Split U.S. Supreme Court: Federal Arbitration Act Preempts California Rule

WASHINGTON, D.C. - (Mealey's) The Federal Arbitration Act (FAA) preempts a California rule established in Discover Bank v. Superior Court (113 P.3d 1100 [Cal. 2005]) that classifies most collective-arbitration waivers in consumer contracts as unconscionable, a split U.S. Supreme Court ruled April 27, reversing a ruling by the Ninth Circuit U.S. Court of Appeals (AT&T Mobility LLC v. Vincent Concepcion, et ux., No. 09-893, U.S. Sup.). 

"Classwide arbitration includes absent parties, necessitating additional and different procedures and involving higher stakes.  Confidentiality becomes more difficult.  And while it is theoretically possible to select an arbitrator with some expertise relevant to the class-certification question, arbitrators are not generally knowledgeable in the often-dominant procedural aspects of certification, such as the protection of absent parties.  The conclusion follows that class arbitration, to the extent it is manufactured by Discover Bank rather than consensual, is inconsistent with the FAA," Justice Antonin Scalia wrote for the majority. 

Chief Justice John G. Roberts Jr. and Justices Anthony M. Kennedy, Clarence Thomas and Samuel Anthony Alito Jr. joined in the opinion.  Justice Thomas filed a concurring opinion. 

Justice Stephen G. Breyer filed a dissenting opinion, holding that the California "law is consistent with the federal Act's language and primary objective" and that the majority is wrong to conclude that the FAA preempts the rule.  

Justices Ruth Bader Ginsburg, Sonia Sotomayor and Elena Kagan joined in the dissenting opinion.  

On March 27, 2006, Vincent and Liza Concepcion filed a class action lawsuit in federal court against AT&T, alleging that the company fraudulently charged sales tax on a cellular phone that had been advertised as "free."  U.S. Judge Dana M. Sabraw of the Southern District of California consolidated the Concepcions' case with a similar class action lawsuit filed by Jennifer L. Laster. 

AT&T's wireless service contract contains an arbitration clause by which all disputes are required to be submitted to arbitration.  In addition, the contract contains a class action waiver clause that requires all disputes to be brought in an individual capacity. 

In December 2006, AT&T revised the arbitration agreement to add a new premium payment clause.  Under this clause, AT&T will pay a customer the maximum claim that may be brought in small claims court in the county of the customer's billing address if the arbitrator issues an award in favor of the customer that is greater than AT&T's last settlement offer made before the arbitrator was selected. In California, the maximum claim would be $7,500. 

The Ninth Circuit panel found that the class action waiver is unconscionable under the standard established in Discover Bank.  The panel held that the Concepcions' suit involved "predictably small amounts of damages," allegations that the defendant "carried out a scheme to deliberately cheat large numbers of consumers out of small sums of money" and a standardized contract that doesn't permit the consumer to negotiate the terms. 

AT&T petitioned the high court. 

Kenneth S. Geller and Evan M. Tager of Mayer Brown in Washington, D.C., represent AT&T.  Deepak Gupta of Public Citizen Litigation Group in Washington represents the Concepcions. 

[Editor's Note:  Full coverage will be in the May 6 issue of Mealey's Litigation Report: Class Actions.  In the meantime, the opinion is available at or by calling the Customer Support Department at 1-800-833-9844.  Document #43-110506-012Z.  For all of your legal news needs, please visit] 

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