On Wednesday April 27, 2011, the Supreme Court, by a 5-4 decision, overturned California’s refusal to enforce waivers of class action rights in consumer arbitration agreements, holding that the Federal Arbitration Act (“FAA”) preempted California’s rule. The Court’s holding calls into question state rules finding arbitration provisions unconscionable based on the purported unfairness to claimants of contractual arbitration procedures. The decision further underscores the strong federal policy in favor of arbitration agreements and indicates consumers (and likely other groups) will be less able to avoid contractual arbitration provisions resulting in the survival of far fewer class actions.

In AT&T Mobility, plaintiffs filed a putative class action in the Southern District of California alleging false advertising and fraud based on AT&T charging sales tax on cellular telephones that were advertised as “free.” After the suit had been filed, AT&T amended the Wireless Services Agreement (“WSA”) it had with customers to include a payment by AT&T of $7,500 should the customer prevail in an arbitration at an amount greater that AT&T’s last written settlement offer before the arbitration had commenced. After this amendment, AT&T moved to compel the plaintiffs to submit their claims to individual arbitration under the revised WSA, which contained a waiver of rights to proceed by class action.