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In the first of four highly anticipated rulings on class action issues this term, the United States Supreme Court has handed down a major victory for business interests.  In a 5-4 decision in AT&T Mobility LLC v. Concepcion, No. 09-893, the conservative majority held that the Federal Arbitration Act pre-empts state contract law principles in determining the enforceability of a class arbitration waiver–an arbitration agreement that expressly precludes arbitration on behalf of a class.  Here is a link to the slip opinion.  Prior opinions issued by many state courts have found class arbitration waivers unconscionable and have allowed class actions despite the existence of an express agreement in consumer contracts barring them. 

Importantly, Justice Scalia’s majority opinion goes beyond even the question originally presented for review, which was whether the FAA pre-empts state law “when when [class action] procedures are not necessary to ensure that the parties to the arbitration agreement are able to vindicate their claims.”  Instead, the majority’s decision appears to hold that the FAA preempts state law (and possibly even removes “unconscionability” as a basis for invalidating an arbitration clause even when not based on state public policy) even when the lack of a class action mechanism as a practical matter leaves plaintiffs with no remedy at all.

Justice Thomas’s concurring opinion gives a ray of hope to consumer interests seeking to pursue class action litigation in cases where a class arbitration waiver exists.  Justice Thomas agreed that the FAA preempts state decisions on whether an arbitration clause is unconscionable, but he notes that this decision does not necessarily preclude an argument that no agreement existed in the first instance, such as where the agreement is found to have been entered into as a result of coercion or fraud.  However, although he concedes that unconscionability rising to the level of a complete lack of mutual assent would be a basis to decline to enforce an arbitration agreement, he appears to conclude that unconscionability based purely on public policy would never be a basis to invalidate an arbitration agreement under Section 2 of the FAA, since it would not impact the formation of the arbitration agreement.  See Slip Op. at 4, n.* (Thomas, J., concurring).   So, if there is a ray of hope for plaintiffs, it appears to be a small one.

One big issue left unresolved after the Court’s decision is whether federal courts still have the power to declare class arbitration waivers invalid as a matter of substantive federal law.  For example, in In re American Express Merchants’ Litigation, No. 06-1871-cv, the Second Circuit Court of Appeals recently reaffirmed its decision invalidating a class arbitration waiver after an earlier decision was vacated by the Court to reconsider in light Stolt-Nielsen, S.A. v. AnimalFeeds Int’l Corp., 130 S. Ct. 1758 (2010).  In doing so, the court evaluated the validity of a class arbitration waiver “under the federal substantive law of arbitrability,” not under state law contract principles.  See also Gay v. CreditInform, 511 F.3d 369 (3d Cir. 2007); Kristian v. Comcast Corp., 446 F.3d 25, 63 (1st Cir. 2006).  This analysis would not clearly be affected by the holding of the Supreme Court’s decision today, although the tone of the majority’s opinion would seem to call the invalidation of any class arbitration waiver provision into question.