AT&T MOBILITY LLC v. CONCEPCION

Opinion of the Court

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SUPREME COURT OF THE UNITED STATES
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No. 09–893

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AT&T MOBILITY LLC, PETITIONER v. VINCENT

CONCEPCION ET UX.

ON WRIT OF CERTIORARI TO THE UNITED STATES COURT OF

APPEALS FOR THE NINTH CIRCUIT

[April 27, 2011]

JUSTICE SCALIA delivered the opinion of the Court.

Section 2 of the Federal Arbitration Act (FAA) makes agreements to arbitrate “valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” 9 U. S. C. §2. We consider whether the FAA prohibits States from conditioning the enforceability of certain arbitration agreements on the availability of classwide arbitration procedures.

I

In February 2002, Vincent and Liza Concepcion entered into an agreement for the sale and servicing of cellular telephones with AT&T Mobility LCC (AT&T).1 The contract provided for arbitration of all disputes between the parties, but required that claims be brought in the parties’ “individual capacity, and not as a plaintiff or class member in any purported class or representative proceeding.” App. to Pet. for Cert 61a.2 The agreement authorized AT&T to make unilateral amendments, which it did to the arbitration provision on several occasions. The version at issue in this case reflects revisions made in December 2006, which the parties agree are controlling.

The revised agreement provides that customers may initiate dispute proceedings by completing a one-page Notice of Dispute form available on AT&T’s Web site. AT&T may then offer to settle the claim; if it does not, or if the dispute is not resolved within 30 days, the customer may invoke arbitration by filing a separate Demand for Arbitration, also available on AT&T’s Web site. In the event the parties proceed to arbitration, the agreement specifies that AT&T must pay all costs for nonfrivolous claims; that arbitration must take place in the county in which the customer is billed; that, for claims of $10,000 or less, the customer may choose whether the arbitration proceeds in person, by telephone, or based only on submissions; that either party may bring a claim in small claims court in lieu of arbitration; and that the arbitrator may award any form of individual relief, including injunctions and presumably punitive damages. The agreement, moreover, denies AT&T any ability to seek reimbursement of its attorney’s fees, and, in the event that a customer receives an arbitration award greater than AT&T’s last written settlement offer, requires AT&T to pay a $7,500 minimum recovery and twice the amount of the claimant’s attorney’s fees.3

The Concepcions purchased AT&T service, which was advertised as including the provision of free phones; they were not charged for the phones, but they were charged $30.22 in sales tax based on the phones’ retail value. In March 2006, the Concepcions filed a complaint against AT&T in the United States District Court for the Southern District of California. The complaint was later consolidated with a putative class action alleging, among other things, that AT&T had engaged in false advertising and fraud by charging sales tax on phones it advertised as free.

In March 2008, AT&T moved to compel arbitration under the terms of its contract with the Concepcions. The Concepcions opposed the motion, contending that the arbitration agreement was unconscionable and unlawfully exculpatory under California law because it disallowed classwide procedures. The District Court denied AT&T’s motion. It described AT&T’s arbitration agreement favorably, noting, for example, that the informal disputeresolution process was “quick, easy to use” and likely to “promp[t] full or . . . even excess payment to the customer without the need to arbitrate or litigate”; that the $7,500 premium functioned as “a substantial inducement for the consumer to pursue the claim in arbitration” if a dispute was not resolved informally; and that consumers who were members of a class would likely be worse off. Laster v. T-Mobile USA, Inc., 2008 WL 5216255, *11–*12 (SD Cal., Aug. 11, 2008). Nevertheless, relying on the California Supreme Court’s decision in Discover Bank v. Superior Court, 36 Cal. 4th 148, 113 P. 3d 1100 (2005), the court found that the arbitration provision was unconscionable because AT&T had not shown that bilateral arbitration adequately substituted for the deterrent effects of class actions. Laster, 2008 WL 5216255, *14.

The Ninth Circuit affirmed, also finding the provision unconscionable under California law as announced in Discover Bank. Laster v. AT&T Mobility LLC, 584 F. 3d 849, 855 (2009). It also held that the Discover Bank rule was not preempted by the FAA because that rule was simply “a refinement of the unconscionability analysis applicable to contracts generally in California.” 584 F. 3d, at 857. In response to AT&T’s argument that the Concepcions’ interpretation of California law discriminated against arbitration, the Ninth Circuit rejected the contention that “ ‘class proceedings will reduce the efficiency and expeditiousness of arbitration’ ” and noted that “ ‘Discover Bank placed arbitration agreements with class action waivers on the exact same footing as contracts that bar class action litigation outside the context of arbitration.’ ” Id., at 858 (quoting Shroyer v. New Cingular Wireless Services, Inc., 498 F. 3d 976, 990 (CA9 2007)).

We granted certiorari, 560 U. S. ___ (2010).

II

The FAA was enacted in 1925 in response to widespread judicial hostility to arbitration agreements. See Hall Street Associates, L. L. C. v. Mattel, Inc., 552 U. S. 576, 581 (2008). Section 2, the “primary substantive provision of the Act,” Moses H. Cone Memorial Hospital v. Mercury Constr. Corp., 460 U. S. 1, 24 (1983), provides, in relevant part, as follows:

“A written provision in any maritime transaction or a contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction . . . shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” 9 U. S. C. §2. We have described this provision as reflecting both a “liberal federal policy favoring arbitration,” Moses H. Cone, supra, at 24, and the “fundamental principle that arbitration is a matter of contract,” Rent-A-Center, West, Inc. v. Jackson, 561 U. S. ____ , ____ (2010) (slip op., at 3). In line with these principles, courts must place arbitration agreements on an equal footing with other contracts, Buckeye Check Cashing, Inc. v. Cardegna, 546 U. S. 440, 443 (2006), and enforce them according to their terms, Volt Information Sciences, Inc. v. Board of Trustees of Leland Stanford Junior Univ., 489 U. S. 468, 478 (1989).

The final phrase of §2, however, permits arbitration agreements to be declared unenforceable “upon such grounds as exist at law or in equity for the revocation of any contract.” This saving clause permits agreements to arbitrate to be invalidated by “generally applicable contract defenses, such as fraud, duress, or unconscionability,” but not by defenses that apply only to arbitration or that derive their meaning from the fact that an agreement to arbitrate is at issue. Doctor’s Associates, Inc. v. Casarotto, 517 U. S. 681, 687 (1996); see also Perry v. Thomas, 482 U. S. 483, 492–493, n. 9 (1987). The question in this case is whether §2 preempts California’s rule classifying most collective-arbitration waivers in consumer contracts as unconscionable. We refer to this rule as the Discover Bank rule.

Under California law, courts may refuse to enforce any contract found “to have been unconscionable at the time it was made,” or may “limit the application of any unconscionable clause.” Cal. Civ. Code Ann. §1670.5(a) (West 1985). A finding of unconscionability requires “a ‘procedural’ and a ‘substantive’ element, the former focusing on ‘oppression’ or ‘surprise’ due to unequal bargaining power, the latter on ‘overly harsh’ or ‘one-sided’ results.” Armendariz v. Foundation Health Pyschcare Servs., Inc., 24 Cal. 4th 83, 114, 6 P. 3d 669, 690 (2000); accord, Discover Bank, 36 Cal. 4th, at 159–161, 113 P. 3d, at 1108.

In Discover Bank, the California Supreme Court applied this framework to class-action waivers in arbitration agreements and held as follows: “[W]hen the waiver is found in a consumer contract of adhesion in a setting in which disputes between the contracting parties predictably involve small amounts of damages, and when it is alleged that the party with the superior bargaining power has carried out a scheme to deliberately cheat large numbers of consumers out of individually small sums of money, then . . . the waiver becomes in practice the exemption of the party ‘from responsibility for [its] own fraud, or willful injury to the person or property of another.’ Under these circumstances, such waivers are unconscionable under California law and should not be enforced.” Id., at 162, 113 P. 3d, at 1110 (quoting Cal. Civ. Code Ann. §1668). California courts have frequently applied this rule to find arbitration agreements unconscionable. See, e.g., Cohen v. DirecTV, Inc., 142 Cal. App. 4th 1442, 1451–1453, 48 Cal. Rptr. 3d 813, 819–821 (2006); Klussman v. Cross Country Bank, 134 Cal. App. 4th 1283, 1297, 36 Cal Rptr. 3d 728, 738–739 (2005); Aral v. EarthLink, Inc., 134 Cal. App. 4th 544, 556–557, 36 Cal. Rptr. 3d 229, 237–239 (2005).

III

A

The Concepcions argue that the Discover Bank rule, given its origins in California’s unconscionability doctrine and California’s policy against exculpation, is a ground that “exist[s] at law or in equity for the revocation of any contract” under FAA §2. Moreover, they argue that even if we construe the Discover Bank rule as a prohibition on collective-action waivers rather than simply an application of unconscionability, the rule would still be applicable to all dispute-resolution contracts, since California prohibits waivers of class litigation as well. See America Online, Inc. v. Superior Ct., 90 Cal. App. 4th 1, 17–18, 108 Cal. Rptr. 2d 699, 711–713 (2001).

When state law prohibits outright the arbitration of a particular type of claim, the analysis is straightforward: The conflicting rule is displaced by the FAA. Preston v. Ferrer, 552 U. S. 346, 353 (2008). But the inquiry becomes more complex when a doctrine normally thought to be generally applicable, such as duress or, as relevant here, unconscionability, is alleged to have been applied in a fashion that disfavors arbitration. In Perry v. Thomas, 482 U. S. 483 (1987), for example, we noted that the FAA’s preemptive effect might extend even to grounds traditionally thought to exist “ ‘at law or in equity for the revocation of any contract.’ ” Id., at 492, n. 9 (emphasis deleted). We said that a court may not “rely on the uniqueness of an agreement to arbitrate as a basis for a state-law holding that enforcement would be unconscionable, for this would enable the court to effect what . . . the state legislature cannot.” Id., at 493, n. 9.

An obvious illustration of this point would be a case finding unconscionable or unenforceable as against public policy consumer arbitration agreements that fail to provide for judicially monitored discovery. The rationalizations for such a holding are neither difficult to imagine nor different in kind from those articulated in Discover Bank. A court might reason that no consumer would knowingly waive his right to full discovery, as this would enable companies to hide their wrongdoing. Or the court might simply say that such agreements are exculpatory—restricting discovery would be of greater benefit to the company than the consumer, since the former is more likely to be sued than to sue. See Discover Bank, supra, at 161, 113 P. 3d, at 1109 (arguing that class waivers are similarly one-sided). And, the reasoning would continue, because such a rule applies the general principle of unconscionability or public-policy disapproval of exculpatory agreements, it is applicable to “any” contract and thus preserved by §2 of the FAA. In practice, of course, the rule would have a disproportionate impact on arbitration agreements; but it would presumably apply to contracts purporting to restrict discovery in litigation as well.

Other examples are easy to imagine. The same argument might apply to a rule classifying as unconscionable arbitration agreements that fail to abide by the Federal Rules of Evidence, or that disallow an ultimate disposition by a jury (perhaps termed “a panel of twelve lay arbitrators” to help avoid preemption). Such examples are not fanciful, since the judicial hostility towards arbitration that prompted the FAA had manifested itself in “a great variety” of “devices and formulas” declaring arbitration against public policy. Robert Lawrence Co. v. Devonshire Fabrics, Inc., 271 F. 2d 402, 406 (CA2 1959). And although these statistics are not definitive, it is worth noting that California’s courts have been more likely to hold contracts to arbitrate unconscionable than other contracts. Broome, An Unconscionable Applicable of the Unconscionability Doctrine: How the California Courts are Circumventing the Federal Arbitration Act, 3 Hastings Bus. L. J. 39, 54, 66 (2006); Randall, Judicial Attitudes Toward Arbitration and the Resurgence of Unconscionability, 52 Buffalo L. Rev. 185, 186–187 (2004).

The Concepcions suggest that all this is just a parade of horribles, and no genuine worry. “Rules aimed at destroying arbitration” or “demanding procedures incompatible with arbitration,” they concede, “would be preempted by the FAA because they cannot sensibly be reconciled with Section 2.” Brief for Respondents 32. The “grounds” available under §2’s saving clause, they admit, “should not be construed to include a State’s mere preference for procedures that are incompatible with arbitration and ‘would wholly eviscerate arbitration agreements.’ ” Id., at 33 (quoting Carter v. SSC Odin Operating Co., LLC, 237 Ill. 2d 30, 50, 927 N. E. 2d 1207, 1220 (2010)).4 We largely agree. Although §2’s saving clause preserves generally applicable contract defenses, nothing in it suggests an intent to preserve state-law rules that stand as an obstacle to the accomplishment of the FAA’s objectives. Cf. Geier v. American Honda Motor Co., 529 U. S. 861, 872 (2000); Crosby v. National Foreign Trade Council, 530 U. S. 363, 372–373 (2000). As we have said, a federal statute’s saving clause “ ‘cannot in reason be construed as [allowing] a common law right, the continued existence of which would be absolutely inconsistent with the provisions of the act. In other words, the act cannot be held to destroy itself.’ ” American Telephone & Telegraph Co. v. Central Office Telephone, Inc., 524 U. S. 214, 227–228 (1998) (quoting Texas & Pacific R. Co. v. Abilene Cotton Oil Co., 204 U. S. 426, 446 (1907)).

We differ with the Concepcions only in the application of this analysis to the matter before us. We do not agree that rules requiring judicially monitored discovery or adherence to the Federal Rules of Evidence are “a far cry from this case.” Brief for Respondents 32. The overarching purpose of the FAA, evident in the text of §§2, 3, and 4, is to ensure the enforcement of arbitration agreements according to their terms so as to facilitate streamlined proceedings. Requiring the availability of classwide arbitration interferes with fundamental attributes of arbitration and thus creates a scheme inconsistent with the FAA.

