Supreme Court Says FAA Preempts Rule on Class Arbitration Waivers

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In a ruling that will affect the arbitration of labor and employment law disputes, a divided U.S. Supreme Court April 27 held that a California rule of law classifying most waivers of classwide arbitration in consumer contracts as unconscionable is preempted by the Federal Arbitration Act and is therefore unenforceable (AT&T Mobility LLC v. Concepcion, U.S., No. 09-893, 4/27/11).

Writing for the majority in the 5-4 decision, Justice Antonin Scalia said that a state rule of law that requires making classwide arbitration procedures available to parties who have agreed to arbitrate individual consumer disputes “interferes with fundamental attributes of arbitration and thus creates a scheme inconsistent with the FAA.”

Chief Justice John G. Roberts and Justices Anthony M. Kennedy, Clarence Thomas, and Samuel A. Alito joined in the majority opinion. Thomas also wrote a concurring opinion.

Dissenting, Justice Stephen G. Breyer said the rule of unconscionability described in the California Supreme Court's decision in Discover Bank v. Superior Court ( 113 P.3d 1100 (Cal. 2005)) is a principle that applies not only to arbitration agreements but also to other contracts, and is not preempted by the FAA.

Justices Ruth Bader Ginsburg, Sonia Sotomayor, and Elena Kagan joined in the dissent.

Ruling Called Important for Employers, Employees.

Although the case involves consumer contracts for wireless telephone services, the enforceability of class action waivers in arbitration agreements also arises in the employment context.

Several business representatives BNA reached April 27 were emphatic in expressing their agreement with the Supreme Court ruling.

Robin S. Conrad, executive vice president of the National Chamber Litigation Center in Washington, D.C., called the decision “as important for employers and employees as it is for businesses and consumers.” She said the high court “really understands that arbitration is a fast, fair, and efficient way to resolve disputes--including those between employers and employees.”

Rae T. Vann of Norris, Tysse, Lampley & Lakis in Washington, D.C., filed an amicus brief for the Equal Employment Advisory Council supporting AT&T. Vann told BNA she is “very heartened” by the majority's support for the FAA's public policy of favoring the use of arbitration in a ruling she called a “clear repudiation of efforts to relegate arbitration agreements to second-class status.”

On the other hand, Deepak Gupta, the lawyer at Public Citizen Litigation Group in Washington, D.C., who argued the case for Vincent and Liza Concepcion, told BNA April 27 that the court's decision is a “crushing blow to American consumers and employees.” Stating that the 5-4 split fell “along predictable ideological lines,” he said the decision “will make it harder for people with civil rights, labor, consumer and other kinds of claims that stem from corporate wrongdoing to join together to obtain their rightful compensation.”

Case Involved AT&T Customer Agreement.

The dispute before the high court arose from a consumer lawsuit and proposed class action. The Concepcions purchased cellular telephones and services from AT&T Mobility in a package that referred to the phones as “free.” When they were charged approximately $30 sales tax on the phones, the Concepcions in March 2006 filed a proposed class action lawsuit in the U.S. District Court for the Southern District of California, asserting claims under California law based on the company's advertisement of a free phone and imposition of the sales tax charge.

AT&T moved to compel arbitration of the dispute, citing the customers' acceptance of a service agreement providing that they would arbitrate any dispute with AT&T and would proceed in an individual capacity, “not as a plaintiff or class member in any purported class or representative proceeding.”

AT&T Mobility unilaterally revised its arbitration provision in late 2006 through a notice in customers' bills. The notice committed the company to paying all of the arbitration fees incurred by a customer in pursuing nonfrivolous claims against the company. The revised agreement also allowed claims to be brought in small claims court, and provided that the company would pay at least $7,500--as well as double attorneys' fees--if a customer obtained an arbitration award that exceeded the company's last settlement offer.

