Federal Arbitration Act Pre-Empts State Laws Banning Class Arbitration Waivers


Class arbitration waivers are used widely in consumer contracts, requiring consumers to arbitrate their disputes on an individual basis and not as a class. A company offering goods and services at a modest price may view arbitration as preferential to litigation because it is, theoretically, quicker, less formal, inexpensive, and allows for confidentiality. Arbitrating disputes on a class-wide basis similar to the procedure permitted under Federal Rule of Civil Procedure 23, however, may remove the advantages of arbitration and create burdens even greater than litigation because of the requisite notice of claims to the class, which destroys efficiency, confidentiality, and amasses potential damages far too great for many companies willing to risk, even if the claims are suspect. Also, appellate review of arbitration awards is far less robust than appeal rights available when litigating a dispute in court

On the other hand, consumer rights advocates argue that companies can act unfairly or improperly without any threat of legal action by consumers because any monetary damages are nominal on an individual basis and no rational consumer would proceed with litigation that would cost more than the monetary damages the consumer could recoup. These advocates believe that if monetary damages are pursued by consumers on a collective basis, monetary damages will be worth pursuing, which will prevent companies from escaping liability and reaping substantial windfalls to which they should not be entitled. These two competing views and public policies collided in AT&T Mobility LLC v. Concepcion.2 In that case, the U.S. Supreme Court ruled the Federal Arbitration Act (FAA) preempted California’s common law, which, as applied by federal courts in California, had ruled class arbitration waivers found in consumer contracts were unconscionable.3

Facts and Procedural History of AT&T Mobility v. Concepcion

In 2002, the Concepcions entered into an agreement for purchase and service of cellular telephones. The Concepcions purchased telephones that were advertised as “free” phones, but the Concepcions “were charged $30.22 in sales tax based on the phones’ retail value.”4 “The [AT&T Mobility] contract provided for arbitration of all disputes between the parties, but required that [any and all] claims be brought” on an individual basis, not a class basis.5 The contract also provided that, if a dispute arose with AT&T Mobility, customers could “initiate dispute [resolution] proceedings by completing a one-page … form [that was] available on AT&T [Mobility’s] Web site.”6 Once a claim was submitted, AT&T Mobility could offer to settle the claim, but if the claim was “not resolved within 30 days, the customer [could] invoke arbitration by filing a separate Demand for Arbitration, [which was] also … on AT&T [Mobility’s] Web site.”7 If the parties proceeded to arbitration, AT&T Mobility agreed to pay for all costs if the claim was not frivolous, and the “arbitration must take place in the county” where the customer received his or her bill.8 Also, for any “claims of $10,000 or less, the customer [could] choose whether the arbitration proceed[ed] in person” or by telephone, or the case could be submitted on documents alone.9 In lieu of arbitration, “either party could [initiate] a claim in small claims court.”10 If the claim proceeded to arbitration, the arbitrator could award any form of relief, including injunctive relief, punitive damages, and consequential damages. The arbitration agreement prevented AT&T Mobility from seeking “reimbursement of its attorneys’ fees, and, in the event that a customer receive[d] an arbitration award greater than … the last written settlement offer” by AT&T Mobility, the company agreed to pay a minimum of $7,500 (later raised to $10,000) in damages “and twice the amount of the claimant’s attorneys’ fees.”11

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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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