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Supreme Court Strikes a Blow to Class-Action Lawsuits

Jaclyn Jaeger | May 10, 2011

Corporate legal offices are celebrating a recent U.S. Supreme Court ruling that grants companies broad authority to settle disputes through arbitration, rather than costly class-action lawsuits.

The court's decision last month on AT&T Mobility v. Concepcion will have far-reaching implications not only for consumer class-action cases, but potentially for employment and shareholder securities class actions as well. “The decision was a big win for the business community in what may prove to be one of the most important class-action cases in a very long time,” says Vanderbilt University law Professor Brian Fitzpatrick.

The decision also means that the roughly 20 states must now be reconsider their laws that nullify class-action waivers, which are often included in consumer service contracts.

The case stemmed from a 2006 lawsuit, alleging that AT&T's offer for a “free” cell phone to consumers who sign up for its wireless services was fraudulent, because the company charged a sales tax on the retail value of the phone. The consumer contract with AT&T, however, included a mandatory arbitration clause barring class proceedings.

A U.S. District Court in California refused to compel arbitration, finding that such class-action waivers are not enforceable under state law. California law states that class-action waivers are “unconscionable” because they allow defendants to escape liability in circumstances where class actions are the only viable manner of redress.

Citing a previous California Supreme Court decision in Discover Bank v. Superior Court of Los Angeles, the district court further found that California's law was not preempted by the Federal Arbitration Act. The Ninth Circuit Court of Appeals agreed.

But in a 5-4 decision, the U.S. Supreme Court found that California's rule against class-action waivers “stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress.”

“The point of affording parties discretion in designing arbitration processes is to allow for efficient, streamlined procedures tailored to the type of dispute,” the Court said.

In a dissenting opinion, Justice Stephen Breyer, joined by three others, disagreed strongly with the majority's analysis and statutory interpretation. He argued that California state law is consistent with the Federal Arbitration Act's language and objective and does not stand as an obstacle to its “accomplishment and execution.”

“California is free to define unconscionability as it sees fit, and its common law is of no federal concern so long as the state does not adopt a special rule that disfavors arbitration,” Breyer wrote.

Breyer further argued that requiring consumers to arbitrate cases on an individual basis could lead claimants to abandon small-money cases rather than litigate. “What rational lawyer would have signed on to represent Concepcion in litigation for the possibility of fees stemming from a $30.22 claim?” he wrote.

Putting the Decision to Work

The Court's ruling strengthens existing arbitration agreements and is likely to lead to more companies putting them in place. “It paves the way for employers to implement class-action waiver provisions as part of arbitration agreements,” says Stephen Jones, a partner with law firm Nixon Peabody. “If an employer can eliminate the opportunity for a class action, it automatically reduces the employer's exposure significantly.”

“It is possible that Concepcion will lead to a radical reduction—if not an outright eradication of consumer class actions.”

—Brian Fitzpatrick,
Law Professor,

Fitzpatrick says the importance of the ruling “is difficult to overstate.” The decision means employers can now include a class-action waiver provision in the arbitration section of their employment agreements, exempting themselves from employment class actions. He says it will also make securities class actions more difficult.

Because consumer, employment, and shareholder cases make up the vast majority of class actions against businesses today, “the case raises the possibility that businesses may be able to exempt themselves from class actions across the range of their activities,” says Fitzpatrick. “Thus, it is possible that Concepcion will lead to a radical reduction—if not an outright eradication—of consumer class actions.”

Employers should first decide, however, whether they want to use an arbitration provision to adjudicate employment disputes, Jones says. He advises companies to decide on a case-by-case basis to determine whether arbitration is in their best interest, says Jones. When they do use arbitration provisions, they should consider adding the class-action waiver.


The following release was issued by Senators Al Franken and Richard Blumenthal and Representative Hank Johnson in regard to the new class-action legislation:

After consumers were dealt a blow today when the Supreme Court ruled that companies can ban class action suits in contracts, U.S. Sens. Al Franken (D-Minn.) and Richard Blumenthal (D-Conn.) and Rep. Hank Johnson (D-Ga.) said today they plan to introduce legislation next week that would restore consumers' rights to seek justice in the courts. Their bill, called the Arbitration Fairness Act, would eliminate forced arbitration clauses in employment, consumer, and civil rights cases, and would allow consumers and workers to choose arbitration after a dispute occurred.

