Despite the increase in class action lawsuits in 2011, there was one major development related to limiting class actions—the Supreme Court of the United States decision AT&T Mobility LLC v. Concepcion, 562 U.S. ___ (2011). In April 2011, in what many hailed as a win for businesses, the Supreme Court held that the Federal Arbitration Act (FAA) preempts any state authority that strikes down as "unconscionable" consumer contracts with arbitration clauses containing class action waivers.

The background to this decision is Section 2 of the FAA, which makes agreements to arbitrate "valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract" (9 U.S.C. §2, emphasis added). Prior to the AT&T decision, the California Supreme Court had considered the emphasized statutory language, and used the doctrine of unconscionability as such "legal grounds" to strike down class action waivers in consumer contracts.

In AT&T, the Supreme Court of the United States held that the California Supreme Court decision interfered with the clear intent of the FAA to promote arbitration, and held that when a state law would impair the purpose of the FAA, the FAA must preempt the conflicting state law. Importantly, the Supreme Court did not rule that all arbitral class action waivers are enforceable. Rather, the Supreme Court held only that arbitral class action waivers are not, in and of themselves, void as unconscionable.

As a result, courts still must evaluate the particular arbitration agreement at issue on a case-by-case basis to determine whether the terms are fair. The arbitration agreement at issue in the AT&T decision, however, provides an example of one that would be deemed fair and enforceable. The highlights of that arbitration agreement include the following:

  • Venue was in the county where the consumer resides.
  • Consumers could elect to have the arbitration be in-person, telephonic or decided based on written submissions.
  • AT&T agreed to pay all costs for non-frivolous claims.
  • Arbitrators had the power to award any form of individual relief, including issuing injunctions and presumably awarding punitive damages.
  • AT&T waived any right to seek reimbursement of its fees and costs.
  • In the event that a consumer received an award greater than AT&T's last written settlement offer, AT&T was to pay a $7,500 minimum recovery and double the amount of the consumer's attorney's fees.

In light of this decision, businesses at risk for consumer class actions should consider whether the cost of a generous arbitration provision like AT&T's outweighs the risk of consumer class actions. One important factor in this analysis is the difference between the number of consumers who are likely to pursue individual claims to their conclusion, and the likelihood that a plaintiff's lawyer will assert claims on behalf of a large number of consumers without their active participation. In any case, businesses should consider reviewing existing contracts with outside counsel and determine whether revisions are appropriate in light of the AT&T decision.

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