Supreme Court Hears Arguments in Arbitration Preemption Case

On Tuesday the U.S. Supreme Court heard oral arguments (pdf) in a case that could significantly impact class action litigation. The issue before the Court in AT&T Mobility v. Concepcion (09-893) is whether the Federal Arbitration Act (FAA) preempts states from conditioning the enforceability of an arbitration agreement on the availability of class-wide arbitration when that procedure is not necessary to ensure that parties to the agreement are able to vindicate their claims.

The dispute in this matter involved a consumer contract for wireless telephone services that contained both an agreement to arbitrate disputes and a class action waiver clause. In response to a putative class action filed by the Concepcions, the company sought to compel individual arbitration pursuant to the arbitration agreement and class action waiver the plaintiffs had signed.  The arbitration agreement at issue provided a number of pro-consumer terms, including the following: the company would pay all arbitration fees for non-frivolous complaints; the arbitration itself would be conducted in the county of the customer’s billing address; an allowance would be provided for the claimant to proceed in small claims court; the company would provide double the amount of attorneys’ fees and $7,500 if the ultimate arbitration award exceeded the company’s settlement offer; and a waiver of the company’s right to attorneys’ fees in the event it prevailed on the matter.

A California District Court held, however – and the Ninth Circuit Court of Appeals affirmed – that the class action waiver was unconscionable under California law, and that the FAA does not preempt state law on this issue. Counsel for petitioner argued that the standard for unconscionable that California courts apply to arbitration agreements is less stringent than the standard it applies to other types of contracts, which is “whether something is so unfair as to shock the conscience.” Therefore, he asserted, the application of the unconscionability standard to arbitration agreements discriminates against arbitration and therefore does not fall under the “savings clause” of Section 2 of the FAA, which he argued limits revocation of an arbitration agreement to only those situations that apply even-handedly to all contracts. In response Justice Scalia asked, “Are we going to tell the state of California what it has to consider unconscionable?"

In addition, counsel for petitioner invoked the Court’s recent decision in Stolt-Nielsen S.A. v. Animal Feeds Int’l Corp. to support its position that the class wavier in the arbitration agreement is valid. The Court in Stolt-Nielsen held that “a party may not be compelled under the FAA to submit to class arbitration unless there is a contractual basis for concluding that the party agreed to do so.”

The attorney for the respondents, on the other hand, argued that the state unconscionability law is not preempted because 1) “it is consistent with the equal footing principle or nondiscrimination principle that the Court has consistently recognized is embodied in section 2” of the FAA; 2) it ensures that “arbitration is a matter of consent and not coercion,” and that arbitration represents “merely a choice of forum;” and 3) “the State law at issue is a correct and legitimate application of the State's common law to which this Court should defer.”

In response to a question about the effect of the Court’s decision in Stolt-Nielsen, respondent’s counsel replied that it did not apply to the question of the validity of an arbitration agreement with a class action waiver: “What Stolt-Nielsen tells you is that you cannot impose class arbitration on an unwilling defendant.” In reply Justice Scalia stated, “[T]he question is not whether they are being forced to accept class arbitration; it's whether they are being coerced into abandoning regular arbitration [in favor of defending a class action in court]. That's really the issue.”

While this case involved an arbitration provision and class action waiver in a commercial contract, the Supreme Court’s decision will impact such provisions in employment contracts as well. Should the Court agree with the respondents in this matter, class action waivers in arbitration agreements would be rendered meaningless in states that deem such provisions unlawful. On the other hand, should the Court agree with the petitioner, the ability of plaintiffs to bring class action lawsuits where parties are bound to arbitration agreements that waive such suits would be dramatically diminished.

Information contained in this publication is intended for informational purposes only and does not constitute legal advice or opinion, nor is it a substitute for the professional judgment of an attorney.