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AT&T Mobility LLC v. Concepcion et ux.,
No. 09-893, Argued November 9, 2010, Decided April 27, 2011

Introduction

In AT&T Mobility LLC v. Concepcion ("Concepcion"), the Supreme Court held that the Federal Arbitration Act ("FAA") does not permit state law to invalidate class action waivers in arbitration agreements based on unconscionability. In practical terms, Concepcion will permit parties to prohibit class action arbitrations in consumer (and potentially employment) arbitration provisions.

The Facts and Procedural History

In 2002, Liza and Vincent Concepcion purchased Cingular Wireless1 cellphone service advertised as including two "free" phones. The Concepcions were charged $30.22 for sales tax based on the phones' retail price. In 2006, they filed a complaint alleging false advertising and fraud in U.S. District Court for the Southern District of California.2 In 2008, AT&T moved to compel arbitration under the terms of its contract with the Concepcions. The Concepcions opposed the motion on the basis the arbitration agreement's prohibition against class action arbitrations was unconscionable under California Civil Code Section 1670.5(a),3 unlawfully exculpatory under California Civil Code Section 1668,4 and inconsistent with Discover Bank v. Superior Court, 36 Cal. 4th 148 (2005).5 The District Court denied AT&T's motion on the basis that the class action waiver was unconscionable. The Ninth Circuit affirmed. The Supreme Court granted certiorari to determine whether Section 2 of the FAA6 "preempts California's rule7 classifying most collective-arbitration waivers in consumer contracts as unconscionable." The Concepcions contended the Discover Bank rule "is a ground that 'exist[s] at law or in equity for the revocation of any contract'" under Section 2 - the FAA "savings clause."

The Supreme Court's Opinions

The Supreme Court disagreed, finding the Discover Bank rule "an obstacle to the accomplishment of the FAA's objectives," which is "to ensure the enforcement of arbitration agreements according to their terms so as to facilitate streamlined proceedings." Thus, the Supreme Court held California's virtual prohibition of class action arbitration waivers is preempted by the FAA.

Justice Breyer, writing for the dissent, would have found the Discover Bank rule "consistent" with the FAA: "It 'applies equally to class action litigation waivers in contracts without arbitration agreements as it does to class arbitration waivers in contracts with such agreements" (quoting Discover Bank at 165-66). "Linguistically speaking, it falls directly within the scope of the Act's exception permitting courts to refuse to enforce arbitration agreements on grounds that exist 'for the revocation of any contract.' 9 U.S.C. §2 (emphasis added)." "The Discover Bank rule is also consistent with the basic 'purpose behind' the Act. Dean Witter Reynolds Inc. v. Byrd, 470 U.S. 213, 219 (1985). We have described that purpose as one of 'ensur[ing] judicial enforcement' of arbitration agreements. Ibid.".

Joining Justice Scalia in the majority were Chief Justice Roberts, and Justices Kennedy, Thomas, and Alito. Justice Thomas wrote a concurring opinion. Joining Justice Breyer in the dissent were Justices Ginsburg, Sotomayor, and Kagan.

Employees' Perspective

Concepcion is not particularly surprising. In its last few terms, the Court has reinforced the judicial preference for arbitration under the FAA when the parties have agreed to an arbitration clause. See, e.g., Rent-A-Center West Inc. v. Jackson, 130 S.Ct. 2772 (2010), 14 Penn Plaza LLC v. Pyett, 129 S.Ct. 1456 (2009), Hall Street Assoc. LLC v. Mattel, Inc., 552 U.S. 576 (2008), and Buckeye Check Cashing Inc. v. Cardegna, 546 U.S. 440 (2006). During last year's term, the Court held that parties cannot be compelled into class arbitration under the FAA unless the parties have agreed to arbitrate class-wide claims. Stolt-Nielsen SA v. AnimalFeeds Int'l Corp.,130 S.Ct. 1758 (2010). In Concepcion the Supreme Court clarified that, under the FAA, trial courts may not rely on state law principles of unconscionability to strike an arbitration agreement that bars class-wide claims.

