Wednesday, April 27, 2011

Federal Arbitration Act Preempts California Law of Contractual Unconscionability: Supreme Court

This posting was written by William Zale, Editor of CCH Advertising Law Guide.

In a dispute over a consumer contract with an arbitration clause that included a class action waiver, the Federal Arbitration Act preempted a California rule of law that barred the waiver as unconscionable, the U.S. Supreme Court held today in a 5-4 decision.

The court reversed and remanded a decision of the U.S. Court of Appeals in San Francisco (CCH Advertising Law Guide ¶64,059) declining to compel individual arbitration of a consumer’s claim for $30.22 in a dispute over a wireless telephone service provider's practice of charging sales tax on cell phones advertised as “free.” The appeals court had held that the class action waiver in the wireless service agreement was unconscionable under the law of California.

In Discover Bank v. Superior Court, the California Supreme Court held that the doctrine of unconscionability barred the enforcement of class action waivers in arbitration clauses when the contracting party with superior bargaining power is alleged to have deliberately cheated large numbers of consumers out of individually small sums of money.

Federal Arbitration Act

Section 2 of the Federal Arbitration Act provides that a written contractual provision to arbitrate a controversy arising out of the contract is enforceable “save upon such grounds as exist at law or in equity for the revocation of any contract.”

While acknowledging that unconscionability is a generally applicable doctrine of contract law, Justice Scalia, writing for the majority, concluded that Section 2 of the Federal Arbitration Act preempted California’s Discover Bank rule.

Individual v. Class Arbitration

A switch from individual to class arbitration would make the process slower, more costly, less informal, and greatly increase the risks to defendants, according to the Court. When damages allegedly owed to tens of thousands of potential claimants are aggregated and decided at once, the risk of an error will often become unacceptable, the Court announced.

The arbitration agreement provided that the wireless provider would pay claimants a minimum of $7,500, and twice their attorney’s fees, if they obtained an arbitration award greater than the provider’s last settlement offer, the Court added.


Justice Breyer, in a dissent joined by Justices Ginsburg, Sotomayor, and Kagan, questioned whether a rational lawyer would have signed on to represent a client for the possibility of fees stemming from a $30.22 claim. The Federal Arbitration Act’s basic objective was to assure that courts treat arbitration agreements like all other contracts. Recognition of the federalist ideal, embodied in specific language in the statute, should lead the Court to uphold California’s law, not to strike it down, according to the dissent.

The April 27 decision in AT&T Mobility LLC v. Concepcion will be reported in CCH Advertising Law Guide.

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