AT&T Mobility v. Concepcion — Impact Of The Supreme Court's Decision On Employment Class Action

On April 27, 2011, the Supreme Court in AT&T Mobility v. Concepcion1 held that mandatory arbitration provisions that prohibit classwide arbitration are enforceable. The Court's holding overturned a California Supreme Court decision that found similar provisions unconscionable and unenforceable. While not an employment law case, the Supreme Court's decision could have far-reaching implications on employment class action litigation.

Factual Background

In February 2002, Vincent and Lisa Concepcion entered into an agreement for the sale and servicing of cellular telephones with AT&T. AT&T had advertised free cellular telephones with the purchase of wireless service. When the Concepcions purchased AT&T service, they were not charged for the cellular telephones, but were charged $30.22 in sales tax based upon their retail value.

The Concepcion's contract with AT&T provided for mandatory arbitration of all disputes between the parties, and required that any claims be brought "in the parties' individual capacity, and not as a plaintiff or class member in any purported class or representative proceeding."2

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 subsequently 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 that it had advertised as free.3

In March 2008, AT&T moved to compel arbitration pursuant to the arbitration provision in its contract with the Concepcions. The Concepcions opposed the motion and argued that the arbitration provision was unconscionable and unenforceable under California law because it prohibited classwide procedures.

Lower Courts' Decisions and the Discover Bank Rule

The district court denied AT&T's motion.4 The court relied upon the California Supreme Court's decision in Discover Bank v. Superior Court5 in finding that the arbitration provision at issue was unconscionable because AT&T had not demonstrated that bilateral arbitration adequately substituted for the deterrent effects of class actions.

Under California law, courts may refuse to enforce any contract found "to have been unconscionable at the time it was made," or may "limit the application of any unconscionable clause."6 A finding of unconscionability requires "a 'procedural' and a 'substantive' element, the former focusing on 'oppression' or 'surprise' due to unequal bargaining power, the latter on 'overly harsh' or 'one-sided' results."7

In Discover Bank, the California Supreme Court applied the above framework to class action waivers in arbitration agreements. The Court held that when the waiver is found in a consumer contract of adhesion in a setting in which disputes between the parties predictably involve small amounts of damages, and "when it is alleged that the party with the superior bargaining power has carried out a scheme to deliberately cheat large numbers of consumers out of individually small sums of money," such waivers are unconscionable and should not be enforced.8 California courts have frequently applied the Discover Bank rule to...