In the previous segment, we introduced the approach taken by the state courts in California since 2000, when the Supreme Court of California ruled in Armendariz that though enforceable, mandatory arbitration clauses are subject to five fairness factors to protect the statutory rights of employees. In this segment, we discuss the Concepcion case and how it relates to California.
Introduction to Concepcion
The Concepcion case concerned an arbitration clause in a cellular phone contract between AT&T and the Concepcions, a clause which required arbitration of all disputes but prohibited class-wide arbitration. The Concepcions sought to bring a class action in court based on false advertising and fraud. AT&T filed a motion to force bilateral arbitration on the Concepcions. A Federal District Court in California and then the 9th Circuit Court of Appeals, both held — when applying the California case of Discover Bank — that the arbitration clause was unconscionable due to its prohibiting class-wide actions, and therefore unenforceable. Further, it was held that the FAA does not pre-empt objections on grounds of unconscionability.
The ruling of the Supreme Court of the United States
The Supreme Court disagreed, ruling that the FAA does, in fact, pre-empt previous rulings of state courts in California, in particular Discover Bank. The effect of the FAA is that arbitration clauses are given the same standing as other contracts and cannot be defeated by defenses that apply only to arbitration. Even if the unconscionable clause defense applies to all contracts, the exception in section 2 of the FAA for general contract defenses cannot be used to uphold state laws that obstruct the aims of the FAA. In the next installment of this series, we look at the tools used by the Supreme Court in Concepcion and how the ruling affects arbitration of employment disputes.