U.S. Supreme Court Deals Blow to Consumer Class Actions, Reverses California Law that Nullifies Class-Action Waiver Clauses

Published On May 3, 2011 | By Christian Genetski | General, Litigation
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Last Thursday, the U.S. Supreme Court struck a blow to consumer class actions (and the attorneys who regularly file them) when it held in AT&T Mobility v. Concepcion that the Federal Arbitration Act (“FAA”) preempts a rule in California state contract law that nullifies class-action waiver clauses in consumer contracts.   The case involved a mobile phone contract that permitted arbitration of any dispute regarding the contract but mandated that any such claims be brought in an individual capacity, and not as a representative or member in a purported class proceeding.  Both the district court and Ninth Circuit had denied AT&T’s motions to dismiss the plaintiff’s purported class action based on their finding that the class-action waiver clause was unconscionable under the California Supreme Court’s decision in Discover Bank v. Superior Court.  The Supreme Court reversed, holding that the FAA preempted the Discover Bank rule.   The Court noted that the Discover Bank rule’s requirement that class proceedings be available in arbitration was fundamentally inconsistent with the FAA and thus unduly interfered with its purpose, which is to permit more streamlined proceedings.  Justice Thomas wrote a concurring opinion in which he analyzed the FAA text and concluded that states may only deem arbitration contracts unlawful where they were formed under fraud or duress.

The case is a potentially major blow, but less to individual consumers (who, it should be noted, were provided ample availability of remedies through arbitration) than to consumer class action plaintiffs’ attorneys, whose ability to sustain class action litigation supporting high fee awards may be sharply curtailed.  That said, one should expect additional court challenges to the enforceability of class-waiver arbitration clauses, perhaps relying on the Thomas concurrence, as well as challenges through the recently created Consumer Financial Protection Bureau, which has a statutory mandate to study the use of arbitration clauses in consumer financial contracts.