Facts

In February 2002, Vincent and Liza Concepcion entered into a contract with AT&T Mobility LLC for the sale and servicing of cellular telephones. The agreement included an arbitration provision requiring disputes to be resolved individually, not as part of any class or representative proceeding, and AT&T later amended this provision in December 2006 to include consumer-friendly features such as covering arbitration costs for nonfrivolous claims, allowing small claims court alternatives, and providing a $7,500 minimum recovery plus double attorney's fees if the award exceeded AT&T's last settlement offer.

The Concepcions purchased AT&T service advertised as including free phones, but AT&T charged them $30.22 in sales tax based on the phones' retail value, leading to allegations of false advertising and fraud.

In March 2006, the Concepcions filed a complaint against AT&T in the United States District Court for the Southern District of California, which was consolidated with a putative class action making similar claims. In March 2008, AT&T moved to compel arbitration under the contract terms. The Concepcions opposed the motion, arguing the arbitration agreement was unconscionable under California law because it prohibited classwide procedures, relying on the California Supreme Court's Discover Bank rule. The District Court denied AT&T's motion, finding the provision unconscionable as it did not adequately substitute for class actions' deterrent effects. The Ninth Circuit affirmed, holding the Discover Bank rule was not preempted by the Federal Arbitration Act and applied equally to arbitration and litigation. The Supreme Court granted certiorari to review whether the FAA preempted the state rule.

Analysis

Issue #1

Issue

Does the Federal Arbitration Act preempt California's Discover Bank rule, which classifies most class action waivers in consumer arbitration agreements as unconscionable?

Legal Rule

The FAA makes arbitration agreements valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract. State laws are preempted if they stand as an obstacle to the accomplishment of the FAA's objectives, which include enforcing arbitration agreements according to their terms to facilitate efficient, streamlined proceedings. Generally applicable contract defenses like unconscionability are preserved, but not if applied in a way that disfavors arbitration or interferes with its fundamental attributes.

Rule Analysis

The Discover Bank rule, originating from California's unconscionability doctrine, deems class action waivers unconscionable in consumer adhesion contracts involving small damages and allegations of deliberate cheating by the superior party. Although presented as a general unconscionability application, it effectively mandates classwide arbitration by allowing parties to demand it ex post, which interferes with arbitration's core benefits of informality, speed, and low cost.

Classwide arbitration transforms the process into something slower and more costly, requiring complex certification procedures, heightened formality to bind absent parties, and increased risks for defendants due to aggregated claims and limited review of errors. This is inconsistent with the FAA's purpose of enforcing agreements as written for streamlined resolution, as class arbitration was not envisioned in 1925 and sacrifices arbitration's advantages without the parties' consent.

Examples like requiring judicial discovery or jury trials in arbitration illustrate how state rules disproportionately impacting arbitration are preempted, even if framed generally. Statistics showed bilateral arbitrations resolved quickly, while class arbitrations dragged on without merits decisions, confirming the interference. The rule frustrates the FAA's goals by reducing incentives for individual resolutions and pressuring settlements.

Conclusion

Yes, the FAA preempts the Discover Bank rule because it stands as an obstacle to the accomplishment of the FAA's objectives. The judgment of the Ninth Circuit was reversed, and the case was remanded.

Additional Opinions

Justice Thomas: Concurrence

Justice Thomas concurs in the judgment but writes separately to propose a textual interpretation of the Federal Arbitration Act (FAA), arguing that §2 limits defenses to those challenging the formation of the arbitration agreement, such as fraud or duress, based on harmonizing §§2 and 4. He disagrees with broader preemption tests but joins the judgment, noting reluctance in fully endorsing the majority's broader preemption test but agreeing it reaches the correct outcome and provides guidance to lower courts; under his view, California's Discover Bank rule is preempted as it concerns public policy and unconscionability, not contract formation. Thomas reasons that the FAA's text, omitting references to invalidation or nonenforcement and focusing on revocation, supports enforcing arbitration agreements unless formation defects are proven, and the Discover Bank rule's exculpatory nature does not relate to making the agreement.

Justice Breyer: Dissent

Justice Breyer, joined by Justices Ginsburg, Sotomayor, and Kagan, dissents, arguing that California's Discover Bank rule, which deems certain class action waivers unconscionable under general contract law, falls within the FAA's §2 savings clause as a ground for revocation of any contract and does not obstruct the Act's purpose of enforcing arbitration agreements on equal footing with other contracts. He disagrees with the majority's preemption holding, contending that the rule applies equally to arbitration and litigation, promotes the FAA's goals by allowing class arbitration as a compatible procedure, and does not discriminate against arbitration; comparisons should be between class arbitration and class litigation, not bilateral arbitration. Breyer's reasoning emphasizes the FAA's text, history, and objective of nondiscriminatory enforcement, supported by precedents upholding state laws that treat arbitration equally; he highlights federalism, warning that preempting the rule undermines states' roles and ignores class actions' benefits in addressing small-claim disputes, potentially allowing fraud without remedy.