B

The “principal purpose” of the FAA is to “ensur[e] that private arbitration agreements are enforced according to their terms.” Volt, 489 U. S., at 478; see also Stolt-Nielsen S. A. v. AnimalFeeds Int’l Corp., 559 U. S. ___, ___ (2010) (slip op., at 17). This purpose is readily apparent from the FAA’s text. Section 2 makes arbitration agreements “valid, irrevocable, and enforceable” as written (subject, of course, to the saving clause); §3 requires courts to stay litigation of arbitral claims pending arbitration of those claims “in accordance with the terms of the agreement”; and §4 requires courts to compel arbitration “in accordance with the terms of the agreement” upon the motion of either party to the agreement (assuming that the “making of the arbitration agreement or the failure . . . to perform the same” is not at issue). In light of these provisions, we have held that parties may agree to limit the issues subject to arbitration, Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U. S. 614, 628 (1985), to arbitrate according to specific rules, Volt, supra, at 479, and to limit with whom a party will arbitrate its disputes, Stolt-Nielsen, supra, at ___ (slip op., at 19).

The point of affording parties discretion in designing arbitration processes is to allow for efficient, streamlined procedures tailored to the type of dispute. It can be specified, for example, that the decisionmaker be a specialist in the relevant field, or that proceedings be kept confidential to protect trade secrets. And the informality of arbitral proceedings is itself desirable, reducing the cost and increasing the speed of dispute resolution. 14 Penn Plaza LLC v. Pyett, 556 U. S. ___, ___ (2009) (slip op., at 20); Mitsubishi Motors Corp., supra, at 628.

The dissent quotes Dean Witter Reynolds Inc. v. Byrd, 470 U. S. 213, 219 (1985), as “ ‘reject[ing] the suggestion that the overriding goal of the Arbitration Act was to promote the expeditious resolution of claims.’ ” Post, at 4 (opinion of BREYER, J.). That is greatly misleading. After saying (accurately enough) that “the overriding goal of the Arbitration Act was [not] to promote the expeditious resolution of claims,” but to “ensure judicial enforcement of privately made agreements to arbitrate,” 470 U. S., at 219, Dean Witter went on to explain: “This is not to say that Congress was blind to the potential benefit of the legislation for expedited resolution of disputes. Far from it . . . .” Id., at 220. It then quotes a House Report saying that “the costliness and delays of litigation . . . can be largely eliminated by agreements for arbitration.” Ibid. (quoting H. R. Rep. No. 96, 68th Cong., 1st Sess., 2 (1924)). The concluding paragraph of this part of its discussion begins as follows:

“We therefore are not persuaded by the argument that the conflict between two goals of the Arbitration Act—enforcement of private agreements and encouragement of efficient and speedy dispute resolution— must be resolved in favor of the latter in order to realize the intent of the drafters.” 470 U. S., at 221. In the present case, of course, those “two goals” do not conflict—and it is the dissent’s view that would frustrate both of them.

Contrary to the dissent’s view, our cases place it beyond dispute that the FAA was designed to promote arbitration. They have repeatedly described the Act as “embod[ying] [a] national policy favoring arbitration,” Buckeye Check Cashing, 546 U. S., at 443, and “a liberal federal policy favoring arbitration agreements, notwithstanding any state substantive or procedural policies to the contrary,” Moses H. Cone, 460 U. S., at 24; see also Hall Street Assocs., 552 U. S., at 581. Thus, in Preston v. Ferrer, holding preempted a state-law rule requiring exhaustion of administrative remedies before arbitration, we said: “A prime objective of an agreement to arbitrate is to achieve ‘streamlined proceedings and expeditious results,’ ” which objective would be “frustrated” by requiring a dispute to be heard by an agency first. 552 U. S., at 357–358. That rule, we said, would “at the least, hinder speedy resolution of the controversy.” Id., at 358.5

California’s Discover Bank rule similarly interferes with arbitration. Although the rule does not require classwide arbitration, it allows any party to a consumer contract to demand it ex post. The rule is limited to adhesion contracts, Discover Bank, 36 Cal. 4th, at 162–163, 113 P. 3d, at 1110, but the times in which consumer contracts were anything other than adhesive are long past.6 Carbajal v. H&R Block Tax Servs., Inc., 372 F. 3d 903, 906 (CA7 2004); see also Hill v. Gateway 2000, Inc., 105 F. 3d 1147, 1149 (CA7 1997). The rule also requires that damages be predictably small, and that the consumer allege a scheme to cheat consumers. Discover Bank, supra, at 162–163, 113 P. 3d, at 1110. The former requirement, however, is toothless and malleable (the Ninth Circuit has held that damages of $4,000 are sufficiently small, see Oestreicher v. Alienware Corp., 322 Fed. Appx. 489, 492 (2009) (unpublished)), and the latter has no limiting effect, as all that is required is an allegation. Consumers remain free to bring and resolve their disputes on a bilateral basis under Discover Bank, and some may well do so; but there is little incentive for lawyers to arbitrate on behalf of individuals when they may do so for a class and reap far higher fees in the process. And faced with inevitable class arbitration, companies would have less incentive to continue resolving potentially duplicative claims on an individual basis.

Although we have had little occasion to examine classwide arbitration, our decision in Stolt-Nielsen is instructive. In that case we held that an arbitration panel exceeded its power under §10(a)(4) of the FAA by imposing class procedures based on policy judgments rather than the arbitration agreement itself or some background principle of contract law that would affect its interpretation. 559 U. S., at ___ (slip op., at 20–23). We then held that the agreement at issue, which was silent on the question of class procedures, could not be interpreted to allow them because the “changes brought about by the shift from bilateral arbitration to class-action arbitration” are “fundamental.” Id., at ___ (slip op., at 22). This is obvious as a structural matter: Classwide arbitration includes absent parties, necessitating additional and different procedures and involving higher stakes. Confidentiality becomes more difficult. And while it is theoretically possible to select an arbitrator with some expertise relevant to the class-certification question, arbitrators are not generally knowledgeable in the often-dominant procedural aspects of certification, such as the protection of absent parties. The conclusion follows that class arbitration, to the extent it is manufactured by Discover Bank rather than consensual, is inconsistent with the FAA. First, the switch from bilateral to class arbitration sacrifices the principal advantage of arbitration—its informality—and makes the process slower, more costly, and more likely to generate procedural morass than final judgment. “In bilateral arbitration, parties forgo the procedural rigor and appellate review of the courts in order to realize the benefits of private dispute resolution: lower costs, greater efficiency and speed, and the ability to choose expert adjudicators to resolve specialized disputes.” 559 U. S., at ___ (slip op., at 21). But before an arbitrator may decide the merits of a claim in classwide procedures, he must first decide, for example, whether the class itself may be certified, whether the named parties are sufficiently representative and typical, and how discovery for the class should be conducted. A cursory comparison of bilateral and class arbitration illustrates the difference. According to the American Arbitration Association (AAA), the average consumer arbitration between January and August 2007 resulted in a disposition on the merits in six months, four months if the arbitration was conducted by documents only. AAA, Analysis of the AAA’s Consumer Arbitration Caseload, online at http://www.adr.org/ si.asp?id=5027 (all Internet materials as visited Apr. 25, 2011, and available in Clerk of Court’s case file). As of September 2009, the AAA had opened 283 class arbitrations. Of those, 121 remained active, and 162 had been settled, withdrawn, or dismissed. Not a single one, however, had resulted in a final award on the merits. Brief for AAA as Amicus Curiae in Stolt-Nielsen, O. T. 2009, No. 08–1198, pp. 22–24. For those cases that were no longer active, the median time from filing to settlement, withdrawal, or dismissal—not judgment on the merits—was 583 days, and the mean was 630 days. Id., at 24.7 Second, class arbitration requires procedural formality. The AAA’s rules governing class arbitrations mimic the Federal Rules of Civil Procedure for class litigation. Compare AAA, Supplementary Rules for Class Arbitrations (effective Oct. 8, 2003), online at http://www.adr.org/ sp.asp?id=21936, with Fed. Rule Civ. Proc. 23. And while parties can alter those procedures by contract, an alternative is not obvious. If procedures are too informal, absent class members would not be bound by the arbitration. For a class-action money judgment to bind absentees in litigation, class representatives must at all times adequately represent absent class members, and absent members must be afforded notice, an opportunity to be heard, and a right to opt out of the class. Phillips Petroleum Co. v. Shutts, 472 U. S. 797, 811–812 (1985). At least this amount of process would presumably be required for absent parties to be bound by the results of arbitration.

We find it unlikely that in passing the FAA Congress meant to leave the disposition of these procedural requirements to an arbitrator. Indeed, class arbitration was not even envisioned by Congress when it passed the FAA in 1925; as the California Supreme Court admitted in Discover Bank, class arbitration is a “relatively recent development.” 36 Cal. 4th, at 163, 113 P. 3d, at 1110. And it is at the very least odd to think that an arbitrator would be entrusted with ensuring that third parties’ due process rights are satisfied.

Third, class arbitration greatly increases risks to defendants. Informal procedures do of course have a cost: The absence of multilayered review makes it more likely that errors will go uncorrected. Defendants are willing to accept the costs of these errors in arbitration, since their impact is limited to the size of individual disputes, and presumably outweighed by savings from avoiding the courts. But when damages allegedly owed to tens of thousands of potential claimants are aggregated and decided at once, the risk of an error will often become unacceptable. Faced with even a small chance of a devastating loss, defendants will be pressured into settling questionable claims. Other courts have noted the risk of “in terrorem” settlements that class actions entail, see, e.g., Kohen v. Pacific Inv. Management Co. LLC, 571 F. 3d 672, 677–678 (CA7 2009), and class arbitration would be no different.

Arbitration is poorly suited to the higher stakes of class litigation. In litigation, a defendant may appeal a certification decision on an interlocutory basis and, if unsuccessful, may appeal from a final judgment as well. Questions of law are reviewed de novo and questions of fact for clear error. In contrast, 9 U. S. C. §10 allows a court to vacate an arbitral award only where the award “was procured by corruption, fraud, or undue means”; “there was evident partiality or corruption in the arbitrators”; “the arbitrators were guilty of misconduct in refusing to postpone the hearing . . . or in refusing to hear evidence pertinent and material to the controversy[,] or of any other misbehavior by which the rights of any party have been prejudiced”; or if the “arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final, and definite award . . . was not made.” The AAA rules do authorize judicial review of certification decisions, but this review is unlikely to have much effect given these limitations; review under §10 focuses on misconduct rather than mistake. And parties may not contractually expand the grounds or nature of judicial review. Hall Street Assocs., 552 U. S., at 578. 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.8

The Concepcions contend that because parties may and sometimes do agree to aggregation, class procedures are not necessarily incompatible with arbitration. But the same could be said about procedures that the Concepcions admit States may not superimpose on arbitration: Parties could agree to arbitrate pursuant to the Federal Rules of Civil Procedure, or pursuant to a discovery process rivaling that in litigation. Arbitration is a matter of contract, and the FAA requires courts to honor parties’ expectations. Rent-A-Center, West, 561 U. S., at ___ (slip op., at 3). But what the parties in the aforementioned examples would have agreed to is not arbitration as envisioned by the FAA, lacks its benefits, and therefore may not be required by state law.

The dissent claims that class proceedings are necessary to prosecute small-dollar claims that might otherwise slip through the legal system. See post, at 9. But States cannot require a procedure that is inconsistent with the FAA, even if it is desirable for unrelated reasons. Moreover, the claim here was most unlikely to go unresolved. As noted earlier, the arbitration agreement provides that AT&T will pay claimants a minimum of $7,500 and twice their attorney’s fees if they obtain an arbitration award greater than AT&T’s last settlement offer. The District Court found this scheme sufficient to provide incentive for the individual prosecution of meritorious claims that are not immediately settled, and the Ninth Circuit admitted that aggrieved customers who filed claims would be “essentially guarantee[d]” to be made whole, 584 F. 3d, at 856, n. 9. Indeed, the District Court concluded that the Concepcions were better off under their arbitration agreement with AT&T than they would have been as participants in a class action, which “could take months, if not years, and which may merely yield an opportunity to submit a claim for recovery of a small percentage of a few dollars.” Laster, 2008 WL 5216255, at *12.

* * *

Because it “stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress,” Hines v. Davidowitz, 312 U. S. 52, 67 (1941), California’s Discover Bank rule is preempted by the FAA. The judgment of the Ninth Circuit is reversed, and the case is remanded for further proceedings consistent with this opinion. It is so ordered.

1 The Conceptions’ original contract was with Cingular Wireless. AT&T acquired Cingular in 2005 and renamed the company AT&T Mobility in 2007. Laster v. AT&T Mobility LLC, 584 F. 3d 849, 852, n. 1 (CA9 2009).

2 That provision further states that “the arbitrator may not consolidate more than one person’s claims, and may not otherwise preside over any form of a representative or class proceeding.” App. to Pet. for Cert. 61a.

3 The guaranteed minimum recovery was increased in 2009 to $10,000. Brief for Petitioner 7.

4 The dissent seeks to fight off even this eminently reasonable concession. It says that to its knowledge “we have not . . . applied the Act to strike down a state statute that treats arbitrations on par with judicial and administrative proceedings,” post, at 10 (opinion of BREYER, J.), and that “we should think more than twice before invalidating a state law that . . . puts agreements to arbitrate and agreements to litigate ‘upon the same footing’ ” post, at 4–5.

5 Relying upon nothing more indicative of congressional understanding than statements of witnesses in committee hearings and a press release of Secretary of Commerce Herbert Hoover, the dissent suggests that Congress “thought that arbitration would be used primarily where merchants sought to resolve disputes of fact . . . [and] possessed roughly equivalent bargaining power.” Post, at 6. Such a limitation appears nowhere in the text of the FAA and has been explicitly rejected by our cases. “Relationships between securities dealers and investors, for example, may involve unequal bargaining power, but we [have] nevertheless held . . . that agreements to arbitrate in that context are enforceable.” Gilmer v. Interstate/Johnson Lane Corp., 500 U. S. 20, 33 (1991); see also id., at 32–33 (allowing arbitration of claims arising under the Age Discrimination in Employment Act of 1967 despite allegations of unequal bargaining power between employers and employees). Of course the dissent’s disquisition on legislative history fails to note that it contains nothing—not even the testimony of a stray witness in committee hearings—that contemplates the existence of class arbitration.

