May 6, 2011
SCOTUS: State laws cannot override contract clauses requiring customers to present complaints individually to arbitration
Taken in part from the Wall Street Journal
WASHINGTONâ€”On April 27, 2011, the Supreme Court handed business a powerful shield against consumer class actions, ruling that state laws can’t override contract clauses requiring customers to present complaints individually to a private arbitrator.
In a 5-4 ruling, split along its usual conservative-liberal divide, the court held that a “national policy favoring arbitration” pre-empted California law intended to protect consumers from widespread fraud.
California consumers had sued AT&T Inc. for allegedly defrauding them by charging $30.22 in sales tax on cellphones it advertised as free.
AT&T invoked the arbitration clause of its form contract, which required complaints to be resolved through private arbitration in an “individual capacity” and barred “any purported class or representative proceeding.”
California courts had found such provisions “unconscionable,” legal parlance for a contract term so unfair it is void. In a 2005 opinion, the California Supreme Court said that when a company schemes “to deliberately cheat large numbers of consumers out of individually small sums of money,” class actions may be the only effective form of redress. While the fraud might reap a windfall, the court’s reasoning went, each individual’s loss would be too small to dispute unless grouped into a single claim.
The 1925 Federal Arbitration Act, adopted to force states to honor arbitration clauses, says arbitration clauses can’t be set aside unless they violate the laws governing contracts in general. The question before the Supreme Court was whether the California rule simply applied general fairness principles to arbitration clauses or specifically targeted arbitration.
Writing for the majority, Justice Antonin Scalia said that class actions inherently conflicted with arbitration’s goals of speed and efficiency.
“The switch from bilateral to class arbitration sacrifices the principal advantage of arbitrationâ€”its informalityâ€”and makes the process slower, more costly, and more likely to generate procedural morass than final judgment,” he wrote in an opinion joined by Chief Justice John Roberts and Justices Anthony Kennedy, Clarence Thomas and Samuel Alito.
Justice Scalia cited statistics showing that the average individual arbitration was resolved in six months or less, while class arbitrations could drag on for years. Moreover, “class arbitration greatly increases risks” for business, he wrote. “Faced with even a small chance of a devastating loss, defendants will be pressured into settling questionable claims.”
In a dissent joined by Justices Ruth Bader Ginsburg, Sonia Sotomayor and Elena Kagan, Justice Stephen Breyer wrote that since the California rule applied equally to class litigation and class arbitration, it can’t “fairly be characterized as a targeted attack on arbitration.”
The Federal Arbitration Act, Justice Breyer wrote, intended to preserve the states’ traditional authority over contract law, insisting only that arbitration receive equal footing with other contracts.
“California is free to define unconscionability as it sees fit, and its common law is of no federal concern so long as the state does not adopt a special rule that disfavors arbitration,” he added.
Wednesday’s decision was the latest in a series that has given arbitration clauses nearly ironclad protection.
In a statement, AT&T said that individual arbitration “often benefits consumers” because claims can be resolved faster than a more complicated class action. “We value our customers, and AT&T’s arbitration program is free, fair, fast, easy to use, and consumer friendly,” the company said.
Some lawmakers, however, say consumers are powerless when banks, software makers and others condition their products on form contracts whose fine print locks them into arbitration.
“In arbitration, there is no transparency, nor is there an independent arbitrator,” said Senate Judiciary Committee Chairman Patrick Leahy, a Vermont Democrat who has held hearings on consumer arbitration.
After Wednesday’s decision, “Congress needs to respond with legislation to clarify the original intent of the Federal Arbitration Act,” Mr. Leahy said.
The Wall Street Journal Law Blog post, “After AT&T Ruling, Should We Say Goodbye to Consumer Class Actions?” can be found here
The SCOTUS opinion, AT&T MOBILITY LLC v. CONCEPCION ET UX, 09-893 can be found here