Supreme Court Upholds Class Action Waivers in Consumer Arbitration Agreements
Many businesses now include arbitration agreements in their contracts with customers and employees. Arbitration can provide an alternative to traditional litigation, especially with regard to small claims. By agreeing to arbitrate claims, customers and businesses agree to forgo claims through the court system. Some courts, however, have found consumer arbitration agreements unconscionable, therefore, diminishing their usefulness to businesses. A recent Supreme Court decision, however, upheld an arbitration agreement allowing a business to utilize an arbitration clause to limit class action liability exposure.
In a 5-4 decision, the United States Supreme Court decided in AT&T v. Concepcion, that corporations may use arbitration clauses to prevent the aggregation of small claims into class action lawsuits. Plaintiffs sued AT&T for false advertising and fraud after being charged $30.22 for sales tax on the retail value of cell phones that were advertised as free. The Plaintiff's contract with AT&T provided for arbitration of all disputes and required that any such claims be brought individually, not as part of a class or representative proceeding.
The Supreme Court reversed lower state and federal courts which had previously determined that arbitration agreements prohibiting the consolidation of small claims into class actions were unconscionable and unenforceable under California Law. The Court determined that the Federal Arbitration Act (FAA), federal law making arbitration agreements “valid, irrevocable, and enforceable” except under certain circumstances, preempted the California law used to invalidate arbitration agreements prohibiting class action suits. The decision in Concepcion, signals the Court’s willingness to prevent states from interfering with the speedy and efficient resolution of claims through arbitration.
