In a 5-4 opinion issued on April 27, 2011 the United States Supreme Court held that the California Supreme Court rule set forth in Discover Bank v. Superior Court, 36 Cal. 4th 148, 113 P.3d 1100 (2005) is preempted by the Federal Arbitration Act (FAA). The rule that came out of the Discover Bank opinion provided that class action waivers in consumer arbitration agreements are unconscionable if the agreement is one of adhesion and involves small amounts of damages and the party with inferior bargaining power alleges a deliberate scheme to defraud. In AT&T Mobility, L.L.C. v. Concepcion, 563 U.S. ___ (2011), the Supreme Court reversed the Ninth Circuit's holding (relying on the holding in Discover Bank) affirming the District Court's denial of AT&T's motion to compel arbitration.
In holding that the FAA preempts the Discover Bank rule, the Court stated that the overarching purpose of the FAA, as evident in the text of Sections 2, 3 and 4, is to ensure the enforcement of arbitration agreements according to their terms so as to facilitate streamlined proceedings. The Supreme Court reiterated its longstanding view that these sections of the FAA reflect both a liberal federal policy favoring arbitration and the fundamental principle that arbitration is a matter of contract. Thus, courts must place arbitration agreements on an equal footing with other contracts, and enforce them according to their terms. The Supreme Court found that requiring the availability of class wide arbitration interferes with fundamental attributes of arbitration and thus creates a scheme inconsistent with the FAA. The Supreme Court also referred to its April 2010 opinion in Stolt-Nielsen wherein the Court held that the arbitration agreement at issue, which was silent on the question of class procedures, could not be interpreted to allow class action arbitration because "the changes brought about by the shift from bilateral arbitration to class-action arbitration are fundamental." Referring back to the case at hand, the Supreme Court then stated that allowing class action arbitration cannot be manufactured; instead, it must be consensual in order to be consistent with the FAA. The Discover Bank rule interferes with arbitration and it stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress in enacting the FAA.
Although this case arises in the context of consumer law, this significant ruling also is a victory for employers and organizations utilizing arbitration agreements containing class action waivers/prohibitions in the employment context.