Courts generally favor contract clauses calling for arbitration of disputes relating to the contract. This principle was reinforced by a recent U.S. Supreme Court case, AT&T Mobility v. Concepcion, which addressed class action waivers in arbitration agreements.

Vincent and Liza Concepcion entered into a cellular telephone contract with AT&T, which contained a provision providing for arbitration of all disputes between them. In addition, the provision required that any claims be brought on an individual, rather than a classwide, basis. AT&T provided the Concepcions with free phones, but charged them sales tax on the phones' retail value. The Concepcions attempted to bring a class action against AT&T under consumer protection statutes, and AT&T sought individual arbitration pursuant to the parties' contract.

The lower court held the contract's arbitration clause was unjust because AT&T had not shown that arbitration on an individual basis adequately substituted for class actions. The Ninth Circuit agreed. Both courts relied on a California case, referred to as Discover Bank, which established a "rule" in California that said that most collective arbitration waivers in consumer contracts are unjust.

Reversing the Ninth Circuit, the U.S. Supreme Court relied on the principle that "arbitration is a matter of contract." The Supreme Court also emphasized that the overarching purpose of the Federal Arbitration Act (FAA), the statute that provides for the resolution of disputes through arbitration, is "to ensure the enforcement of arbitration agreements according to their terms..." The Supreme Court concluded that California's Discover Bank rule unlawfully interferes with the fundamental attributes of arbitration and the purpose of the FAA. According to the Supreme Court, this is because the rule effectively allows a contracting party to get around its agreement to arbitrate individually and instead demand classwide arbitration – a procedure that is more formal, costly and complex than individual arbitration.

>> The Bottom Line

The implications of this decision are uncertain but likely far-reaching. Notably, it calls into question, if not overrules, a number of other court decisions striking down class action waivers. What is clear is the Supreme Court's general deference to the terms of arbitration agreements in contracts.

Companies drafting contracts that wish to avoid class actions should consider including provisions calling for individual arbitration of disputes and waiving class action litigation. On the flip side, consumers signing agreements should look for any clauses doing away with their right to bring a class action against the other party so that consumers understand their rights in the face of a dispute.

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