Consumer Law & Policy Blog

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.

The New York Times on AT&T Mobility v. Concepcion

This editorial appears in today's New York Times:

Gutting Class Action

  The Supreme Court’s 5-to-4 vote in AT&T Mobility v. Concepcion is a devastating blow to consumer rights. By upholding the arbitration clause in AT&T’s customer agreement requiring the signer to waive the right to take part in a class action, the court provided other corporations with a model of how they can avoid class actions. It gave companies even more power when it also ruled out class-based arbitrations.

These are major setbacks for individuals who may not have the resources to challenge big companies in court or through arbitration.

When Vincent and Liza Concepcion signed a two-year contract for AT&T cellphone service, they received what they were told were two free phones. AT&T then charged them $30.22 in sales tax for the phones. They sued the company for fraud in federal court and their case and another were consolidated as a class action.

AT&T argued that the contract required the Concepcions to submit their claim to individual arbitration. A federal trial court, upheld by the United States Court of Appeals for the Ninth Circuit, struck down the AT&T arbitration clause as unconscionable under California law and allowed the plaintiffs to move forward against the company in a class action in federal court.

With Justice Antonin Scalia writing for the majority, the Supreme Court reversed that decision and, in a dramatic example of judicial activism, ruled that class-based arbitrations also would not be permitted.

Justice Scalia argued that “class arbitration sacrifices the principal advantage of arbitration — its informality — and makes the process slower, more costly, and more likely to generate procedural morass than final judgment.”

In his dissent, Justice Stephen Breyer highlights the damage to consumers: “What rational lawyer would have signed on to represent the Concepcions in litigation for the possibility of fees stemming from a $30.22 claim?” And he made clear that many rational couples would not press their own case for that amount if it meant “filling out many forms that require technical legal knowledge or waiting at great length while a call is placed on hold.”

In 2005, the California Supreme Court defined a rule of “unconscionability” for consumer contracts: when they “deliberately cheat large numbers of consumers out of individually small sums of money.” The federal trial court and the Ninth Circuit applied the rule in this case.

Writing about why the Federal Arbitration Act of 1925 pre-empts the California law in question, Justice Scalia demonstrates both his pro-business bias and the selective nature of his brand of originalism.

Contrary to what he suggests, when the law favoring arbitration was enacted, arbitration’s purpose was to resolve disputes between businesses — not businesses and consumers. He doesn’t try to trace his view on class arbitration to the 1925 law because it is mute on the subject. Instead, he provides his own definition of what arbitration should and should not be — with “no meaningful support,” as Justice Breyer writes, in Supreme Court precedent.

In a welcome effort to protect consumers, employees and others, Senators Al Franken and Richard Blumenthal and Representative Hank Johnson have just introduced the Arbitration Fairness Act. It would make required arbitration clauses unenforceable, although its chances aren’t great in the current political environment.

Unless Congress fixes the problem, the Supreme Court’s decision will bar many Americans from enforcing their rights in court and, in many cases like this one, bar them from enforcing rights at all.

Erwin Chemerinsky on AT&T v. Concepcion

Erwin Chemerinsky -- dean of the UC Irvine School of Law, scholar of federal jurisdiction, and an accomplished appellate advocate -- has this op-ed in the Los Angeles Times on the Supreme Court's decision in AT&T Mobility v. Concepcion.  Here's a taste:

The Supreme Court, with the five conservative justices constituting the majority, held that the Concepcions could not be part of a class-action suit but instead had to go to arbitration. The practical reality is that no such claim is ever likely to be brought. As Justice Stephen G. Breyer noted in the dissent: "What rational lawyer would have signed on to represent the Concepcions in litigation for the possibility of fees stemming from a $30.22 claim? . . . ' The realistic alternative to a class action is not 17 million individual suits, but zero individual suits, as only a lunatic or a fanatic sues for $30.'"

