A great deal of attention has been paid to last week’s U.S. Supreme Court ruling in AT&T Mobility v. Concepcion, in which the Court ruled that a California law does not bar arbitration contracts that make consumers give up the ability to pursue claims through class actions lawsuits. Below is a summary of what the case was about and why the U.S. Supreme Court appropriately defended arbitration agreements as a fair, effective, faster, and less costly alternative to class action litigation.
In 2002, Vincent and Liza Concepcion signed up to buy cell phone services from AT&T. The agreement provided for free phones as a part of the deal. The Concepcions entered into a contract with AT&T to buy cell phone services and were charged $30.22 in sales tax, based on the value of the phones.
In 2006 (wonder what happened in the intervening four years – like how long it took a lawyer to find them and convince them to sue), the Concepcions sued AT&T in federal court in California. That lawsuit was later consolidated with a class action lawsuit against AT&T.
The federal district court allowed the lawsuit to proceed even though the contract said all claims must be arbitrated. The court held that another case of the California Supreme Court, Discover Bank v. Superior Court, 36 Cal. 4th 148, required the lawsuit to proceed because the arbitration clause was “unconscionable,” or so unfair that it should be ignored.
AT&T then appealed to the Ninth Circuit, which affirmed the lower court’s decision to allow the lawsuit to proceed because the arbitration provision was unconscionable.
The U.S. Supreme Court said that since the contract between the Concepcions and AT&T was fair and provided for arbitration and prohibited class actions, the lawsuit was invalid. The Supreme Court relied on longstanding federal law, The Federal Arbitration Act, 9 U.S.C. Section 2, which states that arbitration provisions “shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” Id.
The contract said that all disputes between the parties must be resolved through arbitration, and only in an “individual capacity, and not as a plaintiff or class member in any purported class or representative proceeding.” Many other parts of the contract seem quite fair and even pro-consumer. A customer could initiate dispute proceedings by completing a one-page form on the web site. If AT&T did not offer to settle the claim after that, then the customer could invoke arbitration by filling out a Demand for Arbitration, also available on the web site. If the parties proceeded to arbitration, AT&T has to pay for all costs of non frivolous claims, and the customer gets to pick if the arbitration is in person, by phone, or based on written submissions. The customer could also sue in small claims court instead of using arbitration. AT&T was prohibited from seeking attorney’s fees from the customer and if the customer got an award greater than AT&T’s settlement offer, AT&T would have to pay $7,500 minimum to the customer and double the attorney’s fees.
The Supreme Court noted that long standing law has favored a “liberal federal policy favoring arbitration.” Moses H. Cone Memorial Hospital v Mercury Constr. Corp, 460 U.S. 1, 24 (1983). The Supreme Court affirmed this policy. It states: “The point of affording parties discretion in designing arbitration processes is to allow for efficient, streamlined procedures tailored to the type of dispute” (AT&T Mobility v. Concepcion, p. 10).
The Court noted that the California Supreme Court, in its Discover Bank case and the rule that case has come to embody interferes with arbitration (p. 12). Discover Bank prohibited the use of class waivers in arbitration proceedings and created the class wide arbitration mechanism. The US Supreme Court stated that class wide arbitration is not consistent with the Federal Arbitration Act and not consistent with the principles of arbitration. The California Supreme Court’s creation of class arbitration in Discover Bank “makes the process slower, more costly, and more likely to generate procedural morass than final judgment” (p. 14). The Supreme Court also noted that plaintiff’s lawyers have taken the Discover Bank rule and run with it: “there is little incentive for lawyers to arbitrate on behalf of individuals when they may do so for a class and reap far higher fees in the process” (p. 13).
This decision is a strong endorsement of arbitration, and a slap to the California Supreme Court. AT&T used a fair, even pro-consumer contract that also happens to require arbitration and prohibit class actions. Arbitration is once again affirmed by the U.S. Supreme Court as an efficient and fair way to resolve disputes.
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