On April 27, 2011, the U.S. Supreme Court decided AT&T Mobility v. Concepcion, No. 09-893, holding that the Federal Arbitration Act (FAA) preempts the use of state unconscionability doctrines to require arbitration agreements to provide for classwide arbitration.
Plaintiffs entered into a cell-phone contract with AT&T that provided for arbitration of all disputes between the parties but required that claims be brought in the parties' "individual capacity, and not as a plaintiff or class member in any purported class or representative proceeding." When AT&T charged Plaintiffs sales tax on the full retail price of phones that were to be provided free, Plaintiffs sued AT&T in federal district court. Plaintiffs' case was later consolidated with a putative class action alleging consumer fraud. AT&T moved to compel arbitration under the contract. Relying on the California Supreme Court's decision in Discover Bank v. Superior Court, 36 Cal. 4th 148, 113 P. 3d 1100 (2005), the district court denied the motion, finding that the arbitration provision was unconscionable because AT&T had not shown that individual arbitration adequately substituted for the deterrent effects of class actions. The Ninth Circuit affirmed, holding that the FAA did not preempt the Discover Bank rule because that rule was simply "a refinement of the unconscionability analysis applicable to contracts generally in California."
The Supreme Court reversed and remanded. The FAA provides that an arbitration agreement in a contract "shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract" (9 U.S.C. § 2). "Although §2's saving clause preserves generally applicable contract defenses," wrote the Court, "nothing in it suggests an intent to preserve state-law rules that stand as an obstacle to the accomplishment of the FAA's objectives." And "[r]equiring the availability of classwide arbitration interferes with fundamental attributes of arbitration and thus creates a scheme inconsistent with the FAA." First, it sacrifices the principal advantage of arbitration—its informality and speed. Second, it increases the risks to defendants by allowing large awards without review. Hence, even though unconscionability is a generally applicable contract defense, it is preempted when it is used to require the availability of classwide arbitration.
Justice Scalia delivered the opinion of the Court, in which Chief Justice Roberts and Justices Kennedy, Thomas, and Alito joined. Justice Thomas also filed a concurring opinion. Justice Breyer filed a dissenting opinion in which Justices Ginsburg, Sotomayor, and Kagan joined.