Supreme Court to Decide Whether Agreements Barring Class-Wide Arbitration can be Invalidated Under State Law

This week, the Supreme Court granted the certiorari petition of AT&T Mobility LLC (“ATTM”) in AT&T Mobility LLC v. Concepcion, No. 09-893. ATTM’s petition asked the Court to determine whether the Federal Arbitration Act (“FAA”) preempts states from conditioning the enforcement of an arbitration agreement on the availability of particular procedures – here, class-wide arbitration – when those procedures are not necessary to ensure that the parties to the arbitration agreement are able to vindicate their claims.

In this consumer class action, plaintiff alleged that ATTM’s offer of a free” cellular phone with the purchase of a new service contract was fraudulent to the extent the company charged the new subscriber a substantial sales tax on the retail value of each free phone. ATTM moved to compel the consumers to participate in arbitration, as required by the service agreement. The district court denied ATTM’s motion, finding that the provision of the arbitration agreement barring class actions was unconscionable under California law and therefore was unenforceable. The district court further held that California unconscionability law was not preempted by the FAA, which provides that arbitration agreements are valid except where they can be revoked on grounds that could also apply to invalidate an entire contract. The Ninth Circuit affirmed.

In its cert petition, ATTM contended that the case presented an exceptionally important question, the resolution of which could lead to the invalidation of tens of millions of arbitration contracts under California law, if the Ninth Circuit’s opinion was upheld. ATTM argued that, even though its arbitration provision does not permit class arbitration, it gives consumers sufficient incentives to vindicate their claims on an individual basis and is therefore valid and not unconscionable. ATTM also argued that review was warranted because courts were divided on the issue and the decision below conflicted with the FAA and Supreme Court precedent. ATTM noted that the primary purpose of the FAA, as stated by the Supreme Court, is to ensure that private agreements to arbitrate are enforced according to their terms. ATTM also pointed to Supreme Court precedent holding that the FAA prohibits courts from imposing prerequisites to enforcement of arbitration agreements where those prerequisites are not applicable to contracts generally. Finally, ATTM argued that there is a liberal federal policy favoring arbitration agreements, notwithstanding state policies to the contrary.

How this issue is resolved could have a wide spread effect on companies sued in consumer class actions. For instance, a decision in favor of ATTM could be interpreted broadly to allow companies to limit their exposure to class actions simply by including a class action waiver in their arbitration agreements. On the other hand, a ruling in favor of plaintiffs could result in many arbitral class action provisions being invalidated.

Stay tuned.