The issue in the present case was whether the FAA prohibits States from conditioning the enforceability of certain arbitration agreements on the availability of class wide arbitration procedures.
In February 2002, Vincent and Liza Concepcion entered into an agreement for the sale and servicing of cellular telephones with AT&T Mobility LCC (AT&T). The contract provided for arbitration of all disputes between the parties, but required that claims be brought in the parties’ “individual capacity, and not as a plaintiff or class member in any purported class or representative proceeding.” The agreement authorized AT&T to make unilateral amendments, which it did to the arbitration provision on several occasions.
The revised agreement provided that customers may initiate dispute proceedings by completing a one-page Notice of Dispute form available on AT&T’s Web site. AT&T may then offer to settle the claim; if it does not, or if the dispute is not resolved within 30 days, the customer may invoke arbitration by filing a separate Demand for Arbitration, also available on AT&T’s Web site. In the event the parties proceed to arbitration, the agreement specifies that AT&T must pay all costs for non frivolous claims; that arbitration must take place in the county in which the customer is billed; that, for claims of $10,000 or less, the customer may choose whether the arbitration proceeds in person, by telephone, or based only on submissions; that either party may bring a claim in small claims court in lieu of arbitration; and that the arbitrator may award any form of individual relief, including injunctions and presumably punitive damages. The agreement, moreover, denies AT&T any ability to seek reimbursement of its attorney’s fees, and, in the event that a customer receives an arbitration award greater than AT&T’s last written settlement offer, requires AT&T to pay a $7,500minimum recovery and twice the amount of the claimant’s attorney’s fees.
The Concepcions purchased AT&T service, which was advertised as including the provision of free phones; they were not charged for the phones, but they were charged $30.22 in sales tax based on the phones’ retail value. In March 2006, the Concepcions filed a complaint against AT&T in the United States District Court for the Southern District of California. The complaint was later consolidated with a putative class action alleging, among other things, that AT&T had engaged in false advertising and fraud by charging sales tax on phones it advertised as free. AT&T moved to compel arbitration under the terms of its contract with the Concepcions. The Concepcions opposed the motion, contending that the arbitration agreement was unconscionable and unlawfully exculpatory under California law because it disallowed class wide procedures. The District Court denied AT&T’s motion. The Ninth Circuit affirmed, also finding the provision unconscionable under California law as announced in Discover Bank. Laster v. AT&T Mobility LLC, 584 F. 3d 849, 855 (2009). It also held that the Discover Bank rule was not preempted by the FAA because that rule was simply a refinement of the unconscionability analysis applicable to contracts generally in California. Supreme Court granted certiorari.
The question in the case was whether §2 preempts California’s rule classifying most collective-arbitration waivers in consumer contracts as unconscionable. [ Discover Bank rule]
The Concepcions argued that the Discover Bank rule, given its origins in California’s unconscionability doctrine and California’s policy against exculpation, was a ground that exist at law or in equity for the revocation of any contract under FAA §2. Moreover, they argued that even if the Discover Bank rule be construed as a prohibition on collective-action waiver rather than simply an application of unconscionability, the rule would still be applicable to all dispute-resolution contracts, since California prohibit waivers of class litigation as well.
The Supreme Court observed that when state law prohibits outright the arbitration of a particular type of claim, the analysis is straight forward: The conflicting rule is displaced by the FAA. Preston v. Ferrer, 552 U. S. 346, 353 (2008). But the inquiry become more complex when a doctrine normally thought to be generally applicable, such as duress or unconscionability, is alleged to have been applied in a fashion that disfavor arbitration. The Court observed that principal purpose of the FAA is to ensure that private arbitration agreements are enforced according to their terms and the Court had held that parties may agree to limit the issues subject to arbitration, Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., to arbitrate according to specific rules, Volt, and to limit with whom a party will arbitrate its disputes, Stolt-Nielsen.
The Supreme Court held that California’s Discover Bank rule interfered with arbitration. Although the rule did not require class wide arbitration, it allowed any party to a consumer contract to demand it ex post. The rule also required that damages be predictably small, and that the consumer alleged a scheme to cheat consumers. The former requirement, however, was toothless and malleable and the latter had no limiting effect, as all that was required was an allegation. Consumers remained free to bring and resolve their disputes on a bilateral basis under Discover Bank, but there was little incentive for lawyers to arbitrate on behalf of individuals when they may do so for a class and reap far higher fees in the process. And faced with inevitable class arbitration, companies would have less incentive to continue resolving potentially duplicative claims on an individual basis.
After referring to the Court’s precedents, it held that class arbitration, to the extent it was manufactured by Discover Bank rather than consensual, was inconsistent with the FAA. The Court observed that arbitration was poorly suited to the higher stakes of class litigation. In litigation, a defendant may appeal a certification decision on an interlocutory basis and, if unsuccessful, may appeal from a final judgment as well. Questions of law are reviewed de novo and questions of fact for clear error. In contrast, 9 U. S. C. §10 allow a court to vacate an arbitral award only where the award was procured by corruption, fraud, or undue means; there was evident partiality or corruption in the arbitrators; the arbitrators were guilty of misconduct in refusing to postpone the hearing or in refusing to hear evidence pertinent and material to the controversy, or of any other misbehavior by which the rights of any party have been prejudiced; or if the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final, and definite award was not made. The AAA rules do authorize judicial review of certification decisions, but the review was unlikely to have much effect given the limitations; review under §10 focuses on misconduct rather than mistake. And parties may not contractually expand the grounds or nature of judicial review. The Court found it hard to believe that defendants would bet the company with no effective means of review, and even harder to believe that Congress would have intended to allow state courts to force such a decision.
The Concepcions further contended that because parties may and sometimes do agree to aggregation, class procedures were not necessarily incompatible with arbitration. But the Court observed that the same could be said about procedures that the Concepcions admit States may not superimpose on arbitration: Parties could agree to arbitrate pursuant to the Federal Rules of Civil Procedure, or pursuant to a discovery process rivaling that in litigation. The Court held that arbitration was a matter of contract, and the FAA required courts to honor parties’ expectations. Rent-A-Center, West. The Supreme Court concluded that as it stand as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress, California’s Discover Bank rule was preempted by the FAA.
The judgment of the Ninth Circuit was reversed, and the case remanded for further proceedings consistent with the opinion.