by Tracey Barbaree and Michelle Leetham, Esqs.
On April 27, the U.S. Supreme Court held that the Federal Arbitration Act (FAA) protects a company’s right to include a class-action waiver in its arbitration agreement even though a state law bars such provisions as unconscionable. In a 5-4 decision, the court ruled, “States cannot require a procedure that is inconsistent with the FAA, even if it is desirable for unrelated reasons.” (AT&T Mobility LLC v. Concepcion, No. 09-893, U.S. Supreme Court, 2011)
The case involved a retail consumer transaction, but it could have important implications for employers that use arbitration agreements.
Free cell phones, but …
In 2002, Vincent and Liza Concepcion received free cell phones from AT&T Mobility, but their service contract required them to pay sales tax. The agreement also called for arbitration of all disputes—and specifically ruled out class action.
The Concepcions sued AT&T, claiming that the company’s practice of charging sales tax on a cell phone advertised as “free” was fraudulent. The trial judge consolidated the case with a class action addressing the same issues.
AT&T asked the court to compel the Concepcions to submit their individual claims to arbitration. The judge denied AT&T’s motion, holding that the arbitration agreement was “unconscionable and unlawfully exculpatory under California law because it disallowed classwide procedures.”
The 9th Circuit Court of Appeals upheld that decision, finding that AT&T’s class-action waiver was unconscionable under California law. AT&T appealed again, and the case went to the U.S. Supreme Court.
California’s ‘rule’ in doubt
The issue before the High Court was whether the FAA pre-empts states from conditioning the enforcement of an arbitration agreement on the availability of particular procedures—here, classwide arbitration—when those procedures are not necessary to ensure that arbitration will fairly resolve the claims. The FAA requires arbitration provisions to “be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.”
In a 2005 decision, the California Supreme Court ruled in Discover Bank v. Superior Court that collective arbitration is appropriate in cases involving the possibility that one party has schemed “to deliberately cheat large numbers of consumers out of individually small sums of money ….” This so-called Discover Bank rule was the basis for the 9th Circuit’s decision in AT&T Mobility LLC v. Concepcion.
The U.S. Supreme Court rejected that reasoning. In an opinion written by Justice Antonin Scalia, the court held that “[w]hen state law prohibits outright the arbitration of a particular type of claim, the analysis is straightforward: The conflicting rule is displaced by the FAA.” Furthermore, Scalia wrote, none of the FAA’s provisions “stand as an obstacle to the accomplishment of the FAA’s objectives” to promote arbitration.
Arbitration on equal footing
The High Court also reiterated the principle that courts must place arbitration agreements on equal footing with other contracts and enforce them based on their terms.
“The overreaching purpose of the FAA,” the court wrote, “is to ensure the enforcement of arbitration agreements according to their terms so as to facilitate streamlined proceedings.” Because allowing the case to proceed as a class action would undermine the purpose of the FAA, the court overturned the 9th Circuit’s decision and remanded the case to the lower court for further proceedings consistent with its ruling.
Practical impact for employers
Although this decision arose in the context of a consumer contract, it confirms the significant financial benefits of arbitration agreements for both employers and employees and protects employers from being forced to submit to class-based arbitration procedures that may lack due process.
More than 20 states prevent or restrict class-action waivers. After the AT&T Mobility decision, employers in those states will likely be revisiting the issue if they previously removed class-action waivers from their arbitration agreements.
This U.S. Supreme Court opinion also calls into serious question the continuing viability of a 2007 California Supreme Court decision (Gentry v. Superior Court) that California courts routinely rely on to strike down class-action waivers in employment contracts.
Authors: Tracey Barbaree is a shareholder in Ogletree Deakins’ Atlanta office. Michelle Leetham is of counsel in Ogletree Deakins’ San Francisco office. Contact her at (415) 442-4810 or email@example.com.
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