The Federal Arbitration Act (“FAA”) makes arbitration agreements “valid, irrevocable, and enforceable, save upon grounds as exist at law or in equity for the revocation of any contract.” 9 U.S.C. § 2. In Discover Bank v. Superior Court, 113 P.3d 1100 (Cal. 2005), the California Supreme Court adopted a rule that has subsequently been interpreted as banning most consumer arbitration agreements that require arbitration to be conducted on an individual basis. On April 27, 2011, the Supreme Court held in AT&T Mobility LLC v. Concepcion, No. 09-893, that the FAA preempts California’s “Discover Bank rule” as applied to petitioner AT&T Mobility LLC’s arbitration provision because that rule “stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress.” Mayer Brown LLP represented AT&T in this matter.

The plaintiffs in Concepcion filed a putative class action against AT&T, alleging that the company violated California consumer-protection laws by charging sales tax on the full retail value of phones it offered for free as part of transactions bundled with wireless service. AT&T moved to compel the Concepcions to arbitrate their disputes on an individual basis in accordance with their service agreements. Under the applicable version of AT&T’s arbitration provision, customers pay nothing to arbitrate, can choose to arbitrate by telephone or by mail, and are entitled to a minimum recovery of $7,500 and double attorneys’ fees if the arbitrator awards them more than AT&T’s last settlement offer. The district court found that “a reasonable consumer may well prefer [AT&T’s] quick informal resolution with likely full payment over class litigation that could take months, if not years, and which may merely yield an opportunity to submit a claim for recovery of a small percentage of a few dollars.” But the court nonetheless denied AT&T’s motion, concluding that the arbitration agreement was unconscionable under Discover Bank

The Ninth Circuit affirmed. The court recognized that AT&T’s arbitration agreement “essentially guarantees” that customers will receive make-whole relief. But the court held that the inability to arbitrate on behalf of a class renders the provision unconscionable under California law. The Ninth Circuit also held that the FAA does not preempt that law. 

In a 5-4 decision authored by Justice Scalia, the Supreme Court reversed. The Court held that applying California’s Discover Bank rule to invalidate AT&T’s arbitration provision would frustrate the FAA’s purpose of ensuring that arbitration agreements are enforceable as written. The Court observed that, under Section 2 of the FAA, a court may not “rely on the uniqueness of an agreement to arbitrate as a basis for a state-law holding that enforcement would be unconscionable.” Perry v. Thomas, 482 U.S. 483, 492 n.9 (1987). The Court explained that the Discover Bank rule—which “[r]equir[es] the availability of classwide arbitration” regardless of whether that procedure is needed to vindicate the plaintiff’s claim—would “interfere[] with fundamental attributes of arbitration” in three ways. First, “class arbitration sacrifices the principal advantage of arbitration—its informality—and makes the process slower, more costly, and more likely to generate procedural morass than final judgment. . . . Second, class arbitration requires procedural formality” inconsistent with arbitration. “Third, class arbitration greatly increases the risks to defendants,” because class arbitration has the same high stakes of class actions in court yet is subject to the sharply curtailed standard of judicial review of arbitral awards.

Justice Breyer wrote a dissenting opinion, joined by Justices Ginsburg, Sotomayor, and Kagan. The dissenting Justices contended that class proceedings are sometimes necessary to make it worthwhile to prosecute small claims. The majority opinion responded to that contention by observing that “the claim here was most unlikely to go unresolved” because the pro-consumer features of AT&T’s arbitration provision “provide incentive for the individual prosecution of meritorious claims that are not immediately settled.”

This decision is a significant one for businesses that include arbitration provisions in their agreements with customers or employees. Concepcion confirms that the FAA preempts state-law rules and policies that mandate the availability of class procedures—at least when an arbitration clause contains features that, like AT&T’s arbitration clause, ensure that customers are able to vindicate their claims on an individual basis. For more information about the matters raised in this update, please contact Andrew J. Pincus (+1 202 263 3220), Evan M. Tager (+1 202 263 3240), or Archis A. Parasharami (+1 202 263 3328) in our Washington D.C. office.

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