Like the court of appeals below, state and federal courts across the country, applying the laws of twenty states, have ruled that prohibitions on classwide proceedings (whether in court or in arbitration) may be unenforceable in particular cases under general contract-law principles. Respondents’ Appx. By its express terms, the FAA does not pre-empt the application of state contract-law principles to such class-action bans. See 9 U.S.C. § 2 (arbitration agreements are “valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract”). This Court should reject petitioner’s effort to turn a question of state-law unconscionability into one of federal law just because an arbitration provision is involved.
There is nothing surprising about the application of state contract law forbidding unconscionable terms and exculpatory clauses to class action bans embedded in mandatory arbitration agreements. Prohibitions on aggregate litigation are properly held unconscionable or unfairly exculpatory where they make important contractual and statutory rights unenforceable — a circumstance that may arise when businesses have engaged in wrongful conduct that inflicts modest damages on individual consumers unlikely to have the knowledge, incentive or effective means to obtain redress.
To begin with, the losses suffered by individual customers as a result of business misconduct often are small, even though the harm may be enormous in the aggregate. See, e.g., Federal Trade Commission (“FTC”) Staff Report, Consumer Fraud in the United States: An FTC Survey ES-2, 28, 39 (2004) (estimating that in one year, nearly 25 million adults were victims of certain kinds of consumer fraud; among those who lost money, median loss was $220), available at http://www.ftc.gov/reports/consumerfraud/040805con fraudrpt.pdf. When the loss is small, “it is less likely to be recognized by those affected.” Deborah H. Hensler et al., Class Action Dilemmas: Pursuing Public Goals for Private Gain 68 (Rand Inst. for Civil Justice 2000). Even if they realize they have been cheated, aggrieved consumers may not know they have legally enforceable rights, making it unlikely that they will seek relief from unlawful business practices.
When individual damages are low, moreover, it is often not economically feasible to hire a lawyer to take such a “negative value” suit without the ability to spread costs. See Amchem Prods., Inc. v. Windsor, 521 U.S. 591, 617 (1997) (class action mechanism overcomes problem of small recoveries “by aggregating the relatively paltry potential recoveries into something worth someone’s (usually an attorney’s) labor”) (citation omitted); Phillips Petroleum Co. v. Shutts, 472 U.S. 797, 809 (1985) (“[T]his lawsuit involves claims averaging about $100 per plaintiff; most of the plaintiffs would have no realistic day in court if a class action were not available.”); see also Fed. R. Civ. P. 23, 1966 advisory comm. note (observing that “[t]he interest of individuals in conducting separate lawsuits . . . may be theoretic rather than practical” because “the amounts at stake for individuals may be so small that separate suits would be impracticable”); Thomas E. Willging et al., Empirical Study of Class Actions in Four Federal District Courts: Final Report to the Advisory Committee on Civil Rules 7 (Fed. Judicial Ctr. 1996) (“Without an aggregative procedure like the class action, the average recovery per class member or even the maximum recovery per class member seems unlikely to be enough to support individual actions in most, if not all, of the cases studied.”).
Although the lack of counsel available to take small-value claims affects all consumers, persons living in poverty are particularly disadvantaged. Whereas an estimated two thirds of middle-class civil legal needs are not met, that estimate climbs to four-fifths for low-income persons. See Deborah Rhode, Access to Justice: Connecting Principles to Practice, 17 Geo. J. Legal Ethics 369, 377, 397 (2004); see also Legal Services Corporation, Documenting the Justice Gap in America 4 (2d ed. 2007) (“[o]nly a very small percentage of the legal problems experienced by low-income people (one in five or less) are addressed with the assistance” of a lawyer). As one district court observed in certifying a class action against a payday lender: "This is precisely the kind of case that class actions were designed for, with small or statutory damages brought by impecunious plaintiffs who allege similar mistreatment by a comparatively powerful defendant.” Van Jackson v. Check ’N Go of Ill., Inc., 193 F.R.D. 544, 547 (N.D. Ill. 2000). Without a class action, that defendant “might get away with piecemeal highway robbery by committing many small violations that were not worth the time and effort of individual plaintiffs to redress or were beyond their ability or resources to remedy.” Id.
Aggregate litigation levels the playing field in disputes between businesses (which automatically aggregate the costs and benefits of a practice affecting consumers) and individual consumers (who can do so only by joining a class). Class actions enable plaintiffs "to exploit the 'economies of scale' the defendant already naturally enjoys from treating separate claims as a single litigation unit." Bruce L. Hay & David Rosenberg, “Sweetheart” and “Blackmail” Settlements in Class Actions: Reality and Remedy, 75 Notre Dame L. Rev. 1377, 1382 (2000). Because class counsel “can spread their investment over all of the claims — just as the defendant does — it becomes possible to make investments in the litigation that the plaintiffs could not make if the claims were prosecuted separately.” Id. at 1380. As the California Supreme Court has recognized, the availability of classwide action is, “particularly in the consumer context, often inextricably linked to the vindication of substantive rights.” Discover Bank v. Super. Ct., 113 P.3d 1100, 1109 (Cal. 2005).
Individual arbitration is no substitute for class actions for the same reason that individual litigation in court is no substitute: "While many praise arbitration as relatively inexpensive, and geared to help persons with small claims to achieve justice, no one has seriously suggested that arbitration ensures an economically viable forum for persons with claims of five dollars, ten dollars, or even two hundred dollars." Jean R. Sternlight, As Mandatory Binding Arbitration Meets the Class Action, Will the Class Action Survive?, 42 Wm. & Mary L. Rev. 1, 80 (2000). If this Court rules that any class action ban, no matter how onerous, is enforceable so long as it is included in an arbitration agreement, it will be a simple matter for businesses to prevent the effective enforcement of consumer rights. As one commentator put it: "Any transaction that may be cemented with the click of a mouse is susceptible to a class action waiver." Myriam Gilles, Opting Out of Liability: The Forthcoming, Near-Total Demise of the Modern Class Action, 104 Mich. L. Rev. 373, 377 (2005).
Amici agree with and will not repeat respondents' arguments about the scope of FAA preemption. Instead, relying on their collective experience, amici take this opportunity to explain why the availability of aggregate litigation (whether in court or in arbitration) is often essential to secure compensation for consumers and to hold businesses responsible for unlawful practices. The FAA does not entitle businesses to insulate themselves from effective redress.
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