Class Action Waivers Alive Again In California - AT&T Mobility v. Concepcion

California employers have long argued that arbitration agreements that require employees to only bring their cases as individual cases and not class actions should be enforceable. California courts routinely disagreed with this rational, arguing that class action waivers effectively obstructed employees’ rights because the employees were less likely to sue if only suing to recover their individual damages. The California Supreme Court explained in Discover Bank v. Superior Court that most arbitration agreements in the consumer context waiving the right to bring a class action were unconscionable contracts under California law. This rule has also carried over into the employment context and invalidating most employment arbitration agreements in which the employee waived any right to bring a class action for claims that arose during employment. But this week, the California Supreme Court’s decision was expressly overturned by the United Stated Supreme Court in AT&T Mobility LLC v. Concepcion.

The United States Supreme Court held in AT&T Mobility LLC v. Concepcion that the California Discovery Bank ruling “stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress” by enacting the Federal Arbitration Act (FAA). In the case, Plaintiffs brought suit against AT&T for false advertising and fraud by claiming that it provided consumers with a free phone, but the Plaintiffs were required to pay sales tax on the phones, and Plaintiffs alleged therefore the phones were not “free.” AT&T had an arbitration agreement that prevented Plaintiffs from bringing a class action, and required the Plaintiffs to arbitrate their claims. The lower courts held that California’s Discover Bank rule invalidated the class action waiver in the agreement as “unconscionable”. In overturning the lower courts, the US Supreme Court held that California’s Discover Bank rule “classifying most collective-arbitration waivers in consumer contracts as unconscionable” is a clear obstacle to the goals of the FAA. Therefore the FAA preempted California’s Discover Bank rule, allowing the class action waiver in the arbitration agreement to be enforceable.

Ramifications For California Employers

Until now, most class action waivers contained in arbitration agreements entered into with employees were unenforceable under California law. Now the AT&T Mobility decision gives employers an argument again that these types of agreements are permitted under Federal law, and therefore are enforceable. California employers still must be careful to follow other considerations to make such agreements enforceable, and it is important to keep in mind that the AT&T decision was in the consumer context – not an employment agreement.