Supreme Court Upholds AT&T's Contract Clause Prohibiting Class-Wide Arbitration

Date: May 03, 2011

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, ___ U.S. ____ (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), 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 objectives.

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 protections.

The Supreme Court's opinion is available at: http://www.supremecourt.gov/opinions/10pdf/09-893.pdf

FOR MORE INFORMATION, contact Sheila A. Millar at 202 434-4143 or via e-mail at millar@khlaw.com, or Tracy P. Marshall at 202 434-4234 or via e-mail at marshall@khlaw.com.