Consumer Law & Policy Blog

Paul Kirgis: Occupy Arbitration? Judicial Nonviolent Resistance

Here.  Paul is a colleague of mine.  Here's an excerpt:

In this year of nonviolent resistance, at least some lower courts seem to be engaging in a protest of sorts, seeking ways to avoid the inevitable logic of the recent decisions, especially Concepcion. Not surprisingly, California leads the resistance. For example, in its recent decision in Sanchez v. Valencia Holding Co., the California Court of Appeal invalidated an arbitration agreement containing a class waiver in a used car contract on unconscionability grounds, finding that the agreement was a contract of adhesion and unfairly one-sided (the court focused on a variety of terms besides the class-action waiver). And in Brown v. Ralphs Grocery Co., the California Court of Appeal invalidated a class-action waiver in an arbitration agreement as applied to a representative action under California’s Private Attorney General Act, which allows a plaintiff to bring an action on behalf of other employees to enforce the Labor Code, in the process distinguishing representative actions from class actions.

Arbitration Articles Abound!

Myriam E. Gilles

 of Cardozo and

Gary B. Friedman

 of the Friedman Law Group have written After Class: Aggregate Litigation in the Wake of AT&T Mobility v. Concepcion, 79 University of Chicago Law Review (2012).  Here's the abstract:

Class actions are on the ropes. Courts in recent years have ramped up the standards governing the certification of damages classes and created new standing requirements for consumer class actions. Most recently, in Wal-Mart v. Dukes, the Supreme Court articulated a new and highly restrictive interpretation of the commonality requirement of Rule 23(a). But all of this pales in comparison to the Court’s April 2011 decision in AT&T Mobility v. Concepcion, broadly validating arbitration provisions containing class action waivers. The precise reach of AT&T warrants close scrutiny. Our analysis suggests that following AT&T, some plaintiffs will be able to successfully challenge class waivers under certain circumstances. Also, the new Consumer Financial Protection Bureau - if it is not still-born at the hands of hostile congressional midwives - is likely to eliminate some class action waivers in the financial services field. But most class cases will not survive the impending tsunami of class action waivers. And as this great mass of consumer protection, antitrust, employment and other cases is swept out to sea, the question arises: what or who can fill the resulting enforcement gap?

And here, we believe the “private attorney general” role assumed by class action lawyers over the past several decades will inevitably give way to a world in which state attorneys general make unprecedented use of their parents repatriate authority. Insulated from the threats posed by class action waivers and restrictive class action standing doctrine, AGs are now uniquely positioned to represent the interests of their citizens in the very consumer, antitrust, wage-and-hour and other cases that have long provided the staple of private class action practice. And to tackle complex cases, underfunded AG offices will make use of the private class action lawyers who have acquired expertise in originating, investigating and prosecuting class cases. Of course, there are political risks here - given the model’s dependency on contingent fee arrangements - but there are also substantial political benefits, as AGs around the country begin to take leadership positions in the sort of complex, big-ticket cases that are likely to contribute meaningfully to state coffers - and redress the injuries of consumers and employees who would otherwise have no recourse in a post-AT&T world.

Amy Schmitz

 of Colorado contributes Arbitration Ambush in a Policy Polemic, 3 Penn State Yearbook on Arbitration and Mediation 52, (2011).  Here's her abstract:

Arbitration has been demonized in the media and consumer protection debates, often without empirical support or consideration of its attributes. This has led to renewed efforts to pass the Arbitration Fairness Action, which would bar enforcement of pre-dispute arbitration clauses in consumer, employment, and civil rights contexts. It also inspired Dodd-Frank’s preclusion of arbitration clauses in mortgage contracts, along with the Consumer Financial Protection Bureau’s charge to prohibit or limit enforcement of pre-dispute arbitration agreements in consumer financial products and services contracts. Some of this negativity toward arbitration is warranted, especially in the wake of the United Supreme Court’s recent holdings highlighting a pro-business stance enforcement of arbitration agreements. Nonetheless, this does not necessarily justify abolishment of consumer arbitration. Accordingly, this Article suggest a more reasoned approach, and offers suggestions for carefully considered reforms that protect consumers without overly impeding beneficial use of arbitration. Litigation is not always the answer. Instead, it is time to rescue and revive arbitration from ambush.

