U.S. Supreme Court blocks class action lawsuits where arbitration clause is present

Posted on Apr 27th, 2011

In a victory for large corporations against wronged consumers, the Supreme Court ruled in AT&T Mobility LLC v. Concepcion that the Federal Arbitration Act pre-empts state law allowing consumers to participate in class actions. The Supreme Court overturned California law that previously held that class action bans in arbitration clauses will not be upheld if they enable companies to cheat large numbers of consumers out of individually small amounts of money.

The Court even went further and found that the Federal Arbitration Act requires enforcement of prohibitions of class-wide arbitration (which are found in most consumer arbitration clauses), even though nowhere does the Federal Arbitration Act say or imply this. Thus the Supreme Court has completely cut off all ability for consumers with substantially identical, small dollar amount claims to join together regardless of forum.  Even in arbitration, each consumer will be forced to arbitrate his or her claim individually.

Justice Stephen Breyer, in his dissent, pointed out the folly of this decision: “What rational lawyer would have signed on to represent the Concepcions in litigation for the possibility of fees stemming from a $30.22 claim? 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.”

As the Dean of UC Irvine Law School, Edwin Chemerinsky, writes, class actions exist precisely for this situation, in which a large number of people lose a small amount of money and none is likely to bring an individual claim.  Also read this excellent editorial on the CBS Moneywatch website.

The effect of the Supreme Court’s decision is to make it nearly impossible for corporations engaged in even massive fraud to be held accountable in situations where many people lose a little.

The Supreme Court has for all intents and purposes granted large corporations the license to steal. All a corporation needs to do is sneak in an arbitration clause via an online click-through agreement, or bury it in the undecipherable fine print of a receipt you don’t receive until you’ve already purchased the product.

To remedy this Supreme Court decision, Congress would need to pass a new law overturning it. To that end, Senators Al Franken (D, Minn.) and Richard Blumenthal (D, Conn.) have introduced legislation to make mandatory arbitration unenforceable. Unfortunately, it is unlikely this legislation will see the light of day in the near future.