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The following article appears courtesy of Curiale Hirshfeld Kramer, LLP.
Every once in a while a court issues a decision that has the potential to change the legal landscape for employers, particularly those in California. The U.S. Supreme Court's 5-4 decision last Wednesday in AT&T Mobility LLC v. Concepcion is one such case. Because of this decision, employers in California and throughout the country now have the ability to stem the tide of costly wage-hour class actions that have burdened them for so long by crafting a strong and even-handed arbitration agreement.
Ironically, AT&T Mobility has nothing to do with California employment law. Instead, the plaintiffs, Vincent and Liza Concepcion, had sued AT&T Mobility in a federal court in California over their purchase in 2002 of a cell phone which they claimed was falsely advertised as being free, when in fact there were hidden charges of approximately $30. They brought a class action suit on behalf of other consumers whom they claimed had also been duped by AT&T Mobility.
The form contract that the Concepcions agreed to when purchasing the cell phone contained an agreement to arbitrate all disputes which, among other things: (1) required them to arbitrate the false advertising claim they had made; and (2) prohibited them from asserting that claim as a class action. In a 2005 decision in Discover Bank v. Superior Court, however, the California Supreme Court had found that class action waivers contained in arbitration agreements were "unconscionable" and therefore unenforceable. Relying on that decision, both the trial court and the Ninth Circuit refused to compel the Concepcions to arbitrate and found that the agreement and the class action waiver were unenforceable.
Last week, the U.S. Supreme Court reversed that decision, finding that the Discover Bank decision was pre-empted by the Federal Arbitration Act (FAA). The U.S. Supreme Court has long found the FAA to embody a "liberal federal policy favoring arbitration" which applies both in state and federal courts. Under that policy, any state court decision which "interferes with" the purpose underlying arbitration, namely the "efficient, streamlined" resolution of disputes, is pre-empted and invalid. The U.S. Supreme Court held that, in this case, requiring defendants to arbitrate class actions would make arbitration unnecessarily costly, inefficient and time-consuming, and therefore held that defendants can impose class action waivers in arbitration. As a result, the California Supreme Court's decision in Discover Bank is no longer good law.
The significance of this decision cannot be overstated. For years, employers in California and throughout the United States have been deluged by class actions where the amounts in controversy for seemingly minor violations are nominal on an individual level, but when aggregated in a class action can lead to multi-million dollar awards. Business groups estimate that these class action suits have cost employers in California and beyond tens of billions of dollars in the last decade alone. The AT&T Mobility decision now provides employers with a powerful new tool to defend against those claims.
Employers throughout the country – and particularly in California – should take advantage of this decision and revise their arbitration agreements to include class action waivers. And those employers that do not require employees to arbitrate disputes should seriously consider doing so now.
But, beware: plaintiff's lawyers are already busy at work launching new attacks on every facet of arbitration agreements to try to avoid the reach of this potentially devastating decision. Only well-crafted and even-handed arbitration agreements tend to pass judicial scrutiny in California, so employers are well-advised to have counsel review their arbitration agreements to be sure they contain none of the red flags that will doom their enforcement.