Stephen E. Friedman

 of Widener adds A Pro-Congress Approach to Arbitration and Unconscionability, 105 Northwestern University Law Review Colloquy 53 (2011).  Here's that abstract::

This Essay endeavors to resolve a current controversy involving the application of the unconscionability doctrine to arbitration agreements. The pro-arbitration policies of the Federal Arbitration Act (FAA) and the anti-arbitration instincts of the unconscionability doctrine are difficult to reconcile. Instead of clarity in this area of law, we have a series of hints and clues, often contradictory, from the Supreme Court. Although Professor David Horton and I share a desire to clarify this area of the law, we have nearly opposite views about how this should be accomplished. This Essay sets forth my position and also responds to Unconscionability Wars, Professor Horton's latest thoughtful effort on the subject.

Finally, we have Texas's A

lan Scott Rau

 who has authored Arbitral Power and the Limits of Contract: The New Trilogy, American Review of International Arbitration, Forthcoming.  The abstract reads as follows:

 The American law of arbitration has for some reason been replete with what we have become accustomed to call “trilogies” – and the last two terms of the U.S. Supreme Court have curiously continued that pattern. Once again the Court has handed us three leading cases on closely-related themes – and these decisions have turned out in fact to be in many ways the most interesting of the lot. (I am referring of course to Stolt-Nielsen, Rent-A-Center, and Concepcion.)

All three amount to extended riffs on the Question of Questions – the scope of arbitral power: And so the Court has continued to dip its finger into this rich mixture – compounded of notions of judicial review, “arbitrability,” “separability,” compétence/compétence, and the preemption of state law – all of our hard-earned lore and learning is there. Apparently it is now well beyond the power of arbitrators to hold that “classwide proceedings are permitted,” at least without some pretty special authorization (Stolt-Nielsen) – while it is well beyond the power of courts to hold that they must be – certainly not when the parties have agreed to an arbitral determination (Rent-A-Center), and even when they haven’t (Concepcion).

It seems reasonably clear that these cases will continue to generate endless discussion. Undoubtedly for the moment the greatest salience will be with respect to arbitration clauses in contracts of adhesion entered into by consumers and employees – although this recent jurisprudence has the potential of sweeping far more broadly. Things now seem curiously muddled: If our law of arbitration no longer seems to have any clear unifying theme, this suggests that private adjudication – rather than presenting us as it once did us with a coherent and self-contained body of doctrine – has become a hostage to a game played out on a larger stage, a pawn of wider, systemic “political” concerns. Throughout the “trilogy” we have seen much familiar learning yoked to the service of a market-driven political agenda, in the process inevitably becoming warped and almost unrecognizable. And so – yet another untoward result – these cases will require the reevaluation of what seemed, for a while, to constitute comfortably settled certainties. Here is at least one step in that direction.

 

 

 

Stipanovich Arbitration Article

Thomas Stipanowich

of Pepperdine has written The Third Arbitration Trilogy: Stolt-Nielsen, Rent-A-Center, Concepcion and the Future of American Arbitration, American Review of International Arbitration (2012). Here's the abstract:

For the third time in the modern era, a triad of key Supreme Court decisions represents a milestone in American arbitration. In this highly controversial “Third Arbitration Trilogy,” the U.S. Supreme Court aggressively expands the “revealed” penumbra of substantive arbitration law under the Federal Arbitration Act and shores up the bulwarks of private, binding dispute resolution under standardized contracts of adhesion binding employees and consumers.

In Stolt-Nielsen S.A. v. AnimalFeeds International, 130 S. Ct. 1758 (2010), the Court, against the backdrop of an international commercial contract scheme and a unique procedural scenario, draws upon the wellspring of divined “federal substantive law” under the FAA to pronounce limits on the ability of arbitrators - or courts - to promote public policies supporting class actions. Many understood Stolt-Nielsen, correctly, as a portent of the Court’s eventual curtailment of state-law-based policies against enforcement of contractual waivers of the ability to participate in a class action when coupled with an agreement to arbitrate.

In Rent-A-Center, West v. Jackson, 130 S. Ct. 2772 (2010), the Court declares that public policies promoting enforcement of arbitration agreements effectively trump the authority of courts to deny or limit the enforcement of arbitration agreements “upon such grounds as exist at law or in equity for the revocation of any contract” - or, more precisely, to police arbitration agreements for unconscionability. Once again, the Court majority “discerns” new Federal substantive law surrounding the FAA. It employs a unique variation on the principle that arbitration agreements are separable from the contracts of which they are a part, aggressively interprets Court precedents transferring from courts to arbitrators authority to resolve enforceability issues, and segregates the determination a contract has been “made” in a formalistic sense from consideration of defenses to its enforceability and validity.

In AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011), the Court once again addresses the interface between pro-arbitration policies under the FAA and the countervailing, limiting force of unconscionability doctrine. Yet again, a majority finds pro-arbitration federal policy circumscribes judicial authority to police arbitration agreements under state law. In this case, the result is to enforce a term in the arbitration agreement waiving the consumer’s right to bring a contractual claim as part of a class action.

Its staunchest adherents may insist that the Court’s actions are necessary to effectively promote pro-arbitration policies under the FAA (announced and repeatedly reinforced by the Court since the mid-1980s) while ensuring that lower courts be measured and precise in the handling of countervailing defenses. In its zeal to further its evolving vision of the FAA, however, the Court has eliminated key safeguards aimed at ensuring fundamental fairness to consumers and employees in arbitration. The Court’s most recent decisions have placed dramatic new limits on judicial oversight of arbitration agreements, making the U.S. a relative “outlier” among global sovereigns.

The Court’s extreme and inflexible posture adds momentum to Congressional efforts to dramatically restrict the use of predispute arbitration agreements. Unfortunately, these legislative responses, like the Court’s decisions, lack a solid empirical foundation. As with the Court’s jurisprudence, there is no guarantee that they will produce the best possible solution for employees and consumers.

Good decisions about the public or private resolution of employment and consumer disputes depend upon a commitment to obtain and act upon better information about the operation of specific forms of arbitration in specific transactional settings, along with comparative data respecting court processes. Recent empirical scholarship has moved us closer to this goal, but much remains to be done.

In assessing process options, policy-makers should consider the potential future role of statutory due process standards for arbitration, regulated arbitration, and arbitration that gives individuals the option of proceeding to court. To the extent public tribunals are necessary, it should not be assumed that the court system as presently structured is the most effective way of addressing consumer or employment disputes. It may be appropriate to develop public consumer tribunals or administrative employment tribunals such as those that exist in some other countries.

In assaying public and private process choices, special attention should be given to the opportunities afforded by online dispute resolution (ODR). Finally, effective policy-making in these arenas cannot ignore the primary hot-button issue, the role of class or collective action.

Arbitration Articles

Shauhin A. Talesh

 of Irvine has writen The Privatization of Public Legal Rights: How Manufacturers Construct the Meaning of Consumer Law, 43 Law & Society Review 527 (2009).  Here's the abstract:

This article demonstrates how the content and meaning of California’s consumer protection laws were shaped by automobile manufacturers, the very group these laws were designed to regulate. My analysis draws on and links two literatures that examine the relationship between law and organizations but often overlook one another: political science studies of how businesses influence public legal institutions, and neo-institutional sociology studies of how organizations shape law within their organizational field. By integrating these literatures, I develop an “institutional-political” theory that demonstrates how organizations’ construction of law and compliance within an organizational field shapes the meaning of law among legislators and judges. This study examines case law and more than 35 years of California legislative history concerning its consumer warranty laws. Using institutional and political analysis, I show how auto manufacturers, who were initially subject to powerful consumer protection laws, weakened the impact of these laws by creating dispute resolution venues. The legislature and courts subsequently incorporated private dispute resolution venues into statutes and court decisions and made consumer rights and remedies largely contingent on consumers first using manufacturer-sponsored venues. Organizational venue creation resulted in public legal rights being redefined and controlled by private organizations.

Meanwhile Christopher R. Drahozal of Kansas and Samantha Zyontz of the Searle Civil Justice Institute have authored Private Regulation of Consumer Arbitration.  Here's their abstract:

Arbitration providers, such as the American Arbitration Association (“AAA”) and JAMS, have promulgated due process protocols to regulate the fairness of consumer and employment arbitration agreements. A common criticism of these due process protocols, however, has been that they lack an enforcement mechanism. While arbitration providers state that they enforce the protocols by refusing to administer cases in which the arbitration agreement materially fails to comply with the relevant protocol, the private nature of arbitral dispute resolution makes it difficult to verify whether providers in fact refuse to administer such cases.

