In a controversial decision, the Supreme Court of the United States on April 27, 2011, ruled in favor of AT&T Mobility which argued that the Federal Arbitration Act trumped state consumer class action laws. The ruling is a significant blow to consumers and class action plaintiff’s attorneys and portends to be a major boon to corporations seeking to limit risk and exposure to class action lawsuits through mandatory, binding arbitration clauses in their consumer contracts.
The case is AT&T Mobility, LLC v. Concepcions and the facts are these. The Concepcions purchased cellular telephone service from AT&T. The service agreement signed had buried deep inside of it the requirement that any such complaints arising out the agreement be handled in a one-on-one arbitration and further required that claims be brought in the parties’ “individual capacity, and not as a plaintiff or class member in any purported class or representative proceeding.”
When signing their contract with AT&T, the Concepcions thought they were getting a package discount on two phones, only to pay sales tax on the full price of the phones, which resulted in a $30 claim. They sued, contending it was a fraud for AT&T to (falsely) advertise the discounted package then charge them tax on the full-price of both phones.
Every consumer signing the same contract as the Concepcions potentially had an identical claim against AT&T but, because individually, each of those claimants were out so little money, it would cost more to hire a lawyer than they could recover if they won. On the other hand, AT&T collected millions of dollars through these charges. By pooling their resources on legal representation, consumers can afford to pursue their legal claims, thus, argued the Concepcions, the need for the class action.
A class action suit was filed against AT&T with the District Court for the Southern District of California. In response to the class action AT&T moved to dismiss the case on the agreement’s waiver of class actions and moved to compel arbitration. The Concepcions opposed AT&T’s motions on the ground that the agreement was unconscionable and unlawful under California law because it disallowed class actions. The district court found that the arbitration provision was unconscionable under California law and the Ninth Circuit affirmed. AT&T appealed to the U.S. Supreme Court.
The lower courts’ decisions were based in part on the fact that many courts have previously deemed class-action bans as unconscionable under state law where precluding class actions would have the effect of allowing companies to get away with widespread wrongdoing, particularly where the damages would be too small to justify pursuing individual claims. Thus, the legal question presented to the Supreme Court was whether the Federal Arbitration Act (FAA) precludes the states from declining to enforce class-action bans when the bans are embedded within arbitration agreements.
In its 5-4 decision, the Supreme Court held that the FAA prohibits states from conditioning the enforceability of arbitration agreements on the availability of class arbitration procedures, or otherwise requiring class actions regardless of prohibitions in an arbitration agreement. The Court held that the FAA preempts state rules that purport to classify class action waivers in consumer arbitration agreements as unconscionable. In its ruling the Court reinforced the importance of enforcing arbitration agreements and their terms and reiterated that the “point of affording parties discretion in designing arbitration processes is to allow for efficient, streamlined procedures tailored to the type of dispute,” and that the informality of arbitration is “desirable, reducing the cost and increasing the speed of dispute resolution.”
The Court rejected the Concepcions’ argument that class action lawsuits were necessary to prosecute small dollar claims that might otherwise slip through the legal system and found that, “[a]rbitration is a matter of contract, and the FAA requires courts to honor parties’ expectations.” “States cannot require a procedure that is inconsistent with the FAA, even if it desirable for unrelated reasons.”
As a result, arbitration agreements will be upheld, but only when drafted properly. In its decision, the Supreme Court made it clear that AT&T’s arbitration agreement was consumer friendly and had provisions that made it unlikely that the matter would go unresolved. For instance, the agreement included provisions that AT&T agreed to pay all costs for nonfrivolous claims; allowed the consumer to choose whether the arbitration would take place in person, by telephone, or through written submissions; and provided that the arbitrator could award any form of individual relief. The agreement also precluded AT&T from seeking attorney’s fees and, in the event that the customer received an arbitration award greater than the amount of AT&T’s last settlement offer, required AT&T to pay a minimum award of $7,500, plus twice the claimant’s attorney’s fees.
What this all means is that when properly drafted, an arbitration agreement and a class-action waiver arm your company from potential consumer class actions. If your company sells to large classes of consumers, we encourage you to allow us to review your contracts to make sure you are taking advantage of the Court’s ruling and are protected to the fullest extent of the law.
For more information on the AT&T v. Concepcion decision see: