In recent years, arbitration agreements have become standard in a multitude of situations, from cell phone plans, to credit cards, to nursing home admissions. Often these contracts contain “class action waivers,” where consumers agree not only to arbitrate disputes, but also to forego class action claims. Because class action waivers are often presented to consumers in pre-printed form contracts, there has been a developing trend in state courts to find them unconscionable and unlawful. This has, of course, lead to much confusion and unpredictability for businesses, because while a particular contract may be upheld in one state, it may be found unlawful in another.
In a case that will hopefully bring predictability back to the law, the U.S. Supreme Court recently held that under federal law an arbitration agreement containing a class action waiver is not unconscionable and unlawful, and that federal law preempts state-law rules to the contrary. See AT&T Mobility v. Concepcion, 563 U.S. ____, 2011 U.S. Lexis 3367 2011, (April 27, 2011).
In Concepcion, the plaintiffs purchased cellular telephone service from AT&T, which was advertised as including free phones. Although the plaintiffs were not charged for the phones, they were charged sales tax. As a result, the plaintiffs filed a class action lawsuit asserting claims for false advertising and fraud. Thereafter, AT&T moved to compel arbitration pursuant to its cell phone contract. The plaintiffs opposed the motion, arguing that the arbitration provision was unconscionable and unlawful under state law because it contained a class action waiver.
The court denied AT&T’s motion to compel arbitration. The court found that although the arbitration agreement contained terms favorable to the consumer, it was nonetheless unlawful under the California Supreme Court’s decision in Discover Bank v. Superior Court, 36 Cal 4th 148 (2005), which held that class action waivers in consumer arbitration agreements are unconscionable.
In reversing, the Supreme Court found that the overarching purpose of the Federal Arbitration Act (“FAA”) is “to ensure the enforcement of arbitration agreements according to their terms so as to facilitate informal, streamlined proceedings.” Accordingly, under the FAA, the parties to a contract “may agree to limit the issues subject to arbitration, ... to arbitrate according to specific rules, ... and to limit with whom a party will arbitrate its disputes....”
The importance of the Supreme Court’s ruling in Concepcion cannot be overstated. Simply, if the Supreme Court had found the arbitration agreement unlawful, then AT&T would have been exposed to class action claims and potentially significant damages.
Although a class action waiver can no longer render an arbitration agreement unlawful under Concepcion, it is important to note that courts may still invalidate consumer arbitration agreements if they are found to be unconscionable under other “generally applicable contract principles.” For instance, in considering whether an arbitration agreement is unconscionable, courts may consider, among other things, whether:
- the consumer is able to negotiate the terms, or whether the contract is presented on a “take-it-or-leave-it” basis;
- the company has exploited its superior bargaining power;
- the arbitration agreement is hidden in small print, or hidden in an array of documents;
- the company can unilaterally change the terms of the arbitration agreement;
- the arbitration agreement imposes unreasonable fees on the consumer; and
- the arbitration agreement requires unreasonable travel.
As a practical matter, to help ensure that an arbitration agreement will be enforced, a business may consider: (1) providing consumers with an option to opt out of an arbitration agreement; (2) placing the agreement in large readable print; (3) prohibiting unilateral changes to the terms of the agreement; (4) ensuring that any expense incurred by the consumer in arbitration will be minimal; and (5) providing for arbitration in the county where the consumer resides.
If you have any questions or would like a copy of the full opinion, please call a member of our Financial Institution and Creditor Rights and Liabilities Practice group.
