The U.S. Supreme Court will decide if a court can refuse to enforce a class action ban in a cell phone contract. The lower court applied state contract law when it ruled an arbitration provision prohibiting class actions cannot be enforced because forcing consumers to file individual cases for small claims means most consumers will never seek to recover illegally charged fees. AARP argued in a brief filed with the court that without class actions, businesses are able to keep enormous amounts of ill-gotten gains. Allowing class action bans creates a profit incentive for businesses to cheat their customers and limits the enforcement of important consumer protection laws.
An increasing number of contracts include forced arbitration clauses. Originally designed for businesses to bring in experts to help resolve business-to-business disputes quickly, outside the court system, arbitration has become ubiquitous in contracts between businesses and people and now routinely can be found in credit card, employment, cell/internet, home construction, medical and nursing home admission contracts. Arbitration does not provide the same protection as court proceedings, can be prohibitively expensive and arbitration clauses often include deceptively subtle waivers of important legal rights.
Moreover, many arbitration clauses specifically ban class actions. Class actions enable the resolution of similar claims by large numbers of people in one single proceeding. They often provide the only way to redress consumer complaints in which individual claims are small (and therefore not worth the individual's time and legal fees to challenge) but which aggregate into huge ill-gotten profits for the wrongdoer. For example, a business with millions of customers can make huge profits by overcharging each customer a few dollars a month. Businesses know that forcing all claims to be heard individually means most people will never seek refunds of money illegally charged. Many people will never notice they are being overcharged, and others will not seek redress through legal action. Who would sue over a few hundred dollars when the legal fees would cost thousands?
The Concepcions responded to an advertisement for a free cell phone with a service contract. When they signed up, they were charged approximately $35 in taxes. They filed a class action complaint to recover the taxes collected, alleging that AT&T violated California law by advertising a free phone then charging the taxes.
While the Concepcion's lawsuit was pending, the Ninth Circuit Court of Appeals ruled in a separate lawsuit with similar claims brought by different plaintiffs against a different company that an arbitration provision requiring aggrieved customers to file individual claims in arbitration was unenforceable. The contract the Concepcions signed had a similar arbitration provision so it was unenforceable pursuant to the Ninth Circuit decision.
But nine months after the Concepcions filed their lawsuit, AT&T sent notice of a change in contract terms of the arbitration agreement. The change provided that if the customers who filed arbitration were able to recover more than the settlement offered by AT&T, AT&T would add a bonus of $7,500 to the recovery. AT&T then sought to compel the Concepcions to arbitrate their claims on an individual basis. The court ruled that the arbitration provision remained unenforceable under California law even with the monetary bonus because forced individual arbitration limits the number of claims that would be brought by injured customers.
AARP joined with other consumer advocates in filing a brief in support of the Concepcion's position that the Federal Arbitration Act ("FAA") does not prohibit class action relief in arbitration. The brief argues that contracts are traditionally interpreted under state law, and that the federal law favoring arbitration does not preempt these state laws. The brief, filed by attorneys with AARP Foundation Litigation, further argues that the ability of consumers to file class actions is vital to ensure that they will be able to seek remedies for wrongdoing in the marketplace.
The brief points out that many of the laws preventing fraud and unfair, abusive and deceptive practices in the marketplace are designed to be enforced primarily through private lawsuits, not by a state or federal enforcement agency paid with taxpayer dollars. But such laws typically are not enforced unless claims can be brought as a class action, because legal fees make the cost of litigation prohibitive for individual claims. The brief provides numerous examples of cases in which consumers would not have been able to recover illegally imposed charges if a class action had been unavailable.
What's at Stake
If the court agrees with AT&T that a class action ban does not make an arbitration provision unenforceable, or that state contract law requiring the availability of class actions is preempted by the FAA, consumers will effectively lose their day in court. Because it is difficult and expensive to arbitrate claims, most people will not seek a remedy to recover small amounts illegally charged. Worse, businesses will have little incentive to avoid cheating their customers.