In AT&T Mobility LLC v. Concepcion (April 27, 2011), the U.S. Supreme Court handed a big win to corporations that want to avoid facing class actions for consumer fraud. In a five to four decision, the Court reversed a Ninth Circuit ruling that invalidated a provision in AT&T’s cell phone contracts which required customers to arbitrate disputes with the company and prohibited them from bringing class action claims to try to remedy alleged misconduct that injured large groups of consumers.
The controversy arose when the Plaintiffs obtained what was supposed to be a “free” cell phone from AT&T, but were charged a sales tax of $30 on the full retail charge for the phone. The Plaintiffs sued in federal court in California, where their case was consolidated with a class action alleging that AT&T had engaged in a campaign of false advertising and fraud concerning the free phone promotion. Class actions have traditionally been used where thousands of consumers have lost relatively small sums of money.
AT&T moved to compel the Plaintiffs to arbitrate their dispute on the basis of the standard customer agreement they had signed. It provided that all disputes had to be arbitrated and further that claims could only be brought on an individual basis, not as a member or representative of a class. The Plaintiffs successfully defeated the motions to compel arbitration by convincing the court that the arbitration clause was “unconscionable” because it did not allow for class actions and thus did not provide an adequate substitute for the deterrent effect of class actions. The Court of Appeals for the Ninth Circuit affirmed the district court, but AT&T sought and was granted review by the U.S. Supreme Court.
The U.S. Supreme Court reversed the Ninth Circuit. The decision was penned by Justice Scalia, who was joined by Justices Roberts, Thomas, and Alito with the swing vote coming from Justice Kennedy. In upholding the arbitration provision, the majority rested on the strong public policy in favor of arbitration embodied in the Federal Arbitration Act (“FAA”). However, that policy is tempered by Section 2 of the FAA, which permits arbitration agreements to be declared unenforceable “upon such grounds as exist at law or equity for the revocation of any contract.” The lower courts had ruled that one of those legal grounds, unconscionability, invalidated AT&Ts’ no-class-actions clause.
According to the majority, the kinds of grounds that allow courts to invalidate an arbitration clause cannot be ones that are hostile to the basic characteristics of the arbitration process. Rather, the legal grounds for voiding the arbitration clause must be legal defenses that would apply to any contract. This means that a court may strike an arbitration clause that was signed under duress (for example, by threat of physical injury to the signer), because duress is a ground for invalidating any contract, not just those dealing with arbitration. On the other hand, Justice Scalia wrote that a court may not declare an arbitration clause unenforceable because it does not afford the parties procedural protections that are judicial, as opposed to arbitral, in nature. As examples, Justice Scalia suggested that a court could not void an arbitration clause because it did not require that there be a panel of twelve arbitrators or judicially monitored discovery, since requiring either of these protections would be tantamount to holding that the claim could not be handled with the kinds of procedures that are typical in arbitration. Based largely upon the majority’s concept of what is the norm in arbitration, the Court concluded that class actions are too complex, too time consuming, and too likely to impact the rights of third parties to be consistent with arbitration’s goals of informal and expeditious dispute resolution.
Justice Scalia’s analysis is striking in the extent to which he viewed the benefits of arbitration from the perspective of the defendant:
…[C]lass arbitration greatly increases risks to defendants. Informal procedures do of course have a cost: The absence of multilayered review makes it more likely that errors will go uncorrected. Defendants are willing to accept the costs of these errors in arbitration, since their impact is limited to the size of the individual disputes, and presumably outweighed by savings from avoiding the courts. But when damages allegedly owed to tens of thousands of potential claimants are aggregated and decided at once, the risk of an error will often become unacceptable. Faced with even a small chance of a devastating loss, defendants will be pressured into settling questionable claims.
The dissenting Justices (Breyer, Ginsburg, Sotomayor, and Kagan) pointed out that the lower court’s reason for invalidating the contract as unconscionable did not discriminate against arbitration since California law treated class action waivers an unconscionable no matter whether the waiver appeared in court or arbitration. They also correctly noted that the majority’s view of arbitration gave short shrift to the fact that (a) the American Arbitration Association (“AAA”) has specific rules for class action arbitrations, and (b) that large companies frequently arbitrate multi-million dollar claims with each other. The dissenters also made the practical observation that preventing consumers who lose nominal sums from collectively asserting their rights in class actions is functionally the same as telling them that they had no rights, since no lawyer would or could bring a suit for $20 or $30.
Without a doubt, AT&T Mobility LLC v. Concepcion represents a huge endorsement of arbitration by the Court. Only federal legislation limiting arbitration—which is not likely in an era of legislative gridlock—can turn back the clock. This will, in turn, keep the pressure on the organizations that sponsor arbitrations (such as the Financial Industry Regulatory Authority “FINRA” and the AAA) to make certain that their rules provide for procedures that are not only economical and expeditious, but fair to all parties. As lawyers who have represented clients in all manner of arbitrations for over twenty-five years, we hope that the arbitration forums are up to the challenge.