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April 2011

U.S. Supreme Court Curbs Class-Wide Arbitration Proceedings

In a significant ruling that could affect millions of arbitration agreements in California and elsewhere, the United States Supreme Court held yesterday in AT&T Mobility LLC v. Concepcion, __ U.S. __ (2011), that arbitration provisions disallowing class-wide arbitration are enforceable.  Rejecting decisions by both the Ninth Circuit Court of Appeals and the California Supreme Court (in Discover Bank v. Superior Court, 36 Cal.4th 148 (2005)), the majority concluded in a 5-4 opinion that the Federal Arbitration Act ("FAA") preempts state statutes or court decisions refusing to honor contractual bans on class-wide arbitrations. 

The AT&T Mobility case arose from an agreement plaintiffs had entered into with AT&T for the sale and servicing of a cellular phone.  AT&T's contract with plaintiffs provided for the arbitration of all disputes between the parties, but 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."  However, the contract also included a number of consumer-friendly terms, including provisions requiring the defendant to pay all arbitration costs for non-frivolous claims and requiring a minimum payment to the consumer of $7,500 and twice the amount of the consumer's attorney fees in the event the arbitration award exceeds the defendant's last settlement offer.

The plaintiffs purchased AT&T service, which was advertised as including "free" phones.  Although they were not charged for the phones, plaintiffs were charged sales tax based upon the phones' retail value.  Plaintiffs filed a complaint in federal District Court that was later consolidated with a putative class action alleging that AT&T had engaged in false advertising and fraud by charging sales tax on the phones it had advertised as free. 

AT&T moved to compel individual arbitration in federal District Court under the terms of the agreement with plaintiffs.  Plaintiffs opposed the motion to compel, arguing that the arbitration provision was unconscionable under California law because it disallowed class-wide arbitration proceedings.  Citing Discover Bank, the District Court concluded that the arbitration provision was unconscionable.  The Ninth Circuit affirmed on appeal, concluding that the Discover Bank rule was not preempted by the FAA. 

In a 5-4 decision, the United States Supreme Court reversed.  Writing for the majority, Justice Scalia observed that the "principal purpose" of the FAA is to "ensur[e] that private arbitration agreements are enforced according to their terms."  Citing this purpose, the Supreme Court found that the Discover Bank rule impermissibly interfered with arbitration because it hindered a speedy resolution of disputes – one of the very goals of the arbitration provision contained within the AT&T contract.  According to the majority, "[a]rbitration is poorly suited to the higher stakes of class litigation."  The majority emphasized that arbitrators are ill-suited to protect the due process rights of absent class members, and that the essentially un-appealable nature of arbitration rulings means that the risk to defendants increases exponentially in the context of a class-wide arbitration.

Furthermore, in responding to the dissent's claim that enforcing arbitration provisions that eliminate class-wide arbitration proceedings might effectively preclude redress of small-dollar claims, the majority concluded that States cannot impose special limitations on arbitration agreements that are inconsistent with the FAA - even if class-wide arbitration may have some tangible benefit. 

It remains to be seen what impact the AT&T Mobility decision may have on other state statutes or court decisions invalidating arbitration clauses on grounds of unconscionability generally. 

In light of the AT&T Mobility decision, businesses may wish to review and revise their consumer contracts to include arbitration provisions precluding class suits.  Companies can maximize the chances that their arbitration clauses will be upheld by incorporating consumer-friendly arbitration provisions similar to those found in the AT&T Mobility contract.

Class Action

Ryan B. Polk

Class Action
Commercial Litigation