Courts generally favor contract clauses calling for arbitration
of disputes relating to the contract. This principle was reinforced
by a recent U.S. Supreme Court case, AT&T Mobility v.
Concepcion, which addressed class action waivers in
Vincent and Liza Concepcion entered into a cellular telephone
contract with AT&T, which contained a provision providing for
arbitration of all disputes between them. In addition, the
provision required that any claims be brought on an individual,
rather than a classwide, basis. AT&T provided the Concepcions
with free phones, but charged them sales tax on the phones'
retail value. The Concepcions attempted to bring a class action
against AT&T under consumer protection statutes, and AT&T
sought individual arbitration pursuant to the parties'
The lower court held the contract's arbitration clause was
unjust because AT&T had not shown that arbitration on an
individual basis adequately substituted for class actions. The
Ninth Circuit agreed. Both courts relied on a California case,
referred to as Discover Bank, which established a
"rule" in California that said that most collective
arbitration waivers in consumer contracts are unjust.
Reversing the Ninth Circuit, the U.S. Supreme Court relied on
the principle that "arbitration is a matter of contract."
The Supreme Court also emphasized that the overarching purpose of
the Federal Arbitration Act (FAA), the statute that provides for
the resolution of disputes through arbitration, is "to ensure
the enforcement of arbitration agreements according to their
terms..." The Supreme Court concluded that California's
Discover Bank rule unlawfully interferes with the
fundamental attributes of arbitration and the purpose of the FAA.
According to the Supreme Court, this is because the rule
effectively allows a contracting party to get around its agreement
to arbitrate individually and instead demand classwide arbitration
– a procedure that is more formal, costly and complex
than individual arbitration.
>> The Bottom Line
The implications of this decision are uncertain but likely
far-reaching. Notably, it calls into question, if not overrules, a
number of other court decisions striking down class action waivers.
What is clear is the Supreme Court's general deference to the
terms of arbitration agreements in contracts.
Companies drafting contracts that wish to avoid class actions
should consider including provisions calling for individual
arbitration of disputes and waiving class action litigation. On the
flip side, consumers signing agreements should look for any clauses
doing away with their right to bring a class action against the
other party so that consumers understand their rights in the face
of a dispute.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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