United States Supreme Court Decision Gives California Employers Opportunity to Prevent Class Action Claims

The United States Supreme Court has ruled that federal arbitration law clears the way for arbitration agreements in California to bar claims from being brought on behalf of a class. Employment arbitration agreements can now be used to prevent class action claims against California employers.

Executive Summary

In AT&T Mobility LLC v. Concepcion, consumers who purchased cellular telephone service brought a class action case in federal court against AT&T, alleging false advertising and fraud for AT&T charging sales tax on phones advertised as free. At the time of purchase, the consumers entered into a contract with an arbitration agreement and class action waiver requiring all claims between the parties to be brought in the parties’ “individual capacity, and not as a plaintiff or class member in any purported class or representative proceeding.” AT&T filed a motion to compel arbitration under the contract. Plaintiffs opposed the motion on the grounds that the arbitration agreement was unconscionable under the rule established by the California Supreme Court in Discover Bank v. Superior Court, 36 Cal. 4th 148 (2005), which invalidates certain arbitration agreements that waive the right to class-wide proceedings. The federal court denied AT&T’s motion and found that the arbitration provision was unconscionable because it barred customers from using class-wide proceedings. The Court of Appeals for the Ninth Circuit agreed, holding that the agreement was unconscionable under California law and the Discover Bank rule. The Ninth Circuit rejected AT&T’s contention that the Discover Bank rule was preempted by the Federal Arbitration Act (“FAA”).

The United States Supreme Court reversed, holding that the California Discover Bank rule is preempted by the FAA. The FAA’s purpose is to ensure the enforcement of arbitration agreements according to their terms to facilitate streamlined proceedings. The Court held that the Discover Bank rule interferes with arbitration in a manner inconsistent with the FAA’s purpose because it allows consumers to demand class-wide arbitration. Class arbitration, if not consensual, sacrifices arbitration’s informality, makes the process slower, more costly, and more likely to generate a procedural morass. It also increases risks to defendants, allows errors in decisions to go unnoticed, and is poorly suited for high stakes cases.

Practical Implications for Employers

Because of the Discover Bank rule, employers in California have not been able to include provisions in employment arbitration agreements barring class actions. In light of this decision, employers with arbitration agreements should consider amending them to include class action waivers to limit exposure to wage-and-hour, discrimination, and other employment claims. Employers who do not have employment arbitration agreements now have a new reason to consider them.

Detailed Summary of AT&T Mobility LLC v. Concepcion

Plaintiffs were consumers who purchased cellular telephone service from AT&T Mobility LCC (“AT&T”), which advertised “free phones” included with the service. Plaintiffs were not charged for the phones, but were charged sales tax on the phones’ value. At the time of purchase, plaintiffs entered into a sale and service contract containing an arbitration agreement. The agreement contained a class action waiver that required all claims between the parties to be brought in the parties’ “individual capacity, and not as a plaintiff or class member in any purported class or representative proceeding.” The agreement contained a user-friendly informal dispute-resolution process and many other terms beneficial to customers. Plaintiffs instead filed a complaint in the federal district court in California, which was consolidated with a putative class action against AT&T, alleging false advertising and fraud for charging sales tax on phones advertised as free.

AT&T moved to compel arbitration under the service contract. Plaintiffs opposed the motion on the grounds that the arbitration agreement was unconscionable under the California Supreme Court’s decision in Discover Bank v. Superior Court, 36 Cal. 4th 148 (2005). In Discover Bank, the California Supreme Court held that class action waivers in consumer arbitration agreements are unconscionable if (1) the agreement is an adhesion contract, (2) any dispute would likely involve small damages amounts, and (3) the party with superior bargaining power is alleged to have deliberately cheated consumers out of small sums of money. Relying on Discover Bank, the district court denied AT&T’s motion and found that the arbitration provision was unconscionable because it barred customers from using class-wide proceedings.

The Court of Appeals for the Ninth Circuit affirmed, holding that the agreement was unconscionable under California law and the Discover Bank rule. The Ninth Circuit rejected AT&T’s contention that the Discover Bank rule was preempted by the Federal Arbitration Act (“FAA”). The Ninth Circuit reasoned that because the Discover Bank revocation rule was generally applicable to all contracts and did not apply solely to arbitration agreements, the rule could be applied to invalidate an arbitration agreement without contravening the FAA.

The United States Supreme Court reversed, holding that the Discover Bank rule is preempted by the FAA. The FAA contains a clause that permits arbitration agreements to be declared unenforceable by generally applicable contract defenses, such as fraud, duress, or unconscionability. The Court reasoned, however, that the intent of this clause was not to preserve state law rules that stand as an obstacle to the accomplishment of the FAA’s objectives. The FAA’s purpose is to ensure the enforcement of arbitration agreements according to their terms to facilitate streamlined proceedings. The Court held that the Discover Bank rule interferes with arbitration in a manner inconsistent with the FAA’s purpose because it allows consumers to demand classwide arbitration. Class arbitration, if not consensual, sacrifices arbitration’s informality, makes the process slower, more costly, and more likely to generate procedural morass. It also increases risks to defendants, allows errors in decisions to go unnoticed, and is poorly suited for high stakes cases. The Court concluded that because the Discover Bank rule “stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress,” the rule is preempted by the FAA.