On April 27, 2011, the U.S. Supreme Court decided AT&T Mobility LLC v. Concepcion, 131 S.Ct. 1740, which held that the Federal Arbitration Act (FAA) preempts state law to the extent that a state law precludes enforcing arbitration agreements according to their terms.  Specifically, the provision at issue within the arbitration agreement was a class-action waiver.  The Supreme Court held that the California rule, established by Discover Bank v. Superior Court, which classified most class-action waivers in arbitration agreements as unconscionable, was preempted by the FAA. 

The plaintiffs in Concepcion sued AT&T over sales tax they paid on phones that were advertised as “free.”  The plaintiffs’ contract with AT&T provided for arbitration of all disputes, 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."  After the plaintiffs brought suit, AT&T moved to compel arbitration.  The plaintiffs opposed the motion, contending, among other things, that the arbitration agreement was unconscionable under California law because it disallowed class actions.  Both the trial court and the Ninth Circuit Court of Appeals agreed and found that the arbitration provision waiving class-wide arbitration was “unconscionable,” and the arbitration agreement was unenforceable.  In reaching their decisions, both courts relied on the California Supreme Court's 2005 decision in Discover Bank v. Superior Court, 36 Cal.4th 148.  In Discover Bank, the California Supreme Court outlined California’s rule that courts may refuse to enforce any contract (including arbitration agreements) found to have been “unconscionable” at the time it was made and also set forth the rule of how to determine if a class-action waiver in a contract is “unconscionable.” 

The U.S. Supreme Court reversed the lower courts and held that the FAA preempts California’s rule because the FAA's "principal purpose," is to "ensure the enforcement of arbitration agreements according to their terms so as to facilitate streamlined proceedings.”  (131 S.Ct. 1740, 1748.)  "Requiring the availability of class-wide arbitration [such as in California’s Discover Bank rule] interferes with fundamental attributes of arbitration and thus creates a scheme inconsistent with the FAA.”  (Id.)  The Court outlined 3 reasons why California’s Discover Bank rule frustrates the purpose of the FAA: (1) switching from two-party to class-wide arbitration “sacrifices the principal advantage of arbitration—its informality— and makes the process slower, more costly, and more likely to generate procedural morass than final judgment;” (2) “class arbitration requires procedural formality” which creates the risk that absent class-members’ rights would not be protected by the arbitrator; and (3) because arbitration has limited grounds for review, class arbitration greatly increases risks to defendants who may be pressured into settling questionable claims when faced with even a small chance of a devastating loss and no effective means of review.  (Id. at 1751-1752.)

It is important to note that Concepcion is not an employment case, but rather a consumer contract case.  However, several courts have determined that Concepcion’s rule is not to be narrowly construed and does apply to arbitration agreements in employment contracts.  Additionally, the U.S. Supreme Court’s decision in Concepcion has set off a flurry of new decisions interpreting the ruling and applying it to arbitration waivers of other types of claims.

For example, there has been some dispute over whether the Concepcion rationale applies to claims brought under the Private Attorney General Act (PAGA).  Under PAGA, the plaintiff acts as the agent of state labor law enforcement agencies to seek civil penalties for Labor Code violations by employers on behalf of himself and other current or former employees.  (See Cal. Lab. Code § 2699, et seq.)  In Brown v. Ralphs Grocery Co., 197 Cal. App. 4th 489, decided on July 20, 2011, the California Supreme Court specifically held that Concepcion did not apply to claims brought under PAGA because PAGA was designed to protect the public, not to benefit private parties.  The court held that Concepcion dealt with the private individual right of a consumer to waive class action remedies in arbitration and does not address whether PAGA’s public right can be waived.  So, the arbitration agreement’s waiver of class actions did not apply to the plaintiff’s claims brought under PAGA and the plaintiff could bring a class action lawsuit against his employer for the PAGA claims. 

Conversely, several federal cases have held that the Concepcion rationale does apply to claims brought under PAGA.  In Grabowski v. C. H. Robinson Co. (S.D. Cal. Sept. 19, 2011) and Quevedo v. Macy's, Inc. (C.D. Cal. June 16, 2011) the courts held that PAGA claims are arbitrable and an arbitration agreement may waive representative actions for claims brought under PAGA.  The courts based their decisions on the “principal purpose” of the FAA articulated in Concepcion and ruled that requiring arbitration agreements to permit representative PAGA claims would, like class claims, make for a slower, more costly process and increase the risks to defendants by aggregating the claims of many employees.  

There has also been dispute over whether claims for equitable and injunctive relief brought under California’s unfair competition law (UCL) are preempted by the FAA.  In both Nelson v. AT&T Mobility LLC (N.D. Cal. August 18, 2011) and Meyer v. T-Mobile USA Inc. (N.D. Cal. Sept. 23, 2011), the courts held that Concepcion requires arbitration of UCL claims.  As in Grabowski and Quevedo for PAGA claims, Nelson and Meyer ruled that class action claims brought under UCL frustrate the purpose of the FAA and therefore arbitration agreements that waive representative actions for UCL claims are valid and enforceable.  Of course, there is a contrasting ruling from In re Directv Early Cancellation Fee Mktg. & Sales Practices Litig. (C.D. Cal. Sept. 6, 2011), which held that UCL claims could not be compelled to arbitration because they were brought by the plaintiffs “as private attorneys general, seeking to vindicate a public right.”  This is the same reasoning applied by Brown for PAGA claims.

So what do all these cases mean for employers?  Although still subject to attack, the US Supreme Court’s decision in Concepcion has opened the door to enforcement of arbitration agreements requiring individual adjudication of certain claims, to the exclusion of class action claims.  Employers should consider revising their arbitration agreements to include class action waivers in order to reduce the risk of being involved in a class action lawsuit.  Since case law is still evolving however, the downside is that the waiver may be found to be unenforceable.  Proper drafting of arbitration agreements, and especially class action waivers, is essential to avoid having the entire agreement be found unenforceable and also to ensure compliance with the FAA.  Employers should consult experienced employment law regarding any questions or concerns with their arbitration agreements.

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Jennifer Adkins Tomlin is an associate at Mullen & Henzell.  She practices with the Employment & Labor Group and the Civil Litigation Group.  Jennifer can be contacted at jtomlin@mullenlaw.com or (805) 966-1501.

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