Supreme Court May Ban Class Action Lawsuits

By Kristen Friend, staff U.S. Supreme Court and Congress writer – November 10, 2010

The Supreme Court heard arguments on Tuesday in a case that could have far-reaching implications for millions of consumers and employees. The case, AT&T Mobility Services vs. Concepcion, has garnered relatively little media attention but could result in an effective ban on class action lawsuits, potentially eliminating a powerful legal tool often used by consumers against businesses accused of fraudulent practices.

The ability to file a class action lawsuit protects consumers by allowing plaintiffs to collectively seek redress against abuse or misconduct, giving a claim much more weight than it would have if filed by an individual. Class action suits typically involve small amounts of money which, when taken as a whole, can constitute substantial damages.

Consumer protection advocates argue that without the threat of class action lawsuits, corporations could systematically nickel and dime unknowing consumers through unfair or deceptive practices. Individual consumers, they argue, are not likely to go through the hassle of going to court to settle a dispute involving $50 or $100. [1]

At issue in this case is whether the Federal Arbitration Act trumps state precedent and preempts state contract law. The Federal Arbitration Act (FAA) was passed in 1925 to ensure that arbitration proceedings carried the same weight as court proceedings. The law requires disputes be settled in arbitration, not by a court, if both parties have agreed in advance to arbitration. [2]

In 2006, Vincent and Liza Concepcion filed a class action suit against AT&T, arguing that they were deceptively charged for a phone that was supposed to be free. The Concepcions had entered into a service agreement with AT&T based on advertising by AT&T Mobility offering a buy one get one free deal on cell phones. AT&T charged the Conceptions for one phone (plus tax) as well as sales tax on the full retail value of the free phone. The Conceptions argued that they and thousands of AT&T customers were defrauded when AT&T charged the hidden sales tax on the “free” phone.

AT&T filed to have the suit dismissed, claiming that their contract disallowed class action lawsuits. In their contract, AT&T specified that complaints had to be resolved by individual arbitration, effectively exempting itself from class action. The U.S. District Court for the Southern District of California declined to dismiss the suit, stating that the anti-class action clause in AT&T’s contract was unconscionable and therefore unenforceable under California law.

The U.S. 9th Circuit Court of Appeals upheld the District Court ruling, and AT&T subsequently petitioned the Supreme Court.

The Conceptions argued, and the Ninth Circuit Court agreed, that AT&T’s class action wavier is unenforceable under California’s Discover Bank rule. The Discover Bank rule finds a class action wavier unconscionable if 1) it is found in a consumer contract of adhesion; 2) it involves disputes that predictably involve small amounts of damages; and 3) “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.” [3]

At issue is whether Section 2 of the FAA expressly or impliedly preempts California’s Discover Bank rule. Section 2 states that arbitration agreements “shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” This statement, referred to as the savings clause, has been interpreted to protect state laws from preemption as long as the law is applied uniformly to all contracts. The Ninth Circuit accepted this reasoning, ruling that California Law was not expressly preempted under Section 2. [4]

If not expressly preempted, state law concerning arbitration clauses may be impliedly preempted if the law conflicts with the goals of the Act, specifically a strong federal policy in favor of arbitration. The Ninth Circuit also found that California law did not undermine the goals of the FAA.

After the Conceptions filed suit, AT&T made changes to its arbitration policy in an effort to make the policy more consumer friendly. For example, the new policy states that if a consumer wins an award through arbitration that is larger than AT&T’s law written offer, that consumer will receive a $7500 bonus payment and reimbursement for attorney’s fees.

Lower courts found that regardless of the changes to the arbitration clause, the wavier was still unconscionable under California law.

Alan S. Kaplinsky, a Philadelphia attorney who co-authored a friend of the court brief on behalf of the American Bankers Association, claims that AT&T has “bent over backward to create consumer-friendly programs.” Kaplinsky also claimed that, “The only people who lose – and there are losers here, so let’s put it on the table – are the plaintiffs’ class-action lawyers.” [5]

Philadelphia attorney Michael D. Donovan, who co-authored a friend of the court brief on behalf of 11 consumer groups, disagrees. According to Donovan, class action lawsuits are critical in protecting consumers and employees against companies that wield much greater power. Donovan also takes issue with AT&T’s claims that their new arbitration policy will prevent consumers from being defrauded, saying only the most motivated consumers will bother to go to arbitration over $30, the amount in question in the Concepcion case.

“AT&T knows it stands to profit if it can keep even a small percentage of the illegal charges it imposes on people. At least in my estimation, it’s a conscious business tactic to allow it to steal a small amount of money from a large group of customers,” Donovan said. [6]

In this case, Court is being asked by two parties to consider two different questions. Which question the Court chooses to rule on will determine how far reaching the decision could become.

AT&T has asked the Court to decide the case narrowly on the question of whether the FAA preempts state law only “when class actions are unnecessary for the effective vindication of consumer and employee rights.” AT&T is arguing that class actions may be necessary in some cases but not in this one due to the consumer friendly nature of their arbitration clause. [7] If the Court sticks to the narrow question and finds in favor of AT&T, the ruling, while significant, will not eliminate class action lawsuits altogether.

Pro-business groups, including the U.S. Chamber of Commerce, have filed briefs asking the Court to decide the case on broader grounds. The Chamber is asking the Court to determine whether class action waivers can “ever” be unconscionable. [8] If the Court listens to the Chamber, and rules on the broad question, the decision will have much more sweeping ramifications. A decision on broad grounds against the respondents could effectively ban class action lawsuits under United States law.

Which question the Court will consider is a matter of debate. Under the leadership of Chief Justice John Roberts, the Court has shown a willingness to hear cases on broad grounds and to overturn precedent, most notably in its recent decision in the high profile case, Citizen’s United. On the other hand, the four reliably pro-business votes also belong to the four Justices most likely to claim a belief in limited federal power and to respect the states’ ability to determine their own laws.

Consumer advocacy and civil rights groups are watching the case with interest due to its potential effect on the use of litigation to prevent fraud and promote equality. Deepak Gupta, an attorney with Public Citizen who argued for the Concepcions, believes that a ruling in favor of AT&T will make class action bans standard language in all contracts. According to Gupta, allowing corporations to opt-out of class action lawsuits would make the market much less fair for consumers. [9]

Class action suits have a long history in the United States and have been used to promote civil rights as well as to protect consumers from wrongdoing. Many employment discrimination suits are brought as a class action on behalf of multiple employees who have been wronged. The benchmark case, Brown v. Board of Education, which found segregated classrooms to be unconstitutional, was a class action suit. [10]

Some consumer advocacy groups are concerned about the reasoning behind the Court’s decision to take the case. These groups fear that the Robert’s Court, believed to be considerably pro-business, has taken the case with the intent to limit plaintiffs’ rights to file class action suits. According to the Alliance for Justice, the Court has already overstepped its role in granting certiorari, “proactively reaching out to decide a case it did not need to hear” where there is “no circuit split on the question presented.” [11] The First, Third, Ninth, and Eleventh Circuit Courts have all agreed that state precedent preempts the Federal Arbitration Act, and 19 states have case law to the same effect.

There is some basis for the claim that the Robert’s Court is predisposed to find against the right of consumers to file class action suits, given the Court’s decisions in two recent cases. In the case Rent-A-Center, West, Inc. v. Jackson, decided in June, the Court changed the rule concerning who has a right to decide the validity of an arbitration agreement.

Antonio Jackson, a black employee of Rent-A-Center, signed a forced arbitration agreement when he became employed with the company. Jackson believed he was passed up for promotions because of his race and filed suit, arguing that Rent-A-Center’s whole arbitration policy was unconscionable. Rent-A-Center argued that an arbitrator had to decide whether the policy was void, not a court. The Supreme Court, in a 5-4 decision, agreed with Rent-A-Center, essentially saying that employees had to have an arbitrator to determine whether they had to have an arbitrator.