6 Of course States remain free to take steps addressing the concerns that attend contracts of adhesion—for example, requiring class-actionwaiver provisions in adhesive arbitration agreements to be highlighted. Such steps cannot, however, conflict with the FAA or frustrate its purpose to ensure that private arbitration agreements are enforced according to their terms.

7 The dissent claims that class arbitration should be compared to class litigation, not bilateral arbitration. Post, at 6–7. Whether arbitrating a class is more desirable than litigating one, however, is not relevant. A State cannot defend a rule requiring arbitration-by-jury by saying that parties will still prefer it to trial-by-jury.

8 The dissent cites three large arbitration awards (none of which stems from classwide arbitration) as evidence that parties are willing to submit large claims before an arbitrator. Post, at 7–8. Those examples might be in point if it could be established that the size of the arbitral dispute was predictable when the arbitration agreement was entered. Otherwise, all the cases prove is that arbitrators can give huge awards—which we have never doubted. The point is that in classaction arbitration huge awards (with limited judicial review) will be entirely predictable, thus rendering arbitration unattractive. It is not reasonably deniable that requiring consumer disputes to be arbitrated on a classwide basis will have a substantial deterrent effect on incentives to arbitrate.

THOMAS, J., concurring

SUPREME COURT OF THE UNITED STATES
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No. 09–893

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AT&T MOBILITY LLC, PETITIONER v. VINCENT

CONCEPCION ET UX.

ON WRIT OF CERTIORARI TO THE UNITED STATES COURT OF

APPEALS FOR THE NINTH CIRCUIT

[April 27, 2011]

JUSTICE THOMAS, concurring.

Section 2 of the Federal Arbitration Act (FAA) provides that an arbitration provision “shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” 9 U. S. C. §2. The question here is whether California’s Discover Bank rule, see Discover Bank v. Superior Ct., 36 Cal. 4th 148, 113 P. 3d 1100 (2005), is a “groun[d] . . . for the revocation of any contract.”

It would be absurd to suggest that §2 requires only that a defense apply to “any contract.” If §2 means anything, it is that courts cannot refuse to enforce arbitration agreements because of a state public policy against arbitration, even if the policy nominally applies to “any contract.” There must be some additional limit on the contract defenses permitted by §2. Cf. ante, at 17 (opinion of the Court) (state law may not require procedures that are “not arbitration as envisioned by the FAA” and “lac[k] its benefits”); post, at 5 (BREYER, J., dissenting) (state law may require only procedures that are “consistent with the use of arbitration”).

I write separately to explain how I would find that limit in the FAA’s text. As I would read it, the FAA requires that an agreement to arbitrate be enforced unless a party successfully challenges the formation of the arbitration agreement, such as by proving fraud or duress. 9 U. S. C. §§2, 4. Under this reading, I would reverse the Court of Appeals because a district court cannot follow both the FAA and the Discover Bank rule, which does not relate to defects in the making of an agreement.

This reading of the text, however, has not been fully developed by any party, cf. Brief for Petitioner 41, n. 12, and could benefit from briefing and argument in an appropriate case. Moreover, I think that the Court’s test will often lead to the same outcome as my textual interpretation and that, when possible, it is important in interpreting statutes to give lower courts guidance from a majority of the Court. See US Airways, Inc. v. Barnett, 535 U. S. 391, 411 (2002) (O’Connor, J., concurring). Therefore, although I adhere to my views on purposes-and-objectives pre-emption, see Wyeth v. Levine, 555 U. S. 555, ___ (2009) (opinion concurring in judgment), I reluctantly join the Court’s opinion.

I

The FAA generally requires courts to enforce arbitration agreements as written. Section 2 provides that “[a] written provision in . . . a contract . . . to settle by arbitration a controversy thereafter arising out of such contract . . . shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” Significantly, the statute does not parallel the words “valid, irrevocable, and enforceable” by referencing the grounds as exist for the “invalidation, revocation, or nonenforcement” of any contract. Nor does the statute use a different word or phrase entirely that might arguably encompass validity, revocability, and enforceability. The use of only “revocation” and the conspicuous omission of “invalidation” and “nonenforcement” suggest that the exception does not include all defenses applicable to any contract but rather some subset of those defenses. See Duncan v. Walker, 533 U. S. 167, 174 (2001) (“It is our duty to give effect, if possible, to every clause and word of a statute” (internal quotation marks omitted)).

Concededly, the difference between revocability, on the one hand, and validity and enforceability, on the other, is not obvious. The statute does not define the terms, and their ordinary meanings arguably overlap. Indeed, this Court and others have referred to the concepts of revocability, validity, and enforceability interchangeably. But this ambiguity alone cannot justify ignoring Congress’ clear decision in §2 to repeat only one of the three concepts.

To clarify the meaning of §2, it would be natural to look to other portions of the FAA. Statutory interpretation focuses on “the language itself, the specific context in which that language is used, and the broader context of the statute as a whole.” Robinson v. Shell Oil Co., 519 U. S. 337, 341 (1997). “A provision that may seem ambiguous in isolation is often clarified by the remainder of the statutory scheme . . . because only one of the permissible meanings produces a substantive effect that is compatible with the rest of the law.” United Sav. Assn. of Tex. v. Timbers of Inwood Forest Associates, Ltd., 484 U. S. 365, 371 (1988).

Examining the broader statutory scheme, §4 can be read to clarify the scope of §2’s exception to the enforcement of arbitration agreements. When a party seeks to enforce an arbitration agreement in federal court, §4 requires that “upon being satisfied that the making of the agreement for arbitration or the failure to comply therewith is not in issue,” the court must order arbitration “in accordance with the terms of the agreement.”

Reading §§2 and 4 harmoniously, the “grounds . . . for the revocation” preserved in §2 would mean grounds related to the making of the agreement. This would require enforcement of an agreement to arbitrate unless a party successfully asserts a defense concerning the formation of the agreement to arbitrate, such as fraud, duress, or mutual mistake. See Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U. S. 395, 403–404 (1967) (interpreting §4 to permit federal courts to adjudicate claims of “fraud in the inducement of the arbitration clause itself” because such claims “g[o] to the ‘making’ of the agreement to arbitrate”). Contract defenses unrelated to the making of the agreement—such as public policy—could not be the basis for declining to enforce an arbitration clause.* II

Under this reading, the question here would be whether California’s Discover Bank rule relates to the making of an agreement. I think it does not.

In Discover Bank, 36 Cal. 4th 148, 113 P. 3d 1100, the California Supreme Court held that “class action waivers are, under certain circumstances, unconscionable as unlawfully exculpatory.” Id., at 65, 113 P. 3d, at 1112; see also id., at 161, 113 P. 3d, at 1108 (“[C]lass action waivers [may be] substantively unconscionable inasmuch as they may operate effectively as exculpatory contract clauses that are contrary to public policy”). The court concluded that where a class-action waiver is found in an arbitration agreement in certain consumer contracts of adhesion, such waivers “should not be enforced.” Id., at 163, 113 P. 3d, at 1110. In practice, the court explained, such agreements “operate to insulate a party from liability that otherwise would be imposed under California law.” Id., at 161, 113 P. 3d, at 1108, 1109. The court did not conclude that a customer would sign such an agreement only if under the influence of fraud, duress, or delusion.

The court’s analysis and conclusion that the arbitration agreement was exculpatory reveals that the Discover Bank rule does not concern the making of the arbitration agreement. Exculpatory contracts are a paradigmatic example of contracts that will not be enforced because of public policy. 15 G. Giesel, Corbin on Contracts §§85.1, 85.17, 85.18 (rev. ed. 2003). Indeed, the court explained that it would not enforce the agreements because they are “ ‘against the policy of the law.’ ” 36 Cal. 4th, at 161, 113 P. 3d, at 1108 (quoting Cal. Civ. Code Ann. §1668); see also 36 Cal. 4th, at 166, 113 P. 3d, at 1112 (“Agreements to arbitrate may not be used to harbor terms, conditions and practices that undermine public policy” (internal quotation marks omitted)). Refusal to enforce a contract for public-policy reasons does not concern whether the contract was properly made.

Accordingly, the Discover Bank rule is not a “groun[d] . . . for the revocation of any contract” as I would read §2 of the FAA in light of §4. Under this reading, the FAA dictates that the arbitration agreement here be enforced and the Discover Bank rule is pre-empted. * The interpretation I suggest would be consistent with our precedent. Contract formation is based on the consent of the parties, and we have emphasized that “[a]rbitration under the Act is a matter of consent.” Volt Information Sciences, Inc. v. Board of Trustees of Leland Stanford Junior Univ., 489 U. S. 468, 479 (1989). The statement in Perry v. Thomas, 482 U. S. 483 (1987), suggesting that §2 preserves all state-law defenses that “arose to govern issues concerning the validity, revocability, and enforceability of contracts generally,” id., at 493, n. 9, is dicta. This statement is found in a footnote concerning a claim that the Court “decline[d] to address.” Id., at 392, n. 9. Similarly, to the extent that statements in Rent-A-Center, West, Inc. v. Jackson, 561 U. S. ___, ___ n. 1 (2010) (slip op. at ___, n. 1), can be read to suggest anything about the scope of state-law defenses under §2, those statements are dicta, as well. This Court has never addressed the question whether the state-law “grounds” referred to in §2 are narrower than those applicable to any contract. Moreover, every specific contract defense that the Court has acknowledged is applicable under §2 relates to contract formation. In Doctor’s Associates, Inc. v. Casarotto, 517 U. S. 681, 687 (1996), this Court said that fraud, duress, and unconscionability “may be applied to invalidate arbitration agreements without contravening §2.” All three defenses historically concern the making of an agreement. See Morgan Stanley Capital Group Inc. v. Public Util. Dist. No. 1 of Snohomish Cty., 554 U. S. 527, 547 (2008) (describing fraud and duress as “traditional grounds for the abrogation of [a] contract” that speak to “unfair dealing at the contract formation stage”); Hume v. United States, 132 U. S. 406, 411, 414 (1889) (describing an unconscionable contract as one “such as no man in his senses and not under delusion would make” and suggesting that there may be “contracts so extortionate and unconscionable on their face as to raise the presumption of fraud in their inception” (internal quotation marks omitted)).

BREYER, J., dissenting

SUPREME COURT OF THE UNITED STATES
_________________

No. 09–893

_________________

AT&T MOBILITY LLC, PETITIONER v. VINCENT

CONCEPCION ET UX.

ON WRIT OF CERTIORARI TO THE UNITED STATES COURT OF

APPEALS FOR THE NINTH CIRCUIT

[April 27, 2011]

JUSTICE BREYER, with whom JUSTICE GINSBURG, JUSTICE SOTOMAYOR, and JUSTICE KAGAN join, dissenting.

The Federal Arbitration Act says that an arbitration agreement “shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” 9 U. S. C. §2 (emphasis added). California law sets forth certain circumstances in which “class action waivers” in any contract are unen ­ forceable. In my view, this rule of state law is consistent with the federal Act’s language and primary objective. It does not “stan[d] as an obstacle” to the Act’s “accomplish ­ ment and execution.” Hines v. Davidowitz, 312 U. S. 52, 67 (1941). And the Court is wrong to hold that the federal Act pre-empts the rule of state law.

I

The California law in question consists of an authorita ­ tive state-court interpretation of two provisions of the California Civil Code. The first provision makes unlawful all contracts “which have for their object, directly or in ­ directly, to exempt anyone from responsibility for his own . . . violation of law.” Cal. Civ. Code Ann. §1668 (West 1985). The second provision authorizes courts to “limit the application of any unconscionable clause” in a contract so “as to avoid any unconscionable result.” §1670.5(a). The specific rule of state law in question consists of the California Supreme Court’s application of these principles to hold that “some” (but not “all”) “class action waivers” in consumer contracts are exculpatory and unconscionable under California “law.” Discover Bank v. Superior Ct., 36 Cal. 4th 148, 160, 162, 113 P. 3d 1100, 1108, 1110 (2005). In particular, in Discover Bank the California Supreme Court stated that, when a class-action waiver “is found in a consumer contract of adhesion in a set ­ ting in which disputes between the contracting parties predictably involve small amounts of damages, and when it is alleged that the party with the superior bargaining power has carried out a scheme to deliber ­ ately cheat large numbers of consumers out of indi ­ vidually small sums of money, then . . . the waiver becomes in practice the exemption of the party ‘from responsibility for [its] own fraud, or willful injury to the person or property of another.’ ” Id., at 162–163, 113 P. 3d, at 1110. In such a circumstance, the “waivers are unconscionable under California law and should not be enforced.” Id., at 163, 113 P. 3d, at 1110.

The Discover Bank rule does not create a “blanket policy in California against class action waivers in the consumer context.” Provencher v. Dell, Inc., 409 F. Supp. 2d 1196, 1201 (CD Cal. 2006). Instead, it represents the “appli ­ cation of a more general [unconscionability] principle.” Gentry v. Superior Ct., 42 Cal. 4th 443, 457, 165 P. 3d 556, 564 (2007). Courts applying California law have enforced class-action waivers where they satisfy general uncon ­ scionability standards. See, e.g., Walnut Producers of Cal. v. Diamond Foods, Inc., 187 Cal. App. 4th 634, 647–650, 114 Cal. Rptr. 3d 449, 459–462 (2010); Arguelles-Romero v. Superior Ct., 184 Cal. App. 4th 825, 843–845, 109 Cal. Rptr. 3d 289, 305–307 (2010); Smith v. Americredit Financial Servs., Inc., No. 09cv1076, 2009 WL 4895280 (SD Cal., Dec. 11, 2009); cf. Provencher, supra, at 1201 (considering Discover Bank in choice-of-law inquiry). And even when they fail, the parties remain free to devise other dispute mechanisms, including informal mechanisms, that, in con ­ text, will not prove unconscionable. See Volt Information Sciences, Inc. v. Board of Trustees of Leland Stanford Junior Univ., 489 U. S. 468, 479 (1989).

