Today the Supreme Court ruled 5-4 in a closely-watched case that waivers of class action rights within arbitration provisions in company contracts are enforceable, even where a state deems those provisions to be unconscionable.

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 the Concepcions said that consumers should be able to band together to redress the massive combined loss to a class of consumers. That is the reason we have class action proceedings.

The problem is that the Concepcions signed a standard form 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 consumers had to settle disputes through arbitration and that no class action, in this case class arbitration, was allowed. 

Both the lower and appellate federal courts in California said that AT & T can’t do that, applying a California Supreme Court decision (Discover Bank v. Superior Court, 36 Cal. 4^th 148, 113 P.3d 1100 (2005)) that held that these class waivers in consumer arbitration agreements are unconscionable in an adhesion contract.  There are contracts that are so one-sided against the bargaining power of consumers, that 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 unenforceable.  AT & T said, oh yes it can have these waivers because there is a federal law, the Federal Arbitration Act of 1925 (the “FAA”), 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 Supreme Court agreed with AT & T against consumers claiming that the purpose of the federal act is to prevent discrimination against arbitration and that a generally applicable contract defense, unconscionability, is “an obstacle to the accomplishment of the FAA’s objectives.”  The Court’s decision, adding to an alarming trend of pro-corporate decisions (see http://www.nytimes.com/2010/12/19/us/19roberts.html), will make it much more difficult for consumers who have small damages to hold businesses which use these fine print class action waivers accountable. 

Justice Scalia, writing for the Court’s majority, did note that “the times in which consumer contracts were anything other than adhesive are long past.”  And then the Court’s opinion drops Footnote 6 to state:  “Of course States remain free to take steps addressing the concerns that attend contracts of adhesion—for example, requiring class-action-waiver 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 to their terms.”  

In other words if a state wants to make consumers aware they can force companies to put the type in bold or 14-point print, they just can’t prevent its enforcement when the state attempts to protect consumers from unconscionable fine print.  The Court finds that a 1925 federal law protecting arbitration trumps consumers rights to hold a business accountable through a class action proceeding.  To override this decision, Congress must intervene with new legislation to make clear that such an outcome will not be tolerated.    

The Court’s opinion can be found here:  http://www.supremecourt.gov/opinions/10pdf/09-893.pdf  Justice Thomas wrote a concurrence.  Justice Breyer wrote a dissent joined by Justices Ginsburg, SotoMayor and Kagan.

Citizen Works/the Fair Contracts Project is a member of the Fair Arbitration Now Coalition. For more information see fairarbitrationnow.org and Public Citizen, as Deepak Gupta, an attorney with its Litigation Group, argued the case, at www.citizen.org.