But, applying the California Supreme Court's Discover Bank decision, the district court decided that the Concepcions were entitled to proceed with a class action and denied the company's motion to compel arbitration.

In Discover Bank, the state's highest court held that a class action waiver is unconscionable if the agreement is a contract of adhesion drafted by the party with superior bargaining power, if it pertains to individual disputes predictably involving small amounts of damages, and if the party with superior bargaining power has prohibited class claims to avoid facing a large number of small claims.

AT&T appealed the district court ruling to the U.S. Court of Appeals for the Ninth Circuit, which affirmed that the class arbitration waiver was unconscionable under Discover Bank. AT&T then petitioned for Supreme Court review, and the justices granted the company's petition (28 HRR 569, 5/31/10), and heard oral argument in the case in November 2010 (28 HRR 1213, 11/15/10).

State Law Called 'Obstacle' to FAA.

The issue before the Supreme Court, Scalia said, was “whether the FAA prohibits States from conditioning the enforceability of certain arbitration agreements on the availability of classwide arbitration procedures.”

Nothing in FAA's Section 2 “suggests an intent to preserve state-law rules that stand as an obstacle to the accomplishment of the FAA's objectives,” Scalia said. He found that the act's “overarching purpose … is to ensure the enforcement of arbitration agreements according to their terms so as to facilitate streamlined proceedings.”

Calling arbitration “poorly suited to the higher stakes of class litigation,” Scalia said that class arbitration of disputes sacrifices the informality and speed of dispute resolution that Congress contemplated in enacting the FAA.

Finding that the Discover Bank rule was an “obstacle” to the purpose and objective behind the FAA, the majority concluded that the rule was preempted by the federal statute. The court reversed the judgment of the Ninth Circuit and remanded the case to the appeals court.

Breyer, dissenting, said the majority's view of Discover Bank as an obstacle to enforcement of FAA “rests primarily upon its claims that the Discover Bank rule increases the complexity of arbitration procedures, thereby discouraging parties from entering into arbitration agreements, and to that extent discriminating in practice against arbitration.” The arguments “are not well founded,” he said.

Breyer acknowledged that contract defenses such as duress and unconscionability slow dispute resolution procedures, but he said federal arbitration law “normally leaves such matters to the States.”

Debate Not Likely to End.

The Supreme Court's action is not likely to end debate about the use of class action waivers in employment cases, and leaves some legal issues to be resolved, according to several comments offered after the announcement of the court's decision.

In a statement provided to BNA April 27, Anthony Oncidi, a partner at Proskauer in Los Angeles and a member of the firm's class/collective action group, said: “I believe the AT&T opinion will signal a renaissance for arbitration in California and elsewhere. Now, in addition to eliminating the risk of a runaway jury, employers and other commercial interests will be able to better manage the risk of being hit with a crippling class action lawsuit.”

Seyfarth Shaw partners Gerald L. Maatman in Chicago and David B. Ross in New York wrote April 27 in the law firm's Workplace Class Action blog that “it behooves employers with pre-dispute arbitration agreements in employment contracts to consider inserting class-action waivers if their agreements do not already contain them.”

They predicted that “employers without arbitration programs are likely to consider adopting them as a means to manage the risk of wage & hour and employment discrimination class actions.” But they also predicted that “class arbitration waivers will continue to face assault” not only from legislators but from the National Labor Relations Board.

Sen. Patrick J. Leahy (D-Vt.), chairman of the Senate Judiciary Committee, had his own reaction to the Supreme Court decision. In a statement issued April 27, Leahy said that “class actions are an effective way to ensure consumer protection, but today's opinion by the Roberts Court continued to move in a direction that undermines this access to justice for hardworking Americans.”

“Now more than ever,” Leahy wrote, “Congress needs to respond with legislation to clarify the original intent of the [FAA].”

By Lawrence E. Dubé


Text of the decision can be accessed at http://op.bna.com/dlrcases.nsf/r?Open=ldue-8gbl4z.