Supreme Court Says Arbitration Agreements Can Derail Class Actions

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In a 5-4 decision, the U.S. Supreme Court has reaffirmed the right of businesses to compel arbitration of consumer complaints, and to block class action litigation through the enforcement of individual arbitration agreements. In so holding, the Court invalidated the prior California Supreme Court rule in Discover Bank v. Superior Court, 36 Cal.4th 148 (2005) that classifies most collective-arbitration waivers in consumer contracts as unconscionable. The Court held that the Discover Bank rule was preempted by the Federal Arbitration Act. The High Court’s decision may pave the way for businesses to insist on including arbitration agreements in individual consumer service contracts as a means of derailing class action lawsuits.

The case, AT&T Mobility LLC v. Concepcion, 09-893, arose out of the plaintiffs’ purchase of AT&T cellular phone service, which was advertised as including free phones with the signing of a service contract. While the plaintiffs were not charged for the phones, they were charged sales tax based on the phones’ retail value. The plaintiffs brought a complaint against AT&T in the U.S. District Court for the Southern District of California, alleging false advertising and fraud, and the case was consolidated with a putative class action. AT&T moved to compel arbitration under the terms of its contract with the plaintiffs, which provided for arbitration of all disputes between the parties, and required that claims be brought in the parties’ “individual capacity, and not as a plaintiff or class member in any purported class or representative proceeding.”

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