April 28, 2011
This article is an interpretation of current law and is offered for informational purposes only. This material is not legal advice and should not be construed or used as a substitute for the advice of an attorney.
In a 5-4 decision, the United States Supreme Court held that consumer arbitration agreements containing class action waiver provisions were protected by the Federal Arbitration Act (FAA), which liberally favors agreements to arbitrate. On April 27, 2011, in AT&T Mobility LLC v. Concepcion, the Court found that a California law conditioning enforceability of arbitration agreements on the availability of class-wide arbitration procedures was antagonistic to the FAA. The Court also held that California's rule classifying most collective-arbitration waivers as unconscionable was preempted. In reaching its decision, the Court noted that arbitration is poorly suited for class litigation, and would result in a slower, more costly and more formal process that was likely not consensual.
The U.S. Supreme Court's decision in AT&T reiterates a strong federal policy favoring arbitration agreements and mandates that such agreements are enforced pursuant to their terms. The decision offers greater certainty to insurance companies and other businesses relying on arbitration for efficient dispute resolution that contractual arbitration provisions will not be set-aside based on individual state views, but only upon legitimate grounds for the revocation of any contract. Insurers and other businesses including arbitration terms that require bilateral rather than class arbitration can expect that such terms will be upheld, rather than face the unintended consequence of class action litigation in an arbitration forum.
While the decision reinforces arbitration as a valuable alternative to costly litigation, because insurance regulation is left to the states under federal law pursuant to the McCarran-Ferguson Act, some states presently prohibit mandatory binding arbitration clauses in various kinds of insurance contracts. Courts that have addressed the tension between the two federal statutes have agreed that the McCarran-Ferguson Act supersedes the FAA when a state law specifically regulates the business of insurance.
