Supreme Court Upholds Validity of Class Action Waivers in Arbitration Agreements

In a divisive five to four vote, the United States Supreme Court ruled yesterday that companies have a right under federal law to enter into arbitration agreements with individuals that waive the rights of persons to bring class-wide claims in arbitration. The ruling is especially significant for employers who include arbitration clauses in employment contracts because it will enable those employers to avoid class-wide claims in arbitration entirely.

The Supreme Court's opinion, AT&T Mobility LLC v. Concepcion, involved the interpretation of a California couple's cellular telephone contract. That contract required the couple to submit claims arising out of their cellular service to arbitration, but prevented them from bringing claims on behalf of a class of other consumers. Two lower courts refused to enforce the contract because California law prohibited arbitration agreements with class action waivers.

But in its opinion, the Supreme Court noted that federal law strongly favors the enforcement of arbitration agreements because they promote the speedy and inexpensive resolution of disputes. The Court found that the California rule prohibiting class action waivers violated that federal policy because it had the effect of making the arbitration process "slower, more costly, and more likely to generate procedural morass than final judgment." Accordingly, the Court held that federal law preempted California law and upheld the validity of the class action waiver.

While the Supreme Court's opinion involved a consumer contract and California law, the Court's reasoning applies to all arbitration agreements, including arbitration agreements in employment contracts in every state. The opinion therefore permits employers who have arbitration agreements with employees to effectively shield themselves from many types of class action claims. Of course, before entering into arbitration agreements with employees, employers should consult with counsel to ensure that the agreements comply with other state and federal requirements not addressed by the Supreme Court's opinion.