Class Action Waivers in Arbitration Agreements are Valid under Federal Arbitration Act (FAA) and California’s Discover Bank Rule, Which Found Such Waivers Unenforceable as Unconscionable Under State Law, is Preempted by the FAA Supreme Court Holds
Plaintiffs filed a putative class action in California federal court against AT&T Mobility, with whom they had cellular telephone service, alleging “false advertising and fraud by charging sales tax on phones it advertised as free.” AT&T Mobility LLC v. Concepcion, ___ U.S. ___ (April 27, 2011) [Slip Opn., at 2-3]. According to the allegations underlying the class action complaint, plaintiffs purchased cellular telephone service from AT&T based on an advertisement for “free phones” because, even though they were not charged for the telephones, “they were charged $30.22 in sales tax based on the phones’ retail value.” Id. Defense attorneys moved to compel arbitration, id., at 3. The cellular telephone service contract required arbitration of disputes between the parties and included a class action waiver, providing that claims must be brought in a “individual capacity, and not as a plaintiff or class member in any purported class or representative proceeding.” Id., at 1. Plaintiffs opposed arbitration on the grounds that the class action waiver was unconscionable under California law. Id., at 3. Despite viewing the arbitration agreement “favorably,” the district court denied AT&T’s motion to compel arbitration because the class action waiver rendered the arbitration clause unconscionable under California law based on Discover Bank v. Superior Court, 36 Cal.4th 148 (Cal. 2005). Id. The Ninth Circuit affirmed, holding that “the Discover Bank rule was not preempted by the FAA because that rule was simply a ‘refinement of the unconscionability analysis applicable to contracts generally in California.’” Id., at 3-4 (citing Laster v. AT&T Mobility LLC, 584 F.3d 849, 857 (9th Cir. 2009). The Supreme Court granted certiorari and reversed.
The service agreement was consumer-friendly: It provided that a customer could initiate a dispute by filling out a one-page form available online, and if not resolved to the customer’s satisfaction within 30 days, the customer could initiate arbitration by filling out another form available online. If a customer commenced arbitration proceedings, the arbitration would be held “in the county in which the customer is billed” and AT&T was required to “pay all costs for nonfrivolous claims.” AT&T Mobility, at 2. (The customer could also elect to proceed in small claims court. Id.) Moreover, if the amount in dispute was less than $10,000, then the customer could elect whether the arbitration should be conducted “in person, by telephone, or based only on submissions.” Id. Additionally, “the arbitrator may award any form of individual relief, including injunctions and presumably punitive damages.” Id. AT&T was prohibited from seeking reimbursement of its attorney fees, and “in the event that a customer receives an arbitration award greater than AT&T’s last written settlement offer,” then the service agreement “requires AT&T to pay a $7,500 minimum recovery and twice the amount of the claimant’s attorney’s fees.” Id. (footnote omitted). Yet despite what appears to have been every effort to craft an arbitration clause favorable to its customer, albeit prohibiting class actions, the lower courts found the arbitration clause unconscionable and unenforceable under the Discover Bank rule. The Supreme Court reversed.
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