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Supreme Court Ruling Deals Blow to Class-Action Lawsuits
A recent U.S. Supreme Court ruling significantly limits the power of consumers and employees to fight back against large companies' unfair practices through class-action litigation.
August 13, 2011 /Government PR News/ -- Few people would expect that a $30.22 sales-tax bill would signal the end of consumer class-action lawsuits. Liza and Vincent Concepcion likely did not think so when they balked at being asked to pay sales tax on "free" phones from their cell-phone service provider. However, the Concepcions' dispute with AT&T reached all the way to the U.S. Supreme Court, and the Court's ruling in the case significantly limits the power of consumers and employees to fight back against large companies' unfair practices through class-action litigation.
Free Cell Phones Advertised
In 2002, Liza and Vincent Concepcion were induced to buy cell-phone service from Cingular Wireless -- later acquired by AT&T Mobility LLC -- by its advertisements offering two free cell phones to new customers who signed up for its service. When they received the phones, however, the Concepcions were charged $30.22 in sales tax based on the phones' retail price.
The Concepcions challenged the charge, claiming that the company (legally referenced as AT&T) engaged in false advertising and fraud by requiring customers to pay sales tax on supposedly free phones. AT&T sought arbitration of the Concepcions' claim, pointing to the arbitration clause in their contract that required arbitration of any claims against the company and specifically prohibiting class-action arbitration and class-action lawsuits.
The Conceptions opposed arbitration and filed a motion in federal district court to prevent it. They argued that the arbitration clause in AT&T's contract was unenforceable because its bar against class-action procedures was unconscionable and inconsistent with California case law.
The Unconscionability Doctrine
The unconscionability doctrine gives courts permission to invalidate parts of or entire contracts if the terms are unconscionable, or so unreasonably unfair to one party that no reasonable and informed person would accept them. In this context, California Supreme Court case law stated that prohibitions against class-action procedures are unconscionable in consumer arbitration agreements such as the contract between AT&T and the Concepcions; therefore, they are unenforceable.
The federal district court sided with the Concepcions, ruling that the arbitration clause in AT&T's contract was unconscionable and unenforceable based on that California case law. When AT&T appealed, the United States Court of Appeals for the Ninth Circuit affirmed the decision.
Then AT&T petitioned the U.S. Supreme Court to review the case, and the Court agreed to determine whether the Federal Arbitration Act's "savings clause" permits California law to invalidate AT&T's arbitration clause.
The FAA Savings Clause
Section 2 of the Federal Arbitration Act, also known as the FAA savings clause, states that arbitration clauses are generally enforceable except when a law that invalidates contracts applies to the arbitration clause being challenged.
The Concepcions claimed that California's unconscionability law voiding arbitration clauses that prohibit class-action procedures is such a law -- it invalidates contracts and applies to the arbitration clause being challenged. Therefore, they argued, California's law falls within the FAA savings clause and may be used to invalidate AT&T's arbitration clause.
Class-Action Bans Permitted
In a 5-4 ruling, the U.S. Supreme Court disagreed and held that the FAA savings clause does not allow California law to invalidate arbitration clauses based on unconscionability. The court reasoned that permitting California's law to render AT&T's arbitration clause unenforceable would be impermissibly contrary to the Federal Arbitration Act's purpose of enforcing "arbitration agreements according to their terms so as to facilitate streamlined proceedings."
In essence, the Court ruled that arbitration clauses prohibiting class-action procedures are valid. This decision is detrimental to consumers and employees because it allows companies to limit the availability of class-action litigation -- a valuable tool for people with claims against large companies -- through arbitration clauses hidden in contracts' fine print.
Few people are likely to pursue arbitration against a company, and paying small amounts to individual customers or employees through arbitration is unlikely to cause behavioral changes in large companies. However, individuals have greater collective power against companies' unfair practices in class-action procedures, and they may result in punitive damages against companies and deter them from continuing to operate unfairly.
California Class-Actions Still Possible
Importantly, Californians wishing to pursue class-action procedures still may do so, and California's unconscionability law still applies to arbitration clauses challenged in state court rather than federal court.
Article provided by Law Offices of Rheuban & Gresen
Visit us at www.rglawyers.com
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