Earlier this year, the United States Supreme Court decided in AT&T Mobility Inc. v. Concepcion that companies can enforce a contract provision that requires customers to arbitrate their disputes individually. Many feared this decision could effectively end consumer class action lawsuits. This article discusses the analyses the Court’s decision and its likely ramifications for class actions in various contexts.

AT&T v. Concepcion involved the purchase of a cell phone and a service agreement, The Concepcions alleged AT&T had engaged in false advertising and fraud by charging sales tax on what they were told was a “free” phone. Although the phone was advertised as free under their service contract, the Concepcions were still required to pay sales tax based upon the retail value of the phone, a sum of $30.22. The Concepcions filed suit against AT&T and their case was consolidated into a class action.

The service agreement the Concepcions signed for service with AT&T contained an arbitration clause that compelled the Concepcions to bring their claim in an arbitration proceeding, and required they do so individually, and not as a member of a class. AT&T moved to compel arbitration in accordance with the contract’s arbitration clause. The district court denied the motion, finding the clause that required the Concepcions to bring the action individually acted as a class action waiver, and this was unconscionable under California law as spelled out by the California Supreme Court in Discover Bank. The Ninth Circuit agreed, AT&T appealed to the United States Supreme Court.

When the case reached the Supreme Court, the issue was whether the Discover Bank ruling which found the class action waiver clause to be unconscionable under California law was preempted by the Federal Arbitration Act. In a 5-4 decision, the Court held it was, and therefore AT&T could compel the Concepcions, or anyone who signs a service agreement, to arbitration to settle their disputes individually. “Requiring the availability of class wide arbitration,” Justice Scalia wrote, “interferes with fundamental attributes of arbitration.” Justice Scalia reasoned arbitrators are ill-suited to handle the magnitude of class-wide cases, and sensible businesses would not agree to participate in informal proceedings when only very limited appeals are possible and yet there is the potential for a devastating loss to the company if the arbitrator were to find for the class.

The implications for this ruling are far-reaching. First, it does not appear this decision will effectively eliminate all consumer class actions because there must be a contract, such as the wireless service agreement between the Concepcions and AT&T which includes the clause preventing the consumer from joining a class action. Nevertheless, areas in which these agreements will likely become more prevalent and probably be upheld include contracts for mobile phones, auto loans, bank deposit agreements, credit cards, and cable television.

Before AT&T v. Concepcion, one effective, if perhaps sometimes over-utilized way consumers could keep corporations honest was through a class action lawsuit, or at least the threat of class action, to recover their damages. Take the Concepcions, for example. AT&T would not be concerned about losing a lawsuit from the Concepcions to recover the $30.22 they alleged they were defrauded in the sale of their “free” phone. But a class action, led by the Concepcions, to recover the sales taxes of thousands or hundreds of thousands of class members would be troubling, even to a company like AT&T. So much so, in fact, that AT&T and other companies would be careful to avoid activities that may cause them to defend a class action.

After Concepcion, however, companies can engage in these potentially questionable business practices with virtual impunity. While there is still the mechanism of arbitration for the Concepcions or any other AT&T customer to get their money back, as Justice Breyer succinctly stated in his dissent, “What rational lawyer would have signed on to represent the conceptions in litigation for the possibility of fees stemming from a $30.22 claim?” Most likely, requiring consumers to arbitrate cases on an individual basis could lead claimants to abandon small-money cases rather than litigate. There is no longer the deterrent threat of a class action to prevent them from incorrectly, improperly, or even fraudulently assessing fees on the consumer.

Consumer class actions are not the only area that will be affected by the decision. Many employers require potential employees to sign binding arbitration agreements as a condition of employment, or even be in effect without a worker’s signature when the employee begins the terms of employment. Because employment claims are typically based on federal laws, employers will likely be successful compelling individual arbitration, rather than face a class action on behalf of the entire category of employees.

Ultimately, it will be up to members of Congress to decide whether to pass legislation to limit companies’ ability to enforce binding arbitration clauses in consumer service agreements or employment contracts. Forms of this type of legislation, such as the Fairness in Arbitration Act, have been proposed in the past, and could very well be revisited considering Concepcion. In the interim, companies will be advised to incorporate and enforce these individual arbitration clauses wherever possible. And consumers would be wise to check their phone bills.

This article appeared in the February and March 2012 issues of the Valley Business Journal

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