AT&T Mobility LLC v. Concepcion
In AT&T Mobility, LLC v. Concepcion, 131 S. Ct. 1740, 179 L. Ed. 2d 742 (2011), the question before the United States Supreme Court was "whether the FAA prohibits States from conditioning the enforceability of certain arbitration agreements on the availability of classwide arbitration procedures." Id. at 1744.
Specifically, the Supreme Court considered whether the FAA preempts California's Discover Bank rule, which "classified most collective-arbitration waivers in consumer contracts as unconscionable." Id. at 1746.
In Concepcion, the plaintiffs entered into an agreement with AT&T for the sale and servicing of cellular telephones, which provided for arbitration of all disputes and contained a class action waiver. Id. at 1744.
The plaintiffs later brought suit against AT&T in federal district court alleging, among other things, that AT&T had engaged in false advertising and fraud by charging sales tax on phones it had advertised as free. Id.
AT&T moved to compel arbitration, which the plaintiffs opposed by arguing that the arbitration agreement was unconscionable and unlawfully exculpatory under California law because it disallowed class action proceedings. Id. at 1744-45.
The federal district court denied AT&T's motion, relying on the California Supreme Court's decision in Discover Bank v. Superior Court, 36 Cal. 4th 148, 30 Cal. Rptr. 3d 76, 113 P.3d 1100 (Cal. 2005), to find the arbitration provision unconscionable. Concepcion, 131 S. Ct. at 1745.
Under the Discover Bank rule, a class action waiver in a consumer contract of adhesion is unenforceable "in a setting in which disputes between the contracting parties predictably involve small amounts of damages, and when it is alleged that the party with the superior bargaining power has carried out a scheme to deliberately cheat large numbers of consumers out of individually small sums of money" because "the waiver becomes in practice the exemption of the party 'from responsibility for its own fraud, or willful injury to the person or property of another.'" Id. at 1746.
The Ninth Circuit affirmed, also finding the provision to be unconscionable under the Discover Bank rule. Id. at 1745.
The United States Supreme Court granted certiorari review on the issue of FAA preemption. The plaintiffs argued that the Discover Bank rule, given its origins in California's unconscionability doctrine and California's policy against exculpation, is a ground that "exists at law or in equity for the revocation of any contract" under 2 of the FAA. Id. at 1746.
They further argued that even if the Supreme Court construed the Discover Bank rule as a prohibition on collective-action waivers rather than an application of unconscionability, the rule would still be applicable to all contracts, since California prohibits waivers of class litigation as well. Id.
The Supreme Court noted that when "a state law prohibits outright the arbitration of a particular type of claim, the analysis is straightforward--the conflicting rule is displaced by the FAA." Id. at 1747.
However, the analysis becomes "more complex when a doctrine normally thought to be generally applicable, such as duress or, as relevant here, unconscionability, is alleged to have been applied in a fashion that disfavors arbitration." Id.
In such situations, a court may not "rely on the uniqueness of an agreement to arbitrate as a basis for a state-law holding that enforcement would be unconscionable." Id.
The Supreme Court reasoned that "although 2's saving clause 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." Id. at 1748.
With respect to class arbitration, the Supreme Court held that:
"the overarching purpose of the FAA, evident in the text of 2, 3, and 4, is to ensure the enforcement of arbitration agreements according to their terms so as to facilitate streamlined proceedings. Requiring the availability of classwide arbitration interferes with fundamental attributes of arbitration and thus creates a scheme inconsistent with the FAA." Id.
The Supreme Court concluded that California's Discover Bank rule interferes with the fundamental attributes of arbitration because "although the rule does not require classwide arbitration, it allows any party to a consumer contract to demand it ex post." Id. at 1750.
The Supreme Court recognized that the Discover Bank rule was limited to adhesion contracts, but observed that "the times in which consumer contracts were anything other than adhesive are long past." Id.
