Supreme Court Upholds Class Action Waivers In AT&T Mobility v. Concepcion

On April 27, 2011, the United States Supreme Court issued an important decision regarding arbitration agreements and the extent to which such agreements may restrict class action claims. The Court’s decision opens the door for employers to insert class action waivers into arbitration agreements contained in their employment contracts.

In 2002, Vincent and Liza Concepcion entered into a contract for the sale and servicing of cellular telephones with AT&T Mobility LLC (“AT&T”). The contract contained an arbitration clause which provided for arbitration of all disputes between the parties, but required that the claims be brought in the parties’ “individual capacity, and not as a plaintiff or class member in any purported class or representative proceeding.” The service plan purchased by the Concepcions was advertised as including the provision of free telephones. The Concepcions were not charged for their phones, but they were charged $30.22 in sales tax based on their phones’ retail value.

In 2005 and 2006, the Concepcions and several other plaintiffs who were charged the sales tax for the value of their phones, filed lawsuits alleging that AT&T engaged in fraud and false advertising in violation of California state law by charging sales tax on phones it advertised as free. The matters were consolidated, and in March 2008, AT&T moved to compel individual arbitration pursuant to the arbitration agreements contained in its contracts with the Concepcions and the other plaintiffs. The District Court denied AT&T’s motion, finding that the arbitration agreements contained in AT&T’s service contracts were unconscionable based on the California Supreme Court’s decision in Discover Bank v. Superior Court, 113 P.3d 1100 (2005), which held that class action waivers in consumer arbitration agreements are unconscionable if the agreement is an adhesion (take it or leave it) contract, disputes among the parties are likely to involve small dollar amounts, and the party with superior bargaining power engaged in a scheme to defraud. The Ninth Circuit affirmed, agreeing that the arbitration provision was unconscionable under the Discover Bank rule and finding that the Federal Arbitration Act (“FAA”) does not bar state or federal courts from applying state contract law principles to find a class action waiver in an arbitration clause unconscionable and unenforceable.

The Supreme Court granted certiorari to decide whether the FAA prohibits states from conditioning the enforceability of certain arbitration agreements on the availability of class-wide arbitration procedures. In a 5-4 decision, the Court reversed the Ninth Circuit’s decision, holding that because the California rule “stands as an obstacle to the accomplishment and execution of the full purposes and objectives of the FAA,” it is preempted by the FAA. Writing for the majority, Justice Scalia framed the Court’s opinion by noting that the Court previously has held that the FAA reflects a liberal federal policy favoring arbitration and that arbitration is fundamentally a matter of contract. On this foundation, the Court reiterated that “the principal purpose of the FAA is to ensure that private arbitration agreements are enforced according to their terms.” In addition to these policy considerations, the Court, relying on its decision Stolt-Neilson S.A. v. Animalfeeds International, Corp., 130 S.Ct. 1758 (2010), also noted the significance of the fundamental differences between class-wide and individual arbitration. Specifically, the Court found that class arbitration lacks the expediency and cost-efficiency of bilateral arbitration and entails greater risk to defendants, and that class actions, as a general matter, require a level of procedural formality not found in arbitration. In light of these differences, the Court held that “requiring the availability of classwide arbitration interferes with the fundamental attributes of arbitration and thus creates a scheme inconsistent with the FAA.”

Justice Breyer authored a dissenting opinion, in which Justices Ginsberg, Sotomayor, and Kagan joined. The dissent argued, as had the Concepcions, that the Discover Bank rule is not preempted by the FAA because the Act’s primary substantive provision provides that arbitration agreements may be declared unenforceable “upon such grounds as exist at law or in equity for the revocation of any contract,” and unconscionability is such a ground. The majority held, however, that nothing in that provision “suggests an intent to preserve state-law rules that stand as an obstacle to the accomplishment of the FAA’s objectives.”

In light of the Court’s decision in AT&T, employers with arbitration agreements in their employment contracts should consider including an appropriate class action waiver in those agreements to the extent that they do not already contain them. Furthermore, employers with employment contracts that do not have arbitration agreements should re-consider the advantages and disadvantages of arbitration in light of the Court’s decision. The Court’s decision in AT&T reinforces the validity of such waivers, which may be used to insulate employers from the risk of class action lawsuits in a broad range of employment disputes, including wage and hour claims, for which class actions have become increasing popular amongst plaintiffs’ attorneys.

© 2011 Kiesewetter Wise Kaplan Prather, PLC