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Justice Denied

One Year Later: The Harms to Consumers from the Supreme Court’s Concepcion Decision Are Plainly Evident

By Taylor Lincoln, Christine Hines, and Negah Mouzoon

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One year ago, the U.S. Supreme Court struck a devastating blow against a critical tool for protecting consumers’ rights. The Court ruled in AT&T Mobility LLC v. Concepcion that corporations can bar consumers from pursuing cases as a class, even where state laws protect their right to do so.1

Concepcion was the latest in a series of decisions in which the Supreme Court has expanded the reach of the 1925 Federal Arbitration Act (FAA) in ways that Congress almost certainly never intended. The Court first placed arbitration on a pedestal in 1984, when it ruled inSouthland Corp. et al. v. Keating that states cannot prohibit businesses from requiring disputes to be settled in binding arbitration, rather than in court.2 Since Southland, corporations have increasingly imposed mandatory arbitration clauses on employees and consumers as a condition of getting a job or doing business. The use of such clauses has become ubiquitous in many industries, as Public Citizen reported in 2009.3

In Concepcion, the Supreme Court extended the reach of the FAA even further. The decision upheld the business practice of blocking consumers from bringing class actions by forcing them to arbitrate disputes and, in the forced arbitration provisions of their consumer contracts, barring arbitration on a class basis.

The decision provided corporations with a tool to insulate themselves from facing meaningful accountability for cheating large numbers of consumers out of amounts too small to make pursuing individual cases economically feasible. Since the decision,corporations have frequently invoked Concepcion to argue that consumers’ claims should not be pursued collectively but, rather, individually. Courts have usually accepted these arguments. Using Westlaw’s KeyCite service, this report identifies 76 potential class action cases where judges cited Concepcion and held that class action bans within arbitration clauses were enforceable.4 [See Appendix] These cases undoubtedly would have included the claims of thousands—if not hundreds of thousands—of consumers.

By itself, forced arbitration is inherently unfair because the corporation usually chooses the private arbitration company that will handle its disputes, creating a clear conflict of interest. Additionally, corporations can write the rules that govern arbitration proceedings involving them—such as rules concerning fees, discovery rights, or hearing venues—giving them the ability to tilt the playing field. Corporations have refused entreaties from consumer groups to offer arbitration as a choice, not a mandate. If the process were truly fair, corporations would trust the market to decide.

Even under the FAA, however, states have the power to deny enforcement of arbitration provisions that are invalid under ordinary contract laws that apply to arbitration and non- arbitration agreements alike. One such rule is the principle of unconscionability, under which contract terms that are overly one-sided and oppressive can be struck down by a court. At the time of the Concepcion ruling, for example, courts in at least 19 states had used the unconscionability doctrine or similar legal principles to hold that corporations could not use arbitration provisions to bar consumers and employees from bringing class actions.5

Concepcion obliterated such state law. Citing the “national policy favoring arbitration,” the Court’s majority interpreted class actions as hostile to the institution of arbitration because it deemed them incompatible with the supposed streamlined nature of arbitration proceedings. Justice Antonin Scalia acknowledged the dissent’s claim that “class proceedings are necessary to prosecute small-dollar claims that might otherwise slip through the legal system.” But, Scalia wrote, “[s]tates cannot require a procedure that is inconsistent with the FAA …”6

Such a broad interpretation of the FAA is sure to inflict a serious toll. Class actions often enable groups of consumers or employees who have been wronged in the same way by the same company to pursue cases that would not be economically justifiable as individual actions. In contrast, bringing individual cases on behalf of large numbers of plaintiffs claiming identical damages would often be inefficient—so much so that many cases would never be brought because the costs of pursuing a case on behalf of an individual would exceed the potential recovery.

This report describes the value of class actions in providing consumers an opportunity to receive redress for wrongdoing. In recent years, as this report documents, class actions have been used to hold corporations accountable for illegal payday lending schemes, unfair business practices, and discriminatory auto lending, among other harmful practices. In the future, as a result of Concepcion, businesses that engage in the same activities may escape accountability.

