In an opinion favorable to employers who use arbitration agreements, the Supreme Court in AT&T Mobility v. Concepcion (pdf) has held that the Federal Arbitration Act (FAA) preempts a California state supreme court decision that conditioned the enforceability of a consumer arbitration agreement on the availability of class-wide arbitration. Emphasizing this country’s “liberal federal policy favoring arbitration,” the Court stated that the FAA preempts the state law rule because it “stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress.” Although the facts of this case centered on commercial contracts, the Court’s decision indirectly reaffirms the validity of including class action waivers in agreements to arbitrate employment disputes. Its central premise are that the FAA requires arbitration agreements to be enforced as written, that states (whether through their courts or legislatures) cannot erect obstacles to their enforcement, and that class waivers are wholly consistent with the purposes of the FAA - expedited, informal dispute resolution.

The facts in this case 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 aggrieved consumers, 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 arbitration provision was unconscionable under California precedent because it precluded class action lawsuits, and that the FAA does not preempt state law on this issue. Specifically, the lower courts ruled that under the California Supreme Court decision in Discover Bank v. Superior Court, the arbitration provision was unconscionable because the company had not shown that bilateral arbitration “adequately substituted for the deterrent effects of class actions.” In its 5-4 decision, the Supreme Court reversed and remanded, finding that “[r]equiring the availability of class-wide arbitration interferes with fundamental attributes of arbitration and thus creates a scheme inconsistent with the FAA.”

Among other rationales, the Court explains that arbitration “is poorly suited to the higher stakes of class litigation,” adding that “the point of affording parties discretion in designing arbitration processes is to allow for efficient, streamlined procedures tailored to the type of dispute.” In arriving at this conclusion, the Court explains that “the switch from bilateral to 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.” For example, the Court contends that contrary to the intent of arbitration agreements, class arbitration “requires procedural formality.” If such procedures are too informal, the Court states, absent class members would not be bound by the arbitration decision. For a decision to be valid, the arbitrator must ensure that absent members are given notice of the proceedings and afforded an opportunity to participate and/or opt out of the class. Having an arbitrator preside over these procedural requirements was not likely Congress’ intent in passing the FAA, according to the Court.

Furthermore, the opinion explains that:

class arbitration greatly increases risks to defendants. Informal procedures do of course have a cost: The absence of multilayered review makes it more likely that errors will go uncorrected. Defendants are willing to accept the costs of these errors in arbitration, since their impact is limited to the size of individual disputes, and presumably outweighed by savings from avoiding the courts. But when damages allegedly owed to tens of thousands of potential claimants are aggregated and decided at once, the risk of an error will often become unacceptable.

The Court also noted that “faced with inevitable class arbitration, companies would have less incentive to continue resolving potentially duplicative claims on an individual basis.”

For more information on this decision and its implications for employers, see Littler’s ASAP: Supreme Court Finds California Class Action Arbitration Waiver Enforceable.