Supreme Court Rules California's Prohibition of Class Action Waivers in Arbitration Agreements Preempted by Federal Law
Paul Siegel | May 1, 2011
Continuing its recent trend of upholding the enforceability of arbitration agreements, the U.S. Supreme Court struck down California courts' refusal to enforce class action waivers in consumer arbitration agreement, on the ground that this state law is preempted by the Federal Arbitration Act.
On its face, the ruling in AT&T Mobility LLC v. Concepcion, No. 09–893, 2011 U.S. LEXIS 3367 (U.S. Apr. 27, 2011), would appear to apply to arbitration agreements in the employment context. Concepcion reverses 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 (and seems to reject a similar ruling by the Second Circuit).
Facts of the Case
The plaintiffs, Vincent and Liza Concepcion, purchased cellular telephone service relying on advertising that promised them a "free" telephone. 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 imposed a mandatory dispute resolution process, which required submission to arbitration of any disputes. The agreement also prohibited customers from bringing class actions or other representative proceedings.
The Lower Court Rulings
Despite finding that the Concepcions were likely to be better off participating in an arbitration under AT&T's dispute resolution process than they would be as plaintiffs in a class action in court due to certain benefits provided by the dispute resolution protocol, the district court denied AT&T's motion to compel arbitration, concluding that the class action waiver was unconscionable (and, therefore, unenforceable) pursuant to the California Supreme Court's ruling in Discover Bank v. Superior Ct., 36 Cal. 4th 148 (2005).
The Ninth Circuit affirmed the ruling. It held that the Federal Arbitration Act (FAA) did not preempt California 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 the FAA preempts California's Discover Bank rule, which classified most class action waivers as unconscionable.
The Supreme Court Ruling
The U.S. Supreme Court held, in a 5–4 decision authored by Justice Antonin Scalia, that the FAA preempts the California law on unconscionability, as applied to the prohibition on class action waivers in arbitration agreements. Thus, the court ruled, the arbitration clause applying to the Concepcions' dispute with AT&T must be enforced as written. The court ruled that the FAA preempted California's prohibition of class action waivers 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's 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.
Conclusion
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. Based on the Supreme Court's decision in Concepcion, it would appear that such clauses are valid and enforceable. However, employers who utilize arbitration agreements must seek legal advice in the preparation of class action waiver provisions and for the drafting of arbitration clauses generally. Concepcion does not stand for the broad proposition that class action waivers contained in arbitration agreements uniformly are enforceable. See, for example, Sutherland v. Ernst & Young LLP, 2011 U.S. Dist. LEXIS 26889 (S.D.N.Y. Mar. 2, 2011) (invalidating class action waiver in wage-and-hour class action). 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.
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