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U.S. Supreme Court Rules That Class Action Waivers in Arbitration Agreements Are Enforceable

Commercial Litigation Alert Daniel E. Conley, Jennifer M. Clements, Sean M. Scullen, Andrea J. Fowler

On April 27, 2011, the United States Supreme Court issued a decision in AT&T Mobility LLC v. Concepcion, holding that states may not decline to enforce class action bans in arbitration agreements under a theory that such contracts are unconscionable. The decision is important and favorable for businesses. You should review the terms and conditions of your contracts with consumers to determine if your contracts require changes to obtain the benefits of this favorable decision. For instance, your consumer contracts should perhaps require that disputes be raised only through arbitration and should prohibit the consumer from joining with others to obtain class action treatment. You should also consider modifying any employment agreements with arbitration clauses so that they include a class action waiver to mitigate the risk of employment-related class actions, as well as consider whether to subject employees to mandatory pre-dispute arbitration agreements in light of such risks.

AT&T Mobility LLC v. Concepcion, 563 U.S. __ (April 27, 2011), concerns a contract for the sale and servicing of cell phones that contained an arbitration provision requiring that all claims be brought in the parties' individual capacities.
The arbitration section of the contract also contained many consumer-friendly provisions. In 2008, two customers (the Concepcions) filed a complaint against AT&T Mobility in the U.S. District Court for the Southern District of California, alleging they had been wrongly charged $30.22 in sales tax for the purchase of a cell phone AT&T Mobility had advertised as "free."

The Concepcions' complaint was later consolidated with a putative class action that alleged that AT&T Mobility had engaged in false advertising and fraud. AT&T Mobility moved to compel arbitration pursuant to its contract, which the Concepcions opposed on grounds that the arbitration agreement was unconscionable. The District Court agreed that the arbitration provision was unconscionable and denied AT&T Mobility's motion to compel arbitration.

The Ninth Circuit affirmed, finding the provision unconscionable under California's Discover Bank rule. The California Supreme Court ruled in Discover Bank that arbitration agreements precluding class action in contracts of adhesion (such as most contracts between large companies and consumers) are unconscionable if the disputes between parties involve only a small amount in damages, and the parties in the inferior bargaining position allege a deliberate scheme to defraud.

On appeal, the Supreme Court reversed the Ninth Circuit. Holding that the Federal Arbitration Act ("FAA") preempted the Discover Bank rule, the Court noted that while Section 2 of the FAA "preserves generally applicable contract defenses, nothing in it suggests an intent to preserve state-law rules that stand as an obstacle to the accomplishment of the FAA's objectives." These objectives, the Court remarked, were to "ensure the enforcement of arbitration agreements according to their terms so as to facilitate streamlined proceedings." The Court further noted that state rules requiring the availability of arbitration class actions are inconsistent with the FAA and poorly suited to the high stakes of class litigation.

For more information on the AT&T Mobility LLC v. Concepcion ruling, please contact Jennifer Clements, Dan Conley, Sean Scullen, Andrea Fowler or your Quarles & Brady attorney.