II

A

The Discover Bank rule is consistent with the federal Act’s language. It “applies equally to class action litiga ­ tion waivers in contracts without arbitration agreements as it does to class arbitration waivers in contracts with such agreements.” 36 Cal. 4th, at 165–166, 113 P. 3d, at 1112. Linguistically speaking, it falls directly within the scope of the Act’s exception permitting courts to refuse to enforce arbitration agreements on grounds that exist “for the revocation of any contract.” 9 U. S. C. §2 (emphasis added). The majority agrees. Ante, at 9.

B

The Discover Bank rule is also consistent with the basic “purpose behind” the Act. Dean Witter Reynolds Inc. v. Byrd, 470 U. S. 213, 219 (1985). We have described that purpose as one of “ensur[ing] judicial enforcement” of arbitration agreements. Ibid.; see also Marine Transit Corp. v. Dreyfus, 284 U. S. 263, 274, n. 2 (1932) (“ ‘The purpose of this bill is to make valid and enforcible agree ­ ments for arbitration’ ” (quoting H. R. Rep. No. 96, 68th Cong., 1st Sess., 1 (1924); emphasis added)); 65 Cong. Rec. 1931 (1924) (“It creates no new legislation, grants no new rights, except a remedy to enforce an agreement in com ­ mercial contracts and in admiralty contracts”). As is well known, prior to the federal Act, many courts expressed hostility to arbitration, for example by refusing to order specific performance of agreements to arbitrate. See S. Rep. No. 536, 68th Cong., 1st Sess., 2 (1924). The Act sought to eliminate that hostility by placing agreements to arbitrate “ ‘upon the same footing as other contracts.’ ” Scherk v. Alberto-Culver Co., 417 U. S. 506, 511 (1974) (quoting H. R. Rep. No. 96, at 2; emphasis added).

Congress was fully aware that arbitration could provide procedural and cost advantages. The House Report em ­ phasized the “appropriate[ness]” of making arbitration agreements enforceable “at this time when there is so much agitation against the costliness and delays of litiga ­ tion.” Id., at 2. And this Court has acknowledged that parties may enter into arbitration agreements in order to expedite the resolution of disputes. See Preston v. Ferrer, 552 U. S. 346, 357 (2008) (discussing “prime objective of an agreement to arbitrate”). See also Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U. S. 614, 628 (1985).

But we have also cautioned against thinking that Con ­ gress’ primary objective was to guarantee these particular procedural advantages. Rather, that primary objective was to secure the “enforcement” of agreements to arbi ­ trate. Dean Witter, 470 U. S., at 221. See also id., at 219 (we “reject the suggestion that the overriding goal of the Arbitration Act was to promote the expeditious resolution of claims”); id., at 219, 217–218 (“[T]he intent of Congress” requires us to apply the terms of the Act without regard to whether the result would be “possibly inefficient”); cf. id., at 220 (acknowledging that “expedited resolution of disputes” might lead parties to prefer arbitration). The relevant Senate Report points to the Act’s basic purpose when it says that “[t]he purpose of the [Act] is clearly set forth in section 2,” S. Rep. No. 536, at 2 (emphasis added), namely, the section that says that an arbitration agree ­ ment “shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract,” 9 U. S. C. §2.

Thus, insofar as we seek to implement Congress’ intent, we should think more than twice before invalidating a state law that does just what §2 requires, namely, puts agreements to arbitrate and agreements to litigate “upon the same footing.”

III

The majority’s contrary view (that Discover Bank stands as an “obstacle” to the accomplishment of the federal law’s objective, ante, at 9–18) rests primarily upon its claims that the Discover Bank rule increases the complexity of arbitration procedures, thereby discouraging parties from entering into arbitration agreements, and to that extent discriminating in practice against arbitration. These claims are not well founded.

For one thing, a state rule of law that would sometimes set aside as unconscionable a contract term that forbids class arbitration is not (as the majority claims) like a rule that would require “ultimate disposition by a jury” or “judicially monitored discovery” or use of “the Federal Rules of Evidence.” Ante, at 8, 9. Unlike the majority’s examples, class arbitration is consistent with the use of arbitration. It is a form of arbitration that is well known in California and followed elsewhere. See, e.g., Keating v. Superior Ct., 167 Cal. Rptr. 481, 492 (App. 1980) (officially depublished); American Arbitration Association (AAA), Supplementary Rules for Class Arbitrations (2003), http://www.adr.org/sp.asp?id=21936 (as visited Apr. 25, 2011, and available in Clerk of Court’s case file); JAMS, The Resolution Experts, Class Action Procedures (2009). Indeed, the AAA has told us that it has found class ar ­ bitration to be “a fair, balanced, and efficient means of resolving class disputes.” Brief for AAA as Amicus Curiae in Stolt-Nielsen S. A. v. AnimalFeeds Int’l Corp., O. T. 2009, No. 08–1198, p. 25 (hereinafter AAA Amicus Brief). And unlike the majority’s examples, the Discover Bank rule imposes equivalent limitations on litigation; hence it cannot fairly be characterized as a targeted attack on arbitration.

Where does the majority get its contrary idea—that individual, rather than class, arbitration is a “fundamen ­ tal attribut[e]” of arbitration? Ante, at 9. The majority does not explain. And it is unlikely to be able to trace its present view to the history of the arbitration statute itself.

When Congress enacted the Act, arbitration procedures had not yet been fully developed. Insofar as Congress considered detailed forms of arbitration at all, it may well have thought that arbitration would be used primarily where merchants sought to resolve disputes of fact, not law, under the customs of their industries, where the parties possessed roughly equivalent bargaining power. See Mitsubishi Motors, supra, at 646 (Stevens, J., dissent ­ ing); Joint Hearings on S. 1005 and H. R. 646 before the Subcommittees of the Committees on the Judiciary, 68th Cong., 1st Sess., 15 (1924); Hearing on S. 4213 and S. 4214 before a Subcommittee of the Senate Committee on the Judiciary, 67th Cong., 4th Sess., 9–10 (1923); Dept. of Commerce, Secretary Hoover Favors Arbitration—Press Release (Dec. 28, 1925), Herbert Hoover Papers—Articles, Addresses, and Public Statements File—No. 536, p. 2 (Herbert Hoover Presidential Library); Cohen & Dayton, The New Federal Arbitration Law, 12 Va. L. Rev. 265, 281 (1926); AAA, Year Book on Commercial Arbitration in the United States (1927). This last mentioned feature of the history—roughly equivalent bargaining power—suggests, if anything, that California’s statute is consistent with, and indeed may help to further, the objectives that Con ­ gress had in mind.

Regardless, if neither the history nor present practice suggests that class arbitration is fundamentally incom ­ patible with arbitration itself, then on what basis can the majority hold California’s law pre-empted?

For another thing, the majority’s argument that the Discover Bank rule will discourage arbitration rests criti ­ cally upon the wrong comparison. The majority compares the complexity of class arbitration with that of bilateral arbitration. See ante, at 14. And it finds the former more complex. See ibid. But, if incentives are at issue, the relevant comparison is not “arbitration with arbitration” but a comparison between class arbitration and judicial class actions. After all, in respect to the relevant set of contracts, the Discover Bank rule similarly and equally sets aside clauses that forbid class procedures—whether arbitration procedures or ordinary judicial procedures are at issue.

Why would a typical defendant (say, a business) prefer a judicial class action to class arbitration? AAA statistics “suggest that class arbitration proceedings take more time than the average commercial arbitration, but may take less time than the average class action in court.” AAA Amicus Brief 24 (emphasis added). Data from California courts confirm that class arbitrations can take considera ­ bly less time than in-court proceedings in which class certification is sought. Compare ante, at 14 (providing statistics for class arbitration), with Judicial Council of California, Administrative Office of the Courts, Class Certification in California: Second Interim Report from the Study of California Class Action Litigation 18 (2010) (providing statistics for class-action litigation in California courts). And a single class proceeding is surely more efficient than thousands of separate proceedings for iden ­ tical claims. Thus, if speedy resolution of disputes were all that mattered, then the Discover Bank rule would reinforce, not obstruct, that objective of the Act.

The majority’s related claim that the Discover Bank rule will discourage the use of arbitration because “[a]rbitration is poorly suited to . . . higher stakes” lacks empirical support. Ante, at 16. Indeed, the majority provides no convincing reason to believe that parties are unwilling to submit high-stake disputes to arbitration. And there are numerous counterexamples. Loftus, Rivals Resolve Dispute Over Drug, Wall Street Journal, Apr. 16, 2011, p. B2 (discussing $500 million settlement in dispute submitted to arbitration); Ziobro, Kraft Seeks Arbitration In Fight With Starbucks Over Distribution, Wall Street Journal, Nov. 30, 2010, p. B10 (describing initiation of an arbitration in which the payout “could be higher” than $1.5 billion); Markoff, Software Arbitration Ruling Gives I.B.M. $833 Million From Fujitsu, N. Y. Times, Nov. 30, 1988, p. A1 (describing both companies as “pleased with the ruling” resolving a licensing dispute).

Further, even though contract defenses, e.g., duress and unconscionability, slow down the dispute resolution proc ­ ess, federal arbitration law normally leaves such matters to the States. Rent-A-Center, West, Inc. v. Jackson, 561 U. S. ___, ___ (2010) (slip op., at 4) (arbitration agreements “may be invalidated by ‘generally applicable contract defenses’ ” (quoting Doctor’s Associates, Inc. v. Casarotto, 517 U. S. 681, 687 (1996))). A provision in a contract of adhesion (for example, requiring a consumer to decide very quickly whether to pursue a claim) might increase the speed and efficiency of arbitrating a dispute, but the State can forbid it. See, e.g., Hayes v. Oakridge Home, 122 Ohio St. 3d 63, 67, 2009–Ohio–2054, ¶19, 908 N. E. 2d 408, 412 (“Unconscionability is a ground for revocation of an arbitration agreement”); In re Poly-America, L. P., 262 S. W. 3d 337, 348 (Tex. 2008) (“Unconscionable contracts, however—whether relating to arbitration or not—are unenforceable under Texas law”). The Discover Bank rule amounts to a variation on this theme. California is free to define unconscionability as it sees fit, and its common law is of no federal concern so long as the State does not adopt a special rule that disfavors arbitration. Cf. Doctor’s Associates, supra, at 687. See also ante, at 4, n. (THOMAS, J., concurring) (suggesting that, under certain circumstances, California might remain free to apply its unconscionability doctrine).

Because California applies the same legal principles to address the unconscionability of class arbitration waivers as it does to address the unconscionability of any other contractual provision, the merits of class proceedings should not factor into our decision. If California had applied its law of duress to void an arbitration agreement, would it matter if the procedures in the coerced agreement were efficient?

Regardless, the majority highlights the disadvantages of class arbitrations, as it sees them. See ante, at 15–16 (referring to the “greatly increase[d] risks to defendants”; the “chance of a devastating loss” pressuring defendants “into settling questionable claims”). But class proceedings have countervailing advantages. In general agreements that forbid the consolidation of claims can lead small ­ dollar claimants to abandon their claims rather than to litigate. I suspect that it is true even here, for as the Court of Appeals recognized, AT&T can avoid the $7,500 payout (the payout that supposedly makes the Concep ­ cions’ arbitration worthwhile) simply by paying the claim’s face value, such that “the maximum gain to a customer for the hassle of arbitrating a $30.22 dispute is still just $30.22.” Laster v. AT&T Mobility LLC, 584 F. 3d 849, 855, 856 (CA9 2009).

What rational lawyer would have signed on to represent the Concepcions in litigation for the possibility of fees stemming from a $30.22 claim? See, e.g., Carnegie v. Household Int’l, Inc., 376 F. 3d 656, 661 (CA7 2004) (“The realistic alternative to a class action is not 17 million individual suits, but zero individual suits, as only a luna ­ tic or a fanatic sues for $30”). In California’s perfectly rational view, nonclass arbitration over such sums will also sometimes have the effect of depriving claimants of their claims (say, for example, where claiming the $30.22 were to involve filling out many forms that require techni ­ cal legal knowledge or waiting at great length while a call is placed on hold). Discover Bank sets forth circumstances in which the California courts believe that the terms of consumer contracts can be manipulated to insulate an agreement’s author from liability for its own frauds by “deliberately cheat[ing] large numbers of consumers out of individually small sums of money.” 36 Cal. 4th, at 162–163, 113 P. 3d, at 1110. Why is this kind of deci ­ sion—weighing the pros and cons of all class proceedings alike—not California’s to make?

Finally, the majority can find no meaningful support for its views in this Court’s precedent. The federal Act has been in force for nearly a century. We have decided doz ­ ens of cases about its requirements. We have reached results that authorize complex arbitration procedures. E.g., Mitsubishi Motors, 473 U. S., at 629 (antitrust claims arising in international transaction are arbitrable). We have upheld nondiscriminatory state laws that slow down arbitration proceedings. E.g., Volt Information Sciences, 489 U. S., at 477–479 (California law staying arbitration proceedings until completion of related litigation is not pre-empted). But we have not, to my knowledge, applied the Act to strike down a state statute that treats arbitra ­ tions on par with judicial and administrative proceedings. Cf. Preston, 552 U. S., at 355–356 (Act pre-empts state law that vests primary jurisdiction in state administrative board).

