The U.S. Supreme Court Upholds Use of Class Action Waivers in Arbitration

The U.S. Supreme Court has held that a state law requiring the availability of class-wide arbitration interferes with the “fundamental attributes of arbitration” and creates a scheme inconsistent with the Federal Arbitration Act (AT&T Mobility LLC v. Concepcion, U.S., No. 09-893, 4/27/11).  The ruling is significant win for corporations seeking to resolve consumer and employee disputes by way of arbitration.

The decision will likely incentivize more companies to use class action waivers and reflects a dislike by the majority of the Court for class actions.

The class action was filed in federal court by AT&T Mobility customers, who sought to recoup $30 in sales taxes they say they were unfairly charged for phones advertised as free.   The customers’ service agreement with AT&T included an arbitration provision waiving the right to proceed with dispute resolution through class arbitration.  The district court denied defendant AT&T’s motion to compel arbitration, finding that the class waiver provision of the parties’ arbitration clause was unenforceable under California law, and that California law was not preempted by the Federal Arbitration Act.  On appeal, the Ninth Circuit affirmed that the class action waiver was unenforceable under California law.  The Ninth Circuit applied the California Supreme Court’s three-part test articulated in Discover Bank v. Superior Court, 36 Cal. 4th 148 (2005) for determining whether a class action waiver in a consumer contract is unconscionable.

Specifically, the opinion held that the Federal Arbitration Act preempted a California rule, articulated in Discover Bank, which prohibits class action waivers in adhesion contracts when the damages are predictably small and the waiver exempts the party from fraud.  The majority undoubtedly considered its previous opinion in the matter Stolt-Nielsen S. A. v. AnimalFeeds Int’l Corp., 78 U.S.L.W. 4328 (U.S. 2010), where it held that a contract silent on the issue of class arbitration could not be interpreted to allow it because the “changes brought about by the shift from bilateral to class-action arbitration” are “fundamental.”

According to Justice Scalia, class-wide arbitration includes absent parties, which necessitates additional and different procedures and involves higher stakes.  Specifically, Justice Scalia stated that “[T]he switch from bilateral to class arbitration sacrifices the principal advantage to arbitration, its informality, and makes the process slower, more costly, and more likely to generate procedural morass than final judgment.” 

The argument raised in dissent, that most small dollar claims will be abandoned if they cannot be adjudicated on a class basis, did not convince the majority.  In dissent, Justice Stephen G. Breyer said that California’s Discover Bank rule is consistent with the Federal Arbitration Act’s objective to place agreements to litigate and to arbitrate on the same footing.  The California law, he said, applies to class action waivers in any type of contract.  Justices Ruth Bader Ginsburg, Sonia Sotomayor, and Elena Kagan also dissented.

Prior to this ruling, there was a cloud hanging over the use of class action waivers in arbitration as courts across the country were split about whether class action bans could be enforced.  The Court has not effectively brought an end to that debate.  It is almost certain that more and more companies will start using class action waivers.  Consumers will benefit because bilateral arbitration is a better alternative for resolving disputes.

Richard B. Newman is an Internet Lawyer and
Business Litigation Attorney at Hinch Newman LLP