Court found that since the parties were not yet ready for trial, prejudice would be minimal.

Second, the Court held that Sprint did not waive its rights by not appealing the initial order refusing to compel arbitration. The Court noted that even though Sprint had a right to appeal, it would have been futile to have done so given the controlling California Supreme Court law at the time.

Finally, the Court held that the class action waiver found in the arbitration provision could no longer be considered unconscionable under Concepcion. As for plaintiffs’ attacks on the contract as a whole, the Court held that since these were not specific to the arbitration provision, they must resolved by an arbitrator.