US Supreme Court Gives New Life to Class Action Waivers in Arbitration Agreements
There has been substantial litigation in California over the enforceability of class action waivers in consumer arbitration agreements and in employment arbitration agreements. California courts, including the California Supreme Court, have invalidated these class action waivers based on a finding that they are unconscionable and unenforceable under California contract law.Yesterday, the United States Supreme Court, in a 5-4 decision authored byJustice Scalia,dealt a swift blow to this California jurisprudence andheld that the Federal Arbitration Act (FAA) preempts California law that interferes withtheFAA’s purpose of promoting arbitration.
The case, AT&T Mobilityv. Concepcion, is not an employment case but a consumer case involvingthe propriety of sales taxcharged by AT&T to consumers for “free” phones. AT&T’s customers signed contracts including an agreement to arbitrate any and all disputes.The agreement required that any dispute be pursued individually and prohibited class claims. Theplaintiffs in the case had sought to pursue a class action against AT&T regardingthe allegedly impropercharges. AT&Tmovedto compel arbitration.Thetrial court denied AT&T’s motion, finding the arbitration agreementand in particular, theclass actionwaiver, unconscionable and unenforceable under Californialaw.AT&T appealed to the Ninth Circuit,but the NinthCircuit affirmed, agreeing the provision was unconscionable. Both courts relied onCalifornia Supreme Court precedent startingwith a case called Discover Bank, in which the Court explained the circumstances in which classwaivers in consumerarbitration agreementswould be deemed unconscionable. AT&T petitioned for review by the United Stated Supreme Court.
Yesterday, the Supreme Court handed down its decision, reversing the Ninth Circuit and holding that the FAA preempts California law insofar as the law operates to interfere with the purpose of the FAA, which is to promote arbitration as a streamlined procedure for resolving disputes. The Court held that the operation of California law to void the class action waiver in AT&T’s contract nullified the parties’ agreement to arbitrate and ran afoul of the FAA. The Court held that the FAA requires arbitration agreements to be enforced according to their terms and on the same footing as any other type of contract. The Court explained that defenses to enforceability (fraud,duress, unconscionability)still existbut may not be applied in a manner so as to discriminate against the type of contract at hand. The Courtsuggested that California courts have applied the doctrine of “unconscionability” to disfavor arbitration agreements and avoid their enforcement, contrary to the FAA.
The Court further explained that the FAA permits parties to agree to limit the types of issues to be arbitrated, including limiting class or collective claims, to further the arbitral goal of providing an efficient, streamlined procedure for resolution of disputes. The Court further stated that any rule, like California’s,”[r]equiring the availability of classwide arbitration interferes with fundamental attributes of arbitration and thus creates a scheme inconsistent with the FAA.”
So what does this mean for California employers? As noted, the AT&T case is not an employment case and did not involve the enforceability of a class action waiver in an employment arbitration agreement. That said, the Court’s reasoning should apply equally to the enforceability of class action waivers in employment arbitration agreements. This will no doubt be more definitively determined in other cases in the near future. In the meantime, employers continuing to battle the cottage industry of wage and hour class actions in California should certainly revisit their arbitration agreements and ensure that a class action waiver is included. These provisions stand much greater likelihood of enforceability in the wake of the AT&T decision. Employers are cautioned, however, that the AT&T case does NOT hold that all California unconscionability standards relating to arbitration agreements are preempted by the FAA. It is likely that the scope of preemptionwill be the subject of much litigation to come, with the focus being whether the standards are applied or operate inamanner that frustrates thepurpose of the FAA.For now,employers should continue to ensure that their arbitration agreements meet general standards of fairness for employment disputes, generally prescribed by the California Supreme Court in Armendariz v. Foundation Health Psychcare Services.