The Supreme Court recently issued a decision in AT&T Mobility LLC v. Concepcion.  The majority upheld the use of a class action waiver in an arbitration provision in cell phone contracts.  The Court held that the Federal Arbitration Act preempted California state law on unconscionability.  The Ninth Circuit had held that under California law the arbitration provision was unconscionable because it prohibited class arbitrations.  The Supreme Court reversed, concluding that “[r]equiring the availability of classwide arbitrations interferes with fundamental attributes of arbitration and thus creates a scheme inconsistent with the FAA.”  (Opinion, at 9.)

Notably, AT&T’s arbitration clause had various procedures favorable to claimants – AT&T would pay all the costs for non-frivolous claims, the arbitration would be held where the claimant resides or by telephone, and if the claimant receives an award higher that AT&T’s last settlement offer, they get a minimum of $7,500 plus twice their attorneys’ fees.

Justice Scalia’s opinion has a lengthy discussion about how class arbitrations are unworkable because: (a) they require lengthy proceedings and procedural formality that detracts from the advantage of arbitration; and (b) the stakes are too high to resolve class-wide disputes without meaningful appellate review.  Justice Scalia writes:

We find it hard to believe that defendants would bet the company with no effective means of review, and even harder to believe that Congress would have intended to allow state courts to force such a decision.  (Opinion, at 16-17.) 

An article in the New York Times said this decision:

appeared to provide businesses with a way to avoid class-action lawsuits in court. All they need do, the decision suggested, is use standard-form contracts that require two things: that disputes be raised only through the informal mechanism of arbitration and that claims be brought one by one.

I think that goes a little too far. The Court clearly said that an arbitration provision cannot be invalidated simply because it does not provide for a class arbitration.  But that does not mean that companies can write arbitration clauses any way they please.  Not every arbitration clause is as favorable to claimants as AT&T’s clause in this case, and courts will always need to address every provision on its own with respect to its enforceability against individual claimants.

Here is where I see the impact of this decision on insurance class actions: 

• When a class action is filed, insurance companies sometimes demand an arbitration (under an auto policy) or appraisal (under property coverage) on the named plaintiffs’ claims, asserting that the dispute must be resolved by those mechanisms rather than in a lawsuit.  Courts, including an Eleventh Circuit opinion, have held that plaintiffs seeking to bring a class action must submit their claims to arbitration or appraisal.  This Supreme Court decision further supports that result.  Insurance class actions will not disappear, however, because not every dispute raised in a proposed class action falls within the scope of an arbitration or appraisal clause.

• I wonder if any insurer will try to include an express class action waiver in an arbitration provision.  I have never seen a policy with such a provision.  Unlike consumer contracts used by most other large companies, provisions used in homeowners and auto policies generally require insurance department approval.  Will insurance departments approve such class action waivers?  Would the Federal Arbitration Act preempt a regulatory refusal to approve such a provision, or would the McCarran-Ferguson Act override that?