WASHINGTON — In a case that could limit the ability of consumers to band together and file legal claims, the U.S. Supreme Court seemed to have trouble nailing down a test to determine when the Federal Arbitration Act trumps state law.
The case, AT&T Mobility v. Concepcion, stems from an offer by AT&T to give customers “free” cell phones when they signed up for wireless service. The company charged sales tax on the retail value of the phones, and the customer service agreements contained an arbitration clause banning class action lawsuits.
Vincent and Liza Concepcion later filed a class action, alleging that the “free” phone offer was fraudulent. The 9th Circuit affirmed a ruling that the class action waiver was unconscionable under California law, and that the Federal Arbitration Act did not pre-empt state law.
Discriminating against arbitration?
At oral arguments in the U.S. Supreme Court on Tuesday, Andrew Pincus, a partner in the Washington office of Mayer Brown, argued for AT&T that allowing states to invalidate arbitration agreements for failing to allow class action claims would essentially “require arbitration to be a carbon copy of litigation, precisely what the [Federal Arbitration] Act was designed to prevent.”
The plaintiff — backed by other business groups — prefers arbitration over litigation because the former is typically a faster and less expensive way for companies to settle disputes with consumers.
When Pincus argued that requiring class actions discriminates against arbitration and therefore violates the FAA, Justice Stephen Breyer wondered why.
“Class arbitration exists,” Breyer noted. “It’s not like having a jury trial. You could have it in arbitration. You can have it in litigation….Where is the discrimination?”
Although the FAA has a “savings clause” that allows state courts to invalidate arbitration clauses on “grounds as exist at law or in equity for the revocation of any contract,” Pincus said the case at issue did not fall into that exception.
Incentivizing fraud detection
Deepak Gupta, a staff attorney at Public Citizen Litigation Group in Washington, argued on the consumers’ behalf that, despite the FAA, contracts can be invalidated if provisions run afoul of public policy under general contract principles.
When the Concepcions entered into the contract, they didn’t realize how unfair it was, he said.
“And so the question is: is that unconscionable as to them?” Gupta said.
“Why are they better off with a class adjudication?” Justice Samuel Alito asked.
“A class action incentivizes lawyers and others to detect … this fraud,” Gupta replied. “It makes it economically justifiable to come forward with these kinds of claims.”
By the end of the hour, Justice Sonia Sotomayor — like Justice Anthony Kennedy and others on the court — was still looking for a standard to apply.
“Counsel, I’ve asked your adversary this question and I’m not sure yet what his answer is, so I’m asking you,” Sotomayor said. “What’s the test you would use?”
“You would see whether the state court is telling the truth,” Gupta said. “Is this law really being applied in the same way in the arbitration context and outside of the arbitration context?”
Impact of ruling
Amici briefs note that the Supreme Court’s ruling could have an impact far beyond consumer cases. Workplace groups assert that it could affect employment cases, particularly matters involving large companies whose employees may not have the means to file individual discrimination suits. And civil rights groups argue that class actions have historically been used as a vehicle in wide variety of discrimination cases.
Conversely, business groups argue that requiring class arbitrations would be unduly burdensome for businesses and essentially would ring the death knell for arbitration agreements. Companies would be more likely to avoid arbitration altogether than to agree to class arbitration, they argue, and therefore an expedient, cost-effective means of dispute resolution would be lost.
A ruling from the court is expected later this term.