Many businesses rely on mandatory and binding pre-dispute arbitration agreements that force consumers and employees to settle any dispute with a company providing products or services without the benefit of legal recourse.

“This ruling is another example of the Supreme Court favoring corporations over consumers,” said Sen. Franken. “The Arbitration Fairness Act would help rectify the Court's most recent wrong by restoring consumer rights. Consumers play an important role in holding corporations accountable, and this legislation will ensure that consumers in Minnesota and nationwide can continue to play this crucial role.”

“Powerful companies who take advantage of ordinary consumers must be held accountable,” said Sen. Blumenthal. “Today's misguided Supreme Court ruling is a setback for millions of Americans, denying injured consumers access to justice. The Arbitration Fairness Act would reverse this decision and restore the long-held rights of consumers to hold corporations accountable for their misdeeds.”

“Forced arbitration agreements undermine our indelible Constitutional right to trial by jury, benefiting powerful businesses at the expense of American consumers and workers,” said Rep. Johnson. “Americans with few choices in the marketplace may unknowingly cede their rights when they enter contracts to buy a home or a cell phone, place a loved one in a nursing home, or start a new job. We must fight to defend our rights and re-empower consumers.”

In Concepcion v. AT&T, consumers brought a claim against AT&T for false advertising. However, because the value of their case was only $30, their case was consolidated into a class action. AT&T sought to block the lawsuit by pointing to the mandatory arbitration clause in the service contract but lower courts applying state law rightly invalidated the arbitration clause because it banned class actions entirely.

In today's 5-4 decision, the Supreme Court overturned these lower court decisions which sought to protect consumers. The majority of the Court held that the Federal Arbitration Act barred state courts from protecting consumers from these arbitration clauses. The effect of this decision essentially insulates companies from liability when they defraud a large number of customers of a relatively small amount of money.

A longtime advocate for consumers and workers in cases of forced arbitration, in 2009 Sen. Franken passed legislation with bipartisan support that restricts funding to defense contractors who commit employees to mandatory binding arbitration in the case of sexual assault and other civil rights violations. Congressman Johnson, a longtime champion of workers and consumer rights, first introduced the Arbitration Fairness Act in 2007.

Source: Reps. Blumenthal and Johnson Press Release.

Still, the Conception case may not completely settle the class-action waiver issue. Last week the Supreme Court agreed to hear another arbitration dispute in the case CompuCredit Corp. v. Greenwood. The question in that case is whether the Credit Repair Organizations Act allows consumers to sue their credit card company despite a contract requiring arbitration.

In the case, CompuCredit and Synovus Bank advertised and issued a low-rate credit card to people with poor credit ratings. The case alleges that consumers were promised $300 in available credit, but were charged $257 in fees.

More to Come

The case could also spur states and other regulators to beef up their rules that ban class-action waivers. “Compliance officers should be well aware of what the National Labor Relations Board is doing as well, not just the Supreme Court,” says Amar Sarwal, associate general counsel for the Association of Corporate Counsel.

The NLRB has taken the position that a class-action waiver provision violates the National Labor Relations Act, because it prohibits employees from engaging in concerted activity that's protected under the NLRA. Additionally, the Equal Employment Opportunity Commission will still pursue litigation where it believes evidence of systemic discrimination exists.

The Consumer Financial Protection Bureau, created under the Dodd-Frank Act, is another agency to watch for class-action waivers, Sarwal says. Congress gave the CFPB authority to consider how arbitration provisions should be structured, or whether they should be prohibited completely.

And Congress is taking actions of its own, challenging the Court's ruling in Concepcion. Sens. Al Franken (D-Minn.) And Richard Blumenthal (D-Conn.), and Rep. Hank Johnson (D-Ga.), are expected to reintroduce the Arbitration Fairness Act, which would prohibit mandatory binding arbitration clauses in employment, consumer, and civil rights cases. The legislation, which is expected to be introduced in the coming days, would also allow consumers to elect to participate in post-dispute arbitration.

AT&T Mobility v. Concepcion is “another example of the Supreme Court favoring corporations over consumers,” Franken, the bill's sponsor, said in a statement.

Fitzpatrick doubts, however, that congressional actions will amount to much. “Any such action seems unlikely in light of the divided partisan leadership in Congress,” he says.