by Jackson Lewis

Facts
Continuing to uphold the enforcement of arbitration agreements, the U.S. Supreme Court has struck down the California courts’ refusal to enforce class action waivers in consumer arbitration agreements on the ground that the state law is preempted by the Federal Arbitration Act. AT&T Mobility LLC v. Concepcion, No. 09-893 (Apr. 27, 2011).  The ruling would appear to apply to arbitration agreements in the employment context as well.  The Court reversed the decision of the Ninth Circuit Court of Appeals, which had held that AT&T’s arbitration clause was unconscionable and unenforceable under California law. 

The plaintiffs, Vincent and Liza Concepcion, purchased cellular telephone service relying on advertising that promised them a “free” telephone. They were charged sales tax on the retail value of the phone.  The Concepcions brought a class action lawsuit against AT&T, alleging that the company committed fraud and engaged in false advertising by charging sales tax on the “free” phones. 

The phone service agreement provided for a dispute resolution process that included a clause requiring the submission to arbitration of any disputes between the company and the customer.  It prohibited customers from bringing any claims in a class action or other representative proceeding. The terms of the dispute resolution process were notable for their pro-consumer protections.  One court called them “perhaps the most fair and consumer-friendly provisions this Court has ever seen.” 

Despite finding that the Concepcions were likely to be better off under AT&T’s dispute resolution process than they would be as plaintiffs in a class action, the District Court nevertheless denied AT&T’s motion to compel arbitration, concluding that the class action waiver in the arbitration agreement was unconscionable and therefore unenforceable under the California Supreme Court’s ruling in Discover Bank v. Superior Court, 36 Cal.4th 148 (2005).  The Ninth Circuit affirmed. It held the Federal Arbitration Act (FAA) did not preemptCalifornia case law on unconscionability because, in the Circuit Court’s view, it enunciated a generally applicable principle of state contract law that escaped preemption under the savings clause in section 2 of the FAA.  Section 2 of the FAA permits arbitration agreements to be denied enforcement “upon such grounds as exist at law or equity for the revocation of any contract.”  The primary issue in the case was whether California’s Discover Bank rule, which classified most class action waivers as unconscionable, is preempted by the FAA.

The Supreme Court’s Decision
The Supreme Court held, in a 5-4 decision, that the California law on unconscionability, as applied to the prohibition on class action waivers in arbitration agreements, is preempted.  The Supreme Court ruled that the arbitration clause in this case must be enforced as written.

In a decision written by Justice Antonin Scalia, the Court ruled that California’s prohibition of class action waivers was preempted by the FAA because the prohibition was “an obstacle to the accomplishment and execution of the full purposes and objectives” of the FAA.  The Court emphasized that the FAA reflects the strong federal policy favoring arbitration and the enforcement of arbitration agreements according to their terms.  Even though California unconscionability law in theory applies to all contracts, the particular application of the doctrine to arbitration agreements was an obstacle to the achievement of the FAA’s overarching purposes because it interfered with the arbitration process, in essence, by requiring consumer arbitrations to be conducted on a class basis.  In effect, upholding the California law, according to the Court, would fundamentally change the character of arbitration by making arbitration more formal, cumbersome, and costly.  Requiring class arbitrations also would greatly increase the risk to defendants, because they could face enormous exposure without the procedural protections that are present in court litigation, such as the right to appeal class certification rulings.

The four dissenting Justices maintained that class proceedings are necessary to prevent small-dollar claims from “slipping through” the legal system. The Court’s majority, however, ruled that states cannot require a procedure (in this case, class-wide arbitration) that is inconsistent with the FAA.  The majority also noted that the AT&T arbitration clause had sufficiently pro-consumer provisions to make it “most unlikely” that claims like those of the Concepcions (which totaled about $30) would go unresolved.

Implications of the Decision
Although AT&T Mobility involved a consumer contract, the principles and rationale of the decision appear to be fully applicable to arbitration clauses in employment contracts because the California courts have followed Discover Bankto deny enforcement to class action waivers contained in employment agreements.  Based on the Supreme Court’s decision in Concepcion, it would appear that such clauses are valid and enforceable.  Employers who utilize arbitration agreements should seek legal advice in the preparation of class action waiver provisions and for the drafting of arbitration clauses generally.  Employers that do not utilize arbitration may want to consider whether such a policy is right for them and, if so, what type of alternative dispute resolution program would work for their organization. Jackson Lewis attorneys regularly provide such assistance.