*By Stephen S. Zashin
In a 5-4 decision issued yesterday, the United States Supreme Court
overturned a Ninth Circuit Court of Appeals decision invalidating an
arbitration agreement for being unconscionable under California law. In AT&T Mobility v. Concepcion
the Supreme Court found that the Federal Arbitration Act (“FAA”)
preempted a California law that allowed consumers to avoid contracts in
which they had waived their class action rights.
Justice Scalia, writing for the majority, stated that the country
has a “liberal federal policy favoring arbitration.” He noted that the
FAA was passed in 1925 in response to judges’ hostility to arbitration
agreements and bans states from discriminating against arbitration. He
stated that the FAA preempted the state law because it “stands as an
obstacle to the accomplishment and execution of the full purposes and
objectives of Congress.”
The facts of this case centered on a commercial cell phone
contract. The consumer contract contained both an agreement to arbitrate
disputes and a class action waiver. Vincent and Liza Concepcion sued
AT&T on behalf of themselves and others similarly situated for
advertising discounted cell phones but charging sales tax -- $30.22 – on
the full retail price. The company sought to compel individual
arbitration pursuant to the arbitration agreement and the class action
waiver the plaintiffs signed.
Despite several pro-consumer terms in the arbitration agreement,
the California federal District Court (and Ninth Circuit Court of
Appeals) held that the arbitration agreement was unconscionable because
it precluded class actions. The District and Circuit Courts also found
that the FAA did not preempt state law on this issue. The lower courts
based their decisions on a California Supreme Court decision, Discover Bank v. Superior Court. In Discover Bank,
the California Supreme Court found that by requiring individuals to
arbitrate their small claims individually, and not allow them to join in
a class agreement, the company imposed an illegal contract on the
weaker party. The District and Circuit Courts held that such provision
was unconscionable because the company had not shown that bilateral
arbitration “adequately substituted for the deterrent effects of class
actions.”
The Supreme Court overturned the lower courts explaining that
arbitration “is poorly situated to the higher stakes of class
litigation.” The Court found that by moving from bilateral to class
arbitration, the principles of informal arbitration are sacrificed –
making the arbitration slower, more costly, and “more likely to generate
procedural morass than final judgment.” In effect, the Court found that
it was improper to impose class arbitration when the agreement itself
did not permit it.
Justice Breyer, writing for dissenters, said the majority
misconstrued the history and applicability of the FAA, which Breyer
stated allowed class actions to co-exist with the tenets of the FAA.
Breyer feared that without the ability to join together in class-action
lawsuits “small-dollar claimants” would abandon their claims stating,
“What rational lawyer would have signed on to represent the Concepcions
in litigation for the possibility of fees stemming from a $30.22 claim?”
Although this case dealt with a consumer cell phone contract, the
Court’s decision likely impacts employment arbitration agreements. The
decision reaffirms the validity of including class action waivers in
agreements to arbitrate employment disputes. As a result, employers that
currently have employment arbitration should consider an express class
action ban based upon this case. Employers that do not have employment
arbitration should consider whether to implement such a program to
preclude the possibility of an employment class action.
If you have any questions about how this decision may impact your
arbitration agreement or would like assistance in drafting an
arbitration agreement with a class action waiver, please contact us.
*Stephen S. Zashin,
an OSBA Certified Specialist in Labor & Employment Law, has
experience defending class action lawsuits and arbitrations. In
addition, Stephen has drafted and implemented employment arbitration
programs for some of the country’s largest employers. For more
information about employment arbitration, please contact Stephen at
216.696.4441 or ssz@zrlaw.com.