Another case, Stolt-Nielson S.A. v. AnimalFeeds International, decided in April, dealt with class arbitration in cases where the arbitration agreement itself is “silent” on the matter. The question was: can an arbitrator authorize class arbitration if the agreement does not specifically address it? In this case, the Court established a new rule, stating the Federal Arbitration Act prevents an arbitrator from authorizing class arbitration unless the arbitration agreement provides a basis for determining both parties agreed to it. In short, there can be no implicit agreement to submit to class arbitration.

The Justices’ questioning during oral arguments did little to clear up speculation over their thinking on the matter. Justice Alito expressed concern that class action lawsuits worked directly against the aims of arbitration. The goal, he said, was a quick, inexpensive and fair resolution of disputes. In considering California’s standards, Alito stated, “[The] traditional unconscionability [standard] in California and elsewhere focuses on unfairness to the party who is before the tribunal.” Alito continued, “So here it would be unfairness to the Concepcions, rather than unfairness to other members of the class who are not before the court.” [12]

While Justice Scalia voiced some agreement with Justice Robert’s concerns about class action status, he also appeared skeptical of the idea of preempting state law, asking, “Are we going to tell the state of California what is has [to do]?” [13]

Justice Kagan agreed, questioning the Court’s ability to determine California’s standards for consumer protection. “Who are we to say that the state is wrong about that,” Kagan asked. [14]

Elizabeth Wydra, Chief Counsel for the Constitutional Accountability Center, one of the groups supporting the Concepcions, believes the case is fairly straightforward. “Corporations shouldn’t be allowed to commit fraud a few dollars and one consumer at a time,” Wydra said. “Concepcion should be an easy case. Because state courts are vital in protecting the rights of American consumers, the Federal Arbitration Act specifically preserves a critical role for state law.” [15]

The case may not be getting a lot of attention now, but it is one that should be watched. Everyone, from consumers to businesses, employees to employers, has a stake in the outcome.

A decision is expected sometime in the spring.

Recommended Reading

Sources

1. Brief for Respondents in Opposition to Certiorari, AT&T Mobility v. Concepcion, No. 09-893

2. http://en.wikipedia.org/wiki/Federal_Arbitration_Act

3. Argument preview: Does the Federal Arbitration Act preempt state precedent? http://www.scotusblog.com/?p=107935

4. Id.

5. The Philadelphia Inquirer, http://www.philly.com/inquirer/business/20101109_Supreme_Court_to_consider_limits_on_class-action_suits.html

6. Id.

7. Brief for Respondents in Opposition to Certiorari, AT&T Mobility v. Concepcion, No. 09-893

8. Brief of the Chamber of Commerce of the United States of the United States of America as Amicus Curiae in support of Petitioner No. 09-893

9. The Los Angeles Times, http://www.latimes.com/business/la-fi-lazarus-20101105,0,639054.column

10. University of Illinois, http://www.will.uiuc.edu/community/beyondbrown/brown5cases.htm

11. Alliance for Justice report, AT&T Mobility v. Concepcion: Will the Supreme Court Give AT&T a License to Steal?

12. CNN, http://www.cnn.com/2010/CRIME/11/09/us.scotus.cell.phones.tax/

13. AP, http://www.google.com/hostednews/ap/article/ALeqM5g7n4dJNZC0zQxNj_dri9-siwHRmA?docId=b1f121ece6454f89a6b89258b9f02458

14. Bloomberg News, http://www.bloomberg.com/news/2010-11-09/consumer-arbitration-case-divides-u-s-supreme-court-justices.html

15. CNN, http://www.cnn.com/2010/CRIME/11/09/us.scotus.cell.phones.tax/

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