Class actions exist precisely for this situation, in which a large number of people lose a small amount of money and none is likely to bring an individual claim. The effect of the Supreme Court's decision is to make it far less likely that corporations engaged in even massive fraud will be held accountable when many people lose a little.

The Onion on AT&T v. Concepcion

The Onion asks people on the street for their take:

The U.S. Supreme Court ruled last week that companies could force dissatisfied customers into individual arbitration and prevent them from banding together in a class-action lawsuit. What do you think?

More coverage of AT&T v. Concepcion

Despite the jam-packed news cycle -- the royal wedding, the birth certificate, tornadoes, Osama bin Laden -- there's been a flood of outraged coverage of the Supreme Court's decision in AT&T v. Concepcion. SCOTUSblog rounded up some of the coverage here and here.  Here's a small sampling:

• Byron Williams, While you were away, the Supreme Court did it again, San Jose Mercury News
• Nan Aron, The Corporate Court Does It Again, Huffington Post
• Sacramento Bee editorial
• San Francisco Chronicle editorial
• Times-Union editorial
• Kansas-City Star editorial
• Steve Berk, Consumers Lose Again, The Corporate Observer
• Jeff Gelles, Supreme Court takes a big step toward shutting consumers out, Philadelphia Inquirer
• Nathan Koppel, Will Federal Consumer Bureau Ride to the Rescue of Class Actions?, The Wall Street Journal
• Lawrence Cunningham,SCOTUS AT&T Opinion Par for the Rhetorical Course, Concurring Opinions

Return of the Arbitration Fairness Act

Senators Al Franken and Richard Blumenthal, along with Rep. Hank Johnson, announced today their plan to reintroduce the Arbitration Fairness Act in response to today's Supreme Court's decision in AT&T v. Concepcion. The bill, first introduced in 2007, would ban forced arbitration clauses in employment, consumer, and civil rights cases. It has faced heavy opposition from business interests, including the Chamber of Commerce.

In a statement, Franken said that the Supreme Court's decision in Concepcion "essentially insulates companies from liability when they defraud a large number of customers of a relatively small amount of money," and that the law would allow consumers to continue to "play an important role in holding corporations accountable."

In AT&T v. Concepcion, U.S. Supreme Court Deals Crushing Blow to Consumers

by Deepak Gupta

This morning, the U.S. Supreme Court dealt a crushing blow to American consumers and employees, ruling that companies can ban class actions in the fine print of contracts.

Now, whenever you sign a contract to get a cell phone, open a bank account or take a job, you may be giving up your right to hold companies accountable for fraud, discrimination or other illegal practices.

In a 5-4 vote, the justices held that corporations may use arbitration clauses to cut off consumers and employees’ right to band together through class actions to hold corporations accountable.

Class actions are an essential tool for justice in our society. Brown v. Board of Education was a class action. The fate of class actions should not be decided through the fine print of take-it-or-leave-it contracts.

The court’s decision today turns the Federal Arbitration Act of 1925 – a law that was intended to facilitate private arbitration between sophisticated companies – into a shield against corporate accountability.

Today's decision will make it harder for people with civil rights, labor, consumer and other kinds of claims that stem from corporate wrongdoing to join together to obtain their rightful compensation. 

Justice Breyer asks the critical question:  "What rational lawyer would have signed on to represent the Concepcions in litigation for the possibility of fees stemming from a $30.22 claim? Why is this kind of decision—weighing the pros and cons of all class proceedings alike—not California’s to make?"

Supreme Court Rules 5-4: Cell Phone Provider May Not Ban Class Actions By Consumers

by Deepak Gupta

In a 5-4 decision, the Supreme Court has ruled that a consumer class action against a cell phone company may proceed -- despite a contract that purports to require arbitration and ban class actions. 

This is a big victory for consumers. The opinions of the Justices are available here.  Here are some of the latest headlines:

• Contracts can't stop class actions, top court says 
• Supreme Court says . . . consumers can join class actions despite signed contracts
• Consumers can't sign away class-action right

Read on for more details...