Supreme Court Rules 5-4 That States Cannot Require Class Arbitration
May 3, 2011
Todd D. Steenson- Chicago
In a decision that makes arbitration significantly more attractive for many businesses and employers, the U.S. Supreme Court has ruled that a California rule prohibiting most class action “waivers” in arbitration agreements is preempted by the Federal Arbitration Act (FAA) and is therefore unenforceable. AT&T Mobility LLC v. Concepcion, No. 09-893 (April 27, 2011). Justice Antonin Scalia, writing for the majority in the 5-4 decision, stated that a state rule that requires making classwide arbitration procedures available to parties who have agreed to arbitrate individual disputes “interferes with fundamental attributes of arbitration and thus creates a scheme inconsistent with the FAA.”
This decision means that businesses and employers can insert a provision in their arbitration agreements that prohibits both class action lawsuits and class action arbitrations, and instead requires the consumer or employee to arbitrate only his or her own dispute.
The Federal Arbitration Act
Passed in 1925 to overcome judicial hostility to arbitration agreements, the Federal Arbitration Act provides that arbitration agreements are “valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” The Supreme Court has ruled that the FAA prohibits states from applying special rules to strike down arbitration agreements; rather, a court may strike down an arbitration agreement only if it violates a principle that would require invalidation of any contract.
Class Action Waivers and California’s Discover Bank Rule
A class waiver is a provision in an arbitration agreement by which an individual gives up the right to bring a class action arbitration on behalf of others against the other party to the arbitration agreement. Businesses have used them to limit the risk of class action lawsuits. But a number of state courts have ruled that such class action waivers are unenforceable. For example, in Discover Bank v. Superior Court, 36 Cal. 4th 148, 113 P. 3d 1100 (2005), the California Supreme Court held that waivers in an arbitration agreement of the right to bring a class action arbitration action are unenforceable if the agreement is in an adhesion (i.e., take-it-or-leave-it) contract, disputes between the parties are likely to involve small amounts of damages, and the party with inferior bargaining power (i.e., the consumer or employee) alleges a deliberate scheme to defraud.
Case Involved AT&T Customer Agreement
Vincent and Liza Concepcion purchased cellular telephones and services from AT&T Mobility in a package that referred to the phones as “free,” but were later charged approximately $30 sales tax on the phones. The Concepcions filed a proposed class action lawsuit in the U.S. District Court for the Southern District of California asserting claims under California law based on the company’s advertisement of a free phone and the imposition of the sales tax charge.
AT&T moved to compel arbitration of the dispute, arguing that the Concepcions had agreed to arbitrate any dispute with AT&T in an individual capacity, “not as a plaintiff or class member in any purported class or representative proceeding.”
The AT&T Mobility arbitration agreement was otherwise highly favorable to consumers. It required the company to pay all of the arbitration fees incurred by a customer in pursuing nonfrivolous claims against the company, allowed claims to be brought in small claims court and provided that the company would pay the customer at least $7,500 – as well as double attorneys’ fees – if a customer obtained an arbitration award that exceeded the company’s last settlement offer.
The trial court found that the arbitration agreement was not only fair to the Concepcions, but that consumers who were members of a class would likely be worse off than in an individual arbitration under the arbitration agreement. But, applying the California Supreme Court’s Discover Bank decision, both the trial and appellate courts ruled that the class action waiver in the arbitration agreement was unenforceable and that the Concepcions could proceed with a class action lawsuit.
The Supreme Court Ruling
The Supreme Court disagreed. In a 5-4 decision, Justice Antonin Scalia wrote that the issue was “whether the FAA prohibits States from conditioning the enforceability of certain arbitration agreements on the availability of classwide arbitration procedures.” He answered, “Yes.”
Courts must treat arbitration agreements like other contracts and enforce them according to their terms “so as to facilitate streamlined proceedings,” the Court said. An agreement by parties to arbitrate disputes may not be invalidated by “defenses that apply only to arbitration or that derive their meaning from the fact that an agreement to arbitrate is at issue.”
The Discover Bank rule violated this principle, Justice Scalia wrote. He noted that “California courts have frequently applied this rule to find arbitration agreements unenforceable” and treated arbitration agreements differently from other contracts.
Justice Scalia further wrote that arbitration is “poorly suited to the higher stakes of class litigation,” and that class arbitration sacrifices the informality and speed of dispute resolution that Congress contemplated in enacting the FAA. As a result, “[r]equiring the availability of classwide arbitration” even when the parties specifically agreed to arbitrate claims only on an individual basis, as California’s Discover Bank rule does, “interferes with fundamental attributes of arbitration and thus creates a scheme inconsistent with the FAA.”
The Court further stated that states may not impose other requirements, such as full-blown discovery, rules of evidence or juries in arbitration. Such requirements are “not arbitration as envisioned by the FAA, lack its benefits, and therefore may not be required by state law.” It rejected concerns that class arbitration proceedings are necessary to allow prosecution of “small-dollar claims that might otherwise slip through the legal system,” writing that “States cannot require a procedure that is inconsistent with the FAA, even if it is desirable for unrelated reasons.”
What The Ruling Means
The Concepcion decision is a huge win for businesses and employers. It means that employers may enter and enforce arbitration agreements without the risk of state rules requiring them to arbitrate against a whole class of plaintiffs. It also puts the brakes on efforts by some states to mandate that arbitration agreements provide additional procedures before they will enforce them. This may provide a way to help limit the tide of class actions, particularly those alleging overtime or other wage and hour violations.
To take advantage of the decision, however, businesses and employers should ensure that their arbitration agreements explicitly state (a) that they require arbitration of claims on an individual basis; (b) that the individual waives the right to sue in court over claims covered by the arbitration agreement; and (c) that the arbitration will occur only on an individual basis, not on a class basis.
Employers need to consider a number of other factors to ensure that their arbitration agreements are enforceable. As a general matter, a majority of courts have held that arbitration agreements meeting the following standards are enforceable to require employees to arbitrate federal discrimination claims: the agreement (a) requires the arbitrator to apply the applicable laws; (b) allows the employee to recover remedies the employee could recover in court; (c) provides that the employer pays the costs of arbitration (although not the employee’s attorneys’ fees); and (d) allows the employee to obtain some discovery in advance of any arbitration hearing.
Employers should also be aware that the National Labor Relations Board has attempted to limit employers’ use of arbitration agreements and class action waivers in certain ways. First, the NLRB has ruled that an arbitration agreement cannot preclude employees from filing an unfair labor practice charge with the NLRB, but instead must make clear that employees have that right. Second, The Board’s General Counsel has issued an opinion stating that an employee’s decision to file a class action is an activity protected by the National Labor Relations Act. This means that although an employer may have and enforce a class action waiver in an arbitration agreement, it may not take other adverse action against an employee because he or she filed a class action, even one in violation of a class action waiver.
Finally, Congress may attempt to reverse the Concepcion decision and prohibit class action waivers. A series of highly pro-employer Supreme Court decisions in 1989 and 1990 spurred passage of the Civil Rights Act of 1991. Sen. Patrick J. Leahy (D-Vt.), chairman of the Senate Judiciary Committee, has already stated his view that the Concepcion decision is wrong and that a legislative “fix” is needed. In a statement issued the same day as the decision, Leahy said that “class actions are an effective way to ensure consumer protection, but today’s opinion by the Roberts Court continued to move in a direction that undermines this access to justice for hardworking Americans.” He concluded that “[n]ow more than ever ... Congress needs to respond with legislation to clarify the original intent of the [FAA].”
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