In a Victory for Business Interests, the U.S. Supreme Court Finds in Favor of Class Arbitration Waivers

April 29, 2011

For those of you who attended Murchison & Cumming, LLP’s Year in Review last week, and heard California Courts of Appeal Justice Paul Turner’s discussion about the questionable vitality of California’s rule against class action arbitration clauses in consumer contracts—the United States Supreme Court decision is finally here.

On April 27, 2011, the United States Supreme Court handed business interests a major victory by finding in favor of class arbitration waivers. In a close 5-4 decision in AT&T Mobility LLC v. Concepcion, ___ U.S. ___ (Apr. 27, 2011), No. 09-893, the majority concluded that the Federal Arbitration Act (“FAA”) pre-empts state contract law principles in determining the enforceability of a class arbitration waiver, i.e., an arbitration agreement that expressly precludes arbitration on behalf of a class. Specifically, the Supreme Court found that the FAA pre-empts the rule set forth in the California opinion, Discover Bank v. Superior Court, 36 Cal.4th 148 (2005). In Discover Bank, the California Supreme Court held that class action waivers in consumer arbitration agreements were unconscionable if the agreement is in an adhesion contract, disputes between the parties are likely to involve small amounts of damages, and the party with inferior bargaining power alleges a deliberate scheme to defraud.

In fact, prior opinions issued by many state courts have found class arbitration waivers unconscionable and have allowed class actions despite the existence of an express agreement in consumer contracts barring them. One such opinion was recently issued in Nevada last month. In Picardi v. District Court, ___ P.3d ___, 2011 WL 1205284 (Nev. Mar. 31, 2011), the Nevada Supreme Court struck down a no-class-action arbitration clause as unconscionable under Nevada law.

In any case, Justice Scalia’s majority opinion goes beyond the question originally presented for review, which was whether the FAA pre-empts state law “when [class action] procedures are not necessary to ensure that the parties to the arbitration agreement are able to vindicate their claims.” The majority’s opinion appears to further hold that the FAA pre-empts state law (and possibly even removes “unconscionability” as a basis for invalidating an arbitration clause if not based on state public policy) when the lack of a class action mechanism as a practical matter leaves plaintiffs with no remedy at all.

Justice Thomas’s concurring opinion perhaps gives a small ray of hope to consumer interests seeking to pursue class action litigation even where a class arbitration waiver exists. Justice Thomas noted that the decision does not necessarily preclude an argument that no agreement existed in the first instance, such as where the agreement is found to have been entered into as a result of coercion or fraud. Nevertheless, he concluded that unconscionability based purely on public policy would never be a basis to invalidate an arbitration agreement under § 2 of the FAA, since it would not impact the formation of the arbitration agreement. See Slip Op. at 4, n.* (Thomas, J., concurring).

Ultimately, this decision removes what was perceived to be an insurmountable obstacle in the enforcement of millions of arbitration agreements that benefit customers and businesses alike, and confirms the liberal federal policy favoring arbitration.