Judicial Scrutiny Of Arbitration Clauses Under Concepcio

Two recent federal appellate decisions demonstrate the limits of last year's Supreme Court decision in AT&T Mobility LLC v. Concepcion, 131 S.Ct. 1740 (2011). In Concepcion, plaintiffs alleged a class of California customers to challenge the wireless carrier's practice of charging sales tax on phones promoted as "free" under various service agreements. When AT&T asserted the arbitration and class waiver provisions in its subscriber agreements, the Southern District of California ruled that the arbitration provision was unconscionable because it contained a class action waiver, and was therefore unenforceable under the rule announced by the California Supreme Court in Discover Bank v. Superior Court, 36 Cal.4th 148, 113 P.3d 1100 (Cal. 2005). The Ninth Circuit affirmed on those same grounds. The Discover Bank Rule claimed support in § 2 of the Federal Arbitration Act, (9 U.S.C. §2) (FAA) providing certain exceptions to enforcement of arbitration agreements, including "such grounds as exist at law or in equity for the revocation of any contract." Since the FAA's savings clause allows arbitration agreements to be defeated by state law contract defenses, the Discover Bank Rule was considered by some to be an appropriate application of traditional unconscionability defenses against class action waivers in arbitration agreements. Doctor's Associates, Inc. v. Casarotto, 517 U.S. 681, 687 (1966).

The Supreme Court reversed, holding that Discover Bank is preempted by the FAA because any state statute or judicial "rule" purporting to invalidate arbitration agreements stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress favoring arbitration by enacting the FAA. The FAA's overarching purpose is to ensure the enforcement of arbitration agreements, under which parties may agree to limit the issues subject to arbitration, or arbitrate according to specific rules, or limit with whom they will arbitrate. But class arbitration, to the extent imposed by rule of court rather than agreement of the parties, is at odds with arbitration's essential function and the FAA's stated policies.

When the Concepcion decision was issued in late April 2011, it was widely hailed as a life-altering victory for the class action defense bar – prompting many to declare that arbitration provisions in consumer contracts and employee handbooks would now insulate merchants and employers from class action litigation. But in the...