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Class Dismissed?

The school year still has more than a month to go, but class actions in consumer cases may be near an end under yesterday’s U.S. Supreme Court ruling in AT&T Mobility LLC v. Concepcion.  The five member conservative majority of the Court struck down California’s law barring arbitration clauses that contained waivers of class action rights in consumer cases because it is preempted by the Federal Arbitration Act (FAA).  The four liberal justices dissented.  Consumer advocates claim this case will immunize corporations from liability to consumers for unfair trade practices because it is too expensive for individual consumers to pursue such cases alone, even in arbitration. 

But a closer look at the decision reveals that such immunity does not come without price.  In this case, AT&T Mobility’s cellular phone sale and servicing agreement provided that customers could initiate dispute proceedings by completing a one-page Notice of Dispute form available on AT&T’s Web site.  If the dispute is not resolved within 30 days, the customer can invoke arbitration by filing a separate Demand for Arbitration, also available on AT&T’s Web site.  In the event the parties proceed to arbitration, the agreement specifies that AT&T must pay all costs for nonfrivolous claims; that arbitration must take place in the county in which the customer is billed; that, for claims of $10,000 or less, the customer may choose whether the arbitration proceeds in person, by telephone, or based only on submissions; that either party may bring a claim in small claims court in lieu of arbitration; and that the arbitrator may award any form of individual relief, including injunctions and presumably punitive damages.  The agreement, moreover, denies AT&T any ability to seek reimbursement of its attorney’s fees, and, in the event that a customer receives an arbitration award greater than AT&T’s last written settlement offer, requires AT&T to pay a $7,500 minimum recovery and twice the amount of the claimant’s attorney’s fees.

It would have been nice if AT&T gave its customers a choice to opt in or out of the arbitration clause, but I suspect many if not most consumers would opt in.  In this case, the lead plaintiff’s claim was that AT&T improperly charged him about $30 sales tax for a free phone.  How many consumers in such a situation would not opt for a dispute resolution mechanism that is free (to the consumer) and relatively simple?  AT&T built into the agreement adequate incentive for it to pay or settle most claims.  Class action litigation, either in court or in arbitration, usually ends in a settlement, but only after the consumption of large amounts of attorney fees, costs and time.  The policy question that remains after the Supreme Court’s decision in this case is whether the additional deterrent effect of a possible class action is worth the expenditure of those fees, costs and time. 

I am not a fan of arbitration clauses imposed on unsophisticated parties in contracts of adhesion.  But the arbitration clause and class action waiver in this case were hardly one-sided.  They provide incentives and benefits, as well as detriments, to both parties.  Neither the parties nor the Court addressed this aspect of the unconscionability issue in this case, but it may still be possible to argue that some arbitration and class-action waiver clauses are so one-sided as to be unenforceable, even under the FAA.  So, as long as this decision is not used to validate every arbitration clause and class action waiver in all consumer contracts, it may not mean the end of consumer class actions in all cases. 



June 1 has come and gone, and one deadline has taken effect while another has been postponed again.

  • Wisconsin’s automobile insurance requirement is now the law. However, police will refrain from issuing tickets to uninsured drivers for at least the first month. Instead, the police will give drivers 30 to 60 days to get insurance and show proof of it.
  • Meanwhile, the FTC has once again postponed its identity theft “red flag” rules while it, or Congress, tries to figure out who to exempt from the requirement.

On the topic of arbitration and class actions, the Wisconsin Court of Appeals has clarified how it will decide whether an arbitration clause is unconscionable, especially in Consumer Act cases.  In a case that was poorly briefed and argued by both sides, the court remanded for further findings on the issues of substantive and procedural unconscionability. 

In federal court, the 7th Circuit has put aside its usual antipathy towards class actions and affirmed class certification in a consumer fraud case, at least on the issue of liability. 


7th Circuit continues to make class actions scarce

Class actions are supposed to be for people who have small claims that are not worth pursuing alone but, due to the number of people affected, are worth pursuing in the aggregate.  Nonetheless, the 7th Circuit U.S. Court of Appeals continues to read the class action rules and cases strictly, making it difficult for people with similar small claims to join together and pursue justice.  Whether it is consumers who are sent credit cards in violation of the truth-in-lending act or pre-trial detainees who are kept in jail too long after bond is posted, the court continues to parse the rule and case law with scant attention to the larger picture and purpose of the procedure. 

Credit Card case

In Muro v. Target Corp., the named class representative settled her claim but reserved her right to appeal the district court’s denial of class certification.  The 7th Circuit denied her appeal because she did not have a sufficient interest to continue the litigation on behalf of the class.  This type of reasoning gives defendants an incentive to pick off willing class representatives by settling with them, thereby avoiding exposure to the larger class as a whole. 

Pre-trial detainee case

In Harper v. Sheriff of Cook County, the court found that individual variations in facts among class members precluded certification.  In my opinion, this shows a lack of imagination and creativity that the class action mechanism should promote.  The important thing to remember is that all of the plaintiffs’ claims are too small to bring individually, so the individual variations cannot be too large to begin with.  If necessary, subclasses could be devised to take into account some of the variations. 

If the courts really want to dispense justice to as many people as possible, they must quit equating big individual claims with important issues.  Resolving small individual claims that affect hundreds of thousands or millions of people can be more important to fostering trust and confidence in our legal system. 


Caveat arbitrator

The recent settlement of the Minnesota Attorney General’s lawsuit against National Arbitration Forum (NAF) was a welcome development for consumers.  Minnesota alleged that the company—which had been named as the arbitrator of consumer disputes in tens of millions of credit card agreements—hid from the public its extensive ties to the collection industry.  Under the settlement, NAF must stop accepting any new consumer arbitrations and will permanently stop administering arbitrations involving consumer debt, including credit cards, consumer loans, telecommunications, utilities, health care, and consumer leases.  Mandatory pre-dispute consumer arbitration clauses have been suspect for many years because the clauses have been hidden in fine print and the parties’ bargaining power is extremely unequal.  The American Arbitration Association has developed Consumer Due Process Protocols in order to determine which alternate dispute resolution (ADR) mechanisms were fair and which were not.  Arbitrators and mediators should be required to be familiar with these protocols.  The Seventh Amendment to the United States Constitution guarantees the right to a trial by jury in civil cases, when more than $25 is in dispute.  This right can be waived, but like any other waiver, it should be done only after fully informed and voluntary consideration of the costs and benefits.  ADR can be faster and less costly than litigation, but we already pay for judges and the courts through our taxes.  Before giving up such a valuable right, consumers should be fully advised.  They may be giving up not only their right to be heard by a jury of their peers, but also the right to an appeal.  They may also be taking on costs that they are not prepared to pay.  And sometimes confidentiality is not desirable.  If one consumer has been harmed by an illegal financing scheme, it is likely that others have been similarly harmed.  If such disputes are kept out of public courtrooms, other consumers may not become aware of the problem.  There is also the issue of independence, which was the problem with NAF.  When deciding whether an arbitrator or mediator is truly neutral and independent, follow the money.  Where do their fees and referrals come from?  Everyone knows how judges and jurors are paid (poorly!).  Make sure you know how your mediator or arbitrator makes a living.