The United States Supreme Court held yesterday that the Federal Arbitration Act preempted California state contract law which courts had applied to find arbitration agreements invalid if they did not permit class arbitration. The Supreme Court’s decision appears to clear the way for consumer contracts to require the individual arbitration of disputes and prohibit consumers’ use of class action in litigation or arbitration. Some commentators are even saying the decision “could spell the death-knell of consumer class actions.” 

In AT&T Mobility LLC v. Concepcion, the Concepcions brought an action in federal court alleging that AT&T had engaged in false advertising and fraud by charging sales tax on mobile phones it advertised as free. Their action was later consolidated with a putative class action. AT&T tried to compel arbitration because the Concepcions had entered into a contract that contained an arbitration clause. Both the District Court and the Ninth Circuit Court of Appeals denied AT&T’s motion to compel arbitration. The lower courts relied on the California Supreme Court’s decision in Discover Bank v. Superior Court to invalidate the arbitration clause in the contract as “unconscionable” under state law because the provision did not allow for class action arbitration. The Ninth Circuit rejected the argument that “class proceedings will reduce the efficiency and expeditiousness of arbitration.”

When the case went to the Supreme Court, the American Bankers Association, American Financial Services Association, Consumer Bankers Association, Financial Services Roundtable, and California Bankers Association submitted an amici curiae brief urging reversal of the Ninth Circuit. Many of these organizations’ members have included arbitration clauses in their consumer contracts that call for the individual arbitration of disputes. They maintained that arbitration is a prompt, fair, inexpensive, and effective method of resolving disputes and that the Ninth Circuit gave insufficient weight to the benefits of arbitration and the costs and problems associated with class actions. According to these organizations, a decision affirming the Ninth Circuit would have undercut the practical value of arbitration.

In a 5-4 ruling, the Supreme Court said that California’s Discover Bank rule “interferes with arbitration” and “stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress,” including the faster resolution of disputes. Arbitration agreements may be invalidated by “generally applicable contract defenses,” such as fraud, duress, or unconscionability, but not by “defenses that apply only to arbitration or derive their meaning from the fact than an agreement to arbitrate is at issue.”

The majority opinion written by Justice Scalia emphasized the ability to use arbitration to create “efficient, streamlined procedures tailored to the type of dispute.” For example, parties can specify that the decision maker be a specialist in the relevant field, keep proceedings confidential to protect a trade secret, and keep proceedings informal to reduce the cost and increase the speed of resolution. In the majority’s view, class arbitration undermines many of the benefits of arbitration and increases risks to defendants. The majority also found arbitration to be “poorly suited to the higher stakes of class litigation,” particularly because of the lack of appellate review. “We find it hard to believe that defendants would bet the company with no effective means of review, and even harder to believe that Congress would have intended to allow state courts to force such a decision.”

The Supreme Court’s decision provides a good reminder of the importance of drafting an arbitration clause that is tailored to how the parties want a dispute to be handled. Among other things, an arbitration clause can specify:

·         how much discovery will be permitted,

·         whether dispositive motions are permitted,

·         whether mediation is required before filing a demand for arbitration,

·         whether the proceedings and award shall remain confidential

·         how many arbitrators will hear the matter,

·         whether the arbitrator(s) have the authority to determine the enforceability and scope of arbitration clause

·         where the hearing will be held,

·         whether the hearing must be held within a certain time period, and

·         how the evidence will be presented and how long the hearing can last.

The way in which these issues are addressed in the arbitration clause will depend on many factors, including the nature of the contract and what is at stake in the transaction.

Click here for the Supreme Court decision.

Click here for the amici brief.