On April 27, 2011, the United States Supreme Court issued
an important decision upholding an arbitration clause barring class-wide
arbitration. The decision has important implications for telecommunications and
other consumer contracts, including website terms and conditions. In AT&T Mobility LLC v. Concepcion et ux, No. 09-893, 2011 U.S. LEXIS 3367 (Apr. 27, 2011),
the plaintiffs (husband and wife) sued AT&T in a California Federal
District Court for advertising free cell phones but charging a sales tax -
$30.22 - on the full retail price. The contract provided for arbitration of all
disputes between the parties, but required that claims be brought in the
parties' "individual capacity, and not as a plaintiff or class member in
any purported class or representative proceeding." The Concepcions'
lawsuit was consolidated in the District Court with a class action alleging
that AT&T had engaged in false advertising and fraud by charging sales tax
on "free" phones.
In denying AT&T's motion to compel arbitration, the
District Court found that AT&T's arbitration provision was unconscionable
because it disallowed class-wide proceedings. The District Court based its
opinion on the California Supreme Court's decision in Discover Bank v.
Superior Court, 36 Cal. 4th 148 (2005) [enhanced version available to lexis.com subscribers / unenhanced version available from lexisONE Free Case Law],
which ruled that an arbitration clause was unenforceable because a class-action
waiver contained within it would exculpate Discover Bank from liability for
wrongdoing involving small sums of damages. The Ninth Circuit Court of Appeals
agreed, further holding that the Discover Bank rule was not preempted by
the Federal Arbitration Act (FAA) because the rule was simply a refinement of
the unconscionability analysis applicable to contracts in California.
The United States Supreme Court disagreed and reversed
the Ninth Circuit's ruling. Section 2 of the FAA provides that all arbitration
clauses shall be valid, irrevocable, and enforceable but permits arbitration
agreements to be declared unenforceable "upon such grounds as exist at law
or in equity for the revocation of any contract" (the "savings clause").
The Supreme Court noted that while the savings clause generally preserves
applicable contract defenses, nothing in it suggests an intent to preserve
state-law rules that stand as an obstacle to the accomplishment of the FAA's
While California's Discover Bank ruling did not
necessitate class-wide arbitration, it allowed any party to a consumer contract
to demand it after the fact. Requiring the availability of class-wide
arbitration interferes with fundamental attributes of arbitration and thus, the
Supreme Court held, creates a scheme inconsistent with the FAA.
With the recent expansion of privacy class action suits
related to online and mobile data collection practices, well-crafted
arbitration clauses addressing class action suits and arbitrations in website
terms and conditions and similar agreements with consumers may offer important
FOR MORE INFORMATION,
contact Sheila A. Millar at 202 434-4143 or via e-mail at firstname.lastname@example.org, Tracy P. Marshall at 202
434-4234 or via e-mail at email@example.com,
or Crystal N. Kincaid at 202 434-4254 or via e-mail at firstname.lastname@example.org.