Schiff Hardin LLP Class Action Alert

U.S. Supreme Court Upholds "No Class Action" Arbitration Clause

The United States Supreme Court has upheld a "no class action" arbitration clause in a consumer contract against a state law unconscionability challenge, holding that the Federal Arbitration Act ("FAA") preempted California's "Discover Bank rule." AT&T Mobility LLC v. Concepcion, No. 09-893 (U.S. Sup. Ct. Apr. 27, 2011). The California rule (variations of which have been adopted by other states) had been interpreted to invalidate class action waivers in most consumer arbitration agreements.

The decision understandably has generated considerable excitement in the business community, and will be an important tool in defending consumer class actions. We caution, however, that the decision should not be viewed as a foolproof means of insulating all types of consumer claims from classwide resolution.

The plaintiffs filed suit in California federal court, alleging that AT&T had violated California consumer protection laws by charging sales tax on cell phones it had advertised as free. AT&T moved to compel individual arbitration under its contract, which prohibited classwide arbitration.

The Ninth Circuit held that the class action waiver was unconscionable under Discover Bank v. Superior Court, 113 P.3d 1100 (Cal. 2005), which invalidates such clauses if the agreement is an adhesion contract, the dispute involves small amounts of damages, and the consumer alleges a scheme to defraud. The court also held that Section 2 of the FAA — which deems arbitration provisions enforceable "save upon such grounds as exist at law or in equity for the revocation of any contract" — did not preempt the California rule, because the rule was "a refinement of the unconscionability analysis applicable to contracts generally in California."

In a 5-4 decision, the Supreme Court reversed. In an opinion by Justice Scalia (joined by Chief Justice Roberts and Justices Kennedy, Thomas, and Alito), the Court held that the FAA preempted Discover Bank because the rule was "an obstacle to the accomplishment of the FAA's objectives." According to the Court, although the rule did not require class arbitration, it "allow[ed] any party to a consumer contract to demand it ex post." The Court held that class arbitration, to the extent it is "manufactured" by Discover Bank, rather than consensual, is inconsistent with the FAA's purpose of enforcing arbitration agreements according to their terms.

Building on its decision in Stolt-Nielsen S.A. v. AnimalFeeds International Corp., 130 S. Ct. 1758 (2010), that arbitrators may not impose class arbitration unless authorized by the parties' contract, the Court enumerated several ways in which, it its view, class arbitration is inconsistent with the bilateral arbitration contemplated by the FAA:

• "[C]lass 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."
• "[C]lass arbitration requires procedural formality. . . . We find it unlikely that in passing the FAA Congress meant to leave the disposition of these procedural requirements [e.g., adequate representation, notice, opt-out rights] to an arbitrator," who is not "generally knowledgeable in the often-dominant procedural aspect of certification . . . ."
• "[C]lass arbitration greatly increases risks to defendants. . . . Arbitration is poorly suited to the higher stakes of class litigation."

Despite these statements, it is not certain that Concepcion would validate all unduly one-sided, "anti-consumer" arbitration provisions.

First, Concepcion addresses federal preemption of state laws inconsistent with the FAA, and does not specifically address the invalidation of arbitration provisions under federal law. A long line of cases holds that arbitration of certain federal statutory claims (e.g., antitrust, ADEA, TILA) should ensure that the plaintiff "effectively may vindicate his statutory cause of action in the arbitral forum." Thus, arbitration provisions that impose prohibitive costs on plaintiffs, or that purport to waive important federal statutory rights or remedies, may still be invalid under the FAA. Although a court may not force an unwilling defendant into class arbitration, it may still have the authority to invalidate a "no class action" provision and require the defendant to proceed to class litigation. E.g., In re American Express Merchants' Litig., 634 F.3d 187, 193 (2d Cir. 2011) (invalidating "no class action" arbitration clause because class action was only economically feasible means of enforcing federal antitrust claims: "Stolt-Nielsen states that parties cannot be forced to engage in a class arbitration absent a contractual agreement to do so. It does not follow . . . that a contractual clause barring class arbitration is per se enforceable."). (The Second Circuit has since requested briefing from the parties on "how [Concepcion] applies to this case.")

Second, the dissenting Justices (Breyer, Ginsburg, Sotomayor, and Kagan) argued that class proceedings are sometimes necessary to prosecute small claims that otherwise may "slip through" the system. Although the Court responded that "States cannot require a procedure that is inconsistent with the FAA, even if it is desirable for unrelated reasons," the Court also noted the pro-consumer aspects of AT&T's arbitration provision, which made it "most unlikely" that the claim would go "unresolved": AT&T pays all costs for nonfrivolous claims; the arbitration must take place in the customer's county; for claims of $10,000 or less, the customer may choose to arbitrate in person, by phone, or by submission; either party may file in small claims court; the arbitrator may award any form of individual relief; AT&T cannot seek reimbursement of its attorneys' fees; and claimants receive a minimum recovery of $7,500 (since raised to $10,000) and twice their attorneys' fees if they obtain an arbitral award greater than AT&T's last settlement offer.

Of course, this does not mean that a consumer arbitration agreement must contain all (or even any) of these provisions to be valid. But it does suggest that companies should tread cautiously in this area.

Finally, the Court stated, in a footnote, that "States remain free to take steps addressing the concerns that attend contracts of adhesion — for example, requiring class-action-waiver provisions in adhesive agreements to be highlighted." Although the Court noted that such steps cannot "conflict with the FAA or frustrate its purpose," the Court did not elaborate further on the nature of these permissible "steps."

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