Arguing Against Per Se Invalidation of Class Action Waivers in Consumer Form Arbitration Agreements
The issues addressed on the merits by NELF as amicus in this U.S. Supreme Court appeal is whether the Federal Arbitration Act (“FAA”), 9 U.S.C. §§ 1-16, preempts a state’s per se rule against the enforcement of class action waivers in consumer form contracts that predictably involve small-value claims, i.e., most consumer contracts. The case involves putative consumer class action brought in U.S. district court in California alleging that AT&T Mobility (“ATTM”) engaged in fraudulent advertising when it offered its customers a “free” phone for which it nevertheless charged sales tax, as required under California law. ATTM moved to compel arbitration in accordance with the arbitration provision of its service agreement, which barred class arbitration. The district court denied ATTM’s motion ruling that the class arbitration waiver was unconscionable under California law, relying on a California case, Discover Bank v. Super. Ct, 113 P.3d 1100 (Cal. 2005). The Ninth Circuit affirmed. ATTM filed a petition for certiorari, which was granted by the Supreme Court.
In its brief, filed in support of ATTM, NELF argued, first, that in light of the FAA’s mandate that arbitration agreements must be treated equally with other contracts, the Ninth Circuit’s decision should be vacated because it rests on the California court’s Discover Bank decision which created an unconscionability rule that singles out consumer class arbitration waivers and invalidates them categorically. NELF also argued that California’s court-created rule offends the FAA because it markedly departs from the general law of unconscionability in California, which, as in most states, requires a case-specific inquiry into all of the facts and circumstances surrounding the contract. Here, in particular, there was considerable record evidence bearing on the fairness of the ATTM arbitration provision vis-à-vis consumers, all of which the Ninth Circuit felt constrained to disregard as of no consequence under Discover Bank. Finally, NELF argued that the Discover Bank decision, which the federal courts applied as the governing law in this case, may actually harm consumers by discouraging businesses from offering the consumer-friendly terms that are generally meant to compensate consumers for the waiver of class-action arbitration.
On April 27, 2011, the Supreme Court, in a 5-4 decision, reversed the Ninth Circuit and held that the FAA preempts the Discover Bank rule for unconscionability. The majority opinion by Justice Scalia essentially agrees with NELF’s arguments that the Discover Bank rule is a “toothless” standard that effectively singles out arbitration agreements for per se invalidation. In addition, the Court concluded that the Discover Bank rule effectively requires class arbitration, and that compelled class arbitration is incompatible with the FAA’s purposes “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 fundamental attributes of arbitration and thus creates a scheme inconsistent with the FAA.”
The issues addressed on the merits by NELF as amicus in this U.S. Supreme Court appeal is whether the Federal Arbitration Act (“FAA”), 9 U.S.C. §§ 1-16, preempts a state’s per se rule against the enforcement of class action waivers in consumer form contracts that predictably involve small-value claims, i.e., most consumer contracts. The case involves putative consumer class action brought in U.S. district court in California alleging that AT&T Mobility (“ATTM”) engaged in fraudulent advertising when it offered its customers a “free” phone for which it nevertheless charged sales tax, as required under California law. ATTM moved to compel arbitration in accordance with the arbitration provision of its service agreement, which barred class arbitration. The district court denied ATTM’s motion ruling that the class arbitration waiver was unconscionable under California law, relying on a California case, Discover Bank v. Super. Ct, 113 P.3d 1100 (Cal. 2005). The Ninth Circuit affirmed. ATTM filed a petition for certiorari, which was granted by the Supreme Court.
In its brief, filed in support of ATTM, NELF argued, first, that in light of the FAA’s mandate that arbitration agreements must be treated equally with other contracts, the Ninth Circuit’s decision should be vacated because it rests on the California court’s Discover Bank decision which created an unconscionability rule that singles out consumer class arbitration waivers and invalidates them categorically. NELF also argued that California’s court-created rule offends the FAA because it markedly departs from the general law of unconscionability in California, which, as in most states, requires a case-specific inquiry into all of the facts and circumstances surrounding the contract. Here, in particular, there was considerable record evidence bearing on the fairness of the ATTM arbitration provision vis-à-vis consumers, all of which the Ninth Circuit felt constrained to disregard as of no consequence under Discover Bank. Finally, NELF argued that the Discover Bank decision, which the federal courts applied as the governing law in this case, may actually harm consumers by discouraging businesses from offering the consumer-friendly terms that are generally meant to compensate consumers for the waiver of class-action arbitration.
On April 27, 2011, the Supreme Court, in a 5-4 decision, reversed the Ninth Circuit and held that the FAA preempts the Discover Bank rule for unconscionability. The majority opinion by Justice Scalia essentially agrees with NELF’s arguments that the Discover Bank rule is a “toothless” standard that effectively singles out arbitration agreements for per se invalidation. In addition, the Court concluded that the Discover Bank rule effectively requires class arbitration, and that compelled class arbitration is incompatible with the FAA’s purposes “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 fundamental attributes of arbitration and thus creates a scheme inconsistent with the FAA.”
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