Topic: Enforceability of class action waivers.
In exchange for signing a two-year wireless service contract, AT&T offered customers a free cell phone. California requires sales tax payments on the full value of such free phones, and AT&T charged the subscriber for the amount of the tax. The Concepcions filed a putative class action against AT&T for fraud, unjust enrichment, and false advertising despite the fact that their service agreement with AT&T contained an arbitration agreement. That agreement, which was considered to be very consumer-friendly, prohibited class arbitration proceedings. AT&T sought to enforce the agreement and class waiver, but both the District Court and the Ninth Circuit allowed the action, holding that the California Supreme Court decision in Discover Bank v. Superior Court made the agreement's class action waiver unconscionable. In a 5-4 decision, the United States Supreme Court reversed. The majority held that the Federal Arbitration Act (FAA) preempts Discover Bank and prohibits states from conditioning the enforcement of arbitration agreements on the availability of class procedures. Specifically, Discover Bank creates an obstacle to the FAA objectives of ensuring enforcement of arbitration agreement terms and facilitating "informal streamlined proceedings" that coincide with arbitration's "fundamental attributes" of efficiency, informality and lower cost. Addressing the dissent's concerns that the decision harmed consumers who opt not to pursue small-dollar claims individually, the majority opined that states cannot require procedures that are inconsistent with the FAA even if an unrelated, desirable reason exists for the procedure.
- Concepcion affirms that the FAA empowers private parties to limit issues or types of proceedings through contractual agreement. Expect that Concepcion's holding may be extended to other types of contracts-such as employment agreements and commercial contracts-containing arbitration provisions with class action waivers.
- The FAA embodies a liberal federal policy favoring arbitration agreements, and Concepcion gives providers of consumer goods and services a clear advantage in the ongoing battle between those who want to use class actions to protect consumers and those who seek to avoid this type of litigation through the use of contractual arbitration provisions.
- Under the majority's opinion, states remain free to take steps to address contracts of adhesion. But any procedure implemented must be consistent with the FAA-leaving states without a clear mechanism of enforcement.
- Currently, multiple proposals are before Congress urging that Concepcion be overturned. Stay tuned for developments!
The informal, quick-and-easy to use dispute resolution system contained in AT&T's service contract may have bolstered its position that its arbitration provision was fair and reasonable. Creating a similar fair and reasonable dispute resolution process along with mandatory arbitration and class waiver provisions in consumer goods and service contracts will minimize allegations of unfairness and any remaining risk of consumer class litigation or arbitration.
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