The Supreme Court has now held that the Federal Arbitration Act (“FAA”), 9 U.S.C. section 2, preempts state laws that would condition arbitration agreements on the availability of class action arbitration procedures.  AT&T Mobility v. Concepcion.pdf, 563 U.S. ____ (April 27, 2011).  This new holding overturns prior holdings from California as well as other jurisdictions, and may make arbitration agreements a much more attractive prospect for employers. 

We first wrote about this case on June 1, 2010, in the wake of the Supreme Court’s decision in Stolt-Nielsen v. AnimalFeeds Int’l Corp.pdf., 559 U.S. ___ (2010), in which the Court found that a party could not be forced to compel class action arbitration of claims when the agreement did not provide for such treatment. The Concepcion case presents the related issue of whether a state can prevent the enforcement of arbitration agreements that do not provide for class actions on unconscionability or other grounds.  Although courts almost universally cite the strong public and statutory policy favoring arbitration, some courts had created rules specific to arbitration that made it more difficult and expensive, particularly for employers.  Chief among these requirements, most notably in California and the Ninth Circuit, was one that rendered such agreements “substantively unconscionable” if they contained a class action waiver.  See Discover Bank v. Superior Court, 36 Cal. 4th 148, 113 P.3d 1100 (2005).  Thus, if an employment agreement required the arbitration of employment claims, but either waived or did not provide for class-wide arbitration, it would be unenforceable in most cases. 

The Concepcion case itself was not an employment action, but a claim that AT&T should not have charged consumers sales tax on allegedly “free” cellular telephones.  Although the named plaintiffs had signed an arbitration agreement as part of their cellular telephone contract, they brought suit in the United States District Court for the Southern District of California, where their claims were consolidated with a putative class action involving the same subject matter.  When AT&T moved to compel arbitration of the claims, they opposed the motion because the agreement barred the use of class action proceedings and because, under Discover Bank, it therefore could not be enforced.   The district court found that the agreement was unconscionable for that reason and the Ninth Circuit affirmed.  These rulings were consistent with both Discover Bank and prior Ninth Circuit authority. 

The Supreme Court, however, reversed and found that the FAA preempted the state law requirement that rendered arbitration agreements unenforceable unless they provided for class-wide litigation.  First, it found that while the FAA did not preempt state law rules of general contract interpretation, the California requirements went beyond those rules.  Instead, it likened the requirement that class-wide treatment be available to one dictating that the matter be heard by a judicial officer, or a jury, rules that would quickly make arbitration meaningless.  Because the rule requiring class action procedures was applied in a fashion that disfavors arbitration, it was itself unenforceable.

Further, the court found that the purpose of the FAA had been to avoid “judicial hostility” to arbitration, and to promote arbitration in accordance with the parties’ agreements.  The California requirement, it concluded, interfered with both of those purpose.  Of critical importance, the court noted that class procedures were by their very nature likely to defeat the purpose of arbitration by including nonparties, slowing the proceedings, increasing their costs and procedural complexity, destroying confidentiality, and placing the matter into the hands of an arbitrator who might lack the requisite class action expertise.  Further, because of the limited right of review, such a proceeding would be more prone to error, and errors could not be corrected until far later in the process.  Thus, the Court concluded that the California requirements were “an obstacle to the accomplishment and execution of the full purposes and objectives of Congress” and were preempted.

The importance of this decision cannot be overemphasized and will likely be a topic of discussion for months or years.  At its most basic level, the Concepcion case means that an employer can avoid class actions by providing for arbitration of employment claims and limiting arbitration to the resolution of claims on an individual basis.  The decision also appears to limit other court-made restrictions to arbitration and my make arbitration overall a much more favorable alternative for employers trying to control their litigation costs. 

The Bottom Line:  The Supreme Court has now recognized that employers can avoid class actions through their arbitration agreements.  Expect much more from courts, commentators, and Congress over this issue.