At the same time, we have repeatedly referred to the Act’s basic objective as assuring that courts treat arbitra ­ tion agreements “like all other contracts.” Buckeye Check Cashing, Inc. v. Cardegna, 546 U. S. 440, 447 (2006). See also, e.g., Vaden v. Discover Bank, 556 U. S. ___, ___ (2009); (slip op., at 13); Doctor’s Associates, supra, at 687; Allied-Bruce Terminix Cos. v. Dobson, 513 U. S. 265, 281 (1995); Rodriguez de Quijas v. Shearson/American Express, Inc., 490 U. S. 477, 483–484 (1989); Perry v. Thomas, 482 U. S. 483, 492–493, n. 9 (1987); Mitsubishi Motors, supra, at 627. And we have recognized that “[t]o immunize an arbitration agreement from judicial chal ­ lenge” on grounds applicable to all other contracts “would be to elevate it over other forms of contract.” Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U. S. 395, 404, n. 12 (1967); see also Marchant v. Mead-Morrison Mfg. Co., 252 N. Y. 284, 299, 169 N. E. 386, 391 (1929) (Car ­ dozo, C. J.) (“Courts are not at liberty to shirk the process of [contractual] construction under the empire of a belief that arbitration is beneficent any more than they may shirk it if their belief happens to be the contrary”); Cohen & Dayton, 12 Va. L. Rev., at 276 (the Act “is no infringe ­ ment upon the right of each State to decide for itself what contracts shall or shall not exist under its laws”).

These cases do not concern the merits and demerits of class actions; they concern equal treatment of arbitration contracts and other contracts. Since it is the latter ques ­ tion that is at issue here, I am not surprised that the majority can find no meaningful precedent supporting its decision.

IV

By using the words “save upon such grounds as exist at law or in equity for the revocation of any contract,” Con ­ gress retained for the States an important role incident to agreements to arbitrate. 9 U. S. C. §2. Through those words Congress reiterated a basic federal idea that has long informed the nature of this Nation’s laws. We have often expressed this idea in opinions that set forth pre ­ sumptions. See, e.g., Medtronic, Inc. v. Lohr, 518 U. S. 470, 485 (1996) (“[B]ecause the States are independent sovereigns in our federal system, we have long presumed that Congress does not cavalierly pre-empt state-law causes of action”). But federalism is as much a question of deeds as words. It often takes the form of a concrete decision by this Court that respects the legitimacy of a State’s action in an individual case. Here, recognition of that federalist ideal, embodied in specific language in this particular statute, should lead us to uphold California’s law, not to strike it down. We do not honor federalist principles in their breach.

With respect, I dissent.

Print this transcript Transcript: 

ORAL ARGUMENT OF ANDREW J. PINCUS ON BEHALF OF THE PETITIONER

Chief Justice John G. Roberts: We will hear argument first this morning in Case 09-893, AT&T Mobility v. Concepcion.

Mr. Pincus.

Mr. Pincus: Thank you, Mr. Chief Justice, and may it please the Court:

The Ninth Circuit concluded in this case that a State law may mandate the use of a particular procedure in arbitration as long as the law also requires the use of that same procedure in litigation.

That interpretation of section 2 of the Federal Arbitration Act would permit a State to oppose in arbitration any procedure employed in court and thereby require arbitration to be a carbon copy of litigation, precisely what the Act was designed to prevent.

Section 2 of the Federal Arbitration Act provides that an arbitration agreement may be held unenforceable under State law only if the State law rule being invoked to invalidate the agreement qualifies as a ground that exists in law or equity for the revocation of any contract.

Respondent argues that, because California's Discover Bank rule does not facially discriminate against arbitration, it falls within the savings clause.

But the plain language of the savings clause makes clear that it is not limited to statutes that discriminates facially against arbitration.

By referring to "any contract", it makes clear that, as this Court has said, the rule must be applicable to contracts generally.

Justice Antonin Scalia: What if -- what if a State finds it unconscionable to have an arbitration clause in an adhesion contract which requires the arbitration to be held at a great distance from -- from where the other party is and requires that party to pay the cost of the arbitration?

Can a State not find that to be unconscionable?

Mr. Pincus: It can, Your Honor, and--

Justice Antonin Scalia: Well, that wouldn't apply to other -- to other contracts.

Mr. Pincus: --But the legal doctrine that the State is applying there, as States have and as we discuss in our brief, is a doctrine that applies a general principle of unconscionability with principles elucidating how it applies that apply evenhandedly across the board.

Justice Antonin Scalia: Are we going to sit in judgment?

Are we going to sit in judgment?

I know you say -- you say it has to shock the conscience, but if a State wants to apply a lesser standard of unconscionability, can we strike that down?

Mr. Pincus: If it wants to apply a lesser standard to arbitration clauses, yes, absolutely you can, because that would -- that would violate what is at the core of the provision, which is discrimination against State law.

If a State -- if a State enacted -- if the legislature enacted a statute and it was headed arbitration -- unconscionability, rather, and section 1 of that statute had general principles to be applied to all contractual provisions to determine unconscionability: It must shock the conscience, the question is addressed with respect to the party before the court against whom the contract is going to be applied, and the third principle is unconscionability is decided ex ante.

And then section B said -- I'm sorry?

Justice Sonia Sotomayor: What's the difference, then, with the act that you are positing?

A State comes in -- or I should ask: Is there no difference between a State saying these terms in a contract are unconscionable, making the petitioner always pay the fees and making him or her arbitrate in a different State -- that is unconscionable -- or a general rule of State law that says in a contract of adhesion the stronger party can't impose undue cost or expenses on the other side to vindicate their rights, whether it's in litigation and/or arbitration.

In your mind, there is no difference between those two things, between these two approaches to the issue?

Mr. Pincus: I don't think so, Justice Sotomayor.

Maybe if I could finish with my example, it may elucidate the distinction that I'm trying to draw.

Justice Antonin Scalia: So how do you address Justice Scalia's -- if you are saying there is no difference between those two things, then how can a State find those terms unconscionable?

Under what theory, general theory of law, would they be--

Mr. Pincus: I think the critical question is: Is the State applying the same principles to arbitration, of unconscionability to arbitration agreements, as to other agreements?

And in my example I was positing a first provision that laid out three principles that would be applied.

If part B of that section, or part 2 of that section, said with respect to arbitration agreements, on the other hand, we are going to require that the procedures be equivalent to what is in court, we are going to look at the time the dispute arises rather than ex ante, and we are going to look at the effect on everyone, then I think it would be quite clear that that would be discrimination.

Justice Antonin Scalia: --That is bad, absolutely, but that's not what the State is going to do.

The State is simply going to say: We find this to be unconscionable.

And you say it's not unconscionable; it's very fair.

And the State says: Eh, we think it is unconscionable.

Are we going to tell the State of California what it has to consider unconscionable?

Mr. Pincus: Respectfully, Justice Scalia, I don't think that's what the State is doing here.

I think what the State is doing here is saying -- is not saying, under the same principles we apply elsewhere, this is unconscionable.

They're just saying, it's quite clear that it's--

Justice Ruth Bader Ginsburg: There's nothing--

Mr. Pincus: --I'm sorry.

Justice Ruth Bader Ginsburg: --There is nothing that indicates that California's laws are applying a different concept of unconscionability.

You haven't come up and said, oh, look what they did here.

And in another case they said it has to shock the conscience.

Maybe across the board, California is saying: We think that unconscionability should have a broader meaning.

Is it unfair to the weaker party to the bargain?

Is there really no genuine agreement here?

And if that is so, that will fit our definition of unconscionability.

You don't have anything that says -- the California court hasn't said: We are applying a special definition of unconscionability to arbitration agreements.

Mr. Pincus: Well, they haven't said that, Your Honor, but their opinion makes clear that they do.

For example, the statute in California that defines unconscionability specifically says unconscionability shall be assessed at the time of contracting.

Here, the decision holding the Discover Bank rule is specifically based on a determination of unconscionability, not ex ante, when there would be a variety of situations to consider, but it is explicitly based at the time the dispute arose.

Justice Elena Kagan: I was under the impression--

Mr. Pincus: So it's clear that they are applying a different--

Justice Elena Kagan: --I was under the impression, Mr. Pincus, that Discover Bank specifically cites a case which arose not in the arbitration context, but instead in the general litigation context, which is this America Online case, and thereby made clear that its rule, however different it may seem to you from normal contract provisions, its rule applied both in the arbitration sphere and in the litigation sphere.

Mr. Pincus: --Justice Kagan, I think that question goes to -- to a separate question.

I think Respondent has two arguments.

One is, because this rule applies to all dispute resolution provisions, it is a general -- it applies to any contract that qualifies under section 2.

We think that that clearly can't be the case, for several reasons.

First of all, section 2 says "any contract", and that, the Court has said, means principles that apply to contracts generally, not principles that are limited to dispute resolution contracts.

Justice Elena Kagan: Well, this--

Justice Ruth Bader Ginsburg: Well, any contract that would have an arbitration clause.

Mr. Pincus: True, Your Honor.

But if the provision meant that, then as long as -- as long as a State law banning arbitration said, we are banning arbitration in any contract, then the State could say it applied to any contract.

Or a provision that said juries are required to resolve every dispute, whether in arbitration or not.

Justice Ruth Bader Ginsburg: Can we criticize one feature of this?

You are not claiming that, vis a vis litigation, arbitration is being disfavored, which was the original concern about arbitration agreements and what prompted the Federal Arbitration Act.

The courts didn't like to have their business taken away, and so they were disfavoring arbitration contracts.

That is no part of the picture here, as far as I can see, because the rule is the same whether it's litigation or arbitration.

Mr. Pincus: Well, we -- we do make an argument, Your Honor, that the impact of this rule is much more significant on arbitration than it is on litigation, because it basically -- with respect to litigation, it is reaffirming the default rule, but with respect to arbitration, it has a quite significant different effect, which is really to transform arbitration in the ways that the Court described in Stolt-Nielsen.

And so we do argue that it does have a disproportionate burden, but our principal argument here is that the "any contract" requirement means that the State law rule being applied has to be a rule that applies generally to contractual provisions, as the Court has said.

Justice Antonin Scalia: Yes, but some -- some elements of unconscionability can only arise in a litigation or an arbitration context, such as requiring the complaining party to litigate or arbitrate at a distant location.

How could that possibly apply in -- to any other contracts?

Mr. Pincus: Well, that -- that now turns to the second argument that Respondents make, which is, even if the mere fact that it applies to litigation and arbitration satisfied section 2, the rule satisfied -- satisfies section 2 because it is merely a specific application of California's general unconscionability rule.

Justice Antonin Scalia: Yes.

Mr. Pincus: And -- and our response to that is: It is quite clear that in three critical respects, it is the principles that were applied -- not the result, but the principles that were applied in order to find unconscionability here -- are different than the principles applied in every other context.

By example--

Justice Antonin Scalia: Three?

What are the three?

Mr. Pincus: --The three are, first of all, looking to the effect on people other than the parties to the dispute.

In every other case--

Justice Antonin Scalia: I was going to ask you about that.

Right.

Mr. Pincus: --the question is: Is it fair to the person before the court to apply the contract to them?

Here, the district court found it was quite fair to apply to that person; the problem was third parties.

The second issue: When is the unconscionability decision made?

As I said, the statute says ex ante.

Here, the decisions explicitly say: We are going to look at it at the time the dispute arises.

Third question: The general standard is shock the -- so unfair as to shock the conscience.

Here the standard is: Is there a deterrent effect equivalent to a judicial class action?

Three critical differences, three differences that are not differences in result, but are differences in the legal principles that are being applied to determine unconscionability.

Justice Stephen G. Breyer: I thought that Discover Bank is the California case that sets it out; is that correct?

Mr. Pincus: Yes, Your Honor.

Justice Stephen G. Breyer: So that's California law.

And what they say in Discover Bank is -- they are talking about class waivers in both arbitration contracts and not arbitration contracts.

And they say they are void when it's a consumer contract of adhesion, when they predictably involve small amounts of damages, when it is claimed that the party with the superior bargaining power has carried out a scheme deliberately to cheat large numbers of consumers out of individually small sums of money, and the waiver becomes in practice the exemption of the party from responsibility for its own fraud.

Now, seems to -- those seem to be the principles that apply.

Those principles apply to litigation.

They apply to arbitration.

What's the problem?

They don't say anything there about the things you mention.

They just mention four things, which I just read.

Mr. Pincus: Well, and the only -- as I said, there are two questions in this case and I think it's helpful to keep them separate.

One is: Is it permissible, simply because the rule applies to both litigation and arbitration, is that sufficient to satisfy--

Justice Stephen G. Breyer: No.

I would guess it's like Switzerland having a law saying, we only buy milk from cows who are in pastures higher than 9,000 feet.

That discriminates against milk from the rest of the continent.

But to say we want cows that have passed the tuberculin test doesn't.

So I guess we have to look at the particular case.

And here, my impression is -- correct me if I am wrong -- the class arbitration exists.

It's not a -- it's not like having a jury trial.

You could have it in arbitration.

You can have it in litigation.

So where is the 9,000-foot cow, or whatever it is?

Where is the discrimination?

Mr. Pincus: --Well, I think this is exactly the 9,000-foot meadow, Your Honor, because I think the problem here is there is -- it is not possible, based on the language of section 2 or any other basis that we can think of, to say a statute that requires the full use of discovery procedures in court and in arbitration or factual determinations by a panel of six individuals selected at random--

Justice Ruth Bader Ginsburg: Mr. Pincus, are they necessarily saying that?

As I read it, the plaintiff brought a case to court, not to arbitration, and then there was a motion to stay the State court litigation.

Why isn't it a proper reading of this case to say: You want -- if you are in the arbitration forum, it's bilateral, but you can't dupe these plaintiffs out of a class action?

So if you don't have a class action in arbitration, you can have it in court.

That is, the class action is preserved, not necessarily in the arbitration forum, but in the court.

Mr. Pincus: --Well, I think the problem, Justice Ginsburg, is both prongs of that requirement are independently problematic.

I think, for the reasons that I was just saying and I think for the reasons that the Court explained in Stolt-Nielsen, requiring class arbitration is just the same as requiring discovery or a jury trial or all of the other judicial processes in arbitration.

And if the alternative prong of that is to say, well, if you don't do that you must exclude these claims from arbitration--

Justice Sonia Sotomayor: But they're not requiring--

Mr. Pincus: --is independently--

Justice Sonia Sotomayor: --But they're not requiring arbitration--

Chief Justice John G. Roberts: Go ahead, Justice Sotomayor.

Justice Sonia Sotomayor: --They are not saying you have to arbitration -- class actions in all arbitration proceedings.