This article reports the results of the first empirical study of the AAA’s enforcement of its Consumer Due Process Protocol. We find that the AAA’s review of arbitration clauses for protocol compliance appears to be effective at identifying and responding to those clauses with protocol violations. During the time period studied, the AAA refused to administer a substantial number of cases (almost 10% of its total consumer caseload) that involved a protocol violation. Moreover, in response to AAA protocol compliance review, over 150 businesses have either waived problematic provisions or revised arbitration clauses to remove provisions that violated the Consumer Due Process Protocol.

Our findings support the proposition that private regulation by the AAA complements existing public regulation of the fairness of consumer arbitration clauses. Any consideration of the need for future legislative action should take into account the effectiveness of this private regulation. That said, we do not assert that private regulation alone - with no public regulatory backstop, such as through court oversight - suffices to ensure the fairness of consumer arbitration proceedings. Rather, we suggest ways that courts and policy makers could reinforce the AAA’s enforcement of the Consumer Due Process Protocol as well as ways the AAA could improve its own review process.

 

Lisa Tripp's Empirical Study of Arbitration Clauses in Nursing Home Contracts

Lisa Tripp of John Marshall has written An Empirical Study of Pre-Dispute Binding Arbitration Agreements in Nursing Home Admission Contracts. Here's the abstract:

The use of pre-dispute binding arbitration agreements has been commonplace in variety of commercial contexts, such as brokerage agreements, insurance contracts and credit card contracts for many years. Health care had historically been one of the fields that had not embraced pre-dispute binding arbitration agreements. The reluctance to use pre-dispute binding arbitration agreements appears to be changing in at least one sector of the health care field. An examination of admission contracts used by North Carolina nursing homes and telephone survey of North Carolina nursing homes revealed that 43 percent of nursing homes now incorporate pre-dispute binding arbitration provisions into their admission contracts. All of the major nursing home chains operating in North Carolina use pre-dispute binding arbitration agreements in at least some of their facilities, while smaller operators use them sporadically.

The terms of these agreements vary considerably. The large chains tend to incorporate some of the provisions in the model arbitration agreement drafted by the American Health Care Association (AHCA), the nursing home industry trade organization. AHCA’s model language includes a 30-day rescission period and language that acceptance of the arbitration provision is not a precondition to admission. Some of the large chain facilities also include a provision that the arbitration will be conducted at the facility if the parties can’t agree on another location. Some of the smaller operators include provisions that limit damages and discovery, prohibit punitive damages, and expressly condition entry to the facility on signing the pre-dispute arbitration agreement.

The implications of the rising use of pre-dispute binding arbitration clauses may be significant. There are many counties in North Carolina where 50-100 percent of all of the nursing home operators use these agreements. With so many operators selecting pre-dispute binding arbitration, this may have the effect of forcing some vulnerable elders out of the public court system with all of its safeguards, and into private arbitration without those protections.

Although some of these agreements contain language stating that the agreement is voluntary or may rescinded, this language, by itself, provides no guaranteed protection that facilities are enforcing the contracts as written. This study found incidents where nursing homes were requiring new residents to sign pre-dispute binding arbitration agreements as a condition of admission, even though the language in those facilities’ agreements stated that signing the agreement was voluntary. This study also found evidence of a significant amount of confusion among staff of nursing homes using these agreements about whether their facilities were using them at all and what arbitration agreements really meant.

 

 

Why the House Bill to "Improve" the CFPB Would Cripple It

by Jeff Sovern

H.R. 1315, the so-called Consumer Financial Protection Safety and Soundness Improvement Act passed by the House last week displays an extraordinary number of seemingly neutral "improvements" that would collectively have the effect of crippling the Consumer Financial Protection Bureau, or even tipping it over to an agency that would be more protective of banks than consumers.  Unfortunately, because of the complexity of the issues, explaining all that briefly in a way that can be easily understood is not easy.   That's probably the point. The bill is diabolically clever. 

Let's start with the commissioners.  Of the five commissioners, one has to be the Vice Chairman for Supervision of the Federal Reserve System.  That would be the same Fed that Congress gave the power to prevent predatory lending to in 1994 that the Fed didn't use until 2008, far too late to prevent the subprime fiasco.  It would also be the same Fed that sometimes seems unduly influenced by the banks it regulates.  So let's count that commissioner as a vote against consumer protection.  No more than two of the remaining four commissioners can be members of the same political party. If the president appoints two Democrats and two Republicans, say, that leaves us with a majority of the commissioners who are either Republicans or who work for the Fed.  Of course, it doesn't have to work that way. The president could appoint independents instead of Republicans.  But remember also that the Commissioners have to get through the Senate. It's easy to imagine the same 44 Senators who have opposed any nominee for director saying they will oppose nominees for the Commission unless two are Republicans.  So instead of a director who will protect consumers, we end up with a significant chance of an agency that protects banks, even with a democratic president.  You can also imagine combinations that end up replicating the same kind of partisan gridlock we have in Congress already.  For example, suppose we have four commissioners seated, split between pro-consumer and pro-bank factions, and the Senate refuses to confirm a fifth commissioner who would break the tie.  See how clever this is?

