In a much-anticipated decision regarding class actions and arbitration, the U.S. Supreme Court held on April 27, 2011, that the Federal Arbitration Act (FAA) preempts state contract law limitations on the enforceability of arbitration agreements. In a 5-4 opinion by Justice Scalia in AT&T Mobility v. Concepcion, No. 09-893, 563 U.S. ___ (April 27, 2011), the Court held that California’s Discover Bank rule, which classified most collective-arbitration waivers in consumer contracts as unconscionable, stood as “an obstacle” to Congressional purpose and is, therefore, preempted by the FAA.

The decision represents a significant victory for businesses seeking to enforce individual arbitration agreements in contracts with consumers, employees, and others. The sweeping language of the Court’s opinion is likely to expand significantly the enforceability of arbitration provisions and class action waivers in consumer and employment contracts.

In Concepcion, a husband and wife filed a class action against AT&T Mobility LLC alleging various violations of California’s consumer protection statutes. AT&T moved to compel individual arbitration pursuant to the wireless service contract’s arbitration agreement, which contained an express class action waiver. The district court and the Ninth Circuit held that the class action waiver was unconscionable under California’s Discover Bank rule because: (1) it was contained within a contract of adhesion; (2) the dispute involved small amounts of damages; and (3) the plaintiffs alleged a scheme to deliberately cheat large numbers of consumers out of small amounts of money. Laster v. AT&T Mobility LLC, 584 F.3d 849, 854-55 (9th Cir. 2009). Like the district court, the Ninth Circuit held that “[t]he FAA does not bar federal or state courts from applying generally applicable state contract law principles and refusing to enforce an unconscionable class action waiver in an arbitration clause.” Id. at 856-57 (internal quotation omitted).

The Supreme Court reversed, holding that a state may not condition the enforceability of arbitration agreements on the availability of classwide arbitration procedures. Although generally applicable contract defenses are preserved under the FAA, the Court held that the FAA preempted California’s Discover Bank unconscionability rule because “nothing in [the FAA] suggests an intent to preserve state-law rules that stand as an obstacle to the accomplishment of the FAA’s objectives.” Slip Opinion at 9.