Concepcions brought suit against AT&T in federal district court as part of a putative class action and the class collectively alleged that AT&T had engaged in false advertising and fraud by charging sales tax on phones it advertised as free.
The Federal Arbitration Act is a federal law applying to transactions affecting interstate commerce, which requires arbitration of certain transactions. This act applies in both state and federal court.
Vincent and Liza Concepcion (plaintiffs) bought cellular phones and service from AT&T Mobility, LLC (AT&T) (defendant) after seeing an advertisement that offered free phones. The Concepcions were not charged for the phones but they were charged $30.22 in sales tax. Included in the service agreement was an arbitration provision that required all disputes between the parties to be resolved by an arbitrator and prohibited arbitration in the form of a class action. The agreement also allowed AT&T to make unilateral amendments to the contract at any time, which it did. The Concepcions brought suit against AT&T in federal district court as part of a putative class action and the class collectively alleged that AT&T had engaged in false advertising and fraud by charging sales tax on phones it advertised as free. AT&T filed a motion to compel arbitration under the terms of the agreement with the Concepcions. The district court denied AT&T’s motion based on a California Supreme Court case, Discover Bank v. Superior Court, 36 Cal. 4th 148 (2005), and found that the arbitration provision was unconscionable because AT&T had not shown that bilateral arbitration adequately substituted for the deterrent effects of class actions. The Ninth Circuit Court of Appeals affirmed and the U.S. Supreme Court granted certiorari to review.
Whetherthe Federal Arbitration Act preempt any state law that conflicts with it.
Section 2 of the Federal Arbitration Act (FAA) makes agreements to arbitrate “valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” 9 U.S.C. § 2. The second portion of § 2 is a savings clause that permits arbitration agreements to be declared unenforceable utilizing common contract defenses such as fraud, duress, or unconscionability.California’s Discover Bank rule interferes with arbitration because it allows any party to a consumer adhesion contract to demand class-wide arbitration when damages are predictably small. Additionally, the switch from bilateral to class arbitration sacrifices the principal advantage of arbitration, namely the informality of the process. Class arbitration makes the process slower, more costly, and more likely to generate inconsistent results. Moreover, class arbitration greatly increases risks to defendants. When damages owed to tens of thousands of potential claimants are aggregated and decided at once, the risk of an error will often become unacceptable. Because it stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress, the Discover Bank rule is preempted by the FAA. The judgment of the court of appeals is reversed and the matter is remanded for further proceedings consistent with the opinion.
The majority agrees that the Discover Bank rule falls directly within the scope of the FAA’s exception permitting courts to refuse to enforce arbitration agreements on grounds that exist “for the revocation of any contract.” 9 U.S.C. § 2. However, the majority errs in holding that the Discover Bank rule increases the complexity of arbitration procedures and is thus preempted by the FAA. The majority does not explain why class arbitration is so burdensome. Because California applies the same legal principles to address the unconscionability of class arbitration waivers as it does to address the unconscionability of any other contractual provision, the merits of class proceedings should not be a factor in the Court’s decision. Nevertheless, the majority unnecessarily focuses on that aspect and reaches a decision that is contrary to precedent. –Breyer, J.
The FAA requires that an arbitration agreement be enforced unless a party successfully challenges the agreement by showing fraud or duress. Under the plain language of the FAA, there can be no state rule, such as the Discover Bank rule, that can trump the federal law.- Thomas, J.
In Discover Bank v. Superior Court, 36 Cal. 4th 148 (2005), the California Supreme Court held that a contract of adhesion between a consumer and a company with superior bargaining power, that included an arbitration provision requiring a waiver of class actions, was unenforceable because such waivers were unconscionable. When a state law prohibits the arbitration of a particular type of claim, the conflicting rule is preempted by the FAA. The analysis becomes more complex, however, when there is an allegation of unconscionability, such as in the case at bar. The principal purpose of the FAA is to “ensur[e] that private arbitration agreements are enforced according to their terms.” State laws that interfere with that purpose succumb to preemption by the FAA.