That is not to say Concepcion will allow businesses to use arbitration agreements to eliminate class actions entirely. In some settings - for example, FINRA proceedings - class-wide claims are litigated while individual claims are arbitrated. (See FINRA Code of Arbitration for Consumer Disputes, Rule 12204(a).) In addition, Concepcion applies only to arbitration subject to the FAA; it does not apply to arbitration agreements construed in state courts (for example, when the underlying claims do not present a basis for federal jurisdiction). State courts remain free to apply state law unconscionability principles to arbitration clauses that are challenged in state court litigation, and they frequently do so. See, e.g.Muhammad v. County Bank of Rehoboth Beach, 189 N.J. 1, 912 A.2d 88 (N.J. 2006), and Kinkel v. Cingular Wireless LLC, 223 Ill.2d 1, 857 N.E.2d 250 ( Ill. 2006).

Even in federal courts, Concepcion is limited to situations where the FAA preempts state law. To the extent federal common law includes the principles of unconscionability of contracts - and courts have suggested as much in other contexts (see, e.g., Operating Engineers Local 39 Health Benefit Fund v. Gustafson Constr. Co., 258 F3d. 645, 655 (7th Cir. 2001); Husman Constr. Co. v. Purolator Courier Corp., 832 F.3d 459, 461 (8th Cir. 1987), and Fairfield Mfg. Co., Inc. v. Hartman, 132 F.Supp.2d 1142 (N.D. Ind. 2001) - Concepcion may not insulate an arbitration clause from an unconscionability challenge. Such a challenge may be difficult, of course, in light of: (i) Concepcion's strong language that arbitration clauses are to be enforced as agreed upon, and (ii) Concepcion's rejection of arguments that consumers should be protected from adhesion contracts. In any event, if Congress passes legislation defining the role of arbitration in consumer and employment disputes, the state law preemption analysis from Concepcion could fall by the wayside.

Employers' Perspective

In Concepcion, the Supreme Court has reiterated its belief in the sanctity and enforceability of arbitration provisions by holding the arbitration provision in dispute was enforceable under the FAA. The Court held the California law to the contrary was preempted. The arbitration provision at issue provided for the arbitration of all disputes but excluded class wide arbitrations. The Court continued to display its disfavor of class arbitrations premised upon a belief class arbitrations sacrifice some of the essential benefits of arbitration, namely informality and expeditiousness.

While other cases have held under certain circumstances, pre-dispute arbitration agreements drafted by an employer may be unenforceable when they contain unconscionable terms, it would appear the exclusion of class-wide arbitration as a provision of an arbitration agreement is not viewed as unconscionable by the Court. Accordingly, it is now clear employers may issue arbitration agreements with a provision that does not permit class-wide arbitration.

This Hot Topic was prepared by the ADR in Labor and Employment Law Committee of the ABA Section of Labor & Employment Law with the assistance of Susan Grody Ruben, Arbitrator and Mediator in Cleveland, OH; Thomas A. Doyle, who represents employees at Saunders & Doyle in Chicago, IL; and Robert D. Weisman, who represents employers at Schottenstein Zox & Dunn in Columbus, OH.

1AT&T acquired Cingular in 2005.
2 The Concepcions' Complaint was consolidated with a putative class action.
3 A court may refuse to enforce a contract found "to have been unconscionable at the time it was made," or may "limit the application of any unconscionable clause." California Civil Code § 1670.5. Unconscionability has "a procedural and a substantive element, the former focusing on oppression or surprise due to unequal bargaining power, the latter on overly harsh or one-sided results." Armendariz v. Foundation Health Psychcare Services, Inc., 24 Cal. 4th 83, 114 (2000).
4 A contract is unlawful if it has for its "object, directly or indirectly, to exempt anyone from responsibility for his own…violation of law."
5 "[W]hen [a class action] waiver is found in a consumer contract of adhesion in a setting in which disputes between the contracting parties predictably involve small amounts of damages, and when it is alleged that the party with the superior bargaining power has carried out a scheme to deliberately cheat large numbers of consumers out of individually small sums of money, then…the waiver becomes in practice the exemption of the party 'from responsibility for [its] own fraud….' …[S]uch waivers are unconscionable under California law and should not be enforced." Id., at 162 (quoting California Civil Code § 1668).
6 "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."
7 In Concepcion, the Supreme Court refers to this rule as "the Discover Bank rule."

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