In what some are referring to as the most important business case of the year, the Supreme Court on Wednesday, April 27th, handed down its decision in AT&T Mobility v. Concepcion (PDF), holding that companies may insert class action waiver provisions in consumer arbitration agreements, effectively barring consumers from banding together to file claims against companies with whom they have contracted. Mainstream media commentators joined consumer advocates in noting the potential reach of the decision, with Vanderbilt Law Professor Brian Fitzpatrick saying in the San Francisco Chronicle that a decision favoring AT&T “could end class-action litigation in America as we know it.”
The basic gist of the case is as follows: Vincent and Liza Concepcion entered a cell phone contract with AT&T which promised them a “free phone.” While AT&T did not charge directly for the phone, it charged the Concepcions taxes based on the full retail price of the phone, which resulted in a charge of approximately $30. The Concepcions sued on behalf of themselves and others similarly situated, arguing that this was a fraudulent practice. AT&T, however, moved to dismiss arguing that a clause in the contract the Concepcions had signed contained an arbitration provision that (1) forced them to resolve all disputes through arbitration, and (2) prevented them from proceeding as a class in arbitration.
The district court declined to enforce the arbitration agreement as unconscionable, relying on a 2005 California Supreme Court ruling barring class action waivers as unconscionable. The decision was affirmed by the Ninth Circuit. In a 5-4 decision split on ideological lines, the Supreme Court reversed, holding that that the Federal Arbitration Act (a law favoring the use of arbitration to resolve disputes) preempted state court decisions disfavoring arbitration (for a more detailed explication of the Court’s reasoning, see this summary).
While the decision does not allow companies to directly insert class action waivers as such, it allows them to accomplish the same effect by compelling arbitration, then saying that plaintiffs may not pursue classwide remedies in arbitration. As Fitzpatrick points out, “virtually all class actions today occur between parties who are in transactional relationships with one another: shareholders and corporations, consumers and merchants, employees and employers.” Fiztpatrick goes on to point out the core concern implicated: “Sometimes businesses inflict injuries too small to sue over. How many people will sue when someone cheats them out of $100? How many lawyers will take a case worth $1,000? Not many. But, if people don’t sue, businesses know they can cheat people out of small amounts with impunity.”
There are several reasons, however, to believe that Fitzpatrick and others may be jumping the gun by heralding the end of class actions and declaring that the Concepcion decision leaves consumers defenseless against small-scale corporate malfeasance.
First, it’s unclear how far Concepcion will reach into consumer and other class action litigation. As an initial matter, many of the most serious attempts to remedy corporate injury− most notably tobacco, asbestos, and defective pharmaceutical litigation−are not class actions, usually involve consumers who have no contractual relationship with the corporation in question, and thus would be unaffected by the Concepcion decision.
Even within the realm of class actions, the impact of Concepcion may be limited to the consumer context. While Fitzpatrick raises the possibility that Concepcion might be applied by companies seeking to deter shareholder class actions, this is less likely. First, the corporate governance landscape is very different from a consumer context. While it’s unlikely that individual consumers would have the motivation or clout to demand that companies not insert class action waivers, there are many large pension funds (most notably CalPERS) and activist hedge funds that advocate for shareholder rights and good corporate governance practices among the companies they invest in. With considerable amounts of capital and influence, these entities would likely strongly oppose any attempt to weaken their ability to bring or participate in class action lawsuits.
Second, there is the possibility of legislative action to nullify the effect of Concepcion. Senators Al Franken, Dick Blumenthal, and Representative Hank Johnson have already introduced legislation partially intended to counteract the impact of Concepcion. Fitzpatrick argues that the power of the business lobby in Washington makes passage of any legislative remedy improbable. While this certainly is a valid point, the arbitration/class action issue, which is essentially about the ability to pursue action against corporations that rip people off, is easily comprehensible and very relatable for most consumers, meaning that legislators will run increased risk of angering their constituents if they oppose such measures (as compared to more complex or arcane business legislation). Indeed, Franken has already managed to win minor success in curtailing the reach of mandatory arbitration in the employment context.
Finally, the heavily overlapping nature of regulatory authority in the United States means that government agencies could use rulemaking, litigation or other regulatory measures to curtail the impact of Concepcion. For instance, many consumer class actions, including the Concepcion’s, were brought under laws prohibiting false or deceptive advertising, which the FTC Bureau of Consumer Protection has authority to enforce. In the shareholder context, Fitzpatrick notes that the SEC has frowned upon arbitration, and could use its authority to prevent Concepcion from reaching shareholder class actions. Similarly, some have suggested that the newly-created Bureau of Consumer Financial Protection may use its rulemaking authority to prohibit class action bans for consumer financial products.
Certainly, a legislative or regulatory savior may fail to materialize. But the very real possibility that they will makes it slightly premature to predict the true reach of Concepcion. While the Supreme Court seems to have opened the door to tip the balance of power between consumers and companies, time will tell how fully AT&T and others like it will be able to follow through.