April 27, 2011

April 27, 2011:
Supreme Court approves consumer arbitration agreements that disallow class arbitration, holding that the FAA preempts a California rule that would invalidate such agreements as unconscionable.  AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011).

Vincent and Liza Concepcion purchased a cell phone and related services from AT&T.  The sales contract contained an arbitration agreement that required arbitration of all disputes, but disallowed any "class or representative proceeding."  563 U.S. at 336.  The Concepcions sued AT&T in federal court, complaining of a sales tax charge on a phone that AT&T provided for free.  Their case was consolidated with a class action against AT&T asserting the same complaint.  A California unconscionability rule provided that an agreement waiving the right to class proceedings is unconscionable if the agreement is contained in "a consumer contract of adhesion," concerning which individual disputes will "predictably involve small amounts of damages," and the consumer alleges a scheme to cheat large numbers of consumers out of individually small sums of money.  Id. at 340.  Relying on that rule, the district court concluded that the AT&T arbitration agreement was unconscionable and denied AT&T's motion to compel arbitration.  The Ninth Circuit affirmed.  In a five to four decision, the Supreme Court reversed.  "Requiring the availability of classwide arbitration interferes with fundamental attributes of arbitration and thus creates a scheme inconsistent with the FAA."  Id. at 344.

Justice Scalia delivered the Court's opinion.  He began with the proposition that "[t]he overarching purpose of the FAA . . . is to ensure the enforcement of arbitration agreements according to their terms so as to facilitate streamlined proceedings."  Id.  The California unconscionability rule, as applied to arbitration agreements, interfered with that "overarching purpose" in three respects.  First, requiring "class arbitration sacrifices the principal advantage of arbitration –  its informality."  Id. at 348.  "Second, class arbitration requires procedural formality."  Id. at 349 (emphasis in original).  Last, Justice Scalia reasoned that arbitration was ill suited to the high dollar stakes of class treatment.  "Informal procedures do of course have a cost:  The absence of multidureslayered review makes it more likely that errors will go uncorrected."  Id. at 350.  While defendants are willing to accept that cost in exchange for the benefits of arbitration (efficiency, speed, informality, less expense) when the stakes are small, if forced to arbitrate tens of thousands of claims at once, "the risk of an error will often become unacceptable."  Id.  "Because it 'stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress,' . . . California's . . . rule is preempted by the FAA."  Id. at 352.

The impact of Concepcion is potentially far reaching.  The Court acknowledged that states can impose some limitations on the enforceability of arbitration agreements in contracts of adhesion, such as requiring that class-action waiver provisions be highlighted.  Id. at 347 n.6.  Subject to such limitations, Concepcion theoretically provides companies who service large numbers of consumers in small dollar transactions with the ability to preclude consumer access to class action treatment by mandatory arbitration provisions that disallow class action arbitration.

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