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Supreme Court Holds California Consumer Class Action Waiver Enforceable

Update
04.29.2011

In AT&T Mobility v. Concepcion, No. 09-893, the U.S. Supreme Court made a strong statement disfavoring consumer class action arbitration.  Specifically, the Court determined that the Federal Arbitration Act ("FAA") prohibited states from conditioning enforceability of arbitration agreements on the availability of class arbitration procedures.  In the present case, the Court addressed the California Supreme Court's ruling in Discover Bank v. Superior Court,1 which had found class action waivers in consumer contracts unconscionable and unenforceable.

In a 5-4 ruling, Justice Antonin Scalia's majority opinion held that the FAA preempted Discover Bank because it stood as an obstacle to the enforcement of arbitration agreements in accordance with their terms.  This case, while not an employment case, calls into question the continued viability of judicially created obstacles to enforcement of employment arbitration agreements, including, potentially, the requirements identified in Armendariz and Gentry.

Factual and Procedural Underpinnings of the Case

Vincent and Liza Concepcion entered into a cell phone contract with AT&T Mobility LLC ("AT&T") based on an advertisement for a free phone.  The Concepcions were not charged for the phones, but they were charged sales tax based on the phones' retail value.  They sued AT&T, alleging that it engaged in false advertising and fraud.  Their Southern District Court of California case was then consolidated into a putative class action lawsuit.  AT&T moved to compel arbitration under the cell phone contract, which required that arbitration be pursued on an individual basis and not as a plaintiff or class member in a class.  In opposition, the Concepcions argued the contract was unconscionable because it contained an unenforceable class action waiver under the California Supreme Court's ruling in Discover Bank

The district court denied AT&T's motion to compel arbitration, agreeing that the class action waiver was unconscionable under Discover Bank.  The Ninth Circuit affirmed on the same grounds and additionally held that the FAA did not preempt Discover Bank because it was simply "a refinement of the unconscionability analysis [in California]" and did not conflict with the FAA's goals.

The Supreme Court's Decision

The Supreme Court disagreed with the district court and the Ninth Circuit, finding that Discover Bank was indeed preempted.  The Discover Bank case found that a consumer arbitration provision barring class actions was unconscionable in that individual arbitration could not substitute for the deterrent effects of class actions because such individual claims involved small amounts of damages

In overruling Discover Bank, the Court focused on its interference with arbitration, as it allowed a consumer to demand class arbitration after the fact even though the arbitration provision did not permit it.  The Court found that the underlying purpose of the FAA required courts to interpret arbitration agreements according to their terms—just like any other contract.  As such, the Court determined that, to the extent class arbitration was manufactured by Discover Bank rather than by consent of the parties, it is inconsistent with the FAA. 

In reaching this decision, the Court built upon its 2010 decision in Stolt-Nielsen S.A. v. AnimalFeeds International Corp.which found that where an agreement was silent as to whether class arbitration was permissible, it could not be interpreted to allow it. 

Next, the Court took apart the rationale underlying Discover Bank.  First, class arbitration sacrifices the advantages of arbitration, making it slower and more costly.  Second, class arbitration requires procedural formality absent in bilateral (or individual) arbitration, specifically, the requirements under Federal Rule of Civil Procedure 23 (adequacy of the class representative and notice, an opportunity to be heard, and ability to opt out of the class by absent class members).  Third, class arbitration increases the risks for defendants—"the absence of multilayered review."  Specifically, in litigation, defendants have the right to an interlocutory appeal of a certification decision and can appeal from a final judgment.  In contrast, a court can only vacate an arbitration award under the FAA in narrow circumstances (e.g., fraud, corruption, arbitrator misconduct, etc.). 

In conclusion, the Court found that the FAA preempted California's Discover Bank rule because it stood "as an obstacle to the accomplishment and execution of the full purposes of and objectives of Congress."

Does the Court's Decision Bring an End to California's Distaste for Employment Arbitration?

California employers may now ask, are class action waivers and "essential fairness" analysis no longer applicable in California?  While there is no direct answer because Concepcion was a consumer case, not an employment case, it appears it could level the playing field in the area of employment disputes and employment class actions.  One could, and employers should, argue that the reign of Armendariz2 and Gentry3  may be coming to an end. 

In Armendariz, the California Supreme Court found that compulsory arbitration of employment disputes may be denied where the arbitration provision is unconscionable or fundamentally unfair.  The Court determined that the following elements of fundamental fairness were required to defend an employee's statutory rights: (1) a neutral arbitrator; (2) adequate discovery; (3) all types of relief otherwise available in court; (4) a written arbitration award that permits limited judicial review; and (5) the requirement that the employer must pay arbitrator's fees and all costs unique to arbitration.  California courts expanded the scope of Armendariz to include claims for Labor Code violations and wrongful termination in violation of public policy and held that both parties must be equally bound by the arbitration agreement.

In a sign of growing distaste for employment arbitration, Gentry expanded upon the now-preempted Discover Bank in finding that a class action waiver of claims under the California Labor Code was unenforceable if the court determined classwide arbitration "would be a significantly more effective way of vindicating the rights of affected employees than individual arbitration."  In essence, the Court usurped and ignored the parties' contract.  Specifically, the Court imposed additional considerations (in addition to Discover Bank's size of the claim consideration) to determine whether classwide arbitration was a more effective means to defend employee rights: (1) the modest size of the potential individual recovery; (2) the potential for retaliation against members of the class; (3) the fact that absent members of the class may be ill-informed about their rights; and (4) "other real world obstacles to the vindication of class members' right to overtime pay through individual arbitration."

The judicially created obstacles to enforcement of the parties' arbitration agreement identified in Armendariz and Gentry may not long survive Concepcion.  If the single obstacle created by Discover Bank is unpalatable to the Supreme Court and preempted by the FAA, it is difficult to see how the obstacles created in Armendariz and Gentry would not be equally distasteful and preempted.  While it is true that Concepcion does not provide a clear decision regarding the continued applicability of Armendariz and Gentry, it certainly provides employers with greater arguments against their applicability.  Moreover, it adds another reason for employers to consider using an arbitration provision.  However, while Concepcion may have called into question whether Armendariz and Gentry are preempted, employers should continue to comply with their requirements until there is clearer authority on their continued viability.  Specifically, the Concepcion court focused on how AT&T created a fair procedure that allowed redress of disputes.  Therefore, employers should continue to use arbitration provisions that are fair and that do not severely restrict employee rights.  Finally, Concepcion would have no impact on arbitration provisions not governed by the FAA.



1 36 Cal. 4th 148, 113 P.3d 1100 (2005).
2 Armendariz v. Found. Health Psychcare Servs., Inc., 24 Cal. 4th 83 (2000).

3 Gentry v, Superior Court, 42 Cal. 4th 443 (2007).

 

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