In a 5-4 decision penned by Justice Scalia, the Supreme Court on April 27, 2011, reversed the Ninth Circuit in the case of AT&T Mobility LLC v. Concepcion, providing a holding that may be easily extrapolated from the consumer class action context in which it arose to the employment arena. In Concepcion, the Supreme Court rejected the application of California's "Discover Bank rule," opining that, "it stands as an obstacle to the accomplishment and execution of Congress" and finding that it was preempted by the Federal Arbitration Act.
In Discover Bank, the California Supreme Court held that class waivers in consumer arbitration agreements were unconscionable if the agreement was an adhesion contract, disputes between the parties were likely to involve small amounts of damages and the party with the inferior bargaining power alleged a deliberate scheme to defraud. Otherwise, under Discover Bank, class waivers in arbitration agreements were valid. In finding the Discover Bank rule preempted, the Concepcion opinion noted, "the times in which consumer contracts were anything other than adhesive are long past" and the requirements that damages be predictably small and that the consumer allege a scheme to cheat consumers had become "toothless and malleable." In reaching its decision, the five-justice majority took critical aim at class arbitration: "The switch from bilateral to class arbitration sacrifices arbitration's informality and makes the process slower, more costly, and more likely to generate procedural morass than final judgment. And class arbitration greatly increases risks to defendants."
Already members of the Plaintiffs' Bar are decrying that the Supreme Court's decision will lead to the crafting of arbitration agreements in consumer, franchise and employment contexts to explicitly exclude participation in class arbitrations. Their concerns are echoed by Justice Breyer in the four-person dissent, which not only takes the position that the "Court is wrong to hold that the [Federal Arbitration Act] pre-empts the rule of state law," but poses the question: "[w]hat rational lawyer would have signed on to represent the Concepcions in litigation for the possibility of fees stemming from a $30.22 claim? See e.g., Carnegie v. Household Int'l., Inc., 376 F.2d 656, 661 (CA 7 2004) ("The realistic alternative to a class action is not 17 million individual suits, but zero individual suits, as only a lunatic or a fanatic sues for $30")."
By contrast, California employers who have faced an onslaught of seemingly lawyer-driven class actions (in both the wage and hour and discrimination contexts) can only view the decision as good news. We would suggest, based on this decision, that companies rethink their existing arbitration agreements and consider adding express language waiving the rights to bring or participate in arbitrations in a class action context. No doubt, as the language is added to employment agreements, individuals will "test" the reach of the Concepcion ruling. Conversely, we would similarly anticipate that the legislature in California (or other states) may try to pass a different rule that could survive federal preemption. Our Labor & Employment team will be following further developments in this regard and is prepared to discuss all aspects of this decision with you.
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