U.S. Supreme Court: Class Actions Waivers in Arbitration Agreements Are Enforceable, Preempted by the Federal Arbitration Act

27 April 2011 Publication
Authors: Roberta F. Howell Michael D. Leffel

Legal News Alert: Consumer Financial Services Litigation

The United States Supreme Court issued a much-anticipated decision today that will dramatically impact class action litigation across the country. In a 5-4 decision, in AT&T Mobility LLC v. Concepcion, No. 09-893 (April 27, 2011) (http://tinyurl.com/6azuf4n), the Court held that arbitration agreements in standard form contracts that waive the right to pursue a class action are enforceable, and that the Federal Arbitration Act, 9 U.S.C. § 1, et seq., preempts a California court ruling to the contrary.

In refusing to enforce the arbitration agreement at issue, the district court and Ninth Circuit in Concepcion had followed the California Supreme Court’s decision in Discover Bank v. Superior Court, 36 Cal. 4th 148, 113 P.3d 1100 (2005), which held that an arbitration agreement that precludes class actions in standard consumer contracts is unconscionable and unenforceable under California law.

The U.S. Supreme Court has long recognized that the FAA reflects a “liberal federal policy favoring arbitration,” Moses H. Cone Memorial Hospital v. Mercury Constr. Corp., 460 U.S. 1, 24 (1983). It also has noted that arbitration agreements are to be enforced on equal footing with other contracts, Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440, 443 (2006), and that the FAA should be interpreted based on the “fundamental principle that arbitration is a matter of contract,” Rent-A-Center, West, Inc. v. Jackson, 561 U.S. ___, (2010) (slip op. at 3).

That said, arbitration agreements can be struck, based on any grounds that “exist at law or in equity for the revocation of any contract.” 9 U.S.C. § 2. The Discover Bank decision, and a long line of cases following this ruling, have held that the generally applicable state law concept of unconscionability can be used to strike arbitration agreements — without running afoul of the FAA — on the grounds that waiving a right to a class action mechanism in a standard consumer contract is unconscionable. For this reason, many large businesses with standard consumer contracts did not include arbitration agreements, or did not enforce them in many states whose courts followed the Discover Bank rule.

All that has now changed. In Concepcion, the U.S. Supreme Court held that the “Discovery Bank rule is preempted by the FAA” because it “‘stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress.’” Slip op. at 18 (quoting Hines v. Davidowitz, 312 U.S. 52, 67 (1941)). Unless there is a legislative change (and proposals have been introduced in the past), going forward, throughout the country, including a class action waiver provision in an adhesion contract with consumers will be enforceable (absent fraud or duress in forming the contract). This will likely have a dramatic impact on class action litigation in states like California, with more and more companies including, and enforcing, class action waivers in their consumer contracts.

Legal News Alert is part of our ongoing commitment to providing up-to-the-minute information about pressing concerns or industry issues affecting our clients and colleagues. If you have any questions about this update or would like to discuss this topic further, please contact your Foley attorney or the following:

Michael D. Leffel
Madison, Wisconsin

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