U.S. Supreme Court Ruling May Open the Door for Class Action Waivers in Employment Disputes

Authors: Andrew L. Satenberg | Joanna Sattler 

In a 5-4 ruling on April 27, 2011, the United States Supreme Court held that the Federal Arbitration Act (“FAA”) trumps a California rule invalidating a class action waiver provision in a consumer arbitration agreement.  AT&T Mobility, LLC v. Concepcion, 563 U.S. ___ (2011).

Consumers Vincent and Liza Concepcion entered into a cell phone contract with AT&T that provided for arbitration of all disputes arising under the contract but did not permit classwide arbitration.  The Concepcions sued AT&T in 2006 in a California Federal District Court after they were charged sales tax on the retail value of the cell phones provided for free under their contract.  

The District Court denied AT&T’s motion to compel arbitration, relying on a 2005 California Supreme Court decision, Discover Bank v. Superior Court, which declared an arbitration agreement that disallowed classwide proceedings unconscionable.  The Ninth Circuit Court of Appeals agreed and held that the FAA did not preempt the California Supreme Court’s Discover Bank rule. 

The U.S. Supreme Court overturned the Ninth Circuit’s ruling, holding that the FAA preempts California’s Discover Bank rule.  Writing for the majority, Justice Scalia reiterated that the FAA reflects a liberal policy favoring arbitration, as well as the fundamental principle that arbitration is a matter of contract.  The overarching purpose of the FAA, he explained, is 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 the fundamental attributes of arbitration and thus creates a scheme inconsistent with the FAA.  According to Justice Scalia, even though it does not require classwide arbitration, California’s Discover Bank rule impermissibly interferes with the fundamental attributes of arbitration because it allows a party to a consumer contract to demand classwide arbitration after the fact.  It is therefore preempted by the FAA.

Because AT&T Mobility is a consumer dispute, rather than an employment matter, it is not clear what the impact of the Supreme Court’s ruling will be on class action waivers in employment disputes.  The ruling does reflect a strong inclination on the Court’s part to enforce arbitration agreements on their terms as well as a willingness to invalidate state court rulings that do not promote that goal.  Employers who are considering adding a class action waiver to their arbitration agreements should consult counsel.  It is likely that the invalidation of the Discover Bank rule will be tested soon in an employment context, so employers should stay tuned.