On April 27, 2011, the U.S. Supreme Court ruled that the Federal Arbitration Act (FAA) preempted state laws prohibiting as unconscionable agreements involving interstate commerce in which consumers waived their right to bring class actions. AT&T Mobility LLC v. Concepcion, No. 09-893.

In AT&T Mobility, the consumers had agreed in their cell phone contracts to arbitrate any dispute with AT&T in their “individual capacities” only, and not as class representatives or members. The consumers nonetheless sued in California federal court, claiming that AT&T had promised them a “free” phone while charging them $30 for sales taxes. The trial court noted that the contract contained many pro-consumer features, but held that the contract’s class-action waiver was unconscionable under California law. That finding of unconscionability was based on California’s promotion of class actions as deterring businesses from cheating consumers; individual, bilateral arbitration, the court found, lacked any such deterrent effect, because small, individual cases present low exposure and because businesses could quietly buy off any consumer who complains. The Ninth Circuit affirmed.

Consumer advocates argued that the California rule did not conflict with the FAA, because it was not limited in scope to arbitration agreements. Instead, they claimed, the California rule applied to all contracts, prohibiting any consumers from waiving their right to bring class actions in any forum. They argued the FAA only preempted state rules that treated arbitration agreements differently from other agreements.

The U.S. Supreme Court, in a narrow 5-4 decision by Justice Scalia, disagreed. In a broad articulation of the reach of the FAA, the Court held that state laws “that stand as an obstacle to the accomplishment of the FAA’s objectives” are preempted by the FAA, whether or not they treat arbitration agreements differently from other contracts. State laws requiring consumer actions to be brought as class actions constitute such an obstacle, because class actions are extraordinarily formal, inefficient, and expensive. The Court also noted that the risk of error is far greater in class actions than ordinary litigation, and that those errors are far less likely to be subject to review in the context of arbitration. The Court accordingly held that the FAA preempted state laws mandating the availability of class-action procedures in consumer arbitrations involving interstate commerce.

The decision in AT&T Mobility is another victory for proponents of arbitration. The decision should encourage businesses to evaluate the benefits of well-drafted arbitration provisions that are substantively fair to consumers while maintaining the efficiencies promised by arbitration.

For more information, please contact Vinson & Elkins lawyers Russ Yager or Stuart Tonkinson. Visit our website to learn more about V&E's Class Actions Litigation practice, or e-mail one of the practice contacts.