May 19, 2024

Supreme Court Allows Contracts That Prohibit Class-Action Arbitration

Though the decision concerned arbitrations, it appeared to provide businesses with a way to avoid class-action lawsuits in court. All they need do, the decision suggested, is use standard-form contracts that require two things: that disputes be raised only through the informal mechanism of arbitration and that claims be brought one by one.

“The decision basically lets companies escape class actions, so long as they do so by means of arbitration agreements,” Brian T. Fitzpatrick, a law professor at Vanderbilt University, said. “This is a game-changer for businesses. It’s one of the most important and favorable cases for businesses in a very long time.”

The decision fits in with recent rulings that have favored arbitrations and been wary of aspects of class actions.

The case was brought by a California couple who objected to a $30 charge for what was said to be a free cellphone. They had signed a “take it or leave it” standard contract from ATT Mobility that required them to resolve disputes through arbitration and barred them from banding together with others to seek class-action treatment, whether in arbitration or in traditional litigation in court.

The couple, Vincent and Liza Concepcion, filed a lawsuit against ATT Mobility seeking class-action treatment. The company, relying on the contract, responded that the case could neither proceed in court nor as a class action in any forum. But lower federal courts refused to enforce the arbitration agreement and allowed the case to go forward. They relied on a 2005 ruling from the California Supreme Court that barred class waivers as unconscionable.

Justice Antonin Scalia, writing for the majority on Wednesday, said the lower courts had failed to properly apply the Federal Arbitration Act, which overrides some state court decisions disfavoring arbitration.

The California Supreme Court decision had barred class waivers in all standard-form contracts, whether applicable to arbitrations or court proceedings, as unconscionable if they gave rise to claims that the companies issuing them had set out “to deliberately cheat large numbers of consumers out of individually small amounts of money.”

Though neutral on its face, the ruling placed an unlawful burden on arbitration agreements and so ran afoul of the federal arbitration law, Justice Scalia wrote.

“Requiring the availability of classwide arbitration interferes with fundamental attributes of arbitration,” Justice Scalia wrote. He was joined by Chief Justice John G. Roberts Jr. and Justices Anthony M. Kennedy, Clarence Thomas and Samuel A. Alito Jr.

Arbitrators are ill suited to handling sprawling cases, Justice Scalia said, and sensible businesses would not agree to participate in informal proceedings from which very limited appeals are possible when faced “with even a small chance of a devastating loss.”

“We find it hard to believe,” Justice Scalia wrote, “that defendants would bet the company with no effective means of review, and even harder to believe that Congress would have intended to allow state courts to force such a decision.”

Justice Scalia added that the arbitration agreement at issue in the case, ATT Mobility v. Concepcion, No. 09-893, was more than fair in the procedures it used and the payments it contemplated in individual cases.

The company, in a statement on Wednesday, said the decision was “a victory for consumers.”

“We value our customers,” the statement said, “and ATT’s arbitration program is free, fair, fast, easy to use and consumer friendly.”

Justice Stephen G. Breyer, writing for himself and Justices Ruth Bader Ginsburg, Sonia Sotomayor and Elena Kagan, said the state court decision banning class waivers did not violate the federal law favoring arbitrations.

Class arbitrations, Justice Breyer wrote, are perfectly appropriate ways to resolve claims that are minor individually but significant in the aggregate.

He said he was puzzled by Justice Scalia’s assertion that there was tension between the goals of arbitrations and class treatment. “Where does the majority get its contrary idea — that individual, rather than class, arbitration is a fundamental attribute of arbitration?”

The apt comparison, Justice Breyer continued, is not between individual and class arbitration but between class arbitration and class actions in court. Class arbitrations, he said, are more efficient.

But the most fundamental problem, he said, is that minor frauds like the one asserted here by the California couple will not be remedied.

“What rational lawyer would have signed on to represent the Concepcions in litigation for the possibility of fees stemming from a $30.22 claim?” he asked. Quoting from a decision in another case, he answered his own question. “Only a lunatic or a fanatic sues for $30,” he said.

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