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May 9, 2011

Supreme Court Rules Class Action Waiver in Arbitration Agreement is Enforceable

On April 27, 2011, in AT&T Mobility v. Concepcion, No. 09-983, __ U.S. __ (2011), the United States Supreme Court held that the Federal Arbitration Act (“FAA”) preempts a decision from the California Supreme Court that had found unconscionable arbitration agreements that disallowed class-wide proceedings.  Although the Supreme Court’s decision in AT&T Mobility concerned a contract of adhesion in a consumer agreement, the Court’s analysis would likely apply to employment arbitration agreements. 

AT&T Mobility v. Concepcion

In AT&T Mobility v. Concepcion, the plaintiffs brought a class action lawsuit against AT&T, claiming that the company had engaged in false advertising and fraud by charging sales tax on phones that it advertised as free.  In March 2008, AT&T moved to compel arbitration pursuant to the contract that the plaintiffs had entered into when they purchased their telephones and service.  The agreements signed by the plaintiffs provided that all disputes between the parties in their “individual capacities” must be settled by arbitration rather than litigation.  The agreement also provided that class-type proceedings could not take place at arbitration. 

The district court refused to enforce the arbitration agreement, finding that, under California law, the class action waiver in the arbitration agreement was unconscionable.  The Ninth Circuit Court of Appeals affirmed the district court’s decision, relying upon the California Supreme Court’s decision in Discover Bank v. Superior Court, 113 P.3d 1100 (Cal. 2005).  In Discover Bank, the California Supreme Court found that individual arbitration was not an adequate substitute for class actions, especially in cases where the amount of damages would be nominal for each individual plaintiff.  The Ninth Circuit also held that the Discover Bank rule was not preempted by the FAA. 

The Supreme Court reversed the Ninth Circuit’s decision, holding that the Discover Bank rule was preempted by the FAA.  The Court’s opinion found that the Discover Bank rule was inconsistent with the FAA because it “stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress.”  The Court found that the rule prohibiting class action waivers interfered with the FAA’s overarching purpose, which is to ensure the enforcement of arbitration agreements according to their terms.  The Court also observed that arbitration is poorly suited to the resolution of class-wide claims, especially given the limited review of arbitral awards. 

Employment Arbitration Agreements

The Court’s AT&T Mobility decision likely bolsters the enforceability of all arbitration agreements, including those regarding employment-related disputes.  Employers should review any arbitration agreements and may want to consider whether to implement arbitration agreements that contain class action waivers.  We are available to assist if you have any questions concerning the Supreme Court’s decision or the implementation of employment arbitration agreements.