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AT&T Mobility, LLC v. Concepcion

Supreme Court of the United States
563 U. S. ____ (2011) (2011)
ELI5:

Rule of Law:

The Federal Arbitration Act (FAA) preempts state laws that classify class-action arbitration waivers in consumer contracts as unconscionable, as such rules stand as an obstacle to the FAA's primary objective of enforcing arbitration agreements according to their terms.


Facts:

  • In February 2002, Vincent and Liza Concepcion entered into a cellular telephone sales and service agreement with AT&T Mobility.
  • The contract contained a mandatory arbitration clause requiring all disputes to be brought in an individual capacity and explicitly prohibiting class-action proceedings.
  • The Concepcions were charged $30.22 in sales tax for phones that AT&T had advertised as being free of charge.
  • The arbitration agreement provided consumer-friendly terms, including that AT&T would pay all arbitration costs for non-frivolous claims.
  • The agreement also stipulated that if a customer received an arbitration award greater than AT&T's last written settlement offer, AT&T would pay a minimum recovery of $7,500 and twice the amount of the customer's attorney's fees.

Procedural Posture:

  • Vincent and Liza Concepcion filed a complaint in the U.S. District Court for the Southern District of California, which was consolidated with a putative class action.
  • AT&T moved to compel arbitration pursuant to its service agreement with the Concepcions.
  • The Concepcions opposed the motion, arguing the class-action waiver was unconscionable under California's 'Discover Bank' rule.
  • The District Court denied AT&T’s motion, finding the arbitration provision unconscionable under state law.
  • AT&T, as appellant, appealed to the U.S. Court of Appeals for the Ninth Circuit.
  • The Ninth Circuit affirmed the trial court's decision, holding that the California rule was not preempted by the Federal Arbitration Act.
  • The U.S. Supreme Court granted certiorari.

Locked

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Issue:

Does the Federal Arbitration Act preempt a state law rule that deems class-action arbitration waivers in consumer adhesion contracts unconscionable?


Opinions:

Majority - Justice Scalia

Yes, the Federal Arbitration Act preempts a state law rule that deems class-action arbitration waivers in consumer adhesion contracts unconscionable. The FAA's saving clause does not preserve state-law rules that stand as an obstacle to the accomplishment of the FAA's objectives. California’s Discover Bank rule, by requiring the availability of classwide arbitration, interferes with the fundamental attributes of arbitration and is thus inconsistent with the FAA. The primary purpose of the FAA is to ensure that private arbitration agreements are enforced according to their terms, allowing parties to benefit from streamlined, efficient, and informal dispute resolution. Class arbitration sacrifices these core benefits by being slower, more formal, costlier, and carrying significantly higher risks for defendants, fundamentally altering the nature of the arbitral proceeding from what the parties contracted for. A state cannot require a procedure that is inconsistent with the FAA, even if it is desirable for other public policy reasons.


Dissenting - Justice Breyer

No, the Federal Arbitration Act does not preempt the state law because California's rule is a generally applicable contract defense that falls within the FAA's saving clause. The Discover Bank rule treats arbitration agreements and other contracts equally by invalidating class-action waivers in both, placing them on the 'same footing' as required by the FAA. The Act's primary purpose was to overcome judicial hostility to arbitration, not to guarantee a specific form of streamlined procedure at the expense of general state contract law. Class arbitration is a valid form of arbitration, and by forbidding class proceedings, companies can effectively insulate themselves from liability for small-dollar claims that are impractical for consumers to pursue individually. The state's rule against such exculpatory waivers is a legitimate exercise of its power to regulate contracts for unconscionability.


Concurring - Justice Thomas

Yes, the FAA preempts the California rule, but for reasons rooted more strictly in the statutory text. The FAA’s saving clause, which permits invalidation on 'grounds as exist at law or in equity for the revocation of any contract,' should be read narrowly to apply only to defects in the formation of the agreement, such as fraud or duress. The Discover Bank rule is based on a finding of substantive unconscionability due to public policy against exculpatory clauses, not a defect in contract formation. Therefore, it is not a ground for 'revocation' under § 2 of the FAA. Although reluctantly joining the majority's purposes-and-objectives preemption analysis, the better rationale is that California's rule falls outside the textual scope of the FAA's saving clause.



Analysis:

This decision significantly strengthened the preemptive force of the Federal Arbitration Act, effectively immunizing class-action arbitration waivers from state unconscionability challenges. It established that the FAA's core purpose is not merely to favor arbitration, but to enforce arbitration agreements as written, prioritizing party autonomy and procedural efficiency over state consumer protection policies. As a result, the case has had a profound impact on consumer and employment law, leading to the widespread use of class-action waivers in contracts of adhesion and limiting the ability of individuals with small-dollar claims to seek collective redress.

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