Relevant Facts: Consumers who responded to an advertisement for a free phone were subsequently charged a fee on their bill, so they sued AT&T for fraud. Their action was joined with others in a nationwide class proceeding. The defense invoked a forced arbitration clause in the consumer contract to force the class action out of the judicial forum and into individual arbitration. A question arose as to availability of class proceedings for the claims as the arbitration clause at issue contained a class action ban. If enforced, pursuit of valid claims would have been financially untenable because each individual claim was only valued at approximately $30 apiece—far less than the cost of legal proceedings. The district court acknowledged that fact and found the class action ban unconscionable under state law. The appeals court affirmed and held that the state law on which the ruling was based was not preempted by the FAA.
Question Before The Court: Whether the FAA preempts a state law holding that class action bans in forced arbitration agreements are unconscionable.
The Opinion: The Court began by addressing the application of the state law of unconscionability, saying, “When state law prohibits outright the arbitration of a particular type of claim, the analysis is straightforward. The conflicting rule is replaced by the FAA. But the inquiry becomes more complex when a doctrine normally thought to be generally applicable, such as duress or unconscionability, is alleged to have been applied in a fashion that disfavors arbitration.” The Court continued, “[a]lthough the Section 2 savings clause preserves generally applicable contract defenses, nothing in it suggests an intent to preserve state law rules that stand as an obstacle to the accomplishment of the FAA’s objectives.” The Court then ruled that the FAA preempts states from barring enforcement of class waivers in arbitration clauses, even for public policy reasons that have nothing to do with arbitration.
Focusing on the use of the class action ban to require individual proceedings, the Court provided, “Arbitration is a matter of contract and the FAA requires courts to honor the expectations of the parties. But [if] what parties have agreed to . . . is not arbitration as envisioned by the FAA and lacks its benefits . . . [it] may not be required by state law.” Rooting its reasoning in concern for defendants to appeal large adverse judgments from class arbitral proceedings, the Court declared that arbitration is poorly suited to the higher stakes of class litigation, finding that “the overarching purpose of the FAA is to ensure the enforcement of private arbitration agreements according to their terms so as to facilitate streamlined proceedings. Requiring the availability of class wide arbitration interferes with fundamental attributes of arbitration and thus creates a scheme inconsistent with the FAA.”
The Court then swatted away the argument that “class proceedings are necessary to prosecute small-dollar claims that might otherwise slip through the legal system” by quipping that “States cannot require a procedure that is inconsistent with the FAA, even if it is desirable for unrelated reasons.”
With this case the Court unambiguously elevated the importance of enforcing a contractual term to arbitrate above almost any other concern. Justice Thomas, in his concurrence, observed that based on the majority’s holding, to win on an FAA Section 2 savings clause argument now would require “a party successfully assert a defense concerning the formation of the agreement to arbitrate, such as fraud, duress, or mutual mistake. . . Contract defenses unrelated to the making of the agreement—such as public policy—could not be the basis for declining to enforce an arbitration clause.”
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