Supreme Court to Decide Whether FAA Preempts State Law Invalidating Arbitration Provision

The U.S. Supreme Court has agreed to determine whether the Federal Arbitration Act (FAA) preempts states from conditioning the enforceability of an arbitration agreement on the availability of class-wide arbitration when that procedure is not necessary to ensure that parties to the agreement are able to vindicate their claims. The case at issue – AT&T Mobility v. Concepcion (09-893) – concerns a consumer contract for wireless telephone services that contained both an agreement to arbitrate disputes and a class action waiver clause. While this matter deals with the viability of an arbitration provision in a consumer contract, the Supreme Court’s decision may impact such provisions in employment agreements as well.

The company, in response to a class action contract dispute, sought to compel individual arbitration pursuant to their consumer agreements. The arbitration provision at issue provided considerably more generous terms, including the stipulation that the company would pay all arbitration fees for non-frivolous complaints; an agreement that the arbitration itself would be conducted in the county of the customer’s billing address; an allowance for the claimant to proceed in small claims court; a provision stating that the company would provide double the amount of attorneys’ fees and $7,500 if the ultimate arbitration award exceeded the company’s settlement offer; and a waiver of the company’s right to attorneys’ fees in the event it prevailed on the matter. A California District Court held, however – and the Ninth Circuit Court of Appeals affirmed (pdf) – that the class action waiver was unconscionable under California law, and that the FAA does not preempt it.

In its petition to the Supreme Court, AT&T Mobility asserted that the question whether the FAA preempts state law rules barring agreements to arbitrate on an individual basis is of “exceptional importance”:

Class-wide arbitration affords none of the benefits of traditional, individual arbitration--it is at least as burdensome, expensive, and time-consuming as litigation--while multiplying the risks enormously because judicial review is so limited. For that reason, hundreds of millions of arbitration agreements require that arbitration proceed on an individual basis.

The Supreme Court’s decision in this matter could have a profound impact on employment agreements in California and in any state in which arbitration clauses have been deemed unconscionable or otherwise invalid.