They are identifying a class of cases in which they pursue the State, who's their own sovereign, and the savings clause in the FAA permits them in law or equity to set forth rules to say in this subset of cases there is a substantive right being affected.

That is different than rules that are looking at procedures and setting uniform procedures in both.

How do we draw the line between a law that says discovery has to happen in arbitration, and one that says a -- in a contract of adhesion, if the superior party retains the right to do discovery but tells the inferior party, you can't?

And a State says, that's unconscionable.

Mr. Pincus: --Your Honor, I think that's the precise difference between the two issues that are -- that are in this case.

For the reason we have been discussing, we think there is a very strong argument that a rule cannot qualify to be saved under section 2 simply because it applies even-handedly to arbitration and litigation because of the fact that that would sweep in all of these other rules that we are talking about.

And an additional reason, to respond to Justice Breyer's question, is that at the time that the FAA was enacted the ouster doctrine did apply to arbitration litigation.

It was a broad doctrine in which courts said: We are going to invalidate any contractual provision that deprives us of jurisdiction whether it directs the claim to arbitration or it directs the claim to some other court.

Justice Elena Kagan: --But Mr. Pincus--

Mr. Pincus: And so the very same argument being made here could have been made then.

Justice Elena Kagan: --But, Mr. Pincus, I'm not understanding what test you are asking us to formulate.

Justice Scalia started this by saying, how about a provision prohibiting certain kinds of attorney's fees?

How about a provision prohibiting certain kinds of -- a law prohibiting certain kinds of discovery provisions?

And you said that would be fine, for the State courts to hold those things unconscionable, but it's not fine for the State court to hold a class arbitration prohibition unconscionable.

So what separates the two?

How do we know when something is on one side of the line and something is on the other?

Both procedures, but you say some are fine, to say that those procedures are unconscionable, but other procedures if you held them unconscionable that would not be sufficient.

Mr. Pincus: What separates the two is, is the State in the particular case in which the determination is made applying principles that apply to -- across -- that apply to its unconscionability doctrine across the board.

Justice Elena Kagan: The State says yes.

Mr. Pincus: Well, but I think--

Justice Elena Kagan: The State says it absolutely is.

Now, who are we to say that the State is wrong about that.

Mr. Pincus: --Well, let me answer that in two ways, Justice Kagan.

First of all, let me explain why the hypotheticals that you posit and that Justice Scalia posited and that Justice Sotomayor posited have been addressed under the traditional unconscionability doctrine that we described.

In all of those cases, what courts have said is this provision -- we are measuring whether it is unconscionable at the time of contracting; we are looking at the effect on the party before the court; can this person get to arbitration, is the fee too high, is it too far away.

What about -- we are looking at the effect on this particular person and we are deciding whether it shocks the conscience or whatever their across-the-board State standard is.

And in all of those cases, that's what those courts do, and that's why those provisions have been invalidated, because they are invalidated under an evenhanded application of the unconscionability provisions that courts apply when they assess--

Justice Samuel Alito: I thought that -- I don't want to interrupt your complete answer.

Mr. Pincus: --Sure.

Justice Samuel Alito: But I thought that was the gist of your argument, the heart of your argument, that traditional unconscionability in California and elsewhere focuses on unfairness to the party who is before the tribunal.

So here it would be unfairness to the Concepcions, rather than unfairness to other members of the class who are not before the court.

Mr. Pincus: That's exactly right, Justice Alito.

Justice Elena Kagan: But, Mr. Pincus, the State says, well, our unconscionability doctrine may not have done that in the past, but now in the year 2010 it actually applies to more things than it did in the past, and we do take into account third parties and that's our new unconscionability doctrine.

Now, it may be a good unconscionability doctrine or it may be a bad unconscionability doctrine, but it's the State's unconscionability doctrine.

Mr. Pincus: But it is not the State's general unconscionability doctrine, Justice Kagan.

It is a doctrine that applies only in the context of class waivers and that's the problem.

If the State were to adopt a general statute that said, for unconscionability purposes henceforward we will look in assessing the unconscionability of every provision at third parties, at the impact on third parties and whether it's fair to them, perhaps they could do that.

I think there might be some reasons why a State wouldn't do that, because that would upset a lot of things in the judicial system that we think of as routine, such as confidential settlements and the fact that arbitration doesn't require publication or estoppel and all kinds of rules could be invalidated on that ground.

But at least it would be an even-handed rule that the State applied across the board, and it would also apply to things like the level of rent in rent contracts and statutes of limitations and all sorts of things.

Justice Stephen G. Breyer: Why, why, why?

Mr. Pincus: But here, that's not -- I'm sorry.

Justice Stephen G. Breyer: Why?

That's I think what Justice Kagan is getting at.

If a State wants to have a doctrine which says, you have to have a seal of a certain kind on certain kinds of contracts, they've never done it before, but now they do it, and on that kind you have to have a seal both on the arbitration contract and on the other.

And here what they've done is they have listed the four characteristics from Discover Bank, and they've said all contracts to do with litigation have to satisfy those four.

At which point I think Justice Kagan said, so what if they've never done this before?

They sure have done it now.

And what's the basis for saying that the Arbitration Act or any other part of Federal law forbids California from doing that?

Mr. Pincus: Two answers to that, Justice Breyer.

First of all, they haven't done it generally with respect to contracts.

They have made up a special rule that is targeted on a special kind of contract and that carries -- to the extent one is worried about discrimination -- nonfacial discrimination designing the category of contracts relating to litigation or dispute resolution is precisely the kind of category that most presents the risk of discrimination that isn't facial.

And again, whatever any contract means, we think it has to mean that the category of dispute resolution contracts can't be one that satisfies any contract, because at the time the law was enacted the ouster doctrine did just that and it was the doctrine that was being targeted.

Justice Anthony Kennedy: But it seems to me that all State -- most State statutes pertaining to contracts pertain to a class that is not entirely universal.

Suppose the State had a statute referring to banks, contracts with banks.

That doesn't apply to all contracts.

It doesn't apply to railroads.

But we know that it applies to a class that generally includes both arbitration and non-arbitration.

And that's this case, because there can be class action rule with respect to litigation and class action rules with respect to arbitration.

So you have to have some rule that recognizes that you don't have to have the entire universe of contracts.

Mr. Pincus: Well, Your Honor--

Justice Anthony Kennedy: And I'm not quite sure what your test is.

You have a few of them in your brief.

Mr. Pincus: --Well, I think the "any contract" language of the statute shows that Congress was not enacting -- was not providing that everything other than facial discrimination qualifies for the savings clause, because it could have said any nondiscriminatory rule.

It said a rule that applies to any contract.

And the reason for that we think is because of the ouster doctrine it was confronted with, which did apply to both arbitration and litigation contracts, and because of the risk generally that a contract rule could be devised that maybe didn't facially discriminate against arbitration, but had the effect of targeting arbitration disproportionately and that's what is going on here.

Justice Antonin Scalia: So how do you have special rules applicable to banks?

Mr. Pincus: Well, most -- most--

Justice Antonin Scalia: Contracts by banks, can't a State say, you know, certain bank contracts have to have this or that?

Mr. Pincus: --In most of the examples that we have looked at of situations like that, the contract principles that are being applied are general principles, and perhaps they are being applied -- they are being specified for four particular categories of contracts, like the UCC, but they are tied to general principles.

Justice Antonin Scalia: They claim that here.

They claim it's the general principle of unconscionability.

Mr. Pincus: But -- but I think, as I have discussed, the problem here it has the label "unconscionability" on it, but the test that is applied has nothing to do with the test that is applied in every other context.

So it's an easy case to decide.

Going back to my statutory example, this is an unconscionability -- this is a test that may have the label on it, but everything that the court looks at to find unconscionability or to find this impermissible are things that are not looked at in the other context.

And in the other context, indeed as the district court said, this contract is more than fair under our general unconscionability standard, because it -- the people before the court are better off than they would be in a class action.

Justice Sonia Sotomayor: So then we have -- we have to serve as reviewers of State law?

Mr. Pincus: I--

Justice Sonia Sotomayor: We have to look at what the States are doing in -- to interpret their own laws?

Mr. Pincus: --I think what the Court has to do, as it does in the independent and adequate State ground context and other contexts, is to determine whether the State is -- is applying a rule that is -- that discriminates, because the core protection of section 2 is discrimination.

And so, if the -- if the State has devised a rule that clearly discriminates, but has simply put the label on -- of unconscionability, surely the FAA permits the Court to look at that.

Otherwise it's -- the protection will be reduced to nothing.

Justice Ruth Bader Ginsburg: So if we look at the California law and we find other instances of unconscionability that are applying a standard less stringent than "shock the conscience", then we would say okay?

Mr. Pincus: No, Your Honor.

I think that the critical question here -- are there other cases that look to the effect on the party before the court?

We found none and -- and Respondents have found none.

Are there other case that assess the -- whether it's unconscionability at the time of the dispute rather than at the time of contracting?

There are none.

The statute specifically requires it to be done at the time of contracting.

And are there cases that say, we are going to look at whether something is -- not whether something is so unfair as to shock the conscience, but at whether it is the equivalent to some statutory procedure?

There are none.

And that's the problem.

Justice Sonia Sotomayor: Then, Mr. Pincus--

Chief Justice John G. Roberts: Thank you.

Mr. Pincus: I'd like to reserve the balance of my time.

Chief Justice John G. Roberts: Thank you, Mr. Pincus.

Mr. Pincus: Thank you.

Chief Justice John G. Roberts: Mr. Gupta.

ORAL ARGUMENT OF DEEPAK GUPTA ON BEHALF OF THE RESPONDENTS

Mr. Gupta: Mr. Chief Justice, and may it please the Court:

As I think several of the questions this morning have brought out, the question here is not what this Court would decide if it were sitting as the Supreme Court of California and applying the State's common law in the first instance.

Rather, the question is whether the State law at issue falls within a statutory savings clause that expressly preserves contract defenses available at law or in equity.

The State law at issue here is not preemptive, for three reasons.

First, it is consistent with the equal footing principle or nondiscrimination principle that this Court has consistently recognized is embodied in section 2.

Second, it's consistent with two key purposes that the savings clause fulfills under the FAA: ensuring that arbitration is a matter of consent and not coercion; and that it represents merely a choice of forum, but not an exemption from the law.

And third, the State law at issue is a correct and legitimate application of the State's common law to which this Court should defer.

Chief Justice John G. Roberts: If I could just go to your -- your second reason seemed to be focused particularly on arbitration as opposed to a principle that applies to every other contract.

Mr. Gupta: Well, let me be clear about what I mean by the second reason.

I think that the savings clause in the FAA serves two critical purposes, and that is that the -- the contract law doctrines ensure consent.

You don't have arbitration unless you have a consensual agreement between both parties, and you look to State contract law to determine whether there is consent.

And also, I think as this Court has repeatedly said about arbitration under the FAA, it represents a choice of forum, but it doesn't withdraw the parties from the substantive liability rules of the State.

Chief Justice John G. Roberts: No, but the substantive State liability rule on the issue you are addressing is that you consider the issue of consent ex ante, and with respect to arbitration you are considering it at the time the dispute arose.

Isn't that a discrimination against arbitration agreements?

Mr. Gupta: Well, first of all, I think it is a -- it's a question of State law whether the determination is ex ante or ex post.

But we actually--

Chief Justice John G. Roberts: Well, sure.

That's true in all of these cases.

Mr. Gupta: --Right.

Chief Justice John G. Roberts: It's a question of what the State law provides; then you consider whether it's consistent with the Federal Arbitration Act.

Mr. Gupta: Right.

And the Discover Bank application of State unconscionability law we believe is an ex ante analysis.

It looks at whether the contract is fair or exculpatory at the time that the contract is made; and indeed there is -- the two arguments that Mr. Pincus made about California unconscionability law are somewhat at war with themselves.

He said that the -- the doctrine looks to third parties and that that's illegitimate; and he said that the doctrine is ex post and that's illegitimate.

But in fact, from the perspective of a consumer that's entering into this contract, from the perspective of any AT&T consumer, they don't know whether they are going to be among the very few consumers who detect fraud, recognize a legal claim, or hire a lawyer to do so, and come forward and seek compensation.

And so the Concepcions are situated just like any other AT&T customer, and that is the point at which fairness is assessed.

So from the perspective of California unconscionability doctrine, the Concepcions and -- and all the other AT&T customers are not differently situated.

It's not a question of whether the Concepcions, once they have chosen to make a claim, whether the contract is then fair to them; it's whether it's fair to any AT&T customer.

Chief Justice John G. Roberts: Well, what other area of contract law does the court consider unconscionability not with respect to the parties before the court, but with respect to third parties?

Mr. Gupta: Well, I think, first of all, the California State law is applying an exculpatory clause prohibition that has been on the books since 1872 in California.

And if you look at the cases, many of which we've cited in our brief today--

Chief Justice John G. Roberts: But isn't that -- doesn't that look to the parties before the court rather than third parties?

Mr. Gupta: --No.

In fact, the -- the California courts have developed a test that says, we'll -- we'll enforce exculpatory clauses, or what would otherwise be exculpatory clauses, if they don't have significant public effects.

So the test under that statute is actually to look to the public effects, the effects of similarly situated people that are parties to the contract.

And for example, there was a case in the early 20th century under that statute where the question was whether a banking contract was unfair; and what the court said is that -- that parties to the contract are not the only people that matter here; what matters is the interests of the banking public.

Chief Justice John G. Roberts: Well, it's a general rule of contract law that contracts contrary to public policy could be unenforceable.

It seems to me that's quite different than saying we're worried about third parties that are in the same position as these particular parties.

In other words, it's not simply adverse public consequences, but it's a different mode of analysis than I'm familiar with under basic contract law.

Mr. Gupta: Well, again, I want to try to explain why I don't think that the Concepcions are -- are any different from the -- what Mr. Pincus is describing as third parties.

At the time that they entered into the contract, the question is whether the contract ex ante is unconscionable as to them.

And they're just like anyone else.