But that is far from all.  The bill also provides for staggered terms, so that in four out of every five years, a term ends and the president gets to nominate a new commissioner.  If President Obama loses in 2012, that will give the new president a nomination fairly quickly.  The president also gets to name the chair of the Commission, so once that nominee is confirmed, the president could designate that person the chair.  And voila: a Bureau that is supposed to protect consumers instead protects banks.

But, of course, President Obama could win re-election.  Perhaps the Bureau, despite the restraints described above, will propose a regulation to protect consumers that would reduce financial institution profits.  Banks still may avoid worry because the Financial Stability Oversight Council could overrule the regulations  Current law says such overruling requires a two-thirds majority, but the House bill would reduce that to a simple majority and take away the Bureau's vote.  Remember that the FSOC includes several bank regulators, including the Comptroller of the Currency, an agency that the banks essentially own.  The House bill also lowers the standard for the FSOC to overrule the Bureau by requiring it to overturn (currently, it's discretionary) Bureau regulations which are "inconsistent with the safe and sound operations of United States financial institutions"  (currently the standard is that it would put safety and soundness at risk).  So suppose the Bureau proposes a regulation which would have the effect of reducing bank profits.  Would that be inconsistent with the safety and soundness of banks? If so, no matter how wonderful the regulation, the FSOC would have to reject it. 

There's more.  Before adopting new regulations the Bureau has to conduct not one but two new analyses.  That can slow things down.

I have a feeling I haven't even found everything that would affect the Bureau's functioning.  As I say, it's diabolical.

Colin Marks on The Possible Irony of Concepcion

Colin P. Marks

 of St. Mary's has written The Possible Irony of AT&T versus Concepcion.  Here's the abstract:

Irony is defined as, “the use of words to express something other than and especially the opposite of the literal meaning.” Though many other definitions of the word exist, in light of the Supreme Court’s majority opinion in AT&T v. Concepcion, this definition comes to mind. Read broadly, the decision strikes a blow to the ability of consumers to bring suits against companies, both inside and outside of arbitration. But that was not the intent behind the federal act which the Court relied upon to justify its decision.

In 1925, when Congress passed the Federal Arbitration Act (FAA), its intended purpose was to promote enforcement of arbitration clauses. Congress did not sweep away all state-created defenses to contract; however; quite the contrary, Congress inserted a savings clause that arbitration provisions could be stricken just as any other contract could, “upon such grounds as exist at law or in equity.” It was upon this basis that the Ninth Circuit upheld a decision to strike down a clause in an agreement between AT&T and the Concepcions which required not only that the Concepcions submit all disputes to arbitration, but also forbade them from forming a class within that arbitration. On appeal to the Supreme Court, AT&T argued that the FAA preempted the unconscionably finding, despite the savings clause, as California law discriminated against arbitration clauses in violation of the FAA. Justice Scalia, writing for the majority, agreed that the unconscionably finding under California law was preempted by the FAA. In overruling the Ninth Circuit, he repeated the theme of the need to promote arbitration. Throughout the majority opinion, he introduced, as a corollary, the desire to promote expedited resolution of disputes.

The majority opinion is itself open to multiple interpretations, however. Read narrowly, the opinion may do nothing more than restate the already established principle that states cannot strike down arbitration clauses simply by virtue of their existence. But the decision can also be read much more broadly. A broad reading of the opinion suggests that any attempt by a court or state legislature to limit the method and means of arbitration in a way inconsistent with what Congress envisioned is preempted by the FAA. Thus, according to the majority opinion, Congress’ desire to promote bilateral arbitrations preempted the California courts’ rulings that clauses limiting the ability to form class actions are unconscionable.

And therein lies the irony.

