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Supreme Court Approves Class Action Ban in Arbitration Agreements


Many companies have created consumer contracts which states that any dispute which might arise between the company and the consumer must be settled in arbitration rather than litigation. This benefits the company in that it is faster, less formal, and more private than litigation. It also gives the company an upper hand because they choose and pay the arbitration company. One such case, Concepcion v. AT&T arose when the consumer tried to bring the case to litigation rather than arbitration. The case revolved around the Federal Arbitration Act of 1925 (FAA).

The Federal Arbitration Act of 1925 states that “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.”

The FAA was invoked in the case of Concepcion v. AT&T in which the Concepcions purchased service from AT&T which was advertised as including free phones. AT&T then allegedly charged the Concepcions $30.22 in sales tax based on the price of the phones. In March 2006, the Concepcions filed a complaint against AT&T in the United States District Court for the Southern District of California. The complaint was later consolidated with a putative class action alleging, among other things, that AT&T had engaged in false advertising and fraud by charging sales tax on phones it had advertised as being free.

AT&T moved to compel arbitration under the terms of its contract with the Concepcions which stated that customers who wished to initiate a dispute must go through the arbitration process provided by AT&T rather than litigation.

Under California law, a framework known as the Discover Bank rule is commonly used in arbitration agreements which provides that when “a waiver is found in a consumer contract of adhesion in a setting 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, or willful injury to the person or property of another.’ Under these circumstances, such wavers are unconscionable under California law and should not be enforced.” On these grounds, AT&T’s motion to compel arbitration was dismissed by all of the lower courts.

The case made its way up to the Supreme Court which found the California Discover Bank rule too broad and feared that it allowed state laws to overrule federal laws which, according to the Court, renders the federal law obsolete.

The Court pointed out that class arbitration (as opposed to class litigation) is a relatively new process and so was not taken into account when the FAA was created in 1925. The size of the class, the fact that members of the class have to be notified, and that it must be determined if the plaintiffs are representative of the class, prevent all of the advantages of arbitration over litigation (quick, informal, private, etc.) from taking place.

Class arbitration would create a greater risk to the defendant, as the process is faster and the absence of multi-layered review makes it more likely that mistakes will go unnoticed and uncorrected which could result in huge losses which could, in turn, prompt defendants to settle cases without strong claims.

The Court concluded that the Concepcions were better off under their arbitration agreement with AT&T than they would have been as participants in a class action which “could take months, if not years, and which may merely yield an opportunity to submit a claim for recovery of a small percentage of a few dollars.”

The Supreme Court concluded that because “it ‘stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress,’ California’s Discover Bank rule is preempted by the FAA. The judgment of the Ninth Circuit is reversed and the case is remanded for further proceedings consistent with this opinion. It is so ordered”

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