In his dissenting opinion in Concepcion, Justice Stephen Breyer, writing for four Justices, described the consequences of the Court’s decision using the example of a case in which a company cheated 17 million people out of $30 each. “The realistic alternative to a class action is not 17 million individual suits, but zero individual suits, as only a lunatic or a fanatic sues for $30,” Justice Breyer wrote, quoting Judge Richard Posner of the U.S. Court of Appeals for the Seventh Circuit.7 Thus, in the absence of a class action option, this company would succeed in retaining $510 million in ill-gotten gains.

Indeed, the dispute in Concepcion matched Posner and Breyer’s example almost perfectly. The case was brought by plaintiffs who were offered a free mobile telephone in exchange for purchasing AT&T’s service. AT&T then charged the Concepcions $30.22 in taxes, based on the telephone’s retail value.8 The Concepcions believed this charge violated AT&T’s promise to provide a free telephone and filed a class action lawsuit on behalf of themselves and the thousands of other customers who had paid similar charges for “free” phones. AT&T moved to compel arbitration, relying on the class-action ban in its contracts with consumers. Based on previous decisions holding class action bans unconscionable as a matter of California law, the Concepcions defeated AT&T’s attempt to compel arbitration in the lower courts, but the Supreme Court reversed in favor of AT&T.

The Court’s majority concluded that having to defend a class action in arbitration instead of court would be an unacceptable imposition on a corporate defendant because of the risk of error in arbitration, even though such a circumstance would only occur when the corporation elected to require disputes to be settled in arbitration in the first place.9

Under this reasoning, the mere possibility that a business might be saddled with an unjust, high-stakes loss in its preferred forum warranted a rule that will block many consumers from pursuing their claims at all.

The predictable effects of the Concepcion decision are already occurring. Corporations have increased their use of contractual language banning class actions, and judges have frequently cited Concepcion in dismissing consumer class action cases that would have gone forward before Concepcion. Some judges have lamented that the decision has stymied cases that plainly should be brought as class actions or likely could be pursued only as class actions.

As a result, consumers who allege wrongdoing by businesses face an increasingly treacherous legal landscape. This report chronicles three cases that illustrate the effects of Concepcion:

  •   Thousands of students who attended culinary schools owned by a for-profit educational company allege that they were lured into taking on tens of thousands of dollars in loans to attend the schools based on the schools’ misrepresentations about job placement. Cases predating Concepcion were allowed to proceed, and one group has received a $40 million settlement.10 The company revised the arbitration clause in its contracts with students to ban class actions. Now as a result ofConcepcion, lawyers who pursued the earlier cases caution that more recent victims may not be able to find representation and seek justice on an individual basis, according to lawyers who brought the earlier cases.
  •   A member of the Army reserves who was deployed overseas returned a leased vehicle before the expiration of his contract period, as permitted under the Servicemembers Civil Relief Act (SCRA). The service member asked for reimbursement of the pro-rated share of advance payments he had made on his lease, as provided under SCRA, but the financing company refused. The service member sought to pursue a class action lawsuit, but was prevented from doing so on the basis of an arbitration clause in his contract that banned class actions. The judge reviewing the case expressed sympathy for the service member but said that he was bound by Concepcion to dismiss the class action.
  •   A T-Mobile cellular telephone customer who had purchased an “unlimited” text and Internet service plan was informed by the company that his bandwidth would be greatly reduced because of the amount of data that he downloaded. Because the customer believed that his agreement placed no restrictions on his “unlimited” plan, he filed a class action lawsuit. T-Mobile sought to block the case because, it said, the customer’s contract contained an arbitration clause that banned class actions. A judge enforced the arbitration clause, including the class action ban, on the basis ofConcepcion. “We, sadly, have turned away tens if not hundreds of case inquiries from consumers of T-Mobile and AT&T due to the arbitration clause,” said Jenelle Welling, the customer’s attorney.11