In AT&T Mobility v. Concepcion, No. 09-893, 2011 WL 1561956 (April 27, 2011), the U.S. Supreme Court addressed whether the Federal Arbitration Act (FAA) preempted California’s judicial rule that effectively required arbitration agreements to include the right to class arbitration for them to be enforceable. Continuing in a long line of cases that have supported arbitration, the Court held this judicial rule was preempted by the FAA since it stood as an obstacle to the accomplishment of the FAA’s objectives; the preempted rule did so because it would have required arbitrations to comply with the procedural formalities, costs, and exposures attendant on class proceedings.

As discussed below, there are complex issues involved in whether and when arbitration may apply to ERISA claims, and whether an employer or fiduciary may wish to require arbitration. Concepcion does not directly answer these questions. However, Concepcion suggests that when arbitration does apply to ERISA claims, it may be used to avoid the delay, expense, and risk associated with class actions.

The Court’s Decision

In Concepcion, the plaintiffs, Vincent and Linda Concepcion, entered into an agreement for the sale and servicing of cellular telephones with AT&T Mobility. This form agreement provided for arbitration of all disputes between the parties, but excluded any class arbitration. Specifically, the agreement 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 had various provisions facilitating arbitration, including simplified forms and procedures to bring claims, and provided that AT&T must pay the costs of all nonfrivolous claims. The agreement also provided that if the arbitration award was greater than AT&T’s last settlement offer, then AT&T had to pay a $7,500 minimum 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. The Concepcions were not charged for the phones, but were charged $30.22 in sales tax based on the phones’ retail value. The Concepcions claimed they should not have been charged $30.22 in sales tax based on the receipt of what had been advertised as free phones. The Concepcions filed a lawsuit in federal court that was consolidated as part of a putative class action asserting a claim related to the alleged improperly charged sales tax. AT&T moved to compel arbitration under the terms of its agreement 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.

Section 2 of the FAA provides that arbitration provisions in contracts are “valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” The district court and the Ninth Circuit held AT&T’s arbitration provision was unenforceable under California’s Discover Bank rule, which generally refuses to enforce consumer and like contracts of adhesion that have class action waivers.[13] The Ninth Circuit reasoned that Discover Bank did not impermissibly single out arbitration agreements because this bar applied to all forms of class action waivers.

The Supreme Court reversed.[14] The Court first noted that the FAA’s preemptive reach may extend not just to state laws that explicitly prohibit arbitration, but also to state laws that are applied in a fashion that disfavors arbitration. Likewise, the Court held that the savings clause of the FAA could not be read to preserve “state law rules that stand as an obstacle to the accomplishment of the FAA’s objectives.” Applying this standard, the Court held that requiring class arbitration would interfere with the FAA’s objectives of providing informal and streamlined proceedings to resolve disputes. The Court noted that class arbitration proceedings are fundamentally different from individual arbitrations, requiring procedural protections and formalities to protect absent parties, and greatly increasing the risk to defendants, who would not have the procedural reviews and protections afforded in class litigation. The Court likened this imposition of class arbitration requirements to state laws that would attempt to directly impose procedural requirements on arbitration (a point the Concepcions conceded could not be done), finding all of this incompatible with the FAA’s objectives. 

The Court concluded its opinion by observing that states could not use other justifications, such as the desire to ensure that small dollar claims can be prosecuted, as grounds to impose procedures incompatible with the FAA. The Court also noted that this concern was unwarranted in this case in light of the agreement’s requirement that AT&T pay $7,500 plus double attorney’s fees if its settlement offer is too low.   

Justice Breyer, with whom Justices Ginsburg, Sotomayor, and Kagan joined, dissented, stating that California’s Discover Bank rule should be saved since it applied to all contracts, not just to agreements to arbitration. The dissent also thought imposing class arbitration did not necessarily frustrate the FAA’s objectives, since it declined to read the FAA as endorsing individual arbitration as a fundamental attribute of arbitration. 

Proskauer’s Perspective

Whether and when arbitration may apply to ERISA claims raises numerous complex issues. For example, the arbitration of benefit claims is subject to significant limitations,[15] and may put at risk the “abuse of discretion” review that courts normally apply to the decisions of the plan administrator. And, despite the Supreme Court’s wholesale embrace of arbitration, it can also be expected that plaintiffs will make procedural arguments to fight arbitration, such as contending that claims brought on behalf of an ERISA plan cannot be subject to a participant’s or employee’s agreement to arbitrate.

Employers may nonetheless want to consider whether to seek arbitration agreements for ERISA claims, particularly ERISA fiduciary claims, in light of the Supreme Court’s holding in Concepcion. Courts have enforced agreements to arbitrate ERISA claims,[16] and based on the Supreme Court’s unequivocal embracing of arbitration, including for statutory employment claims, the stronger case would appear to be that ERISA claims can be subject to arbitration. Likewise, if the claim is subject to arbitration under the FAA, under Concepcion it ought to be permissible for those agreements to arbitrate to preclude class claims. Concepcion reflects that attempting to require class arbitration is incompatible with the objectives of the FAA, while ERISA’s “anti-preemption” provision for federal law suggests that ERISA should defer to this objective.[17]