Publications

2 May 2011

AT&T Mobility, LLC v. Concepcion: FAA preempts rule that makes class action waivers in arbitration agreements unenforceable

FranCast

John J. Dwyer
Barry M. Heller

In a decision that makes it much more likely that class action waivers in franchise agreement arbitration provisions will be found to be enforceable, even if the franchise agreement is found to be a contract of adhesion, the United States Supreme Court, in AT&T Mobility, LLC v. Concepcion, has ruled that the Federal Arbitration Act (FAA”) preempts a California Supreme Court decision that made most class action waivers in consumer arbitration agreements unconscionable and therefore unenforceable. 

This decision is good news for franchisors with arbitration provisions that include class action waivers because it increases the likelihood that disputes will be resolved in individual arbitrations as agreed to by the parties and not as class actions or class arbitrations.  

The decision

The AT&T Mobility case relates to a dispute between the Concepcions and AT&T Mobility (AT&T) over sales taxes charged to the Concepcions by AT&T for a cellular phone advertised as free.  The parties’ sales and service agreement contains an arbitration provision requiring all claims to be brought in the parties’ individual capacity and not as a class action.  Despite the arbitration provision, the Concepcions sued AT&T in federal court.  The complaint was later consolidated with a putative class action against AT&T alleging false advertising and fraud in connection with the sales tax charges.  AT&T moved to compel arbitration.  The District Court denied the motion, finding that, based on the California Supreme Court’s ruling in Discover Bank v. Superior Court, the arbitration provision was unconscionable under California law because it barred class actions (the Discover Bank rule).  The Ninth Circuit affirmed, also relying on the Discover Bank rule.  The Ninth Circuit further held that the Discover Bank rule was not preempted by the FAA.

The United States Supreme Court, by a 5-4 margin, reversed the Ninth Circuit, holding that the Discover Bank rule is preempted by the FAA.  The Court stressed that the principal purpose of the FAA is to ensure that private arbitration agreements are enforced according to their terms.  It stated that “[t]he point of affording parties discretion in designing arbitration processes is to allow for efficient, streamlined procedures tailored to the type of dispute.”  The Court found that the Discover Bank rule interferes with a fundamental attribute of arbitration and creates a scheme inconsistent with the FAA by requiring the availability of class arbitration, despite the parties’ agreement to the contrary.

The Court’s reasoning

The Court found unpersuasive the argument that the Discover Bank rule is limited to adhesion contracts, stating that “the times in which consumer contracts were anything other than adhesive are long past.”  The Court stated that states are free to take steps to address concerns related to adhesion contracts – e.g., by requiring class-action-waiver provisions in arbitration agreements to be highlighted – but such steps cannot conflict with the FAA or frustrate its purpose to ensure that arbitration agreements are enforced according to their terms.

In reaching its conclusion, the Court relied on its recent decision in Stolt-Nielsen, in which it held that an arbitration panel exceeded its powers in imposing class arbitration based on policy considerations rather than the arbitration agreement itself, and found that from that case the “conclusion follows that class arbitration, to the extent it is manufactured by Discover Bank, rather than consensual, is inconsistent with the FAA.”  The Court found that the changes to the process if class arbitration is imposed are “fundamental” because class arbitration takes away the primary advantage of arbitration – informality – and makes the process slower, more costly and, most likely, more procedurally formal (e.g., the AAA rules for class arbitration mimic the Federal Rules of Civil Procedure for class litigation).  The Court further found that class arbitration greatly increases the risks to defendants because of the possibility of much greater losses in a class arbitration proceeding that does not have the same review and appeal procedures as court litigation.  Thus, the Court stated that “[f]aced with even a small chance of a devastating loss, defendants will be pressured into settling questionable claims.” 

The Court also rejected the dissent’s argument that “class proceedings are necessary to prosecute small-dollar claims that might otherwise slip through the legal system.”  The Court held that “States cannot require a procedure that is inconsistent with the FAA, even if it is desirable for unrelated reasons.” 

It should be noted that the Court also relied on the fact that it is unlikely that the claim at issue will go unresolved if it cannot be brought as part of a class because the parties’ arbitration agreement provided that AT&T will pay the Conceptions a minimum of $7,500 and twice their attorneys’ fees if the Conceptions obtain an arbitration award greater than AT&T’s last settlement offer.  Furthermore, the Court pointed out that the parties’ arbitration agreement contains many other consumer-friendly provisions, including:  arbitration in the county where the customer is billed; arbitration in person, by telephone or on submissions for claims of $10,000 or less; the availability of injunctive relief and the possibility of punitive damages; the relinquishment by AT&T of any claim to reimbursement for attorneys’ fees; and an option for small claims court rather than arbitration.  In fact, the Court specifically noted that the District Court concluded that the Conceptions are better off under their arbitration agreement with AT&T than as participants in a class action.

Analysis

It does not appear from the AT&T Mobility decision that the financial guarantees and favorable provisions in the parties’ arbitration agreement are necessary to the Court’s conclusion that the class action waiver is enforceable.  The existence of such guarantees and provisions in the agreement does, however, leave open the possibility that a less consumer-friendly agreement may not be looked upon as favorably by the Court.  In addition, the decision does not mean that a one-sided arbitration agreement may not be susceptible to an unconscionability argument on grounds separate and apart from whether it contains a class action waiver.  Finally, the decision does not address or impact the enforceability of class action waivers in agreements providing for resolution of disputes through litigation, as opposed to arbitration. 

In light of the AT&T Mobility decision, franchisors with franchise agreements containing arbitration provisions that do not include a class action waiver should consider whether they wish to add such a waiver to the provision, and franchisors that have chosen not to include arbitration provisions due to a perceived risk of class actions or class arbitrations if they included such a provision with a class action waiver, may want to reconsider whether to include an arbitration provision in the franchise agreement.

If you would like to discuss any of these issues, please contact John Dwyer and Barry Heller.

And please read our related Alerts on other vital issues arising from this decision:

United States Supreme Court rules that class arbitration waivers are enforceable, an article in the International Arbitration Newsletter

AT&T Mobility v. Conception: the time to reconsider arbitration policies is now, a Class Action Alert

Is AT&T Mobility the beginning of the end for some (or all) employment class actions?, a Labor and Employment Alert

Ninth Circuit invalidates pre-dispute mandatory arbitration clauses under Magnuson-Moss, a Litigation Alert