In the first federal appeals court decision to apply AT&T Mobility LLC v. Concepcion to a non-AT&T Mobility arbitration agreement, the U.S. Court of Appeals for the Third Circuit has held that the Federal Arbitration Act (FAA) preempts New Jersey law prohibiting the enforcement of class action waivers in certain small-dollar cases.

On August 24, 2011, the Third Circuit issued a precedential opinion in Litman v. Cellco Partnership, in which Ballard Spahr submitted an amicus brief on behalf of the U.S. Chamber of Commerce, Consumer Bankers Association, and American Financial Services Association.

Ruling unanimously, the Third Circuit held that its decision in Homa v. American Express Co., 558 F.3d 225 (3d Cir. 2009), had been abrogated by the U.S. Supreme Court’s landmark Concepcion decision and that, under Concepcion, the FAA preempts the New Jersey Supreme Court decision in Muhammad v. County Bank of Rehoboth Beach, Del., 912 A.2d 88 (N.J. 2006).  (Click here to read our alert on the Concepcion decision.)

Plaintiffs’ attorneys have argued that Concepcion should not be followed in cases where the arbitration agreement lacks all of the consumer-friendly features contained in AT&T Mobility’s arbitration agreement. The Third Circuit did not so limit Concepcion. Rather, it put to rest any question as to the scope and applicability of Concepcion and the breadth of the FAA’s preemptive effect:

We understand the holding of Concepcion to be both broad and clear: a state law that seeks to impose class arbitration despite a contractual agreement for individualized arbitration is inconsistent with, and therefore preempted by, the FAA, irrespective of whether class arbitration “is desirable for unrelated reasons.” Therefore, we must hold that, contrary to our earlier decisions in Homa and this case, the rule established by the New Jersey Supreme Court in Muhammad is preempted by the FAA. It follows that the arbitration clause at issue here must be enforced according to its terms, which requires individual arbitration and forecloses class arbitration.

In Muhammad, the New Jersey Supreme Court held that class action waivers in small-dollar consumer contracts of adhesion violate New Jersey public policy and are not enforceable. In Homa, the Third Circuit, applying New Jersey law, refused to enforce a class action waiver in the parties’ arbitration agreement because of Muhammad and held that the FAA did not preempt Muhammad because the prohibition against class action waivers for small-dollar claims was a general contract defense that did not apply exclusively to arbitration provisions.

Litman similarly involved the application of New Jersey law and Muhammad. Initially, the Third Circuit had refused to enforce an express class action waiver given its ruling in Homa. See Litman v. Cellco Partnership, 381 Fed. Appx. 140, 143 (3d Cir. 2010) (“Homa is prior precedent that is directly on point and binding on us.”).

On May 2, 2011, one week after deciding Concepcion, the U.S. Supreme Court vacated the Third Circuit’s decision in Litman and ordered the appeals court to reconsider the decision in light of Concepcion. Litman v. Cellco Partnership, No. 10-551, 2011 WL 1631042 (U.S. May 2, 2011). (Click here to read our earlier alert on this matter.)

On August 24, 2011, the Third Circuit, on remand, applied the “broad and clear” holding of Concepcion and found that its decisions in Litman and Homa had been wrongly decided because Muhammad is preempted by the FAA:

The specific question before us remains whether the FAA preempts the New Jersey Supreme Court’s ruling in Muhammad. As noted above, we had previously held that, pursuant to Homa, it did not. We now examine that decision anew and hold that Homa has been abrogated by Concepcion and that Muhammad is preempted by the FAA.

A Pennsylvania federal district court recently applied the same “broad and clear” holding of Concepcion to find that the FAA similarly preempts Pennsylvania law refusing to enforce class action waivers in consumer arbitration agreements. Alfeche v. Cash America International, Inc., et al. Ballard Spahr represented the defendants in Alfeche. (Click here to read our earlier alert on this matter.)