NCLC joined a dozen other advocacy organizations in a brief by the Legal Aid Society of the District of Columbia and NACA arguing that the Federal Arbitration Act does not prevent state contract law from invalidating as unconscionable a contract providing that a consumer entering into the contract has waived her right to a class action against the phone company.
The Supreme Court on April 27, in a highly anticipated decision in Concepcion sharply limited consumer class actions. The court ruled that the Federal Arbitration Act (FAA) preempts the “Discover Bank” rule, finding unconscionable a contractual clause banning class relief. The Court limited FAA language that an arbitration agreement can be struck down “upon such grounds as exist at law or in equity for the revocation of any contract.” The Discover Bank rule prohibited bans on class-wide relief found in consumer adhesion contracts where damages are small and where the party with superior bargaining power deliberately cheats large numbers of consumers out of individually small sums of money. Since this rule applies to bans on class relief both in court and arbitration, it is grounds for “the revocation of any contract.” The majority still struck it down as inconsistent with the FAA. The majority found that it was fundamental to arbitration that it be streamlined and expeditious. The Discover Bank rule, by forcing class arbitration on an unwilling party, negates the FAA requirement that arbitration agreements be enforceable as written. Class arbitration is inconsistent with FAA arbitration because it greatly increases the risks to defendants, requires arbitrators to make class certification judgments, and is slower, more costly and more likely to generate procedural issues.
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