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United States Supreme Court enforces class action waiver in arbitration agreement

In a move that could have a significant impact for employers, the United States Supreme Court recently upheld a so-called class action waiver provision in an agreement to arbitrate.  Although the decision occurred in the context of a consumer contract, the implications are likely to be far more wide-ranging.  In particular, employers that require employees to agree to otherwise enforceable arbitration clauses are likely to have those clauses upheld and enforced even if they include a bar to classwide arbitration.

In AT&T Mobility, LLC v. Concepcion, AT&T offered a free phone to anyone who signed up for itsThumbnail image for Cellphone-CourtesyOf_www.adigitaldreamer.com.jpg cell phone service.  The contract between AT&T and cell phone service purchasers included a mandatory arbitration clause that barred classwide arbitrations.  Dissatisfied with the fact that AT&T charged sales tax on the “free” phone, cell phone service purchaser Vincent Concepcion joined a purported class action law suit in a California Federal District Court.  AT&T moved to compel one-on-one arbitration under the sales contract.  Both the District Court and the Ninth Circuit Court of Appeals refused to do so.  The lower courts relied on a California state court decision that held that class arbitration waivers in consumer contracts were unconscionable and, therefore, rendered the arbitration clause unenforceable.

The United States Supreme Court reversed the lower courts and held that the arbitration clause should be enforced notwithstanding the class action waiver provision.  The decision affirmed the supremacy of the Federal Arbitration Act (FAA) over state laws that attempt to condition the enforceability of arbitration agreements on the availability of classwide arbitration.  In reaching this outcome, the Court noted that the “principal purpose of the FAA is to ensure that private arbitration agreements are enforced according to their terms.”

The Court further explained that “requiring the availability of classwide arbitration interferes with fundamental attributes of arbitration and thus creates a scheme inconsistent with the FAA.”  First, class arbitration sacrifices the informality of arbitration and makes the process slower and more expensive.  Second, even if greater informality were possible in class arbitration, procedural formality would still be required to ensure the due process rights of absent class members.  Finally, requiring class arbitration would greatly increase the risks to defendants.  As the Court explained, to reap the benefits of arbitration, defendants necessarily give up the right to review and correction of all but a few strictly construed categories of errors.  If classwide arbitration is required, defendants could be left with damages liability to tens of thousands of potential claimants and no effective means of redress for even egregious errors in an arbitrator’s decision.  The Court therefore refused to require classwide arbitration when the arbitration clause itself expressly prohibited it.

Justices Breyer, Ginsburg, Sotomayor, and Kagan dissented, with Justice Thomas concurring in the judgment of the majority.

For employers who have arbitration procedures, the holding in this case should prompt review of the policy to evaluate whether adding a class action waiver is appropriate and can provide an extra level of protection from potential class claims.