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Civil Litigation

Consumer Arbitrations at Risk

The U.S. Supreme Court considers a Ninth Circuit case that asks whether federal preemption trumps a California law permitting courts to find class action waivers in consumer contracts unconscionable.


It is no accident that AT&T Mobility's ban on class actions in arbitration caught the eye of the U.S. Supreme Court, which selected it from a runway parade of other challenges to mandatory arbitration clauses that include class waivers. The phone company had groomed its consumer contract for years, anticipating a model test case. It got one in AT&T Mobility LLC v. Concepcion, No. 09-893, argued before the Court in November.

"The U.S. Chamber of Commerce and AT&T have been trying for a long time to get this on the Court docket," says David Horton, an associate professor at Loyola Law School in Los Angeles who wrote an amicus brief in the case on behalf of consumers. "AT&T went out of its way to create what appears to be a pro-consumer class waiver, but isn't."

The complaint, filed in 2006 by Vincent and Liza Concepcion, alleged that the San Diego couple had overpaid when AT&T charged $30.22 sales tax on the full retail price of two cell phones it had advertised as free. Because of the small amount of money at stake, the Concepcions sued on behalf of a class of consumers subject to AT&T's arbitration clause and class action waiver. Their suit was consolidated with a host of similar suits against a number of other phone carriers.

The district court struck down the class waiver provision of the arbitration agreement in AT&T's service contract as unconscionable, and the Ninth U.S. Court of Appeals affirmed. AT&T appealed for review to the U.S. Supreme Court (Laster v. AT&T Mobility LLC, 584 F.3d 849 (9th Cir. 2009) cert. granted sub. nom, AT&T Mobility LLC v. Concepcion, 130 S. Ct. 3322 (2010)).

For 30 years the U.S. Supreme Court has expanded the reach of the Federal Arbitration Act (9 U.S.C. §§ 1-16) into traditional consumer contracts and employment—areas generally overseen by the states. During that time, the Holy Grail sought by retailers, employers, telecommunications firms, credit card issuers, and a host of others was a class action waiver that judges would enforce. The current challenge puts class action waivers in a head-on contest with the FAA's preemption of state law.

AT&T Mobility's class waiver certainly is different. By signing the standard contract, the company's 90 million subscribers agree to mandatory arbitration of claims under $10,000—but by doing so, they can recover a minimum of $7,500 plus double attorneys fees if the arbitrator awards them more than the company's last settlement offer. Consumers pay no fees or costs for arbitration, and either party may choose to go to small claims court instead. In exchange for these advantages, subscribers waive the right to fight small-dollar disputes in arbitration as a class.

"AT&T's arbitration clause presented the right vehicle," says one California attorney working on the AT&T side who asked not to be identified. "This clause isolates the class issue. ... That's why it was teed up."

Consumer advocates agree on the case's significance. "The future of the American class action is at stake here," says Deepak Gupta, a staff attorney at the Public Citizen Litigation Group who argued the Concepcions' case before the U.S. Supreme Court. "The question is whether contract provisions from large corporations can override consumer rights."

The phone companies that write these contracts counter that plaintiffs lawyers are merely arguing their own self-interest. Class settlements, they contend, amount to a tiny fraction of the supposed harm. And while big fees go to the plaintiffs lawyers, only a small portion of money damages ultimately reach consumers.

Hundreds of millions of consumer and employment contracts contain mandatory arbitration clauses, and many of those ban the use of class actions in arbitration. The number of clauses with class action waivers skyrocketed after a plurality decision by the U.S. Supreme Court found that an arbitrator may decide on class treatment if an arbitration clause is ambiguous (Green Tree Financial Corp. v. Bazzle, 539 U.S. 444 (2003)).

In the ensuing years some federal courts and 20 states, including California, struck down a variety of class bans as unconscionable—in essence, because they curbed consumer ability to recover damages and sheltered companies from liability. Some agreements failed because companies shortened statutes of limitation for consumers (Stirlen v. Supercuts, 51 Cal. App. 4th 1519 (1997)); others because the contract terms stripped consumers of small claims remedies (Whitney v. Alltel Communications, Inc., 173 S.W. 3d 300 (Mo. Ct. App. 2005)).

California law has been clear on the preemption issue ever since the state Supreme Court held that "the FAA does not prohibit a California court from refusing to enforce a class action waiver that is unconscionable." (Discover Bank v. Superior Court, 36 Cal. 4th 148, 173 (2005).) A ruling in Concepcion favorable to AT&T, says Julie A. Vogelzang, an employment law specialist at Duane Morris in San Diego, would provide companies with a powerful new tool.

Between 2003 and 2009 AT&T tinkered with its arbitration agreements, testing provisions in state and federal courts, creating elaborate procedures, and increasingly adding pro-consumer terms—so long as the basic agreement included the class action ban.

The pro-consumer adjustments eventually eliminated mandatory confidentiality, attorneys fee limits, and bars to punitive damages. Washington state plaintiff Michael McKee witnessed the service contract changes during the course of his lawsuit, which began in 2004 with claims that AT&T had overcharged some customers in his zip code. By the time the Washington Supreme Court heard the case, AT&T had changed the agreement five times (McKee v. AT&T Corp., 164 Wash. 2d 372 (2008)).

In a highly unusual step two years ago, AT&T filed an amicus brief with the U.S. Supreme Court in an appeal by T-Mobile USA, Inc., whose own arbitration clause had been found unconscionable (T-Mobile USA, Inc. v. Laster, 407 F. Supp. 2d 1181 (S.D. Cal. 2005) cert. denied, 553 U.S. 1064 (2008)). In its brief for respondents, AT&T asked the Court to deny certiorari, suggesting that its arbitration clause was a "realistic and effective dispute resolution vehicle." When the Court denied cert, it opened the door for AT&T to submit Concepcion the following year.

In its 2009 term the Court backtracked on Bazzle, ruling 5-4 that arbitrators cannot hear class actions unless the arbitration clause specifically permits it (Stolt-Neilsen S.A. v. AnimalFeeds Int'l Corp., 130 S. Ct. 1758 (2010)).

"The problem with permitting class arbitration is that it becomes a hybrid involving courts, becomes hugely costly, exerts enormous pressure to settle, and is costly to defend," says Deborah J. La Fetra, principal attorney for Sacramento-based Pacific Legal Foundation who filed an amicus brief on behalf of AT&T. "The costs end up being passed down to consumers."

But at oral arguments in Concepcion, the justices did not appear to embrace expansion of the FAA to preempt state law. The case, however, still could severely curtail class actions. Lurking in the background—and barely mentioned in the briefs—is the potential for class waivers to curb nonmonetary remedies, such as injunctive relief, for alleged abuse of consumer rights. If class action bans survive, then individual plaintiffs will lack standing to seek class-wide injunctions to stop alleged consumer abuses.

AT&T contends that under its procedures, those who complain will have a full recovery much quicker than they would through class arbitration. "If allowed to stand, the Ninth Circuit's decision applying California law will be the death knell for consumer arbitration in California," AT&T told the court.

But Kirk B. Hulett, plaintiffs co-counsel in Concepcion and a principal at Hulett Harper Stewart in San Diego, sees AT&T's efforts to save class waivers as an attempt to deny consumers a remedy for the company's bad business practices.

"In reality, people just shrug at being ripped off for $25," Hulett says. "Only the occasional person thinks justice is important. AT&T is counting on that."

Pamela A. MacLean, a freelance writer based in the Bay Area, has reported on state and federal courts for 25 years.

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