Legal Alert

Supreme Court Upholds Class Action Waivers

April 27, 2011

Today, the U.S. Supreme Court, in a landmark decision, issued its long-awaited opinion in AT&T Mobility LLC v. Concepcion, holding 5 to 4 that the Federal Arbitration Act (FAA) preempts state laws that invalidate class action waivers in consumer arbitration agreements.

A class action waiver is language in an arbitration agreement that prohibits the parties from participating in a class action in court or in arbitration. While this case involved cell phone contracts, the Court’s opinion will also apply in a wide variety of other contexts, including other consumer contracts, business-to-business contracts, and employment contracts.

AT&T prevailed in the U.S. Supreme Court appeal, but the Court’s decision should be viewed as a victory for both companies and consumers. The Court emphasized the positive attributes of arbitration, heralding its “efficient, streamlined procedures” and its “informality,” which serve the salient purposes of “reducing the cost and increasing the speed of dispute resolution.”

Justice Antonin Scalia wrote the majority opinion, which was joined by Chief Justice John G. Roberts and Justices Anthony Kennedy, Clarence Thomas, and Samuel Alito.

Under the savings clause in Section 2 of the FAA, an arbitration agreement can be invalidated only on state law grounds that apply to “any contract,” not just an arbitration contract. The Ninth Circuit Court of Appeals had held in Concepcion that the FAA did not preempt the test employed by the California Supreme Court in determining the validity of class action waivers in arbitration agreements because the same test was employed by that Court in determining the validity of class action waivers outside arbitration agreements. Under that test, articulated by the California Supreme Court in Discover Bank v. Superior Court of Los Angeles, 36 Cal. 4th 148 (2005), a class action waiver is unconscionable if:

  • The agreement is a consumer contract of adhesion drafted by a party with superior bargaining power
  • The agreement occurs in a setting in which disputes between the contracting parties predictably involve small damages
  • It is alleged that the party with the superior bargaining power has carried out a scheme deliberately to cheat large numbers of consumers out of individually small sums of money

The U.S. Supreme Court concluded that “[a]lthough § 2’s savings 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.” Those objectives are “to ensure the enforcement of arbitration agreements according to their terms so as to facilitate streamlined proceedings.” According to the Court, the FAA preempts state laws invalidating class action waivers in arbitration agreements because “[r]equiring the availability of classwide arbitration interferes with fundamental attributes of arbitration and thus creates a scheme inconsistent with the FAA.”

Ballard Spahr submitted an amicus brief in the case on behalf of the American Bankers Association, Financial Services Roundtable, Consumer Bankers Association, and American Financial Services Association.

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