The Supreme Court further reasoned that the other limitations in the Discover Bank rule also had no limiting effect on the application of the rule:
"The rule also requires that damages be predictably small, and that the consumer allege a scheme to cheat consumers. The former requirement, however, is toothless and malleable (the Ninth Circuit has held that damages of $4,000 are sufficiently small, see Oestreicher v. Alienware Corp., 322 Fed. Appx. 489, 492 (9th Cir. 2009) (unpublished)), and the latter has no limiting effect, as all that is required is an allegation. Consumers remain free to bring and resolve their disputes on a bilateral basis under Discover Bank, and some may well do so; but there is little incentive for lawyers to arbitrate on behalf of individuals when they may do so for a class and reap far higher fees in the process. And faced with inevitable class arbitration, companies would have less incentive to continue resolving potentially duplicative claims on an individual basis." (Id.)
The Supreme Court detailed the disadvantages of class-wide arbitration and concluded that to the extent it is manufactured by the Discover Bank rule rather than consensually agreed upon by the parties, class arbitration is inconsistent with the FAA. Id. at 1750-51.
In response to the dissent's assertion that "class proceedings are necessary to prosecute small-dollar claims that might otherwise slip through the legal system," the Supreme Court stated that " States cannot require a procedure that is inconsistent with the FAA, even if it is desirable for unrelated reasons." Id. at 1753.
The Supreme Court concluded that because the Discover Bank rule stands as an obstacle to the FAA's purposes, it was preempted. Id.
In AT&T Mobility LLC v. Concepcion, the United States Supreme Court held that the FAA preempts California's unconscionability doctrine in some contexts. At issue in Concepcion was the rule articulated by the California Supreme Court in Discover Bank v. Superior Court (2005) 36 Cal.4th 148 (the Discover Bank rule), which (1) held that most collective-action waivers in consumer arbitration contracts were unconscionable, and (2) imposed class-wide arbitration in some circumstances where consumers both had agreed to arbitrate and had waived the right to participate in class actions. The Supreme Court abrogated this rule, finding it is preempted by the FAA. (Concepcion, at p. 1753.)
The Supreme Court held that although the FAA preserves generally-applicable contract defenses, it does not permit state law defenses "that apply only to arbitration or that derive their meaning from the fact that an agreement to arbitrate is at issue." (Concepcion, supra, at p. 1746.) In other words, the court said, "nothing in the FAA suggests an intent to preserve state-law rules that stand as an obstacle to the accomplishment of the FAA's objectives"--i.e., to "'ensure that private arbitration agreements are enforced according to their terms.'" (Id. at p. 1748.)
The court noted that its prior decisions had held that parties may agree to limit the issues subject to arbitration, to arbitrate according to specific rules, and to limit with whom a party will arbitrate its disputes. (Concepcion, supra, 131 S.Ct. at pp. 1748-1749.) It explained: "The point of affording parties discretion in designing arbitration processes is to allow for efficient, streamlined procedures tailored to the type of dispute. It can be specified, for example, that the decisionmaker be a specialist in the relevant field, or that proceedings be kept confidential to protect trade secrets. And the informality of arbitral proceedings is itself desirable, reducing the cost and increasing the speed of dispute resolution." (Id. at p. 1749.) Thus, the court concluded, states cannot require procedures inconsistent with the FAA, even if such procedures are desirable for unrelated reasons. (Id. at p. 1753.)
The United States Supreme Court expressly overruled what it called the Discover Bank rule, which classifies most collective arbitration waivers in consumer contracts as unconscionable and essentially allows any party to a consumer contract to demand classwide arbitration. (Id. at pp. 346-347 131 S.Ct. at p. 1750.) "Requiring the availability of classwide arbitration interferes with fundamental attributes of arbitration and thus creates a scheme inconsistent with the FAA." (Id. at p. 344 131 S.Ct. at p. 1748.)
Noting that the principal purpose of the FAA is to ensure that private arbitration agreements are enforced according to their terms, the court concluded that "class arbitration, to the extent it is manufactured by Discover Bank rather than consensual, is inconsistent with the FAA." (563 U.S. at p. 348 131 S.Ct. at p. 1751.)