The Supreme Court is reviewing the Ninth Circuit's decision in Laster v AT&T Mobility LLC, 584 F.3d 849 (9th Cir. 2009). The case involves an arbitration agreement that expressly prohibits class actions but provides no substitute for class litigation or arbitration. The Ninth Circuit rejected AT&T's argument that California law was preempted by the Federal Arbitration Act (FAA) and held that the contract was unconscionable under California law.

On 24 May 2010, the Supreme Court granted AT&T's petition for certiorari to decide whether the FAA preempts states from conditioning the enforcement of an arbitration agreement on the availability of particular procedures (in this case, class-wide arbitration), when those procedures are not necessary to ensure that the parties to the arbitration agreement are able to vindicate their claims.

In oral argument, AT&T asserted that an arbitration agreement under section 2 of the FAA may be invalidated only on grounds that are applicable to all contracts. Because California law applies a different unconscionability test to arbitration agreements than other contracts - for example, looking at unconscionability at the time the dispute arose rather than when the contract was made - California law is preempted by the FAA.

The Court challenged AT&T's argument that California law discriminated against arbitration agreements. Justice Ginsburg observed that the California court has not stated that it is applying a special definition of unconscionability to arbitration agreements. To side with AT&T, several Justices expressed concern that they would need to re-write California law. For example, Justice Scalia asked: "Are we going to tell the State of California what it has to consider unconscionable?" Similarly, Justice Kagan explained that "it may be a good unconscionability doctrine or it may be a bad unconscionability doctrine, but it's the State's unconscionability doctrine."

The respondent argued that California's unconscionability law is not preempted by the FAA because it is consistent with the FAA's goals of treating arbitration agreements like other contracts and ensuring that party consent is the basis of arbitration. The respondent added that the Court should defer to a correct and legitimate interpretation of state law.

During the respondent's argument, the Justices delved deeper into the FAA, asking what test the Court might use to determine if a statute discriminated against arbitration agreements. Justice Sotomayor questioned how to "distinguish between facially neutral contract law defenses that implicitly discriminate against arbitration and those that do not[.]" Justice Kagan asked if the test was based on the purpose of the statute or its effects.

Justice Ginsburg questioned whether the Court's decision in Stolt-Nielsen SA, et al. v AnimalFeeds Int'l Corp. (see Legal update, Supreme Court rules class arbitration is unavailable when agreement is silent) was dispositive. Justice Ginsburg suggested that AT&T cannot be compelled to arbitrate against a class under the holding in Stolt-Nielsen because class arbitration was not provided for in the arbitration agreement. The alternative to class arbitration under California law, class litigation, would defeat the purpose of the arbitration agreement.

As is often the case, the oral arguments did not provide a clear indication as to how the Court will rule. It appears that the Court's decision will be guided by its concerns about reviewing state law and how courts decide if a law treats all contracts equally. We will continue to report on developments.