This year, the United States Supreme Court is expected to decide whether a retailer can protect itself against class action lawsuits by including a single claim arbitration provision in its contracts with customers.
At issue before the United States Supreme Court is the case of AT&T Mobility v. Concepcion. The question to be decided is whether a retailer can enforce a provision in its contracts with customers that states all disputes will be handled through single-party arbitration, as opposed to class action litigation. This decision is particulary relevant to retailers that commonly use customer agreements to sell products and services, such as banks, fitness clubs, car rental companies, and Internet companies.
Federal courts have recognized that under the Federal Arbitration Act (enacted in 1923), federal law favors arbitration agreements. The United States Supreme Court has noted the greater efficiency, lower costs and easier access associated with arbitrating a claim, as opposed to filing a lawsuit in court. Therefore, under federal law, a state is not permitted to discriminate against arbitration, and a state or federal court is required to uphold an arbitration provision and compel the parties to arbitrate a claim when they previously agreed to arbitrate.
However, the Ninth Circuit Court of Appeals, in declining to enforce the arbitration provision at issue in Concepcion, relied on an exception to the law favoring arbitration agreements where the terms of a contract are so “unfair” that they shock the conscience. The Ninth Circuit held that in light of California’s strong public policy in favor of class actions to resolve small claims by a large number of people, a form agreement waiving that right was unconscionable and enforceable under California law.
The Supreme Court will now decide whether the Federal Arbitration Act preempts California’s public policy in favor of class actions, or whether California can decide that single claim arbitrations are not enforceable in that state. Proponents of arbitration, including many retailers, argue that a ruling against the enforceability of AT&T’s single-party arbitration provision will be the death knell of arbitration in California. If consumers are permitted to bring class action claims, companies will prefer to have them do so in court and will not include arbitration provisions in their consumer contracts. Such a result would conflict directly with the purpose of the Federal Arbitration Act to encourage the resolution of disputes through arbitration.
In contrast, class action proponents argue that a decision enforcing a single-party arbitration provision will permit companies to engage in improper practices without the threat of a large-scale class action claim. Class action proponents also argue that if a single-party arbitration provision is upheld in the consumer context, this will also impact relationships between employers and their employees.
Oral argument of the case was held in November 2010, and the Supreme Court is expected to issue an opinion in the first half of this year.