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Arbitration agreements. We’ve all seen them, and they’re showing up with increasing frequency in all manner of consumer agreements. If you’ve purchased cell phone service or opened a credit card anytime in the last few years, you’ve likely signed one. The effect? If you have a dispute with the company, rather than taking it to court, you’re automatically required to resolve the dispute using arbitration, an alternative dispute resolution procedure that’s usually chosen by the company and run by rules it selects. In other words, you’ll fight your fight against the company on its turf, using its procedures.

Moreover, in addition to including arbitration agreements in their consumer contracts, many companies insert into those arbitration agreements a clause prohibiting the consumer from joining a class action — either in the courts or in the arbitration process — with other consumers who have the same dispute with the company. In other words, the agreements require each individual consumer to go it alone. Many states — California, for example — have previously held these clauses to be unenforceable. The reasoning for many of them was, because arbitration agreements containing "no class litigation" clauses have the practical effect of depriving a large number of consumers out of individually small sums of money (because individual consumers will likely decide its not worth their time to arbitrate their small claims, and the company will get away with its misconduct in thousands of cases), they are unconscionable, or unfair, and, therefore, unenforceable.

Unfortunately, in a decision authored by Justice Scalia, issued late last month, the United States Supreme Court deprived consumers of this last vestige of protection from the overreach of large corporations. In AT&T Mobility v. Concepcion, the plaintiffs, Vincent and Liza Concepcion sued AT&T for deceptive practices after the company charged them sales tax on "free" cellular phones that were included with the cell phone service they purchased from the company. Their law suit was consolidated with a class action suit consisting of plaintiffs alleging the same deceptive practice by AT&T. Eventually, AT&T filed a motion to compel individual arbitration in the Concepcion’s case, based on the arbitration agreement in their contract with AT&T. The federal district court denied the motion, relying on California law holding that arbitration agreements like the one in the Concepcion’s contract were unenforceable. The Ninth Circuit agreed.

The Supreme Court, however, ignored the sound reasoning of the lower courts, thumbed its nose at California’s well-reasoned case law, and decided in favor of AT&T. The basis for the decision? The Court reasoned that the Federal Arbitration Act — the federal law that permits arbitration in lieu of litigation — trumps California law intended to protect consumers. According to the Court, because the Federal Arbitration Act "encourages arbitration," any state case law or statute that stands in the way of arbitration falls to the wayside.

Did it matter to the Court that its decision likely leaves thousands of consumers on their own, left to arbitrate their small claims on an individual basis against large corporations? Or that, after its decision, it apparently doesn’t matter that an arbitration agreement is unconscionable? Apparently not, as the main opinion does not devote even a single paragraph to the California court’s reasoning that arbitration agreements with "no class litigation" clauses are inherently unfair. Indeed, Scalia went so far as to observe that, "States cannot require a procedure that is inconsistent with the FAA, even if it undesirable for unrelated reasons." In other words, once you enter into an agreement with an arbitration clause, it doesn’t matter how unfair or unconscionable that agreement is — you’re stuck with it, no matter what the state courts might say.

What do you think? Does this decision signal the beginning of the end for consumer class action litigation? Will thousands of consumers be left to arbitrate their individually small claims on their own? Has the Supreme Court given corporations a free pass to defraud large numbers of consumers out of individually small amounts of money? Let’s discuss this! Leave me a comment below.

One Comment

  1. Gravatar for William Eadie

    Thanks for the informative post. This certainly doesn't seem like a logical decision--the FAA doesn't seem to justify the result. Not a good development for individual rights.

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