They don't know whether they will detect this fraud and be able to come forward.

And so the question is -- is that -- is that unconscionable as to them?

It's not looking only to the effects on third parties.

But there is also an exculpatory clause prohibition that has always taken into account the effects on the public.

And both of those are at work in Discover Bank.

Justice Samuel Alito: Well, maybe you can explain it this way.

Compare what the Concepcions have available to them under the contract with what going through the arbitration, all the procedures leading up to arbitration and arbitration, against what they would get at best if this were allowed to proceed on a class basis.

Mr. Gupta: Right.

The California--

Justice Samuel Alito: Why is -- why are they better off with a -- with a class adjudication?

Mr. Gupta: --Because from an ex ante perspective, again when they enter into the contract, they have -- there -- it's not reasonable to be -- to expect that they will be among the very few people who will recognize that there's fraud, recognize a legal claim, and come forward.

And so from that perspective, it -- it is not reasonable them -- for them to give up the benefits that they would get from a class action.

A class action incentivizes lawyers and others to detect for this fraud.

It makes it -- it makes it economically justifiable to come forward with these kinds of claims.

Justice Samuel Alito: And -- and isn't that what distinguishes this from the ordinary unconscionability analysis?

If the district court correctly understood the way the AT&T Mobility scheme works and -- and the district court said that under the revised arbitration provision nearly all consumers who purchase the informal -- who pursue, I'm sorry, the informal claims process, are very likely to be compensated promptly and in full, etcetera, etcetera.

If the district court understood that correctly, the scheme here was -- is found to be unconscionable because it doesn't allow the enlistment of basically private attorneys general to enforce -- to enforce the law.

And isn't that quite different from ordinary unconscionability analysis?

Mr. Gupta: I don't think it is.

I mean, obviously it's impossible to come up with a precise analogy that is going to be on all fours.

But in our case we cite -- in our brief we cite cases involving unreasonably shortened statutes of limitations, where the California courts for over 100 years have found that those can be deemed unconscionable.

And the principle is the same.

Those kinds of clauses can interfere with the parties' ability to have notice that they have a claim and take action on that claim.

That -- that kind of procedural limitation has always been deemed unconscionable.

Justice Anthony Kennedy: Suppose that this doesn't have what's called a blowout clause.

Suppose that that kind of clause was not in there.

And the consumer opts out of the arbitration.

Arbitration doesn't -- doesn't go well.

Anyway, can the consumer then insist on the arbitration that the consumer bargained for, the individual arbitration that the consumer bargained for?

Mr. Gupta: Well, under this clause the consumer will always have the ability to proceed on a bilateral -- on a bilateral basis.

Justice Anthony Kennedy: So then the bank has to have -- liability exposure for two different proceedings?

Mr. Gupta: I mean that's true anyway, right?

The the mine run of consumer waivers--

Justice Anthony Kennedy: But you are saying then California can say it's unconscionable to allow the parties to agree that there will be just the single arbitration proceedings?

I don't see how the third parties are necessarily protected.

If you say that the consumer still has the election, that certainly isn't what they bargained for.

Maybe I'm -- maybe that's just a quarrel with the content of the unconscionability standard.

Mr. Gupta: --Right.

Justice Anthony Kennedy: Rather than FAA, but I think it does bear on at least section 4 of the FAA.

Mr. Gupta: Well, and maybe I'm misunderstanding your question, but I think, you know, that's true of any of the procedural limitations that the Petitioners concede would be subject to the unconscionability doctrine.

A person would still be free to proceed under a basis that would otherwise be unconscionable.

For example, if you had an arbitration clause that limited important remedies -- it banned punitive damages, injunctive relief, insisted on a distant forum, required excessive fees -- those would be unconscionable as a matter of state contract law, or could be anyway, but the consumer would still have the ability to proceed on that basis.

Justice Sonia Sotomayor: Counsel, I've asked your adversary this question and I'm not sure yet what his answer is, so I'm asking you it.

How would you propose to distinguish between facially neutral contract law defenses that implicitly discriminate against arbitration and those that do not?

What's the test you would use to tell the difference between the two?

Because obviously there are subterfuges that some legal systems could use to address themselves just to arbitration.

So how do we tell the difference?

Mr. Gupta: Right, and we don't deny that's true.

But it's not that different from the way this Court approaches State law in general.

You start from a position of deference.

The Court says this is facially nondiscriminatory law, it's generally applicable, but there's a limit on that.

If the State law is -- if the State is engaging in obvious subterfuge to deny federally protected rights, this Court has always said--

Justice Sonia Sotomayor: How do we test that?

Mr. Gupta: --that there is a limit--

Justice Sonia Sotomayor: I mean, other than -- I don't want to look through legislative history and determine whether some committee person said something that sounds like subterfuge.

How do I look at the law and its effects and determine that subterfuge or that discrimination?

Mr. Gupta: --I think in the first instance it would be an objective determination.

You would see whether the State court is telling the truth.

Is this law really being applied in the same way in the arbitration context and outside of the arbitration context.

And here we know because, as Justice Kagan said, the first California appellate case on point is a case outside of the arbitration context, the America Online case.

The Discover Bank case relied on that case when it struck down a class-action ban in the arbitration context.

Chief Justice John G. Roberts: Where do you get--

Justice Stephen G. Breyer: Your brother says that the--

Chief Justice John G. Roberts: --Where do you get "obvious subterfuge" in the Federal Arbitration Act?

Mr. Gupta: That's not in the Federal Arbitration Act, Your Honor, but in Mullaney v. Wilbur case and other cases where the Court is describing the limits on deference to State law, those are the kinds of standards the Court has used.

If it's not a credible rule of State law, if the State is not really doing what its saying, and the result is the deprivation of Federally protected rights, this Court has always said that there's a limit on deference to State law.

Now--

Chief Justice John G. Roberts: But that's in the independent and adequate State ground context, which strikes me as quite different.

We have a statute here that says the arbitration agreements have to be treated like any other contract, any contract.

I don't see how that's the same as obvious subterfuge.

Mr. Gupta: --Well, I'm addressing -- Justice Sotomayor's question, if I understand it, is when you have a facially nondiscriminatory rule of contract law, where when you look at the face of the opinion nothing suggests it's nondiscriminatory.

And the question is how do you tell whether the State court is not telling the truth?

And I think in that circumstance you'd have to -- I can't think of any other way you would do the analysis.

Justice Stephen G. Breyer: --You have to -- you would do it differently, because they might be telling the truth.

The example that your brother lawyer gave is this: That we have a State and the State says, if you have a contract, in the dispute resolution provision, whether you have arbitration or not, that provision is void if it says you won't have a judge, and it's void if it says you won't have a jury, and it's void if it says that you will not go to the United States courthouse for deciding all Federal claims.

That applies whether there is an arbitration clause or not an arbitration clause.

Now, that would seem to me no subterfuge.

It is absolutely clear.

They are not lying.

It just happens to prevent arbitration.

And he says that's absolutely true of this one, that once you get into class actions you will discover you have something that really looks like a court case.

You have to have discovery, you have dozens of lawyers involved, you have depositions, you are running off every 5 minutes to the judge or to somebody to say is this deposition good, bad or indifferent.

You have methods for enforcing the deposition.

You have all kinds of things.

He can make a much bigger list than me.

So he says: This case is like the case of California saying everybody can decide it any way they want as long as they do it before a Federal judge.

Okay?

Now what's your answer to that?

Mr. Gupta: Obviously we concede that those kinds of rules are preempted.

Justice Stephen G. Breyer: But what's your answer to his specific effort to assimilate the issue in this case, which is the class action, to the made-up issue, which you concede is a discrimination?

Mr. Gupta: Right.

I think there are two limiting principles in addition to the discrimination inquiry.

Discrimination doesn't get you there.

You can then ask, is the rule tantamount to a rule of non-enforceability of arbitration agreements.

So for example, if a State law says you cannot waive the right to a public jury trial.

Now, obviously that renders all arbitration agreements unenforceable.

It contradicts the general rule of enforceability.

To read the savings clause to allow a rule like that would be to read--

Justice Stephen G. Breyer: What about -- what about a rule that says what you have to have in any contract is a rule that all the rules of the Federal Civil Procedure apply to discovery, not necessarily in a courtroom, but you have to follow exactly those procedures?

Mr. Gupta: --I think that would bring into play the second limiting principle, because parties could contract, obviously, to agree to certain procedural rules like that.

But I think that that would bring into play a principle of obstacle preemption.

Justice Stephen G. Breyer: Okay.

Now, why isn't this obstacle preemption?

Mr. Gupta: Right.

I think one of the purposes -- we agree with Petitioners about this.

One of the purposes of the Federal Arbitration Act is to allow parties to contract their procedures, to tailor their procedures; and in general the courts ought not to be interfering with those kinds of consensual decisions.

But there are two other important purposes at play, and no statute pursues its purposes at all costs.

One of those purposes is to ensure that there's not coercion, that you have a consensual agreement; and another, just as important, is to ensure that arbitration merely represents a change of forum, but isn't an exemption from the law.

So that's -- I think that's at work in the examples that Petitioner concedes.

Justice Ruth Bader Ginsburg: Mr. Gupta, is -- I'd like you to focus on Stolt-Nielsen.

In Stolt-Nielsen this Court said that, absent express consent, no class arbitration.

If the seller or employer, whoever it is, doesn't want that class arbitration, doesn't have to have it.

And here that's surely the case; the ATT has not consented to class arbitration.

Then California law says: Well, that's okay; then you will be subject to a class-action suit in court.

But the very purpose of the arbitration agreement was that you would be in arbitration and not in court.

So why isn't Stolt-Nielsen dispositive of this case?

Mr. Gupta: I think Stolt-Nielsen is properly read as -- the questions there was a question of contract interpretation.

The question here is whether the agreement is valid in the first place, whether you have a contract.

What Stolt-Nielsen tells you is that you cannot impose class arbitration on an unwilling defendant.

Justice Ruth Bader Ginsburg: But here you have an unwilling defendant who doesn't want class arbitration.

Mr. Gupta: Well, the defendant here has specified in its arbitration agreement that if the class-action ban is invalidated, it would prefer to face any class-wide proceedings in court, and that choice is up to the defendant.

If the defendant chose to face class-wide proceedings in arbitration, they could do so under -- under the California rule, or they could elect to do so in court, and they could do so under whatever procedures they specified in the agreement or that were specified in a subsequent agreement between the parties.

California law doesn't impose any particular procedures on the party.

It just insists that in circumstances where the ban would function as an exculpatory clause, that there is some avenue for class-wide proceedings, where claims wouldn't feasibly be litigated individually.

I don't--

Justice Elena Kagan: Mr. Gupta, AT&T says that nobody would ever choose class arbitration; it's the worst of both worlds.

You get all the procedures, you get broad liability, but at the same time you have no judicial review, so that this will effectively kill off arbitration in the consumer context.

Mr. Gupta: --I think one answer to that is that some parties have chosen class arbitration, and we cite some examples in the brief.

There have also been hundreds of class arbitrations conducted by the American Arbitration Association, the leading arbitration association.

Class arbitration has existed for a quarter century, so it's not something that is foreign to arbitration.

But also, I just refer back to what I said to Justice Ginsburg, which is that this is a matter of consent.

Nobody is forcing defendants to face class arbitration, and nobody is forcing them to face it on terms that they haven't consented to.

So if there are concerns about -- about the ability of class arbitration to effectively manage the process, they can be tailored by the parties.

And in fact, there are even hybrid procedures where--

Justice Antonin Scalia: Of course.

The question is not whether they are being forced to accept class arbitration; it's whether they are being coerced into abandoning regular arbitration.

That's really the issue.

Mr. Gupta: --I mean, one could say the same thing about many of the procedural limitations that both parties agree are subject to the unconscionability doctrine.

If a defendant said: Well, we don't want to face arbitration unless we can ban punitive damages or other important remedies, unless we can insist on certain kinds of discovery limitations that the State courts deem unconscionable because they don't allow the parties to vindicate their rights individually, the same argument would hold true.

The defendant would be able to say: Well, that's -- you know, if we can't have arbitration on our terms, we won't have arbitration at all.

That is not what the Federal Arbitration Act says, though.

The Federal Arbitration Act puts arbitration agreements on an equal footing with other contracts.

It forbids States from discriminating against arbitration, but it doesn't require them to remove all impediments that -- that a party may wish removed to have arbitration on their terms, even where it would effectively exculpate--

Justice Antonin Scalia: That's true, as long as those impediments are removed on an -- on an equal footing with all contracts.

Mr. Gupta: --That's right.

That's right, Your Honor, and I think -- you know, we concede that if the California courts were discriminating against arbitration agreements, if they were applying one rule to class-action bans or other kinds of procedural limitations in arbitration and another outside of arbitration, that would not fall within the savings clause.

Justice Samuel Alito: Can I take you back to a question that was asked a few minutes ago, because I'm not sure I understood your answer.

What is the difference between a State rule that says that the rules of civil procedure must be followed in any adjudication and a rule that says that class adjudication must always be available?

Mr. Gupta: I think in the first instance, I don't think that -- I'm assuming that you're describing a rule that purports to apply general contract law, let's say unconscionability; right?

Justice Samuel Alito: Yes, uh-huh.

Mr. Gupta: I don't think -- I think it would be hard for a State to credibly claim that the absence of the Federal Rules of Civil Procedure systematically exculpate one party from -- from liability.

That just--

Justice Samuel Alito: No, I just -- I'm not putting this under an unconscionability label.

These are just general rules, and the question is whether they -- whether they can be applied, whether they constitute discrimination against -- against arbitration.

Mr. Gupta: --Well, whether or not they constitute discrimination against arbitration, I think your first hypothetical would be preempted, because a State could not credibly be serving the purposes that the savings clause serves in insisting on the Federal Rules of Civil Procedure.

Justice Samuel Alito: Why?

Mr. Gupta: Because -- because I don't think that a credible argument can be made that that systematically serves and functions as an exculpatory clause.

There are going to be questions of degree here, but take, for example, discovery.

