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« Court will not order consolidation of union's multi-unit grievance | Main | SCOTUS case on arbitration waiver is settled »

Federal Arbitration Act preempts state law that made class action waiver unconscionable (5-4)
April 27, 2011 by Ross Runkel at LawMemo

Today's decision in AT&T Mobility v. Concepcion (US Supreme Ct 04/27/2011):

In Discover Bank v. Superior Court, 36 Cal4th 148, 113 P3d 1100 (2005), the California Supreme Court held that class action waivers in consumer arbitration agreements are 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.

The US Supreme Court (5-4) held that California's Discover Bank rule is preempted by the Federal Arbitration Act (FAA) because it "stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress."

The cell phone contract between the Concepcions and AT&T provided for arbitration of all disputes, but required that claims be brought in the parties' "individual capacity, and not as a plaintiff or class member in any purported class or representative proceeding." The Concepcions sued AT&T for charging $30.22 in sales tax for a "free" phone. The trial court denied AT&T's motion to compel arbitration. Relying on Discover Bank, it found the arbitration provision unconscionable because it disallowed classwide proceedings. The 9th Circuit agreed, and held that the FAA, which makes arbitration agreements "valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract," did not preempt its ruling. The US Supreme Court (5-4) reversed.

The FAA's overarching purpose is to ensure the enforcement of arbitration agreements according to their terms so as to facilitate informal, streamlined proceedings. Parties may agree to limit the issues subject to arbitration, to arbitrate according to specific rules, and to limit with whom they will arbitrate.

Class arbitration, to the extent it is manufactured by Discover Bank rather than consensual, interferes with fundamental attributes of arbitration. The switch from bilateral to class arbitration sacrifices arbitration's informality and makes the process slower, more costly, and more likely to generate procedural morass than final judgment. And class arbitration greatly increases risks to defendants. The absence of multilayered review makes it more likely that errors will go uncorrected. That risk of error may become unacceptable when damages allegedly owed to thousands of claimants are aggregated and decided at once. Arbitration is poorly suited to these higher stakes. In litigation, a defendant may appeal a certification decision and a final judgment, but 9 USC. ยง10 limits the grounds on which courts can vacate arbitral awards.


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