AT&T Mobility LLC v. Concepcion
563 U.S. ___ (2011)

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Justia Opinion Summary

Respondents filed a complaint against AT&T Mobility LLC ("AT&T"), which was later consolidated with a putative class action, alleging 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 respondents and respondents opposed the motion contending that the arbitration agreement was unconscionable and unlawfully exculpatory under California law because it disallowed classwide procedures. The district court denied AT&T's motion in light of Discover Bank v. Superior Court and the Ninth Circuit affirmed. At issue was whether the Federal Arbitration Act ("FAA"), 9 U.S.C. 2, prohibited states from conditioning the enforceability of certain arbitration agreements on the availability of classwide arbitration procedures. The Court held that, because it "stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress," quoting Hines v. Davidowitz, California's Discover Bank rule was preempted by the FAA. Therefore, the Court reversed the Ninth Circuit's ruling and remanded for further proceedings consistent with the opinion.


SYLLABUS
OCTOBER TERM, 2010
AT&T MOBILITY LLC V. CONCEPCION


SUPREME COURT OF THE UNITED STATES

AT&T MOBILITY LLC v. CONCEPCION et ux.

certiorari to the united states court of appeals for the ninth circuit

No. 09–893. Argued November 9, 2010—Decided April 27, 2011

The cellular telephone contract between respondents (Concepcions) and petitioner (AT&T) provided for arbitration of all disputes, but did not permit classwide arbitration. After the Concepcions were charged sales tax on the retail value of phones provided free under their service contract, they sued AT&T in a California Federal District Court. Their suit was consolidated with a class action alleging, inter alia, that AT&T had engaged in false advertising and fraud by charging sales tax on “free” phones. The District Court denied AT&T’s motion to compel arbitration under the Concepcions’ contract. Relying on the California Supreme Court’s Discover Bank decision, it found the arbitration provision unconscionable because it disallowed classwide proceedings. The Ninth Circuit agreed that the provision was unconscionable under California law and held that the Federal Arbitration Act (FAA), which makes arbitration agreements “valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract,” 9 U. S. C. §2, did not preempt its ruling.

Held: Because it “stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress,” Hines v. Davidowitz, 312 U. S. 52, 67, California’s Discover Bank rule is pre-empted by the FAA. Pp. 4–18.

   (a) Section 2 reflects a “liberal federal policy favoring arbitration,” Moses H. Cone Memorial Hospital v. Mercury Constr. Corp., 460 U. S. 1, 24, and the “fundamental principle that arbitration is a matter of contract,” Rent-A-Center, West, Inc. v. Jackson, 561 U. S. ____, ____. Thus, courts must place arbitration agreements on an equal footing with other contracts, Buckeye Check Cashing, Inc. v. Cardegna, 546 U. S. 440, 443, and enforce them according to their terms, Volt Information Sciences, Inc. v. Board of Trustees of Leland Stanford Junior Univ., 489 U. S. 468, 478. Section 2’s saving clause permits agreements to be invalidated by “generally applicable contract defenses,” but not by defenses that apply only to arbitration or derive their meaning from the fact that an agreement to arbitrate is at issue. Doctor’s Associates, Inc. v. Casarotto, 517 U. S. 681, 687. Pp. 4–5.

   (b) In Discover Bank, the California Supreme Court held that class waivers in consumer arbitration agreements are unconscionable if the agreement is in an adhesion contract, disputes between the parties are likely to involve small amounts of damages, and the party with inferior bargaining power alleges a deliberate scheme to defraud. Pp. 5–6.

   (c) The Concepcions claim that the Discover Bank rule is a ground that “exist[s] at law or in equity for the revocation of any contract” under FAA §2. When state law prohibits outright the arbitration of a particular type of claim, the FAA displaces the conflicting rule. But the inquiry is more complex when a generally applicable doctrine is alleged to have been applied in a fashion that disfavors or interferes with arbitration. Although §2’s saving clause preserves generally applicable contract defenses, it does not suggest an intent to preserve state-law rules that stand as an obstacle to the accomplishment of the FAA’s objectives. Cf. Geier v. American Honda Motor Co., 529 U. S. 861, 872. The FAA’s overarching purpose is to ensure the enforcement of arbitration agreements according to their terms so as to facilitate informal, streamlined proceedings. Parties may agree to limit the issues subject to arbitration, Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U. S. 614, 628, to arbitrate according to specific rules, Volt, supra, at 479, and to limit with whom they will arbitrate, Stolt-Nielsen, supra, at ___. Pp. 6–12.

