Supreme Court Upholds Consumer Arbitration Agreements That Bar Classwide Arbitration

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In a major win for companies doing business with consumers, on April 27, the Supreme Court held that the Federal Arbitration Act (FAA) preempts a California rule of law, announced in Discover Bank v. Superior Court, 36 Cal. 4th 148, 113 P. 3d 1100 (2005), that arbitration agreements are unconscionable and unenforceable unless they provide for classwide arbitration. AT&T Mobility LLC v. Concepcion, 563 U. S. ____ (2011).

Excerpts:

The Supreme Court reversed the judgment of the Ninth Circuit, holding that the FAA preempts the Discover Bank rule. Writing for a five-justice majority, Justice Scalia first noted that, where state law outright prohibits arbitration, the FAA displaces that state law. In Concepcion, however, the inquiry was "more complex" because the Court was asked to consider whether "a doctrine [i.e., unconscionability] normally thought to be generally applicable" and thus excepted from the FAA's broad preemption by Section 2 of that Act was being applied in a manner that disfavored arbitration.

Concepcion thus establishes that the FAA prevents courts from refusing to enforce arbitration agreements merely because they preclude plaintiffs from proceeding as a class. More broadly, it shows that rules of state law that condition enforceability of arbitration agreements on requirements that arbitration include procedures paralleling those of litigation may also be preempted. The more exactingly that states seek to apply unconscionability doctrines to force arbitration to approximate litigation, the more likely such applications are to be preempted by Section 2 of the FAA.

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