U.S. Supreme Court: FAA Preempts State Law Rule That a Class Action Waiver in a Consumer Arbitration Clause Is Unconscionable

by Morgan Lewis
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In AT&T Mobility, LLC v. Concepcion, No. 09-893, — U.S. — (Apr. 27, 2011), the U.S. Supreme Court held in a 5-4 decision that the Federal Arbitration Act (FAA) prohibits states from conditioning the enforceability of consumer arbitration agreements on the availability of classwide dispute resolution procedures. The Court’s decision in Concepcion will have potentially profound effects on the future of certain types of class action litigation, including litigation outside the consumer class action context. In endorsing in the strongest terms the federal policy favoring arbitration embodied in the FAA, the Court seriously undermined—if not overruled—numerous decisions that have voided as unconscionable class and collective action waivers in arbitration agreements. The ruling in Concepcion provides defendants with powerful arguments that the FAA requires enforcement of class action waivers in arbitration agreements, and thus may enable parties to reduce significantly their exposure to class action liability through properly drafted arbitration agreements.

Background

The Concepcions purchased cellular telephone service from AT&T. Their contract with AT&T 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.” The arbitration agreement featured terms that the district court described as notably consumer friendly. Among other things, AT&T agreed to pay all costs for nonfrivolous claims; allowed the consumer to choose whether the arbitration would take place in person, by telephone, or through written submissions; and provided that the arbitrator could award any form of individual relief. The agreement also precluded AT&T from seeking attorney’s fees and, in the event that the customer received an arbitration award greater than the amount of AT&T’s last settlement offer, required AT&T to pay a minimum award of $7,500, plus twice the claimant’s attorney’s fees.

The Concepcions sued AT&T in the U.S. District Court for the Southern District of California, alleging that AT&T violated California consumer protection statutes by charging sales tax on mobile phones that had been advertised as free. The Concepcions alleged they suffered damages of $30.22 — the amount of the sales tax. AT&T moved to compel individual arbitration of the Concepcions’ claims. The district court denied the motion. Relying on the California Supreme Court’s decision in Discover Bank v. Superior Court, 113 P.3d 1100 (Cal. 2005), the lower court found the arbitration provision was unconscionable because AT&T had not shown that individual arbitration adequately substituted for the deterrent effects of class actions. In Discover Bank, the California Supreme Court held that class action waivers in consumer arbitration agreements are unconscionable in cases that involve adhesion contracts, predictably small amounts of damages, and allegations of consumer fraud, because such waivers, in violation of California law, effectively permit a defendant to exculpate itself against its own fraud.

The Ninth Circuit Court of Appeals affirmed the district court’s denial of AT&T’s motion to compel arbitration. It also held that the Discover Bank rule was not preempted by the FAA because that rule was an application of general principles of California unconscionability law.

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