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July 26, 2012 / Admin

U.S. Supreme Court Permits Class Action Ban in Arbitration

Today, the United States Supreme Court issued its much-anticipated ruling in AT&T Mobility LLC v Conception. The holding is not favorable to consumers as it finds that the California Supreme Court ruling in Discovery Bank, which outlawed class action bans in many consumer contracts, is preempted by the Federal Arbitration Act (“FAA”) because it stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress. The 5-4 decision, authored by Justice Scalia, is split along predictable lines, with Justices Roberts, Kennedy, Thomas and Alito joining the majority opinion.

This case was brought in federal court by the Concepcions, who entered into a cell phone agreement with AT&T, and who claimed that AT&T had engaged in false advertising and fraud by charging sales tax on “free” phones. The contract provided for arbitration of all disputes between the parties, but required that claims be brought in the parties’ individual capacity, and not as a plaintiff or class member in any purported class or representative capacity, in other words, a class action ban. AT&T moved to compel the case to arbitration, but the federal trial court and Ninth Circuit Court of Appeals refused, finding the class action ban unconscionable, citing the California Supreme Court decision in Discovery Bank v Superior Court, 36 Cal 4th 148 (2005).  The Ninth Circuit also found that Discover Bank was not preempted by the FAA because it was a refinement of the unconscionability analysis to contracts generally in California and section 2 of the FAA permits arbitration agreements to be not enforced “upon such grounds as exist at law or in equity for the revocation of any contract.”

The U.S. Supreme Court disagreed finding that section 2’s saving clause preserves generally contract defenses, but does not preserve state law rules that stand as an obstacle to the accomplishment of the FAA’s objectives to enforce arbitration agreements according to their terms to facilitate an informal streamlined procedure proceeding. However, as Justice Breyer pointed out in dissent, “a single class proceeding is surely more efficient than thousands of separate proceedings for identical claims. Thus, if speedy resolution of disputes were all that mattered, then the Discover Bank rule would reinforce, not obstruct, that objective of the Act.”

The opinion is an example of the conservative majority of the court siding with big business against the rights of consumers. The decision’s impact on class action litigation could be far reaching because it is hard to envision any company not wanting to capitalize on the decision by inserting class action bans in the fine print of their boilerplate arbitration contracts. Class actions are one of the few swords that consumers hold against big business and are often the only tool to meaningful recovery and a change to an unlawful corporate practice.

For more information about the underlying case see this previous blog post, this blog post and this article in the firm’s Newsletter.


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