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UPDATED AT 5:15 PM EASTERN: Supreme Court Reverses California Ban on Class Arbitration Waivers in AT&T Mobility v. Concepcion (April 27).

The Discover Bank rule is history.

In a 5-4 decision this morning that states that class arbitration is unfair to defendants, the U.S. Supreme Court reversed a U.S. Ninth Circuit Court of Appeals decision that found a cell phone providers’ consumer agreement unconscionable.

The decision strongly backs companies' right to ban class arbitrations in consumer contracts, largely following the views of AT&T Mobility's Supreme Court briefing, and its amicus supporters.

The contract provision struck down by the Ninth Circuit was a class arbitration waiver.  The Court today in AT&T Mobility v. Concepcion, No. 09-893, says that the Federal Arbitration Act preempts California unconscionability law, which the Ninth Circuit used to invalidate the clause.

“Arbitration is poorly suited to the higher stakes of class litigation,” writes Associate Justice Antonin Scalia in his 18-page majority opinion, adding later, “Arbitration is a matter of contract, and the FAA requires courts to honor parties’ expectations. [Citation omitted.] But what the parties . . . would have agreed to is not arbitration as envisioned by the FAA, lacks its benefits, and therefore may not be required by state law.”

The Discover Bank v. Superior Court (36 Cal. 4th 148, 113 P. 3d 1100 (2005)(available by copying and pasting: decision by the California Supreme Court allowed the state’s consumer protection law to remove a class arbitration waiver where a credit card company’s dispute resolution processes weren’t shown to provide the equivalent relief that consumers could get from a class arbitration. 

Under Discover Bank, plaintiffs needed to show they were parties to an adhesion contract with small amounts in dispute.  They also had to allege that they were victims of fraud as a result of the defendant’s actions, including the arbitration scheme. 

The rule, the majority opinion points out, invalidated most class arbitration waivers.

Associate Justice Clarence Thomas wrote a concurring opinion that says that public policy reasons can't be the basis for invalidating an arbitration contract under Federal Arbitration Act Section 2.  (Details here.) Thomas joined Scalia, Chief Justice John G. Roberts Jr., and Associate Justices Anthony M. Kennedy and Samuel A. Alito Jr. in the majority. 

Associate Justice Stephen G. Breyer wrote a 12-page dissent, joined by Associate Justices Ruth Bader Giinsburg, Sonia Sotomayor, and Elena Kagan. (Details here.)

In 2006, the Concepcions filed suit against their wireless service provider, AT&T Mobility, for allegedly defrauding them by charging $30 in sales tax on a cell phone advertised as “free.” The sales contracts’ arbitration clause required arbitration, but banned class arbitration. The plaintiffs contended that California law made both the arbitration clause and the class action waiver unconscionable.

AT&T Mobility, on the other hand, argued that a “premium payment” in the arbitration clause insulated it from an unconcionability charge because the premium payment ensured that it was not immune from individual claims. Under the premium payment clause, the customer gets an additional $7,500 if an arbitrator’s award to a customer is greater than AT&T Mobility’s last written settlement offer before selection of an arbitrator.

A Southern California federal district court denied AT&T Mobility’s motion to compel the Concepcions to submit to individual arbitration under the parties’ arbitration agreement.

That court held that under California law, the agreement’s class-waiver provision is unconscionable, and that the FAA does not preempt California unconscionability law. The Ninth U.S. Circuit Court of Appeals affirmed in an opinion by Circuit Judge Carlos T. Bea, who was joined by Circuit Judges Mary M. Schroeder and Stephen Reinhardt. The Ninth Circuit opinion, briefs, court papers, and argument preview appear at Scotusblog.

Today, Justice Scalia, writing for the majority, analyzed the FAA Section 2 “saving clause” in supporting preemption of the California unconscionability law used to strike down the cell phone contract’s bar against class arbitration.  FAA Section 2 says

A written provision in any maritime transaction or a contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction . . . shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract. 9 U. S. C. §2.

Scalia notes that Section 2 provides a “liberal federal policy favoring arbitration.” Sec. 2's saving clause, the opinion explains, provides grounds for invalidating cases, which include “generally applicable contract defenses, such as fraud, duress, or unconscionability.”

Scalia writes that the question in the case is tougher than an outright prohibition of arbitration by state law, because the attack on arbitration here includes the unconscionability allegation.  But here, he writes, “nothing in [Section 2’s saving clause] suggests an intent to preserve state-law rules that stand as an obstacle to the accomplishment of the FAA’s objectives.” 

The result, the opinion notes, is that “[r]equiring the availability of classwide arbitration interferes with fundamental attributes of arbitration and thus creates a scheme inconsistent with the FAA.”

Scalia looks at the FAA's history in rejecting the dissent’s contention that downplays the importance of expeditious procedures in the law’s passage.  Scalia notes, “The point of affording parties discretion in designing arbitration processes is to allow for efficient, streamlined procedures tailored to the type of dispute.” 

The majority opinion puts arbitration's faster procedures on the same footing as private enforcement of disputes as key goals that justify the FAA’s promotion of arbitration processes.

Discover Bank conflicts with those goals. “Consumers remain free to bring and resolve their disputes on a bilateral basis under Discover Bank, and some may well do so,” writes Scalia, “but there is little incentive for lawyers to arbitrate on behalf of individuals when they may do so for a class and reap far higher fees in the process. And faced with inevitable class arbitration, companies would have less incentive to continue resolving potentially duplicative claims on an individual basis.”

Specifically, the opinion notes that switch to class arbitration destroys “the principal advantage of arbitration—its informality—and makes the process slower, more costly, and more likely to generate procedural morass than final judgment."

Scalia also assails the  increased preliminary procedures, as well as the procedural formality, needed for a class arbitration. Citing the American Arbitration Association’s class arbitration caseload data (available under File & Manage a Case), he notes, “As of September 2009, the AAA had opened 283 class arbitrations. Of those, 121 remained active, and 162 had been settled, withdrawn, or dismissed. Not a single one, however, had resulted in a final award on the merits.”

Finally, Scalia says that class arbitration puts defendants at risk.  While defendants assume the risk of mistakes in abandoning “multilayered review” for faster resolutions, the opinion notes, “the risk of error will often become unacceptable” where the damages could be owed to “tens of thousands of potential claimants.”

The majority opinion states, “We find it hard to believe that defendants would bet the company with no effective means of review, and even harder to believe that Congress would have intended to allow state courts to force such a decision..”

Citing AT&T Mobility’s scheme that pays claimants a minimum $7,500 if they win an arbitration award greater than the company’s final settlement offer, the Court said it was unlikely that the Concepcions’ claims under the contract would go unresolved.

The Court remanded the case for further action.

--Russ Bleemer, Editor, Alternatives (with additional background research compiled by Madeleine Elkan, a CPR Institute Spring 2011 intern)