In a 5-4 decision this week, the Supreme Court ruled that states may not condition the enforceability of arbitration agreements on the availability of classwide arbitration procedures. The Court's decision in AT&T Mobility v. Concepcion solidifies two principles that are of particular interest to businesses: that arbitration is a matter of contract and that class action mechanisms fundamentally degrade the efficiencies that arbitration is designed to offer. Together with the Supreme Court's ruling last Term in Stolt-Nielsen SA v. Animal Feeds International Corp.—which held that parties could not be required to engage in classwide arbitration where an arbitration agreement was silent on the issue—the ruling in AT&T will substantially limit, if not eliminate, the situations in which classwide arbitration may be compelled without the express consent of the parties.
Background
The plaintiffs brought a class action lawsuit alleging that
AT&T acted fraudulently by charging sales tax on cell phones
that it advertised as free. The contract the plaintiffs entered
into required that any disputes be submitted to arbitration on an
individual basis and explicitly prohibited classwide arbitration.
The plaintiffs filed suit in federal court, and that suit was later
consolidated as a class action against AT&T.
AT&T sought to enforce the contract's arbitration
requirement by filing a motion to compel arbitration, but the
district court denied the motion. It did so because of the
so-called Discover Bank rule that the California Supreme
Court adopted in 2005: that waivers of classwide arbitration are
not enforceable because they generally disadvantage consumers.
Discover Bank v. Superior Court, 36 Cal. 4th 148 (2005).
On appeal to the Ninth Circuit, AT&T argued that the
Discover Bank rule was preempted by Section 2 of the
Federal Arbitration Act (FAA). That provision declares that
arbitration clauses "shall be valid, irrevocable, and
enforceable, save upon such grounds as exist at law or in equity
for the revocation of any contract." Section 2 thus preempts
state rules that interfere with private agreements to arbitrate,
unless those rules relate generally to the enforceability of the
contract—such as rules regulating fraud, duress, or
unconscionability. AT&T contended that the Discover
Bank rule—though couched in the language of
unconscionability—was effectively applied in a way that
disfavors arbitration. The Ninth Circuit disagreed, holding that
the Discover Bank rule was "simply a refinement of
the unconscionability analysis applicable to contracts generally in
California."
The Supreme Court's decision
The Supreme Court reversed. In an opinion by Justice Scalia
(joined by Chief Justice Roberts and Justices Kennedy, Thomas, and
Alito), the Court held that while the FAA'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."
According to Justice Scalia, "[t]he overarching purpose of the
FAA . . . is to ensure the enforcement of arbitration agreements
according to their terms so as to facilitate streamlined
proceedings." Although the Discover Bank rule
"does not require classwide arbitration," the
majority reasoned, it effectively "allows any party to a
consumer contract to demand it ex post," even when
the parties had explicitly agreed to forgo classwide arbitration.
"Requiring the availability of classwide arbitration
interferes with fundamental attributes of arbitration and thus
creates a scheme inconsistent with the FAA."
The Court cited its recent decision in Stolt-Nielsen to
support that point. There, another closely divided Court recognized
that transforming a bilateral dispute into a sprawling classwide
arbitration was a "fundamental" change to the
parties' bargain. As the AT&T majority explained,
class arbitration sacrifices arbitration's informality and
makes the process slower, more costly, and "more likely to
generate procedural morass than final judgment." And those
effects are particularly prejudicial to defendants. According to
the majority, the "absence of multilayered review makes it
more likely that errors will go uncorrected," which become
"unacceptable" when "damages allegedly owed to tens
of thousands of potential claimants are aggregated and decided at
once."
Although the majority found that the state law at issue in
AT&T impermissibly disfavored arbitration, it
clarified in a footnote that states may still "take steps
addressing the concerns that attend contracts of adhesion,"
such as requiring arbitration clauses to be set forth in
conspicuous language. But even that narrow opening remains subject
to the FAA's "purpose to ensure that private arbitration
agreements are enforced according to their terms."
By emphasizing the FAA's concerns for honoring private bargains
and efficient dispute resolution, the majority rejected one of the
principal arguments pressed by the plaintiffs and the four
dissenting Justices: that most claims for small dollar amounts will
be abandoned if required to be prosecuted on an individual, rather
than a classwide, basis. Those sorts of concerns are irrelevant
under the FAA, according to the majority. What matters is that
states refrain from imposing arbitral class actions on parties that
never bargained for those inefficient mechanisms in the first
place: "States cannot require a procedure that is inconsistent
with the FAA, even it is desirable for unrelated reasons."
The dissent
Justice Breyer, writing for Justices Ginsburg, Sotomayor, and Kagan, dissented. He argued that the California law was not inconsistent with provisions of the FAA because it applied to class action waivers in any contract. That, according to him, made the Discover Bank rule one of general applicability that came within Section 2's savings clause. In his view, the Discover Bank rule promotes the basic purpose of the FAA, which is to enforce agreements to arbitrate, not to assure procedural and cost advantages. California courts had recognized that in a dispute between an individual consumer and a corporation the two parties may not possess equivalent bargaining power. In such cases, strict enforcement of the arbitration agreement could disadvantage the individual consumer, who likely would not be able to secure legal representation for a claim for a small dollar amount. Moreover, Justice Breyer disagreed with the majority's assessment that the Discover Bank rule is inconsistent with the goals of arbitration, pointing to American Arbitration Association statistics suggesting that class arbitration takes less time than class actions in court. Finally, Justice Breyer argued that federal arbitration law generally leaves contract defenses to the states. "California is free to define unconscionability as it sees fit, and its common law is of no federal concern so long as the state does not adopt a special rule that disfavors arbitration."
Practical implications of the decision
When coupled with Stolt-Nielsen, yesterday's decision in AT&T will substantially curtail classwide arbitrations. The decision also provides businesses with a much greater degree of certainty and predictability with respect to possible consumer litigation. No longer can states single out—under the rubric of unconscionability—contractual clauses that disfavor the arbitral arrangement that businesses and their consumers have specifically bargained for. In the wake of AT&T, businesses will want to give careful consideration to the form and content of arbitration clauses in their consumer contracts.
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