Friday, April 29, 2011

Federal Arbitration Act Preempts State Law Limitations

This week in AT&T MOBILITY LLC v. CONCEPCION ET UX. the U.S. Supreme Court held that the Federal Arbitration Act (FAA) preempts state contract law limitations on the enforceability of arbitration agreements.

Justice Scalia authored a 5-4 opinion on April 27, 2011 in which the Court ruled that California's classification in consumer contracts of collective-arbitration waivers as unconscionable is preempted by the FAA. According to the Court, nothing in the FAA suggests an intent to preserve state rules standing as an obstacle to the accomplishment of the FAA’s objectives. As a result, businesses may continue enforcing individual arbitration agreements in contracts with employees, consumers and others. This opinion upholds enforceability of arbitration provisions and class action waivers in employment and consumer contracts.

The couple who filed a class action against AT&T for various violations of California’s consumer protection statutes challenged arbitration pursuant to a wireless service contract containing express class action waiver. The U.S. District Court and the Ninth Circuit Court of Appeals held that the class action waiver was unconscionable because it was contained within a contract of adhesion, involved small amounts of damages and bilked large numbers of consumers out of small amounts of money. However, the Supreme Court reversed, opining that states may not place conditions upon the enforceability of arbitration.