On April 27, 2011 the U.S. Supreme Court ruled in a 5-4 decision that big corporations can force consumers to arbitrate their disputes instead of filing for class-action status.  Quickly, what this means for you is:

  1. You must now read any contract you sign thoroughly, the arbitration clauses will be upheld
  2. If you buy an item with pre-printed warnings, software with arbitration clauses attached to opening the product, or any type of contract you must sign in order to get a credit card, cell phones, or most anything else, you may have to go through the arbitration process.
  3. Even if millions of people are “cheated” out of money, you will likely not be able to file a class action lawsuit
  4. You may no longer be able to wait until a class action lawsuit is filed, rather, you may need to file for arbitration on your own.

What Was The Background of AT&T v. Concepcion?

The case originally stemmed from a couple in California (Concepcion) who purchased a “free” cell phone from AT&T, but were charged $30.22.  The charges came from sales tax paid on the “free” phones; the Concepcions believed that this was fraudulent behavior on AT&Ts part.  The agreement that the Concepcions signed included an arbitration clause that required claims “be brought in the parties’ “individual capacity, and not as a [plantiff or class member in any purported class or representative proceeding.” (i.e. they banned class-action litigation).  Through California District Court and the Ninth Circuit Court of Appeals, AT&T’s request to ban class-action litigation was deemed “unconscionable.”  The Court said it was unconscionable because it would allow a company to escape accountability for wrong doing.  Roughly 20 other states have struck down class-action bans on the basis that it allows a company to escape accountability for wrong doing.

What Did The Supreme Court Rule?

To understand what the Supreme Court said, it is important to understand that states and federal laws are not always the same, that federal law trumps state law (when the laws overlap), and that the U.S. Supreme Court is the highest court in the country.  The U.S. Supreme Court relied on the Federal Arbitration Act (FAA) which makes arbitration agreements “valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.”  What this basically means is that arbitration agreements should be upheld in most occasions.

The majority stated that the FAA reflects both a “liberal federal policy favoring arbitration” and the “fundamental principle that arbitration is a matter of contract.”  They further pushed this to mean that arbitration clauses should be seen as equal to provisions and rulings within contract law, as compared to what the current California rules were.  The Court referred to the forced arbitration clause as the “Discover Bank” rule (California’s rule classifying most arbitration waivers in consumer contracts as unconscionable).   The Court relied on Perry v. Thomas to show that the FAA preemptive effect extends beyond traditional arbitration agreement regulation.

The primary reasoning behind the decision to allow the enforceability of arbitration and class-action-waivers is to “ensure the enforcement of arbitration agreements according to their terms so as to facilitate streamlined proceedings.  Whereas requiring the availability of class wide arbitration interferes with fundamental attributes of arbitration and is inconsistent with the FAA.”  The reasoning behind this ruling makes sense; in that when you are dealing with relatively small monetary matters, the consumer will usually end up better off by going through arbitration than by trying to go through a class-action.  Many large class-actions suits based on small amounts of money end in coupons, vouchers, and large attorney fees.  However, it is important to note, that in this case, there were significant arbitration instructions; including the fact that if an arbitrator agrees that the litigant should be paid more than the final AT&T offer, that they should be awarded the additional amount or $7,500, plus double attorneys fees.  The Court realizes, that this will likely create little incentive for a lawyer to arbitrate on behalf of these individuals, instead of trying to create a class-action lawsuit and reap far higher fees.