If the opinion is read broadly, in striking down the defense of unconscionably to class actions waivers as inconsistent with the purposes of the FAA, the majority opinion, in effect, has denied a large swath of individuals the realistic opportunity to ever bring their claims, in arbitration or otherwise. In the aftermath of this decision, every corporation will be inserting class action waivers into their arbitration clauses, if they haven’t already, and may be emboldened to go much further. Thus, while the majority opinion cites, as the reason for its decision, to a broad policy of encouraging arbitration and the expeditious resolution of disputes, the effect will be quite the opposite.

This essay explores the possible dual readings of AT&T v. Concepcion in light of the FAA and its interpretation, including Supreme Court precedents. This essay concludes that, though there is support for interpreting the Concepcion decision narrowly, it is more likely that a broader interpretation was intended, but the metes and bounds of this opinion have yet to be explored. Nonetheless, under this broad interpretation, the effect on consumers will be to discourage individuals from seeking redress for their claims. The decision may actually encourage businesses to breach contractual obligations with impunity when the individual sums owed are too small to justify, in the mind of a reasonable consumer, the time and effort to seek a remedy.

 

Has Scalia Killed the Class Action?

Daniel Fisher at Forbes responds to Scott's post from yesterday.  In the article, Alan Kaplinsky, who prides himself of being an architect of forced arbitration in consumer contracts, unconvincingly attempts to downplay the devastating impact of Concepcion for consumer justice and civil rights in America.

If You Believe Forbes, I've Got an AT&T Cell Phone to Sell You

By Scott L. Nelson

Responding to the New York Times’s powerful critique of the Supreme Court’s AT&T Mobility v. Concepcion decision that lets corporations opt out of class action lawsuits by injured consumers, Forbes Magazine's blog derides the very idea that class actions benefit victims of corporate wrongdoing.

According to Forbes, class actions are no more than ways for attorneys to get rich at the expense of class members. Forbes points to a consumer class action against a company called DirectBuy, in which, it says, attorneys for the class sold out consumers by agreeing to a settlement that provides nothing at all for half the class, and benefits of very little value to the other half. Says Forbes, “Even the consumer watchdogs at Public Citizen”—that’s us!—“found this one impossible to swallow; they’ve filed an objection.”

Forbes’s example proves the opposite of the point they’re trying to make. Yes, we filed an objection in the DirectBuy case, as we often do when we see a class settlement that isn’t fair. A lot of other class members, as well as state attorneys general, also objected. And what happened? The court refused to approve the settlement.

You see, one of the benefits of class actions is that they can’t be settled unless a judge independently looks them over and decides they are fair to class members. And, more and more over the last 20 years as watchdogs like Public Citizen and others have filed objections to bad settlements, courts have made good on their obligation to protect class members. The result? Coupon settlements that benefit corporate defendants and enrich lawyers while giving little or nothing to class members are, increasingly, a thing of the past.

By contrast, judges aren’t even permitted to ensure fair outcomes when individuals are forced into one-on-one arbitration rather than being allowed to join together in class actions. Courts generally overturn an arbitration result only in the rare case when someone can prove an arbitrator was corrupt or deliberately ignored the law. Aside from that, pretty much whatever the arbitrators say goes.

And—you guessed it—it’s the corporate defendants who, through the take-it-or-leave-it “contracts” we have to sign if we want any of the necessities of modern life (a job, a phone, a car, credit), decide which organizations will conduct the arbitration.

Who would you rather have determining the fairness of the way your claim against your friendly cell-phone company, credit-card provider, used-car dealer, payday lender, or employer is resolved: a life-tenured federal judge who has a legal obligation to protect your interests, or a private “dispute resolution service” picked and paid for by the defendant? Talk about a no-brainer.

The hard truth is that arbitration clauses that prohibit class actions and collusive class action settlements are just two sides of the same coin: They’re both ways corporate defendants try to minimize their liability for wrongdoing.

Class-action bans do that by preventing large numbers of people from suing, and making it harder for those who can file on an individual basis to recover for their injuries. Collusive class settlements allow corporations (when they can find class action lawyers who are willing to play ball with them) to cut off the claims of large numbers of people for a fraction of their real value. That’s why watchdog groups like us oppose both banning class actions and abusing them.

But wait, says Forbes, even after Concepcion courts will only enforce arbitration clauses with class-action bans if they are really fair to consumers, in fact better than class actions. Forbes points to some features of the AT&T arbitration clause at issue in the Concepcion case that would provide a consumer a $7500 bonus plus double attorney fees if she won more in arbitration than the company’s last settlement offer.

