Brief Fact Summary.
After seeing a free cellphone advertisement, Plaintiffs bought cellphones and service from AT&T. Although Plaintiffs did not pay for the cellphones, they did pay a sales tax for them. The service agreement had an arbitration provision that required arbitration of disputes and prohibited class actions. California case law found these provisions unconscionable.
Synopsis of Rule of Law.
If a state law conflicts with the Federal Arbitration Act, that state law is preempted.
After seeing an advertisement that offered free cellphones, Vincent and Liza Concepcion (Plaintiffs) bought cellphones and service from AT&T Mobility, LLC (Defendant). Plaintiffs were not charged for the cellphones, but they were charged $30.22 in sales tax. The service agreement contained an arbitration provision requiring all disputes between the parties to be resolved in arbitration and prohibiting class action arbitration. Also, the service agreement gave Defendant the right to make unilateral amendments to the agreement, and Defendant did make unilateral amendments. Plaintiffs sued Defendant in federal district court in the form of a putative class action, alleging that Defendant engaged in false advertising and fraud. Defendant filed a motion to compel arbitration based on the arbitration provision in the service agreement, which the federal district court denied. Based on a California Supreme Court case, the federal district court found that the arbitration provision was unconscionable. The federal district court further found that Defendant did not show that bilateral arbitration sufficiently replaced the deterrent effects of class actions. Defendant subsequently appealed to the Ninth Circuit Court of Appeals, which affirmed the federal district court’s ruling. The U.S. Supreme Court granted certiorari.
If a state law conflicts with the Federal Arbitration Act, does the Federal Arbitration Act preempt that state law?
Yes. Under the Federal Arbitration Act, arbitration is considered “valid, irrevocable, and enforceable” to ensure “that private arbitration agreements are enforced according to their terms.” The federal district court relied on a California Supreme Court case, which held a contract of adhesion that included an arbitration provision requiring a waiver of class actions was unenforceable due to unconscionability. If a state law prohibits arbitration, that state law is preempted. The California Supreme Court case conflicts with the Federal Arbitration Act because it gives any party to a consumer adhesion contract the ability to demand class action arbitration. As such, the U.S. Supreme Court reversed the judgment of the lower courts.
Such one-sided, exculpatory contracts in a contract of adhesion, at least to the extent they operate to insulate a party from liability that otherwise would be imposed under California law, are generally unconscionable.View Full Point of Law
The majority is wrong to hold that the Federal Arbitration Act preempts the California Supreme Court case because it increases the complexity of arbitration procedures. Although the majority agrees that the California Supreme Court case falls within the scope of an exception to the Federal Arbitration Act, the majority unnecessarily focuses on the merits of class proceedings. Without explaining why class arbitration is so burdensome, the majority comes to a conclusion that is contrary to precedent. Although California applies the same legal principles to class arbitration as it does to any other contractual provision, the merits of class arbitration should not have been a factor in the Court’s decision.
Under the Federal Arbitration Act, an arbitration agreement must be enforced unless a party successfully challenges the agreement with a claim of fraud, duress, etc. The plain language of the Federal Arbitration Act ensures that the there can be no state law, such as the California Supreme Court case, that can trump it.
Arbitration agreements can be deemed unenforceable if fraud, duress, or unconscionability takes place. The purpose of Federal Arbitration Act is to make sure private arbitration agreements are enforced according to the terms in the agreements. When damages in such instances are usually small, slows the arbitration process, and makes arbitration more costly, then the purpose of the Federal Arbitration Act becomes obstructed.