A divided Supreme Court held this week that the Federal Arbitration Act (FAA) that a states requirement of the availability of classwide arbitration interferes with the fundamental attributes of arbitration and thus creates a scheme inconsistent with the FAA. AT&T Mobility LLC v. Concepcion, No. 09-893, U.S. Supreme Court (April 27, 2011). The case was brought by a California couple who objected to a $30 charge for what was supposed to be a free cellphone. The agreement that they signed provided for arbitration of all disputes between the parties, but required that any claims be brought in the parties’ “individual capacity, and not as a plaintiff or class member in any purported class or representative proceeding.”

The company filed a motion to compel the Concepcions to submit their individual claims to arbitration. The trial judge denied AT & T’s motion, holding that the arbitration agreement was “unconscionable and unlawfully exculpatory under California law because it disallowed classwide procedures.” The Ninth Circuit Court of Appeals upheld the trial judge’s decision. The issue before the Supreme Court was whether the FAA preempts states from conditioning the enforcement of an arbitration agreement on the availability of particular procedures, such as in this case, classwide arbitration, when those procedures are not necessary to ensure that the parties to the arbitration agreement are able to pursue their claims.

Section 2 of the FAA provides that an arbitration provision “shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” The question before the U.S. Supreme Court was whether a ruling by the California Supreme Court in Discover Bank v. Superior Court that banned class waivers as unconscionable is a “groun[d] for the revocation of any contract.” The California Supreme Court had banned class action waivers in all standard-form contracts, whether applicable to arbitrations or court proceedings, if they gave rise to claims that the companies issuing them had set out “to deliberately cheat large numbers of consumers out of individually small amounts of money.”

The U.S. Supreme Court rejected the lower courts’ ruling and the applicability of the Discovery Bank rule. As stated by the Court, “the overarching purpose of the FAA, evident in the text of §§2, 3, and 4, is to ensure the enforcement of arbitration agreements according to their terms so as to facilitate streamlined proceedings. Requiring the availability of classwide arbitration interferes with the fundamental attributes of arbitration and thus creates a scheme inconsistent with the FAA.”

Although the decision arose in the context of a consumer contract, the applicability of the ruling extents to other areas. As an example employers who have removed class action waivers from their arbitration agreements may soon revisit that decision. Stay tuned for the Supreme Court’s decision in Wal-Mart Stores, Inc. v. Dukes, where some of the principles in AT&T v. Concepcion may be applied.