Supreme court stuffs challenge to consumer arbitration

The U.S. Supreme Court delivered a stinging defeat to class-action lawyers today when it reversed a California ruling that invalidated contracts that required consumers to pursue disputes in arbitration instead of litigation.

In a decision by Justice Antonin Scalia that split along the usual 5:4 line, the court reaffirmed the view that the Federal Arbitration Act trumps state law even when it comes to contracts between relatively unsophisticated consumers and giant corporations. The case, AT&T vs. Concepcion, involved a consumer who felt ripped off after being charged sales tax on a supposedly "free" cellular phone by AT&T. The case was less about the little guy, however, than the lawyers who bundle thousands of little guys together into class actions the average consumer may not even know exist.

The majority ruled that the FAA represents a "national policy favoring arbitration" and that Congress intended to steer disputes into the "efficient, streamlined proceedings" instead of traditional litigation. To bolster the point, Scalia cited statistics from the American Arbitration Association showing the typical consumer proceeding ended in four to six months, while out of 283 class proceedings opened by 2009, 121 were still opened and zero had resulted in a final award.

The decision highlights the increasingly awkward conflict between supposedly conservative support of states' rights and the liberals' traditional support of consumer rights and federal power. Justice Stephen Breyer, in a dissent joined by Justices Ginsburg, Sotomayor and Kagan, said the majority was trampling the rights of California citizens to set their own legal standards for "unconscionable" contracts.

The FAA has a "savings" clause saying it isn't intended to overrule traditional state concepts governing contract law. And the California Supreme Court, interpreting a state law prohibiting companies from defrauding customers, had determined that contracts prohibiting class actions were unconscionable because they allow companies to steal small amounts from large numbers of customers without the possibility of legal redress.

The dissenters criticized the majority for reading into the FAA concepts that can't be found in the text of the law. "Where does the majority get its contrary idea—that individual, rather than class, arbitration is a 'fundamental attribut[e]' of arbitration?" Breyer wrote.

Instead of comparing the complexity of class actions to the efficiency of arbitration proceedings involving a single consumer, Breyer wrote, the majority should have compared the relative speed of a class proceeding before an arbitrator to a traditional class action in court. California was within its rights to rule that contracts prohibiting any form of class resolution were unconscionable, the dissenters said.

A single class proceeding is surely more efficient than thousands of separate proceedings for identical claims. Thus, if speedy resolution of disputes were all that mattered, then the (California rule) rule would reinforce, not obstruct, that objective of the Act.

The majority held that Congress intended the FAA to apply to all contracts requiring arbitration, even so-called "contracts of adhesion" where the consumer has to agree in order to purchase a product. The complaint that consumers won't bother to bring small claims — or more importantly, that they can't find a lawyer to represent them in small claims — is belied by the terms of the AT&T contract that provided a $7,500 payoff plus double the legal fees if an arbitrator awards more than the company's final settlement offer.

The argument ultimately came down to the role of lawyers in such cases. With arbitration, the majority wrote, consumers can resolve their claims relatively rapidly but lawyers have little incentive to get involved.

Consumers remain free to bring and resolve their disputes on a bilateral basis …and some may well do so; but there is little incentive for lawyers to arbitrate on behalf of individualswhen they may do so for a class and reap far higher fees in the process. And faced with inevitable class arbitration, companies would have less incentive to continue resolving potentially duplicative claims on an individual basis.

(Published by Forbes - April 27, 2011)