U.S. Supreme Court holds that states cannot compel class action arbitration where parties’ contract contains arbitration provision explicitly waiving right to such action.

AT&T Mobility, LLC v. Concepcion, 131 S. Ct. 1740 (2011)

A cell phone contract between Concepcions and AT&T provided for arbitration of all disputes, but did not permit class-wide arbitration. After the Concepcions were charged sales tax on the retail value of phones provided free under their service contract, they sued AT&T in a California Federal District Court. Their suit was consolidated with a class action alleging, inter alia, that AT&T had engaged in false advertising and fraud by charging sales tax on "free" phones.

The District Court denied AT&T's motion to compel arbitration under the Concepcions' contract. Relying on the California Supreme Court's Discover Bank decision, it found the arbitration provision unconscionable because it disallowed class-wide proceedings. The Ninth Circuit agreed that the provision was unconscionable under California law and held that the Federal Arbitration Act (FAA), which makes arbitration agreements "valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract," did not pre-empt its ruling.

AT&T appealed.  The US Supreme Court addressed whether the FAA prohibited States from conditioning the enforceability of certain arbitration agreements on the validity of class-wide arbitration procedures.  Writing for the majority, Justice Scalia recalled that the purpose of the FAA is to ensure the enforcement of arbitration agreements according to their terms so as to facilitate streamlined proceedings. Requiring the availability of class-wide arbitration interferes with fundamental attributes of arbitration and creates a scheme inconsistent with the FAA. Parties may agree to limit the issues subject to arbitration, to arbitrate according to specific rules, and to limit with whom they will arbitrate.

Scalia further posited that Class arbitration, to the extent it is created by the Discover Bank rule rather than consensual (i.e., contractually agreed upon by the parties), interferes with fundamental attributes of arbitration. The Discover Bank Rule then, while not requiring class-wide arbitration, still conflicted with the FAA by allowing any party to demand it after the fact. 

The US Supreme Court’s decision highlights the emphasis of the courts (both state and federal) that arbitration agreements are treated like any other contract and will be enforced according to their terms.  As parties may limit the issues submitted to, and manner of arbitration, a provision in an arbitration agreement waiving class-wide arbitration is not unconscionable.