Ruling Allows Class Action Waivers in Arbitration Agreements

(July 19, 2011) The U.S. Supreme Court recently gave companies nationwide the potential for relief from the continual onslaught of class action litigation.

In AT&T Mobility, LLC v. Concepcion, a divided 5-4 court held that companies can include class action waivers in their consumer arbitration agreements.

California courts, including the California Supreme Court, have previously found these class action waivers unenforceable. The U.S. Supreme Court specifically invalidated these California cases, holding that the Federal Arbitration Act (FAA) pre-empts California law.

Background

The case involved a lawsuit filed by a California couple who bought a “free” phone from AT&T but were charged $30 in sales tax based on the phone’s retail value. The lawsuit alleged, among other things, that AT&T had engaged in false advertising and fraud by charging sales tax on phones it advertised as free.

The couple sought to consolidate its case with a class action. As AT&T’s customers, however, the couple had signed a contract that contained an arbitration agreement. The arbitration agreement included a clause that required any dispute be pursued individually and prohibited class action suits.

AT&T moved to compel arbitration under the terms of its contract with the couple. The lower courts refused to compel arbitration and held that AT&T’s arbitration agreement, specifically the class action waiver, was unconscionable under the California Supreme Court’s decision in Discover Bank v. Superior Court.

U.S. Supreme Court Decision

The U.S. Supreme Court, in a decision authored by Justice Antonin Scalia, disagreed with the lower courts and held that AT&T’s arbitration agreement was enforceable and that companies may require buyers to sign arbitration agreements that preclude class-action claims.

The high court held that California’s judicial rule voiding class action waivers conflicted with the underlying purpose of the FAA, which is to ensure that private arbitration agreements are enforced according to their terms and to promote “efficient, streamlined” dispute resolution.

The court explained that forcing companies into class action arbitration sacrifices one of the key advantages to arbitration—informality—and makes the process slower, costlier and more likely to generate a procedural mess.

The court also expressed its concern that class action arbitration would greatly increase the risk to companies because of the absence of a multilayered judicial review.

Although companies are willing to accept the risk of error in an individual case in order to gain the benefits of arbitration, companies are unlikely to want to accept this risk when thousands of potential claims are aggregated and decided at once. Faced with class action arbitrations, companies may feel pressure to settle dubious claims.

The U.S. Supreme Court concluded that California’s rule prohibiting class action waivers was pre-empted as a matter of federal law.

Legislative Response

In response to the decision, federal legislation has been introduced to forbid pre-dispute mandatory arbitration agreements in employment, consumer or civil rights disputes. The federal bill is a repeat of one introduced in 2009.

In California, Senator Noreen Evans (D-Santa Rosa) has also indicated that she may pursue legislation at the state level.

Impact of Decision

This decision provides welcome help to California companies that want to use arbitration to resolve disputes. It is still an open question what this case will mean for employment arbitration agreements, given that the facts involved the enforceability of a consumer arbitration agreement.

However, the case does show a willingness of a narrow majority of the high court to overturn state court rulings that interfere with the goal of promoting arbitration.

In light of this ruling, the California Chamber of Commerce recommends that companies review their business agreements and consult with legal counsel to determine whether to include a class action waiver in arbitration agreements or modify existing arbitration provisions.

Companies should continue to monitor developments in this area.

Staff Contacts: Gail Cecchettini Whaley, Mira Guertin