Supreme Court Deals Blow to Consumer Class Actions

On April 27, 2011, the U.S. Supreme Court, in AT&T Mobility LLC v. Concepcion, dealt a blow to consumer class actions. In a 5-4 opinion written by Justice Antonin Scalia, the Court ruled that when a contract of adhesion requires that individual disputes be resolved through arbitration, states cannot also require that the contract provide for classwide arbitration. Read on to learn exactly what this means for consumers and perhaps employees.

In this case, consumers sued AT&T in a class action lawsuit, alleging that the company engaged in false advertising and fraud by advertising a free phone as part of a cellular phone service contract, and then charging customers $30 in sales tax for the phone. The contract between AT&T and its customers required that consumer disputes be resolved through arbitration. The contract was a contract of adhesion, meaning it was a take it or leave it contract and not individually negotiable. Contracts of adhesion are used in all sorts of consumer transactions.

The arbitration clause in AT&T's contract did not provide for any way that consumers could have their dispute resolved as a class through arbitration. So, the consumers brought a class action lawsuit in court. Class actions are commonly used to challenge business practices or contract provisions where the resulting damages (in this case, $30 per customer) are too small to justify individual lawsuits or arbitration claims.

AT&T moved to compel the plaintiffs to resolve the dispute through arbitration. The District Court refused, ruling that AT&Ts arbitration agreement was unconscionable and unenforceable because it did not provide for classwide arbitration. The court relied on the prevailing rule in California, called the Discovery Bank rule (named for the 9^th Circuit opinion that set the rule). The Discovery Bank rule said the following: If a companys contract of adhesion provides for individual arbitration of consumer disputes, it must also provide for classwide arbitration. Any ban on class action arbitration in these types of contracts is unenforceable. The 9^th Circuit agreed with the District Courts decision.

The Supreme Court overruled the 9^th Circuit decision, finding that the Discovery Bank rule was preempted by the Federal Arbitration Act (FAA), which encourages contracting parties to resolve disputes in a speedier and less formal manner than using the court system. According to the Supreme Court, requiring businesses to provide for classwide arbitration in their contracts of adhesion would discourage businesses from having arbitration agreements. The plaintiffs in the AT&T case, therefore, could not bring a class action in court and would, instead, have to file individual arbitration claims.

It is uncertain how far-flung the effect of this ruling will be, or whether it will apply to other types of contracts, for example, in the employment context. However, its certain that companies doing business in California are, as we speak, busily revising arbitration agreements to exclude classwide arbitration relief, or are adding arbitration agreements to contracts of adhesion that didnt have them already. The bottom line: In the future it will be more difficult for consumers to challenge unfair or fraudulent business practices, particularly if the damage to individual consumers from the practices is small.