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Client Advisory - Supreme Court Ruling Deals a Blow to Consumer Class Actions
April 2011
Kori Anderson-Deasy
Thanks to the Supreme Court’s ruling in AT&T Mobility LLC v. Concepcion, businesses now have a mechanism to insulate themselves from costly class actions. In Concepcion, the Court considered whether states can invalidate arbitration agreements that prohibit class arbitration proceedings. In a decision that changes the landscape of consumer class action litigation, the Court confirmed the enforceability of arbitration provisions and waivers akin to those at issue in Concepcion, which are designed to prevent the initiation of class action litigation. Furthermore, the decision will likely redefine the contours of arbitration and class action litigation in other contexts, including employment cases.
The dispute in Concepcion arose from a contractual agreement between AT&T and Vincent and Liza Concepcion for the sale and servicing of cellular telephones. While AT&T had advertised that purchasers of its cellular service would receive free phones, the Concepcions were charged approximately $30 in sales tax for the value of the phones they received. As a result, they filed a complaint in a California federal district court, which was later consolidated with a putative class action that alleged, in part, that AT&T had engaged in false advertising and fraud by charging sales tax on phones that it had advertised as free.
However, AT&T’s form contract required arbitration of all disputes and prohibited classwide arbitration. Although AT&T attempted to enforce this arbitration provision to prevent the claim from proceeding in court on a class basis, both the District Court and the Ninth Circuit held that the provision was unenforceable based upon then existing California law, which made the waiver of classwide arbitration proceedings in consumer contracts per se unconscionable. On April 27, 2011, the Supreme Court overturned the Ninth Circuit in a 5-4 decision, holding that the Federal Arbitration Act (“FAA”) preempted state law, which required the availability of classwide arbitration in direct contravention of the terms of the parties’ arbitration agreement.
As the Court explained, the FAA’s purpose is to ensure that private arbitration agreements are enforced according to their terms to facilitate efficient and expeditious dispute resolution. However, the Court recognized that classwide arbitration slows the process, increases costs, eliminates the informality of arbitration, and increases risks to business defendants that did not choose to arbitrate on a class basis, while providing no effective means for rectifying errors by the arbitrator. Therefore, state laws that require the availability of classwide arbitration procedures, despite contrary contract terms, interfere with the “fundamental attributes of arbitration and [create] a scheme inconsistent with the FAA.”
This ground breaking decision confirms the enforceability of class arbitration waivers such as those in Concepcion, and provides businesses with a road map for ensuring that their arbitration agreements will effectively thwart potentially devastating class action litigation. However, the decision does not provide businesses with carte blanche to impose unconscionable or usury arbitration clauses on its customers in adhesion contracts. Implicit in the Court’s decision is the requirement that such clauses be fair, reasonable, and otherwise enforceable. The Court looked favorably on the arbitration procedures called for in the contract at issue in Concepcion because they were quick, easy to use, did not impose unreasonable burdens on the consumer, and were likely to prompt complete recovery for an individual consumer that would likely exceed the amount recovered by an individual class member in a collective action. Accordingly, the secondary lesson taught by Concepcion is that adhesion contracts must afford individuals a fair and transparent dispute resolution process coupled with a clear class action waiver in order to be enforceable and effectively contain the risk of class action litigation.
Moreover, the Supreme Court’s decision is also likely to have far-reaching implications, perhaps even in the employment context. While Concepcion’s full impact will be revealed as courts entertain and decide cases challenging or seeking to enforce various arbitration provisions, there can be no doubt that the decision changes the rules of the game for businesses, which can now contractually curtail “bet the company” class action litigation.
This advisory is for guidance only and is not intended to be a substitute for specific legal advice. If you would like further information, please contact the Edwards Angell Palmer & Dodge LLP attorney responsible for your matters or one of the attorneys listed below:
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Windy R. Catino, Partner |
+1.617.951.2277 |
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