Will the Supreme Court Let Corporations Ban Consumer Class Actions in the Fine Print of Contracts Compelling Arbitration?
11.9.10
Will the Supreme Court Let Corporations Ban Consumer Class Actions in the Fine Print of Contracts Compelling Arbitration?
Today the Supreme Court heard an extremely important contracts case to decide whether waivers of class actions within arbitration provisions in company contracts are enforceable. The case involves two consumers, Vincent and Liza Concepcion, who bought cell phones that AT& T advertised as discounted (one phone was paid for, the other “free,” but they were charged sales tax on the full amount for the phones). The loss involved to the consumers was $30.22 for the two phones. No one person would sue to recover $30.22 (or less), but consumers who could band together would because of the massive loss to a class of consumers. And there’s the reason we have class action proceedings.
The problem is that the Concepcions signed a contract for phones and service— a “wireless service agreement” with Cingular Wireless, later acquired by AT & T, in which AT & T tried to exempt itself from class actions. The contract said the consumer had to settle disputes through arbitration and that no class action, in this case class arbitration, was allowed.
The courts in California said that AT & T can’t do that. There are contracts that are so one-sided, a company cannot write or contract itself out of public policy designed to protect consumers—and that the class action waiver was unconscionable and thereby unenforeceable. AT & T said, oh yes it can, because there is a federal law, the Federal Arbitration Act of 1925, which preempts or prohibits states from imposing conditions on the enforceability of arbitration agreements, even though many states currently do, and that the class action waiver must stand.
The purpose of the Act was to prevent discrimination against arbitration. The Act provides that arbitration agreements are enforceable, “save upon such grounds as exist at law or in equity for the revocation of any contract.” That is the technical question the Court hears—whether this federal law will preempt state laws that have the effect of banning these class action waivers in any contract, as against public policy, when they are contained in an agreement with an arbitration provision that is subject to the Act.
If AT & T wins it will be very hard for consumers who have small damages to hold businesses accountable in arbitration. It is unlikely consumers will seek to recover a few pennies or dollars, which, when added up across a class of consumers wrongfully or deceptively treated, could be millions and millions of dollars.
Taking away the consumer class action in the fine print of contract arbitration provisions would make it much more difficult to deter businesses from wrongdoing. For more information see this excellent compilation of briefs, decisions, and commentary at Public Citizen Litigation Group, which is handling the case for the Concepcions: