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In determining that the Federal Arbitration Act (“FAA”) preempted a California rule that rendered most class action waiver provisions in consumer arbitration agreements unconscionable, the Supreme Court in AT&amp;T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011) shed doubt on the continued viability of the class action device in the arbitration context.  Reasoning that class arbitration undermines the usual informality of the arbitral process and greatly increases the pressure on defendants to settle, the Supreme Court declared arbitration to be ill-suited for the class action mechanism.  Like the Supreme Court’s decision in Stolt-Nielsen S.A. v. AnimalFeeds International Corp., 130 S. Ct. 1758 (2010), the Court’s decision in Concepcion further chipped away at plaintiffs’ future ability to arbitrate disputes as a class.

In Concepcion, plaintiffs commenced a putative class action in federal court against AT&amp;T, alleging that AT&amp;T had falsely advertised its phones as free by charging plaintiffs a sales tax based on the phones’ retail value.  Relying on an arbitration provision in the parties’ sales and service agreements, AT&amp;T moved to compel arbitration.  The arbitration provision prohibited class arbitration, which, plaintiffs argued, rendered the agreement unconscionable under California law.  Relying on the California Supreme Court’s decision in Discover Bank Laster v. AT&amp;T Mobility LLC, 584 F.3d 849 (Cal. 2009), the district court agreed and denied AT&amp;T’s motion.  The Ninth Circuit affirmed.

The California Supreme Court’s decision in Discover Bank, commonly known as the “Discover Bank rule,” held that under certain circumstances, class action arbitration waiver provisions in consumer contracts of adhesion are unconscionable and should not be enforced.  According to Discover Bank, such circumstances exist when disputes between the parties will likely involve minimal damages and the defendant has superior bargaining power and has deliberately cheated large numbers of consumers out of small sums of money.  Seeking to apply the Discover Bank rule to the present case, plaintiffs argued that the rule was not preempted by the FAA, and was instead viable under the FAA’s saving clause—a clause promulgated to preserve generally applicable contract defenses available under state law.

The Supreme Court rejected plaintiffs’ argument, finding that the FAA’s savings clause evidenced no intent to preserve expressly anti-arbitration state-law rules that stand squarely in the way of the accomplishment of the FAA’s objectives.  Designed to promote arbitration, the Court reasoned that the FAA preempted the Discover Bank rule and prohibited plaintiffs from arbitrating as a class pursuant to the parties’ agreement.  In so deciding, the Supreme Court considered the disadvantages of class action arbitration, showing its obvious disfavor for using the class action device in the arbitral forum.  Among other disadvantages, the Court reasoned that class arbitration is slower, costlier, and less likely to result in a speedy final judgment than courtroom litigation.

Class Arbitration: Supreme Court Holds That FAA Pre-Empts California Law on Unconsciounability of Arbitration Provisions