Supreme Court Decides FAA Preempts State Rule against Class Arbitration Waivers
In a 5-4 ruling, the U.S. Supreme Court held that a California rule classifying most waivers of class wide arbitration in consumer contracts as unconscionable is preempted by the Federal Arbitration Act (FAA) and is unenforceable. AT&T Mobility LLC v. Concepcion (2011).
This dispute arose from a consumer lawsuit. 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, the Concepcions filed a class action lawsuit in California federal district court based on the company’s advertisement of a free phone. AT&T moved to compel arbitration of the suit based on the customers’ acceptance of a service agreement that said they would arbitrate any dispute and would proceed in an individual capacity, “not as a plaintiff or class member in any purported class or representative proceeding.”
The California court decided that the Concepcions could proceed with the class action. It said 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 arguing that Section 2 of the Federal Arbitration Act makes agreements to arbitrate “valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” The issue before the Supreme Court was “whether the FAA prohibits States from conditioning the enforceability of certain arbitration agreements on the availability of class wide arbitration procedures.”
The Supreme Court has previously held that courts must place arbitration agreements on an equal footing with other contracts and enforce them according to their terms. But it has also held that Section 2 of the FAA permits arbitration agreements to be invalidated on defenses generally applicable to contracts, including fraud, duress, and unconscionability.
The Supreme Court decided that a state rule of law that requires making class wide 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.”
This decision is important for employers when drafting arbitration agreements in employment contracts. Employers are advised to consider inserting class action waivers if their agreements do not already contain one. And, employers without arbitration provisions may consider adopting them to manage the risk of class actions. These clauses will continue to be challenged, however, and so require legal advice and careful drafting.