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The Federal Arbitration Act Trumps State Class Arbitration Laws

Tuesday, December, 27, 2011

The question of federal versus state authority is a hot debate every time it gets raised. Particularly, when it comes to the Federal Arbitration Act versus state laws regarding class arbitration, it is a two-edged sword. In a recent class-action contract arbitration, it was decided that the FAA overrides state level class-action laws.

AT&T Mobility v. Concepcion and Class Arbitration

In the case of AT&T Mobility v. Concepcion, the question arose in whether or not class arbitration waivers were under the jurisdiction of California law, or if the FAA had jurisdiction. The Supreme Court decided that the FAA over-rides California's law based on the ruling in Discover Bank v. The Supreme Court. This was a split decision (5-4) with some hard opposition on the minority's side.

California's Discover Bank rule provides the ability to dismiss class arbitration waivers in contracts between an individual and a corporation. This ability hinges on the idea that the waivers are “unconscionable,” where it is provable that the entity that created the contract did so in order to defraud other parties. The FAA, on the other hand, upholds the waivers. What this ultimately means is that when a customer enters a contract, the FAA could prevent them from arranging a class-action arbitration.

The Pros and Cons of This Decision

On one hand, this could appear to be a victory for corporations everywhere and give them an unfair advantage in arbitration proceedings. Certainly, it is true that by and large, corporations have vastly greater bargaining power than individuals. It also could be viewed by many as federalism impinging on state sovereignty.  Certainly the dissenting judges thought so.

On the other hand, class-action proceedings do conflict with the purpose of contract arbitration. Mediations are meant to provide a quick, private, simple and inexpensive alternative to actual litigation. Class-action proceedings involve processes that tend to complicate and slow down the mediation, add expenses and make it more difficult to keep private. Besides, if a mediations ruling is unacceptable to one of the parties, it can always be appealed, in which case class-action litigation is perfectly viable.