Originally published on the Employer's Law Blog
In AT&T Mobility LLC v. Concepcion et ux., 563 U.S. ___ (2011), a 5-4 majority of the United States Supreme Court determined that the Federal Arbitration Act (FAA) pre-empts a California rule that California courts had previously applied to invalidate "unconscionable" consumer arbitration agreements. California's so-called Discover Bank rule had classified most collective arbitration waivers contained in consumer contracts as unconscionable and therefore unenforceable. In Concepcion, the Court held that the FAA pre-empts the Discover Bank rule because, in the words of the majority, that rule presented "an obstacle to the accomplishment and execution of the full purposes and objectives of Congress."
Background
The Concepcion decision arose out of a dispute between a cellphone company, AT&T Mobility LLC ("AT&T"), and Vincent and Liza Concepcion, a couple who objected to being charged $30.22 in sales tax for what AT&T had advertised as a free cellphone under their service contract. The Concepcions sued AT&T in federal court, and their suit was subsequently consolidated with a factually related class action. When AT&T moved to compel arbitration under the cellphone contract, the District Court denied AT&T's motion, and, relying on the California Supreme Court's decision in Discover Bank v. Superior Court, 36 Cal. 4th 148, 113 P.3d 1100 (2005), determined that the arbitration clause was unconscionable under California law because of its prohibition of collective arbitration. The United States Court of Appeals for the Ninth Circuit affirmed, finding the provision unconscionable under California law, holding that the Discover Bank rule was not pre-empted by the FAA and rejecting AT&T's argument that the Discover Bank rule undermined well-settled federal policy in favor of arbitration. The Supreme Court granted certiorari to hear AT&T's appeal.
Decision
In an opinion written by Justice Scalia, the majority began its analysis by reiterating the federal policy favoring arbitration embodied by the FAA. The Court also acknowledged, however, that the FAA's saving clause permits arbitration agreements to be declared unenforceable "upon such grounds as exist at law or in equity for the revocation of any contract," including unconscionability. The Concepcions contended that the Discover
Bank rule, which originated from California's unconscionability jurisprudence, fit within the FAA's saving clause. While the majority agreed with the Concepcions' contention that the FAA's saving clause preserves generally applicable contract defenses, it disagreed with the Concepcions' application of the saving clause to their case.
The Court held that nothing in the FAA's saving clause "suggests an intent to preserve state-law rules that stand as an obstacle to the accomplishment of the FAA's objectives," and explained that the "principal purpose" of the FAA is to ensure enforcement of private arbitration agreements according to their terms. The majority concluded that California's Discover Bank rule interfered with arbitration, and also ruled that, in general, arbitration is "poorly suited to the higher stakes of class litigation." Having found that California's Discover Bank rule is pre-empted by the FAA, the Court reversed the judgment of the Ninth Circuit and remanded the case for further proceedings.
What This Means for Companies
The Concepcion decision approved arbitration clauses that contain class-action waivers in consumer contracts. The reach of the decision, however, is likely not limited to consumer contracts. The holding and its reasoning are naturally extended to apply to employment contracts that contain arbitration clauses, as well. Indeed, Concepcion provides an opportunity for companies to potentially avoid class-action arbitration and its attendant cost by requiring the arbitration of certain grievances and the waiver of collective arbitration. While critics of Concepcion, including consumer advocacy groups, have argued that the decision turns the FAA into a shield against corporate accountability, proponents of the decision point out that the Court recognized that arbitration frequently benefits consumers.
Senate Judiciary Committee Chairman Patrick Leahy, D-Vermont, has called for a congressional response to Concepcion in order to "clarify the original intent of the Federal Arbitration Act." It remains to be seen what action Congress will take, if any. In the meantime, companies should consider Concepcion, and its broad rejection of state rules that interfere with the objectives of the FAA, when deciding whether to include arbitration clauses that contain collective arbitration waivers in consumer and employment contracts.
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