Citation. 131 S. Ct. 1740 (2011)
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Brief Fact Summary. Vincent and Liza Concepcion (P) and members of a class (P) filed suit against AT&T for deceptive advertising. They had contracted with AT&T (D) for the sale and servicing of cellular phones. The contract provided for arbitration and AT&T (D) moved the court to compel arbitration. The motion was denied by the district court, and the decision was affirmed by the Ninth Circuit Court of Appeals. AT&T (D) appealed to the Supreme Court.
Synopsis of Rule of Law. The Federal Arbitration Act of 1925 displaces state law which prevents the making of contracts which disallow class action.
Facts. Vincent and Liza Concepcion (P) contracted with AT&T Mobility LCC (AT&T) (D). When they found that they had to pay tax on phones advertised by the company as being free, they filed a case which became a class action. The contract included a provision that all claims were to be settled through arbitration, and also prohibited class arbitration. AT&T(D) moved court for an order compelling arbitration as per the contract. The Concepcions (P) opposed the action by AT&T on the grounds that the executed contract was unacceptable in law and illegal in California law because it did not allow class arbitration. The motion was denied by the district court because of the class action waiver, though it approved of the arbitration agreement in general. The court felt that bilateral arbitration would not present the same level of deterrence as class actions, and so the anti-class action provision was unconscionable. AT&T (D) appealed, arguing the preeminence of the Federal Arbitration Act of 1925 (FAA) over California law. The lower court decision was affirmed by the Ninth Circuit Court of Appeals, finding precedent in the Discover Bank v. Superior Court, 36 Cal. 4th 148 (2005). It also stated that the Discover Bank rule was not preempted by the FAA since it expressed the condition of unconscionability applicable to all contracts in California. AT&T (D) appealed to the U.S.Supreme Court.
Issue. Does the FAA preempt state law that does not allow contracts which prohibit class action arbitration?
(Scalia, J.) No. The FAA displaces state law that prohibits contracts which do not allow for class action arbitration. The rule stated in the Discover Bank case which makes the enforceability of arbitration conditional on the availability of class action arbitration, even if the parties to the contract have agreed to disallow it, interferes with the nature of arbitration process and is inconsistent with the FAA. It cannot be defended under the pretext that the rule is applied only to adhesion contracts, or non-negotiated contracts between a dominant party and another, because this description applies to some extent to almost all consumer contracts. If the court is concerned about this type of contract it ought to take steps to address them in such a way as not to conflict with the FAA or to make the FAA useless in ensuring the enforceability of arbitration agreements according to their terms. Class arbitration, if disallowed by the parties to an arbitration agreement, cannot be forced upon them by the Discover Bank rule. Such an act is not in keeping with the FAA’s aims and purpose. Making class arbitration necessary to every arbitration contract will change the very nature of the arbitration process. It will remove the very useful element of informality and cumber the process, increase the expenses and make procedures more formal. It will also increase the risks to the business AT&T (D) since it does not possess the same availability of review or appeal procedures as litigation does. Thus AT&T will sustain immense pressure to settle disputes which are not valid in an effort to prevent class action arbitration. The argument that claims for small sums which might not succeed in the litigation system require the presence of class action suits is invalid. The reason for desiring the inclusion of class action in arbitration is unrelated to the aim of arbitration, and the procedure contemplated is out of keeping with the FAA. Even more, the fear that the claim in the present suit will not be resolved unless it is made part of a class action suit is not justified, since the arbitration offers the Concepcions more than the award in a class action suit would. The decision is therefore reversed and the case remanded.
Dissent. Breyer, J.) The California state law disallowing contracts with class action waivers is not a blanket policy but meant to deal with contracts containing class action waivers which are legally unenforceable for any reason. Such contracts may or may not be arbitration-based. Such a law would be both in keeping with the FAA and also be within the range of the FAA’s exception which allows courts to refuse to compel arbitration according to contract in such case that there is sufficient reason to revoke the contract.
Discussion. Since the arbitration contract in this case was uniformly declared to be fair to all concerned, by all courts, the decision may have to be viewed in this light. An agreement which is not so fair to the consumer might evoke a different decision, and an unfair agreement which profits only one party to the contract may be revoked as unconscionable on its own merits, regardless of the presence or otherwise of a class action waiver. It deals only with contracts which allow arbitration as a means of settling disputes, and does not give any guidance as to whether class action may be disallowed in contracts which allow litigation to be the means of resolving disputes.