Justices grill attorneys on class action bans in arbitration clauses

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November 18, 2010

Justices grill attorneys on class action bans in arbitration clauses 

In oral arguments last week in a case involving communications giant AT&T, the justices repeatedly questioned whether the Supreme Court had any right to interfere with how California conducts its own contract law—specifically, whether it could conclude that the Federal Arbitration Act preempts state law saying that class action bans in mandatory arbitration clauses are unconscionable.

By Carmel Sileo

The Supreme Court heard oral arguments last week in a case that attorneys say could determine the future of class action lawsuits. The closely watched case centers on whether the Federal Arbitration Act (FAA) preempts state law determinations that class action bans in arbitration clauses are unconscionable.

The decision in the case, involving communications giant AT&T, could have wide-ranging impact—especially on consumer lawsuits alleging fraud and deceptive practices, many of which include claims that are too small to be brought individually. Class actions have traditionally been the answer to this problem, because they give plaintiffs the opportunity to pursue remedies collectively.

“A ruling for AT&T would grant businesses a license to steal and could wreak havoc on laws designed to protect consumers and employees,” Nan Aron, president of the Alliance for Justice, an advocacy organization headquartered in Washington, D.C., wrote on the Change.org blog.

In 2005, plaintiffs Vincent and Liza Concepcion signed up for cell phone service through wireless provider AT&T Mobility, which was offering a free phone with the service contract. When they discovered that they had been charged sales tax on the phone, they filed a class action against the company for fraud. AT&T argued that the arbitration clause of their contract banned the class action.

A trial court found that the contract could not be enforced under California law, because the California Supreme Court had held in an earlier case—Discover Bank v. Superior Court (113 P.3d 1100 (Cal. 2005))—that class action bans are unconscionable. The Ninth Circuit affirmed. (AT&T Mobility v. Concepcion, 584 F.3d 849 (9th Cir. 2009).)

In oral arguments November 9, a repeated theme was whether the Court had any right to interfere with how California conducts its own contract law, specifically whether the justices could conclude that the FAA preempts the Discover Bank decision.

Most of the justices expressed strong reluctance to do so. Justice Antonin Scalia asked, “Are we going to tell the state of California what it can consider unconscionable?” Justice Elena Kagan said that if California wanted to adopt its own doctrine to determine unconscionability, “who are we to say that the state is wrong about that?”

Justice Stephen Breyer asked Washington, D.C., lawyer Andrew Pincus, who represented AT&T, “What’s the basis for saying that the arbitration act or any other federal law forbids California from [finding the arbitration clause unconscionable]?”

Pincus responded that the state was not applying the principles it outlined in Discover Bank across the board, but rather had “made up a special rule that is targeted on a special type of contract.”

Deepak Gupta, a lawyer with Washington, D.C.-based Public Citizen, represented the plaintiffs in his first argument before the Court. He urged the justices to give deference to federalism.

“The state law at issue,” said Gupta, “is a correct and legitimate application of the state’s common law, to which this Court should defer.”

Chief Justice John Roberts and Breyer asked whether the plaintiffs’ argument amounted to interference with parties’ ability to set their own terms in a contract. Gupta agreed that courts should not interfere with “consensual” arrangements but said it was important for courts to “ensure that there’s not coercion” and that “arbitration represents merely a change of forum, but isn’t an exemption from the law.”

The content of the justices’ questions might indicate how they will vote, said attorneys who were present in the courtroom—or it might not.

"I am optimistic," said John Vail, vice president of the Center for Constitutional Litigation in Washington, D.C., which represented AAJ as an amicus in the case. "The biggest question is, where is Justice Thomas, and what values will he and the other justices give to federalism? If Justice Thomas maintains his strong stand against displacement of state power, then a good outcome is likely. Justices Scalia and Kennedy also had questions about whether it was appropriate to displace California's ban on class action waivers, which it had applied evenhandedly to litigation and arbitration." Justice Clarence Thomas maintained his customary silence during the arguments.

A transcript of the oral argument is available at the Court’s Web site.

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