On April 27, 2011, the United States Supreme Court handed down a landmark decision, clearing the way for the use of class action waivers in arbitration agreements arising out of consumer transactions. In AT&T Mobility LLC v. Concepcion, the Supreme Court held that the Federal Arbitration Act (FAA) preempted a California law allowing judges to invalidate class action waivers in arbitration agreements on unconscionability grounds. In the 5-4 decision, Justice Scalia delivered the opinion of the Court and was joined by Chief Justice Roberts and Justices Kennedy, Thomas and Alito. Justice Breyer dissented and was joined by Justices Ginsburg, Sotomayor and Kagan.

Background

In 2002, Plaintiffs Vincent and Liza Concepcion entered into an agreement with AT&T Mobility LLC (AT&T) for cellular telephone service. The cellular service package that the Concepcions purchased from AT&T included free telephones. Thus, at the time of their purchase, the Concepcions were not charged for their telephones. They were, however, charged $30.22 in sales tax based on the retail value of the telephones.

The contract between the Concepcions and AT&T also contained a provision requiring (1) the arbitration of all disputes and (2) that all claims be brought in the party’s “individual capacity, and not as a plaintiff or class member in any purported class or representative proceeding.”  In short, the agreement contained a class action waiver, which proved to be the central issue in the litigation that ensued.   

In 2006, the Concepcions filed a complaint against AT&T in the United States District Court for the Southern District of California, alleging that AT&T had engaged in false advertising and fraud by charging sales tax on the phones that it had advertised as “free.”  AT&T moved to compel arbitration pursuant to the parties’ agreement. The District Court denied AT&T’s motion, holding that the arbitration provision was unconscionable because it did not permit classwide arbitration, i.e. because of the class action waiver. The District Court based its decision on a California Supreme Court case known as Discover Bank v. Superior Court, 113 P.3d 1100 (2005), which held that class action waivers in consumer arbitration agreements could be held unconscionable if the agreement was one of adhesion, involved a dispute over a small amount of money, and the consumer contended that the party with greater bargaining power engaged in a deliberate scheme to defraud.

The Ninth Circuit affirmed the District Court’s ruling, expressly holding that the arbitration provision in the parties’ agreement was unconscionable under the Discover Bank Rule. Significantly, the Ninth Circuit also rejected AT&T’s arguments that the Discover Bank Rule was preempted by the FAA. In reaching that conclusion, the Ninth Circuit relied on the “savings clause” set forth in Section 2 of the FAA, which allows arbitration agreements to be invalidated “upon such grounds as exist at law or in equity for the revocation of any contract,” e.g. fraud, duress and unconscionability. The court reasoned that because the Discover Bank Rule was merely a “refinement” of the general law of unconscionability in California, it was not preempted by Section 2 of the FAA.   

The Supreme Court reverses, holding that the Discover Bank Rule is preempted by the FAA

On certiorari, the Supreme Court reversed the decision of the Ninth Circuit, holding that the Discover Bank Rule was preempted by the FAA. Writing for the majority, Justice Scalia acknowledged that the Discover Bank Rule arose from the doctrine of unconscionability, which has general application in the law of contracts, and that Section 2 of the FAA preserves “generally applicable contract defenses.”  However, the savings clause contained in Section 2 was not intended to “preserve state-law rules that stand as an obstacle to the accomplishment of the FAA’s objectives,” which included the enforcement of private agreements and the encouragement of efficient and speedy dispute resolution. Concluding that the Discover Bank Rule stood “as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress,” the Court held that California’s Discover Bank Rule was preempted by the FAA and remanded the case for further proceedings.

Conclusion

The Supreme Court’s decision in Concepcion will unquestionably have far-reaching consequences. Assuming arbitration clauses and class action waivers are sufficiently “consumer friendly,” as was AT&T’s, it is now possible for corporations that deal with consumers through standardized contracts to protect themselves against the costs, delays and other burdens of class action litigation. Such clauses will surely become the norm in the telecommunications, banking, insurance and online retail industries, to name a few.

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