A new U.S. Supreme Court decision holding that individuals can
waive the right to participate in a class action as part of an
arbitration agreement has the potential to limit the availability
of class action treatment for commercial and consumer
disputes.
In AT&T Mobility LLC v. Concepcion, the Court relied on the
"liberal federal policy favoring arbitration" to hold
that the Federal Arbitration Act preempts California law that
prevented enforcement of a contract clause waiving the right to
participate in a class action. These clauses required any claims to
be brought in an individual capacity rather than as a class action
or in a class arbitration. California courts – and courts
in several other jurisdictions – had held that such
clauses are "unconscionable" and therefore
unenforceable.
The Concepcion case was brought by a couple who alleged that
AT&T Mobility had engaged in false advertising when it offered
"free" cellular telephones but then charged sales tax of
about $30 on the full retail price of the telephones. The couple
wanted to proceed with a class action on the issue and had argued
that the provision in their consumer contract limiting them to an
individual claim was unenforceable under California law.
The Supreme Court disagreed, stressing that the "over-arching
purpose" of the Federal Arbitration Act is to ensure
enforcement of arbitration agreements according to their terms so
as to "facilitate streamlined proceedings." And while
arbitration of individual claims can provide reduced costs and
increased speed of dispute resolution over court proceedings, the
same does not hold true for arbitration of class claims, the Court
held. As the Supreme Court reasoned, requiring class-wide
arbitration when the parties' contract says otherwise
"interferes with fundamental attributes of arbitration and
thus creates a scheme inconsistent with the FAA."
The plaintiffs and those supporting their position, argued that
allowing class waivers to be enforced would mean many consumer
suits would never be brought, as consumers routinely sign
arbitration agreements and the value of their claims often will not
make individual litigation worthwhile. While the majority opinion
recognized this policy concern (and the four-member dissent
stressed it), the Court stated that it was compelled to apply the
FAA as written, holding that "States cannot require a
procedure that is inconsistent with the FAA, even if it is
desirable for unrelated reasons."
While the full impact of the Concepcion decision will not be known
until the lower courts have the opportunity to flesh out its
contours, the Court's reasoning could extend to various other
contracts and contexts. However, the case invites businesses of all
sorts – and especially those providing goods and services
to consumers – to consider including in their contracts
an arbitration provision that includes a waiver of class action
rights.
The Concepcion case divided the Supreme Court and has drawn
considerable attention from the business community and the
plaintiffs' bar. A large number of interest groups on both
sides of the issue filed "friend of the Court" briefs to
express their disparate points of view. That division is expected
to continue as some legislators who disagreed with the decision
have indicated they will address the issue of arbitration
agreements by introducing legislation in Congress.
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