I think that both parties would agree that if an employer said: I get discovery and you, the employee, don't get discovery for your fact-bound discrimination--

Justice Samuel Alito: No, but I really would appreciate it if you would answer my hypothetical on one that was posed before.

What is the difference -- let me change it slightly -- between a rule that says you must follow the rules of evidence in every adjudication and a rule that says that class adjudication must always be available?

I think your answer comes down to the proposition that the former is inconsistent with the idea of arbitration, and therefore, that's why it's not allowed, and the latter is not inconsistent with the idea of arbitration, and therefore, it is allowed.

Is that correct or not?

Mr. Gupta: --No, I think -- I think -- I think a better way to analyze that is under the rubric of obstacle preemption, because there are important purposes that are served by the savings clause in invalidating certain procedural procedures that have an exculpatory effect, a substantively unfair effect, but at the same time the act, to be able to function, has to allow parties to contract for--

Justice Samuel Alito: Well, okay.

It amounts to the same thing.

Insisting on compliance with the Federal -- with the California rules of evidence is an obstacle to arbitration, but allowing -- insisting on the availability of class adjudication is not an obstacle to arbitration.

But in the end--

Mr. Gupta: --Right.

Justice Samuel Alito: --we have to make a value judgment about whether these things, one thing or the other, fits with arbitration.

That's what it comes down to.

Mr. Gupta: No, I think -- I think that's not right.

I mean, I think in the first instance you defer to what the State court says it is doing, and what the State says it is doing -- and there is no reason to doubt this -- is that it is preventing a procedural limitation that systematically favors one party, tilts the playing field to a degree that parties cannot feasibly vindicate their claims through arbitration.

Justice Samuel Alito: And when it -- when it imposes the rule that the -- the rules of evidence apply across the board, it says it feels that these are necessary in order for parties to be treated fairly in every method of adjudication.

Mr. Gupta: Right.

And, I mean, obviously, the application of the Federal Rules of Evidence don't have a systematic effect that favors one party or the other, and -- and so I think a rule like that would not be credible.

And I'm trying to answer your hypothetical, but I do think that the discovery--

Justice Stephen G. Breyer: Where do we look to find the answer?

I mean, I understand your answer and I know the other side's going to say: Well, this is a tremendous obstacle.

If I have one person to deal with, I say: You want your $75, I will offer you $75, and if you don't take it and I turn out to be wrong, I'm going to give you $7,500.

That's their system.

Right?

So they say the alternative is class action.

There are a million customers.

I'm faced with a claim for $75 million.

I can't afford that.

I'll settle it, even if I'm right.

So if you have your rule, I'm going to be facing these things all the time.

I'm not -- I'm not going to enter into arbitration agreements.

I will take my chances in court.

Okay?

Now, that -- that's their argument.

So it is empirical, in part: What do I look to?

It's not logic.

It's a question of where should I -- what should I read to show, in your opinion, you're right?

Mr. Gupta: --I think you have to look first at what the State law is trying to do, and the -- the hypotheticals about the insistence on jury trials, insistence on Federal Rules of Evidence or civil procedure, those are clear -- it just would not be credible for a State, I think, to say that those things are required.

Justice Elena Kagan: Is your test a purpose test or an effects test?

Is it a test that says the State is doing this in order to kill arbitration, or is it a test that says the State is doing something that will kill arbitration?

Mr. Gupta: I think you can look to both.

I think you would have to look to both.

I mean, it would pose an obstacle to the statute, whether the State was doing something antithetical to the purposes of the statute or whether it had the effect of destroying arbitration.

In either case, those things would be preempted.

But all of these hypotheticals describe rules that don't exist under any State's laws and are unlikely to exist, because they -- they can't -- they wouldn't really be able to be reconciled with traditional notions of contract law, and then you really would have obvious subterfuge.

You really would have a rule that is not true State law.

But -- but I think if you look, for example, at discovery, a State could not insist on plenary discovery, full discovery, to the same degree available in courts, but a State can certainly insist on invalidating one-sided discovery limitations.

A State could certainly say to someone who seeks to vindicate a fact-bound employment discrimination claim has to have some opportunity to develop the facts.

Otherwise, that -- that is exculpatory.

Justice Anthony Kennedy: If you stick with the theory that the test is whether or not the law in question is inconsistent with the idea of arbitration -- whose idea of arbitration?

What about, suppose it's the bank's idea of arbitration, that we -- we want this settlement, say; we do not want that; that's the bank's idea of arbitration that the parties agreed on.

Mr. Gupta: Right.

I think you are right Justice Kennedy, and I think the difficulty of ascertaining what is sort of at the essential core of arbitration means that the -- that the test of what's tantamount to a rule of non-enforceability is going to be -- it's going to be a very small category.

It's going to describe the ouster doctrine, the jury trial waiver of prohibition; and I think that's why you have got to resort to some principle of obstacle preemption to figure out whether the State is -- is legitimately fulfilling the purposes, the important purposes that the savings clause serves, or whether it's just insisting on full-scale procedures for the sake of it, in ways that have nothing to do with the -- the State policing its own marketplace, protecting its substantive rules of liability and ensuring that parties can adequately vindicate their claims.

And if a State is doing that, I think that kind of rule--

Justice Antonin Scalia: Yes, but I -- I find it difficult to regard as -- voiding exculpatory contracts.

I mean, yes, contracts which say I'm not liable if -- even though I've committed a wrong, that's exculpatory.

But the State here says, you have to not only be liable for any faults that the other party to this contract discovers, but the other party of this contract has to be able to benefit from whatever faults anybody else in the world might find and bring -- and bring a class action lawsuit.

I -- that -- that goes well beyond forbidding any exculpatory provisions.

Mr. Gupta: --Well, with respect, Justice Scalia, that is not the rule of law that this State has announced.

The State has made a judgment that if you preclude class-wide relief, that will mean -- that will gut the State's substantive consumer protection laws, because people will -- in the context of small frauds not be able to bring those cases.

Chief Justice John G. Roberts: Thank you, counsel.

Mr. Gupta: Thank you, Mr. Chief Justice.

Chief Justice John G. Roberts: Mr. Pincus, you have 4 minutes remaining.

REBUTTAL ARGUMENT OF ANDREW J. PINCUS ON BEHALF OF THE PETITIONER

Mr. Pincus: Thank you, Mr. Chief Justice.

Although we believe we win under the principle of obstacle preemption that was just being discussed for the reasons that were enunciated in Stolt-Nielsen, we think there is a much easier way for this Court to decide this case.

Congress when it wrote section 2 used the phrase "any contract".

And it clearly did that for a reason, and the reason was it wasn't -- it recognized, as Justice Sotomayor said, that there could be attempts through nondiscriminatory provisions to injure arbitration; and the protection Congress adopted was a prophylactic rule.

It said if the State law rule that the State is trying to apply to an arbitration clause applies broadly to a large set of clauses, that's the best protection against discrimination and that's why the "any contract" language is there.

And so, in answer to your question, Justice Sotomayor, about where to look for, for what "any contract" means, we think it means very broad; and the Court has said that, and the doctrines that the court has identified as qualifying -- duress, fraud and unconscionability -- are doctrines that apply broadly across the entire range of contract.

But one thing that is very clear, we think, is that it can't mean -- "any contract" can't mean any dispute resolution contract, because that is the gerrymandered category that most presents the risk of discrimination.

And if the Court holds that that category is impermissible to justify a rule, it deals with all of the hypotheticals that are being discussed because they are all jury waivers, discovery, evidence; those are all rules that, as the Court has propagated as hypotheticals, are rules that apply to all dispute resolution clauses, and they are focused on dispute resolution clauses.

So we think that disposes of the argument that Discover Bank can be applied, simply because it applies to litigation contracts and arbitration contracts.

The next question is Respondents' second argument, which is okay, if that is not a reason it falls within the savings clause, it falls within the savings clause because it's simply an application of California's general unconscionability doctrine.

And that is where we turn to the first part of the issues I was discussing in the issues that -- that I was discussing in the first part of the argument with the Court, which is it isn't, because in the three particulars that I listed, it is clearly a totally different legal rule that simply has the unconscionability label on it.

And just to drill down on my colleague's discussion that this was really an ex ante analysis.

It couldn't be an ex ante analysis, because that would have to take into account that the vast majority of claims that anyone will ever have under a contract are nonclassable claims.

And as to nonclassable claims, it's clear that the arbitration process is infinitely better than the court process, because for most small consumer claims there is no real court process.

And so if one were to make an ex ante assessment of the fairness for the parties of the court, it wouldn't just be about classable claims; it would have to include nonclassable claims; and as to those claims it is clear that there is a tremendous benefit to those people from the arbitration clause.

With respect to exculpation, my friend referred to the California rule that the contract has to have a public effect.

That is not about effects on third parties.

In the Tunkl case, which is a California Supreme Court case that we cite, the court makes clear that it's looking for contracts that -- in which public services are being performed and that are otherwise imbued with a public interest.

It's not looking at all at the effects on third parties.

Finally, my colleague spoke about lots of class arbitrations.

To our knowledge all of those class arbitrations were arbitrations that were conducted before this Court's decision in Stolt-Nielsen where a party had a silent agreement and therefore it was held by some lower courts to mean that class arbitration was permissible.

We are not aware as we say in our brief of any contract that explicitly permits class arbitrations for the reasons that the Court discussed.

It's not -- just not something that makes any sense.

Thank you.

Chief Justice John G. Roberts: Thank you, counsel.

The case is submitted.

Print this transcript Transcript: 

Justice Antonin Scalia: This case is here on writ of certiorari to the United States Court of Appeals for the Ninth Circuit.

The respondents Vincent and Liza Concepcion entered into a contract for the sale and servicing of cellular telephones with the petitioner here, AT&T Mobility LLC.

The contract provided that all disputes between the parties would be arbitrated and that each party would enter arbitration in its “individual capacity, and not as a plaintiff or class member in any purported class or representative proceeding."

The contract also specified that AT&T, would among other things, bear the cost of arbitration in all nonfrivolous cases, would not seek reimbursement of its attorney's fees, and would provide a minimum award of $7,500 plus double attorney's fees to any customer who recovered more in arbitration than AT&T had offered in settlement.

In March 2006, the Concepcions filed a complaint against AT&T in the United States District Court for the Southern District of California.

That complaint was later consolidated with a putative class action.

It alleged that AT&T had engaged in false advertising and fraud by charging sales tax on phones that AT&T had advertised as free with the purchase of cellular service.

AT&T moved to compel arbitration under the terms of its contract, but the District Court denied the motion.

The Ninth Circuit affirmed.

It held that the arbitration agreement was invalidated by a California law which said that class waivers in consumer arbitration agreements are unconscionable and hence, unenforceable if three conditions are satisfied.

First, the agreement is in an adhesion contract, that is a -- a take it or leave it contract presented by a party in a strong bargaining position.

Second, disputes between the parties are likely to involve small amounts of damages.

And third, the party with inferior bargaining power alleges a deliberate scheme to defraud.

The Ninth Circuit also held, and this is the federal issue that brings the case to this Court, that the California law did not run a foul of the Federal Arbitration Act or the FAA which makes agreements to arbitrate, “valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.”

“Unconscionability,” the Ninth Circuit said, “Is a ground for revocation of any contract.”

In an opinion filed with the clerk today, we reverse the judgment of the Ninth Circuit.

The FAA was enacted in 1925 in response to longstanding judicial hostility to agreements to arbitrate.

By requiring courts to hold arbitration agreements "valid, irrevocable and enforceable," the Act was meant to preserve for agreed upon use, a procedure that provides the flexibility necessary to develop specialized dispute resolution mechanisms.

We have held that parties may agree to limit the issues subject to arbitration, to arbitrate according to specific rules, and to limit with whom they will arbitrate.

And we have held that state laws, specifically targeting arbitration, such as laws prohibiting the arbitration of particular types of claims are preempted.

Although the FAA says that arbitration agreements can be held unenforceable on grounds that exist at law or in equity for the revocation of any contract.

If that language does not give States free rein to adopt the policies that discriminate against arbitration or interfere with its central mechanics.

We have held that a saving clause such as that cannot be read to create an exception so large that it swallows the whole statute.

Here, to allow any ground of unconscionability that is generally applied, would do just that.

Nothing would stop States from declaring that all agreements for dispute resolution, whether in court, in mediation, or an arbitration are unconscionable unless they require adherence to the Federal Rules of Evidence, or allow judicially monitored discovery.

Such rules would destroy arbitration as we know it, which is what the FAA was designed to preserve.

We think that an effective requirement of classwide consumer arbitration is similar to those examples and is similarly preempted.

We held in Stolt-Nielsen versus AnimalFeeds International Corporation that, “the changes brought about by the shift from bilateral arbitration to class-action arbitration are fundamental.”

Classwide arbitration is slower and procedurally much more complicated than bilateral arbitration.

In court litigation, for a class-action money judgment to bind absentee class member -- members, those -- the -- the representatives of those members must -- I'm sorry.

The representatives of those members must at all times adequately represent them.

The absent members must be afforded notice, an opportunity to be heard, and a right to opt out of the class.

At least this amount of process would presumably be required in class arbitration.

Moreover, the aggregation of claims in class arbitration greatly increases the stakes for the defendant.

And when the stakes are very high, the informality of arbitration becomes much less appealing, because there is little opportunity for judicial review to correct the mistakes that informality produces.

Section 10 of the FAA allows a court to set aside an arbitral award only in very limited circumstances, essentially, amounting to misconduct by the arbitrator.

And we have held that parties may not contractually expand the grounds or nature of judicial review.

Defendants would rarely be willing to bet the company in a class arbitration proceeding with no effective means of review.

Given these considerations, the California law in question stands as an obstacle to the accomplishment of the purposes and objectives of the FAA, it is accordingly preempted.

The judgment of the Court of Appeals is reversed and the case is remanded for further proceedings.

Justice Thomas has filed a concurring opinion.

Justice Breyer has filed a dissenting opinion in which Justice -- Justices Ginsburg, Sotomayor and Kagan have joined.