Use of “Premium Payment Clause” in Arbitration Agreements

Rahman & Rabbi Legal

The US Supreme Court in the famous AT & T v. Conception case ultimately decided that class action waiver in arbitration agreements is not unconscionable. In deciding such, the US Supreme Court overturned the US Court of Appeals, Ninth Circuit decision in this case which held that the class action waiver in arbitration agreements is unconscionable under California law. In this case, the company AT & T Mobility LLC (“AT & T”) argued that the unconscionability of the class action waiver is negated by the use of premium payment clause in the arbitration agreement. This argument was denied by the Court of Appeals. However, in its majority opinion, the US Supreme Court bypassed this issue of the influence of premium payment clause in class action arbitration situations and upheld class arbitration waiver clause by way of federal preemption.

In this case, the whole argument of class action waiver was introduced in order to sweep away the sense of unconscionability of the class action waiver clause. However, it is contended here that this endeavor should not succeed. The use of premium payment clause should not be considered as an obstacle to enforcing class arbitration including an international class arbitration. A premium payment clause is a stipulation in an arbitration agreement by which one of the parties to the arbitration agreement undertakes to pay a fixed premium amount as a way to facilitate a pre-action settlement procedure prior to entering into the actual dispute settlement stage. And, the defense of unconscionability is generally used against the enforcement of a contract or part thereof if the contract if unfair or oppressive in nature. Generally, a premium payment clause is used as a beforehand procedure to arbitration or any other mechanism to dispute settlement. In the present scenario of this case, under the premium payment clause as used by the AT & T company, AT & T undertook to pay a customer $7,500.00 if the arbitrator issues an award in favor of a California customer that is greater that AT & T’s last written settlement offer made before the arbitrator was selected. There is an ongoing trend to use this kind of premium payment clause in consumer contracts in order to persuade the customers to settle the matter even before initiating the dispute settlement mechanism as mentioned in the dispute settlement clause of the consumer contracts.

In this AT & T case, the addition of the premium payment clause was done by the company unilaterally and more interestingly, at a time after a proceeding was initiated by a customer against the company. On March 27, 2006, before the premium payment clause was added, the Conception filed a complaint in the United States District Court for the Southern District of California against AT & T. In December 2006, AT & T unilaterally revised the arbitration agreement to add a new premium payment clause. In March 2008, after the premium payment clause was added, AT & T filed a motion to compel the Conception plaintiffs to submit their claims to individual arbitration under the revised arbitration agreement. In its decision, US Court of Appeals, Ninth Circuit held that the class waiver provision of the arbitration agreement was unconscionable under California law and that California unconscionability law is not preempted by the Federal Arbitration Act.

Barrister Md. Monzur Rabbi
Advocate, Supreme Court of Bangladesh
Head of Chambers
Rahman & Rabbi Legal
Fulbright Fellow, International Arbitration, Miami, USA