But the bonus payment—which it appears no consumer has ever succeeded in obtaining—is a sham. The company can always avoid it by offering the consumer the face value of her individual claim. For the Concepcions, that would be about $30. So if consumers like the Concepcions go to the trouble and expense of getting the legal advice needed to learn that they’ve been defrauded and to figure out how to file a claim, at the end of the day the company will offer them their $30 and avoid paying any bonus or legal fees.

As a result, in the typical consumer case where a lot of people (thousands, hundreds of thousands or even millions) have been ripped off by a company for a small amount of money each, the company will come out way ahead even if thousands of people go to the trouble of filing for arbitration to get their $30 back, because thousands more won’t.

And that “even if” is a pretty big one. The fact is that it’s very unlikely that thousands of people will file arbitrations seeking $30, or $50, or even $100 or $500 each, because it won’t be worth the time of any lawyer to help them—unlike in a class action where the small claims of class members can yield a large enough recovery to compensate both class members and their lawyers. And anyway, as Justice Breyer said in dissent in Concepcion, only a lunatic would arbitrate over $30.

In short, the lesson of Concepcion is that an arbitration agreement that bans class actions doesn’t have to be fair to be enforced; at most, it only has to look fair—to someone who can’t, or won’t, look past the window-dressing. And, indeed, we don’t yet know whether courts applying Concepcion will require class-action bans to have even the fairness fig-leaf that the AT&T contract offered.

So don’t be fooled. If corporations really thought consumers would be as likely to get full redress for mass grievances through individual arbitration as through class actions, why would they fight so hard to avoid class actions and steer all claims into arbitration? Because they want to pay legitimate consumer claims more quickly? Right…

In short, if you believe that individual arbitration is just as likely to lead to effective remedies against corporate wrongdoing as class actions, I’ve got an AT&T cell-phone I’d like to sell you.

Los Angeles Times: Congress Should Overrule Concepcion

The Los Angeles Times this morning runs the following editorial on AT&T v. Concepcion.  In recent weeks, similar editorials have appeared in the New York Times, San Francisco Chronicle, and Sacramento Bee, among other places.

Editorial: Carving out class-action exceptions

Because a recent Supreme Court decision on a class-action suit involved a federal statute, not the Constitution, Congress can — and should — overrule the court.

May 17, 2011

In a case that began with a disgruntled cellphone customer, the U.S. Supreme Court has made it harder for groups of consumers or employees to band together to seek damages from corporations. Because the decision involved a federal statute, not the Constitution, Congress can — and should — overrule the court.

Almost a decade ago, Vincent and Liza Concepcion entered into a sales contract with AT&T Mobility that contained an arbitration clause forbidding a customer to join with others in a class-action lawsuit against the company. The Concepcions, who were aggrieved because they were charged $30.22 in sales tax on a supposedly free phone, brought a class-action suit against AT&T anyway two years later. Class actions allow many people who suffer the same harm to join as a "class" to seek compensation.

At first glance, the Concepcions would seem to have no legitimate complaint. After all, they had voluntarily signed a sales contract limiting them to standalone complaints. But the California Supreme Court has held that some contracts barring class actions are "unconscionable" and thus unenforceable. The U.S. 9th Circuit Court of Appeals decided that the AT&T contracts were unconscionable because, among other things, consumers couldn't negotiate them with AT&T; they were take-it-or-leave-it documents offered by a party with superior bargaining power.

The Federal Arbitration Act allows arbitration agreements to be disregarded if state law allows it. But Justice Antonin Scalia wrote that that exception didn't apply to the Concepcions' dispute because breaking their contract with AT&T would frustrate the purpose of the arbitration act.

Underlying this legal debate about the interplay of state and federal law is a real-world concern: that consumers not be exploited by vastly more powerful merchants. Class actions allow injured consumers in California and other states who might not bring an action on their own to combine their claims and receive greater damages. (Opponents of class actions say the principal beneficiaries of such lawsuits are lawyers.)

With its narrow reading of the federal arbitration act, the court has put such remedies out of reach for many consumers. Fortunately, Congress can overrule the decision by amending the act to allow states to declare some arbitration agreements unconscionable. Sen. Al Franken (D-Minn.) is preparing to introduce legislation that would go further by banning binding "pre-dispute" arbitration clauses in consumer, employment and civil rights contracts. It's not clear that such a drastic remedy is necessary, but at a minimum consumers should be spared the roadblocks that were thrown in the way of the Concepcions.