On Wednesday, April 27, 2011, the United States Supreme Court decided AT&T Mobility LLC v. Concepcion. Although factually, the case involved consumer products and arbitration agreements, the decision may have a significant impact on employers and employees who enter into arbitration agreements, as well as class action practice.
By way of background, California courts had previously ruled
that when a consumer contract of adhesion purports to require
individual arbitration of consumer disputes with the vendor,
essentially any alleged ban on class arbitration is unenforceable.
This was the so-called "Discover Bank rule".
California courts had applied this rule even if the consumer
contract contained provisions making it worthwhile for an
individual consumer to challenge a small dispute (e.g., an improper
charge on a phone bill). In AT&T's case, the contract
provided that AT&T would pay the all the forum costs except
in cases deemed frivolous and that the consumer could elect whether
arbitration would be in person, by telephone, or based just on
documents. Furthermore, if the consumer did better than
AT&T's last offer to settle, the consumer would be
guaranteed a recovery of at least $7,500, plus attorney's fees.
However, the agreement did not allow for class arbitration.
In the AT&T case, the lower courts had recognized
that AT&T's procedures provided a speedy,
non-burdensome method for individual consumers to obtain redress.
Nonetheless, the lower courts invalidated the class action waiver
requirement on the ground that under Discover Bank, any
class action waiver is unconscionable unless the arbitration
procedure "adequately substituted for the deterrent effects of
class actions," a test that is essentially unattainable.
Finally, the lower courts ruled that the Federal Arbitration Act
("FAA") did not preempt or overrule the Discover
Bank rule. On this point, the United States Supreme Court
disagreed. Writing for the 5-4 majority, the high court set aside
the Discover Bank rule barring class action waivers,
reasoning that the rule frustrated the FAA's central purpose of
enforcing parties' contractual agreements to resolve disputes
through speedier, less formal procedures than litigation in court.
Justice Scalia noted that courts had a history prior to the FAA of
using "a great variety of devices and formulas" to
invalidate arbitration agreements, and even today "California
courts have been more likely to hold contracts to arbitrate
unconscionable than other kinds of contracts."
The Supreme Court had to address the question of whether requiring
any arbitration agreement to also provide for class actions in
effect frustrates the purpose of agreeing to arbitration in the
first place. In other words, does the Discover Bank rule
effectively discourage companies from agreeing to arbitration
because the risks of class arbitration outweigh any benefits to the
company from arbitration. The Court found that the rule indeed had
that effect, explaining:
(1) Arbitrators tend to lack expertise in the complex procedural
arguments that are often at the center of class certification
determinations. As a result, companies will be more reluctant to
trust arbitrators with these issues.
(2) Because of the lack of meaningful judicial review on the merits
in arbitrations (when compared to court cases), companies would
face great risk of massive judgments that they could not appeal.
This is much less of a concern in individual arbitrations.
(3) While arbitration is supposed to allow flexibility in
procedures, class arbitration effectively requires the
incorporation of stricter legal requirements into the case, because
a failure of an arbitrator to follow them will prevent enforcement
of the class judgment against absent class members.
It remains to be seen whether courts will apply this new
AT&T decision in the employment context. It also remains to
be seen what impact the Supreme Court's holding today will have
on other prior decisions from the California courts ---- such as
the judicial rule that class action arbitration waivers in
employment contracts are almost always unconscionable; or the
judicially created rules for enforceability of employment
arbitration agreements (such as requiring the employer to pay all
the forum costs in excess of those that a plaintiff would be forced
to face in court).
Arbitration can be an a faster and more cost effective method for
employers and employees to resolve disputes. In this case, the
Court spent some time talking about how AT&T bent over
backwards to create a fair procedure that allowed redress of
disputes. Therefore, prudent employers will ensure that their
arbitration provisions are fair and that employees' rights are
not severely restricted. By doing so, employers will maximize the
odds that the courts will uphold their arbitration agreements and
class action waivers.
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.