   (d) Class arbitration, to the extent it is manufactured by Discover Bank rather than consensual, interferes with fundamental attributes of arbitration. The switch from bilateral to class arbitration sacrifices arbitration’s informality and makes the process slower, more costly, and more likely to generate procedural morass than final judgment. And class arbitration greatly increases risks to defendants. The absence of multilayered review makes it more likely that errors will go uncorrected. That risk of error may become unacceptable when damages allegedly owed to thousands of claimants are aggregated and decided at once. Arbitration is poorly suited to these higher stakes. In litigation, a defendant may appeal a certification decision and a final judgment, but 9 U. S. C. §10 limits the grounds on which courts can vacate arbitral awards. Pp. 12–18.

584 F. 3d 849, reversed and remanded.

   Scalia, J., delivered the opinion of the Court, in which Roberts, C. J., and Kennedy, Thomas, and Alito, JJ., joined. Thomas, J., filed a concurring opinion. Breyer, J., filed a dissenting opinion, in which Ginsburg, Sotomayor, and Kagan, JJ., joined.

Primary Holding
Any state laws that forbid agreements that forestall class action arbitration are preempted and invalid under the Federal Arbitration Act of 1925.
Facts
Like other consumers, the Concepcions signed an agreement with AT&T Mobility LLC regarding the sale and servicing of mobile phones. However, the company had advertised certain phones as being free without alerting the consumers that they would need to pay tax on them. When the Concepcions and others who had signed the agreement found out, their claim against AT&T grew into a class action. This presented inherent problems because the contract at issue provided that all claims would be resolved through arbitration and also provided that arbitration would move forward only on an individual basis rather than for the class in general.

When AT&T sought to compel arbitration, the Concepcions argued that the agreement was unconscionable and unlawfully exculpatory because it provided no mechanism for resolving class-wide disputes. While the lower court found that the arbitration agreement was generally enforceable, it ruled that the provision barring class arbitration was unenforceable because it was unconscionable in a situation when AT&T had failed to prove that bilateral arbitration was a sufficient substitute for the deterrent effect of class actions. On appeal, AT&T asserted that any California law governing the provision was preempted by the Federal Arbitration Act of 1925. However, the Ninth Circuit agreed with the lower court that the provision was unconscionable under California law and its decision in Discover Bank v. Superior Court (2005), which it found was not preempted by the FAA. The Ninth Circuit reasoned that the federal law merely refined the determination of whether a contract was unconscionable that already was being applied to interpret contracts in California.

Opinions

Majority

  • Antonin Scalia (Author)
  • John G. Roberts, Jr.
  • Anthony M. Kennedy
  • Clarence Thomas
  • Samuel A. Alito, Jr.

The California system is incompatible with the FAA because it allows a party to override an agreement prohibiting class arbitration. While it is limited to form contracts, these contracts of adhesion are typical in the relationships between companies and consumers. Although states may regulate contracts of adhesion to some extent, they cannot do so in a way that undermines the purposes of the FAA. Class arbitration may not be allowed under the FAA if the parties to a contract have agreed that it will not be available. There are many reasons why engaging in it may be counterproductive for parties and courts, such as the reduced informality of the proceedings as well as the greater cost and inefficiency. It lacks the same review and appeal procedures as standard litigation, so it places a greater risk upon the parties without offering much reward. For example, a company like the defendant might feel pressured to settle undeserving claims.

The possibility that minor claims might not be brought individually within the legal system but would be heard through a class action does not justify a result that conflicts with the FAA. In this instance, it appears that the consumers will have better options by using the methods available under the arbitration agreement than by participating in a class action.

Dissent

  • Stephen G. Breyer (Author)
  • Ruth Bader Ginsburg
  • Sonia Sotomayor
  • Elena Kagan

Rather than banning all forms of class action waivers in contracts between companies and consumers, the state regulation is based on a broader notion of what is unconscionable. There is no inconsistency with the purposes of the FAA, since it applies to contexts outside arbitration agreements. Therefore, the court should have found that this arbitration provision was unconscionable under the exception to the FAA that allows courts to find arbitration agreements unenforceable if any of the usual grounds for revoking the contract is present.

Concurrence

  • Clarence Thomas (Author)

Case Commentary

Since this agreement was reasonably fair on its face, this decision does not reach the issue of what might happen if an agreement was tilted dramatically in the company's favor. Some courts probably would hold that it was unenforceable on grounds of unconscionability in that situation, and this federal law would not prevent them from reaching that result.

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