Compliance Bulletin

U.S. Supreme Court Strikes Down California Ban on Arbitration Class Action Waivers
May 2, 2011

The United States Supreme Court overturned a decision arising in California that had invalidated contractual restrictions against class-wide arbitration. CBA has closely followed this case and filed briefs in the Ninth Circuit where it was originally litigated and in the U.S. Supreme Court.

 The decision of AT&T Mobility v. Concepcion arose after the Concepcions sued the cellular telephone company for charging sales tax in the amount of $30.22 for a phone that was advertised as “free.” The plaintiffs filed on behalf of a class of similarly situated AT&T customers. The contract provided for arbitration of all disputes but did not permit class-wide arbitration. The District Court denied AT&T’s motion to compel arbitration, relying on the California Supreme Court’s decision in Discover Bank v. Superior Court [1], another case in which CBA weighed in with a brief. AT&T appealed, and the Ninth Circuit Court of Appeals affirmed the District Court’s decision.

The Discover Bank decision stands for the proposition that an arbitration provision is unconscionable because the defendant had not shown that bilateral arbitration adequately substituted for the deterrent effects of class actions. If a contract of adhesion (a form contract imposed by a party with superior bargaining power against a weaker party) pertains to matters that predictably involve disputes over small amounts, and the more powerful party is alleged to have cheated large numbers of consumers out of individually small sums of money, then the class arbitration restriction is considered to be unconscionable and unenforceable. Section 2 of the Federal Arbitration Act (FAA) [2] makes agreements to arbitrate “valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” The Ninth Circuit held that the FAA did not preempt its ruling because a contract that is unconscionable is one that is revocable.

On appeal, the U.S. Supreme Court last week disagreed with the Ninth Circuit’s decision, noting that the savings clause in the FAA only permits arbitration agreements to be declared unenforceable by generally applicable contract defenses rather than by defenses that apply only to arbitration. When state law prohibits outright the arbitration of a particular type of claim, the conflicting rule is displaced by the FAA.

In its 5-4 opinion, the Court noted that class arbitration undermines the principal advantage of arbitration, which is informality, and makes the process slower, more costly, and more likely to generate procedural complexities. The Court also noted that the American Arbitration Association’s rules governing class arbitrations are just as complex as the Federal Rules of Civil Procedure for class litigation, and doubted that Congress, in enacting the FAA in 1925, even contemplated class arbitration let alone intended to leave the disposition of these procedural requirements to an arbitrator. Finally, the Court found that class arbitration greatly increases risks to defendants because of the absence of multi-layered review. Even a small risk of a loss would compel settlement regardless of the merits.

CBA argued in its brief to the Supreme Court that California courts have inappropriately attached the label of “unconscionable” to all arbitration agreements that conflict with the state’s policy in favor of class actions. By doing so, arbitration agreements in particular are singled out as invalid, in direct contravention of the FAA. We also argued that the Ninth Circuit court had failed to weigh the benefits of arbitration, of which there are many, and the disadvantages of class proceedings.

Because the AT&T decision directly addresses the State of California’s public policy attacks on arbitration agreements with class action waivers, it should give California businesses more options on how to to settle disputes in an efficient manner. One of the questions that remains to be resolved is whether the new Consumer Financial Protection Bureau has the authority to limit the use of arbitration agreements in contravention of the FAA and the Court’s latest decision. Section 1028 of the Dodd-Frank Act grants authority to the Bureau to conduct a study and report to Congress concerning the use of consumer arbitration agreements. It also authorizes the Bureau to “prohibit or impose conditions or limitations on the use of an agreement between a covered person and a consumer for a consumer financial product or service providing for arbitration of any future dispute between the parties, if the Bureau finds that such a prohibition or imposition of conditions or limitations is in the public interest and for the protection of consumers.”

Click here to a link to the Supreme Court’s decision.

  1. 36 Cal. 4th 148, 113 P. 3d 1100 (2005).
  2. 9 U.S.C.Section 1 et seq.

The information contained in this CBA Regulatory Compliance Bulletin is not intended to constitute, and should not be received as, legal advice. Please consult with your counsel for more detailed information applicable to your institution.

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