The U.S. Supreme Court on Wednesday embraced a strict reading of a federal arbitration law, making it more difficult for individuals with small claims to join together in a class action against large companies accused of fraud or other wrongdoing.
The 5-to-4 decision is a victory for corporations and business groups that favor tough enforcement of arbitration agreements as a more efficient means of resolving disputes than reliance on an overburdened, expensive, and sometimes unpredictable court system.
Analysts say the decision provides a blueprint for businesses and corporations to avoid class-action liability by requiring customers, employees, and others to sign arbitration agreements barring class actions.
“Today’s decision reduces corporate accountability by making it impractical, if not impossible, for consumers to hold corporations accountable for their wrongdoing,” said class action attorney Mark Rifkin of the New York law firm Wolf Haderstein Adler Freeman & Herz.
The decision “continues a disturbing trend favoring large public companies at the expense of individuals,” he said in a statement.
Doug Kendall, president of the Constitutional Accountability Center, denounced the ruling as “judicial policymaking in its most naked form.”
The facts of the case
The decision stems from the case of Vincent and Liza Concepcion. In 2002, the couple entered an agreement with AT&T Mobility for cell phone service.
The contract included a requirement that any disputes be submitted to arbitration on an individual basis (rather than as a class action).
AT&T’s promotion promised free phones. But when the Concepcions received their first bill they were charged $30.22 in sales tax based on the phones’ retail value.
Feeling cheated, they filed a lawsuit in federal court. The suit was later consolidated as a class action charging AT&T with false advertising and fraud for charging tax for phones it advertised as free.
AT&T sought to enforce its arbitration requirement, and asked the court to dismiss the case. The federal judge refused and a panel of the Ninth U.S. Circuit Court of Appeals upheld that decision.
At issue before both courts was whether consumers in California could bypass the terms of an arbitration agreement because that agreement had required the arbitration be conducted individually rather than in concert with a class of complaining customers.
The California Supreme Court had earlier ruled that arbitration agreements that require individuals to waive the opportunity for class arbitration are unenforceable because they generally disadvantage one party to the agreement.
The federal judge and the appeals court agreed with this reasoning, ruling in favor of the Concepcions.AT&T appealed, asking the nation’s highest court to examine the case.
How the Supreme Court ruled
On Wednesday, the U.S. Supreme Court reversed the federal appeals court’s decision, concluding that the California rule is preempted by the Federal Arbitration Act.
The decision means those who sign arbitration agreements calling for individual hearings will be bound by those terms and may not seek recourse in the courts.
“Arbitration is a matter of contract, and the FAA requires courts to honor parties’ expectations,” Justice Antonin Scalia wrote in the majority opinion.
“The overarching purpose of the FAA…, is to ensure the enforcement of arbitration agreements according to their terms so as to facilitate streamlined proceedings,” Justice Scalia wrote. “Requiring the availability of classwide arbitration interferes with fundamental attributes of arbitration and thus creates a scheme inconsistent with the FAA.”
Voting with Scalia in the majority were Chief Justice John Roberts, and Justices Anthony Kennedy, Clarence Thomas, and Samuel Alito.
In a dissent, Justice Stephen Breyer said he did not view the California rule as inconsistent with provisions of the federal arbitration law.
He said California courts had recognized that in a dispute between an individual and a corporation the two parties may not possess equivalent bargaining power. In such cases, strict enforcement of the arbitration agreement could disadvantage the individual.
“In general agreements that forbid the consolidation of claims can lead small-dollar claimants to abandon their claims rather than to litigate,” Justice Breyer wrote.
AT&T’s arbitration agreement with the Concepcions included a provision that if the customer received an arbitration award larger than AT&T’s last written settlement offer, the company would pay a $7,500 minimum recovery and twice the amount of the Concepcions’ attorney’s fees.
Scalia said this provision created an incentive for consumers to pursue arbitration.
Breyer disagreed. He said AT&T could avoid the $7,500 payout by paying the face value of the Concepcions’ claim – $30.22.
“What rational lawyer would have signed on to represent the Concepcions in litigation for the possibility of fees stemming from a $30.22 claim?” Breyer asked.
The justice said it should be left up to the states to decide whether a collective arbitration ban rendered such agreements unenforceable.
Breyer’s dissent was joined by Justices Ruth Bader Ginsburg, Sonia Sotomayor, and Elena Kagan.
In reaction to the decision, AT&T said the high court’s opinion was a “victory for consumers.”
“We value our customers, and AT&T’s arbitration program is free, fair, fast, easy to use, and consumer friendly,” the company said in a statement.
Some analysts said the high court struck a balance between the competing needs of consumers and corporations.
“Arbitration can be an efficient, low cost avenue for a consumer to bring a claim against a service provider, but if those claims could easily become sprawling class actions, what business would include an arbitration clause in its contracts,” said Jack Pace, a lawyer with White & Case in New York. “You would get none of the procedural protections of a court of law, but all of the risks of a class action.”
Critics saw the decision as a grant of immunity to major corporations.
“This is a death blow to Americans’ chances for justice when faced with forced arbitration clauses,” said consumer fraud attorney Gibson Vance.
“This devastating decision has the potential to result in virtually no consumer or employee cases involving small claims being heard anywhere,” he said in a statement. “Corporations will now be allowed to get away with sweeping wrongdoing, particularly where the damages would be too small to justify pursuing individual claims.”