Supreme Court Says Business Favorable Arbitration Clauses Can Block Class Action Lawsuits

from the which-is-more-evil? dept

Wed, Apr 27th 2011 2:20pm — Mike Masnick

Back when I was in college, one of my favorite classes was a class on arbitration. It was really fascinating to dive deep into how arbitration works, and it's a process I've remained fascinated with for years. Conceptually, it sounds like such a good idea. Have an arbitrator help work out a dispute, rather than going through a fully adversarial court process. And, when it's done right, it can be very effective. And, yet, many people are realizing that the system today is broken. According to various reports (pdf), businesses prevail 96.8% of the time in business-initiated contract arbitration cases handled by the National Arbitration Forum (and business-initiated cases are the vast, vast, vast majority of the cases). If that number seems unnaturally high, you've spotted the problem. The main issues is that, usually, the business gets to choose the arbitrator (or at least gets approval). Unlike the court system, the arbitrator is being paid for by the parties, and if that arbitrator wants to get more business, he or she is going to view the party likely to hire him or her in the future more favorably. This isn't to say there's outright corruption. I'm sure many arbitrators believe they're being fair. But the results are pretty damning.

At the same time, an equally broken process is the class action system. We've seen over and over again that class action lawsuits are used more as a way to enrich lawyers, rather than to help any particular class. The lawyers get the bulk of any settlement, and anyone in the class gets a couple dollars over an issue they didn't really care about in the first place. Or, in some cases, it's even more ridiculous where the "settlement" actually pushes people in the class to buy products from the company being sued.

So, I have to admit that I was somewhat conflicted about the Supreme Court case concerning the legality of arbitration clauses in California and their ability to block consumer class action lawsuits. In the end, the Supreme Court has ruled that the lower court rulings (in both the district and appeals courts), which upheld the right to a class action lawsuit against AT&T, were wrong. The lower courts found that the arbitration clause was an "unconscionable contract," but the Supreme Court felt otherwise, with a ruling that seemed to buy into all of the myths of arbitration, rather than what the data actually says.

The background story on the case is that a couple, Vincent and Liza Concepcion, sued AT&T in a class action lawsuit, saying that there were advertisements for free mobile phones, but sales tax was still applied on the full retail price meaning the phones weren't really free. Frankly, this seems like a somewhat silly class action claim to make and it fits with my feelings towards class action lawsuits. But, that shouldn't get in the way of the larger question, of whether or not such class actions (legitimate or not) can be blocked entirely by an arbitration clause. AT&T, of course, claimed that the arbitration clause in its contract blocked the class action lawsuit and meant it had to go through arbitration (and not as a class, but on an individual basis). And from there, we got the lower courts' decisions rejecting the clause and the Supreme Court now accepting it.

As much as I'm troubled by bogus class action lawsuits, this ruling bothers me much more. I do think that both the class action process and the arbitration process are regularly abused, but that the class action process is both more likely to be fixed and less likely to result in completely unfair results. If this involved a situation where two parties had a full and fair negotiation and then agreed to an arbitration clause, I wouldn't have much of a problem with it. But when it's a "click through" sort of agreement, where the consumer has no way to bargain or negotiate the contract -- and, in fact, isn't really expected to have read the contract -- I have serious problems with the idea that people can be forced to give up their basic rights to go to court over something that is designed for them not to read.

On top of that, this certainly opens the door to companies putting arbitration clauses everywhere to keep them out of court on all sorts of potential misdeeds. The unintended consequences of this sort of thing are certainly troubling. The proper response, at this point, would be for Congress to fix the law and to make it clear that you can't give up the right to go to court through such a non-negotiated contract... but the chances of that actually happening seem slim at best.

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Filed Under: arbitration, california, class action, supreme court
Companies: at&t

31 Comments

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Anonymous Poster, 27 Apr 2011 @ 2:29pm

Wow, we really have become a corporatocracy.
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Octothorpe (profile), 27 Apr 2011 @ 2:45pm

Arbitration
I took the opportunity once to contact my legislators once regarding these arbitration agreements, one of whome was the head of the senate judicial committee at the time, and the reply I got back was simply "I don't believe in legislating contractual terms", basically saying that he doesn't want to do anything to weaken a businesses ability to screw consumers via arbitration contracts and other non consumer friendly contracts.

I am my fellow constituents have since voted the sucker out. Score small victory for the people.
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Nobody, 27 Apr 2011 @ 2:45pm

Good. Stops the Lawyers from collecting big profits with these Class Action suits while the plaintiffs get nothing.
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Steven (profile), 27 Apr 2011 @ 2:50pm

I wonder. If I struck the arbitration clause from the contract (crossed it out) and then signed it (assuming the employee still completed the sale) would I not be bound by that portion of the contract?
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Anonymous Coward, 27 Apr 2011 @ 3:27pm

Re:
I agree. It's much simpler to let the corporations keep the profits while the plaintiffs get nothing. After all, if the lawyers got any of the money, they might pay taxes on it, and taxes cost jobs.
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Anonymous Coward, 27 Apr 2011 @ 3:32pm

Re:
I did that with a job I started. I was expected to print and sign a PDF form that gave all sorts of ridiculous things to my employer. I removed the pieces that I didn't like, printed it, and signed it. They hired me. Then they found out their no-compete didn't work on me because I never signed one.

Yes it works (in that case, according to the Texas Workforce whatever they're called now). It wouldn't work with someone like AT&T's electronic signup (there's no way to strike things from it) or at their store I think. I don't think they'd let you mark it that way without a red flag coming up.
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Anonymous Coward, 27 Apr 2011 @ 4:09pm

Re: Re:
I'm assuming (hoping) this is sarcasm.

It's curious to me why people have such a problem with lawyers getting a large percentage of the $$ from class action settlements, but they have no problem with the government getting all the $$ from criminal fines.
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SUNWARD (profile), 27 Apr 2011 @ 4:31pm

Ontario changed the law already
binding arbitration can no longer be used in Ontario when it involves an individual (not sure about business to business)

next up, is to sue the arbitrators.
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Capitalist Lion Tamer (profile), 27 Apr 2011 @ 7:43pm

Well, I'm glad it's being decided for us...
Because arbitration is such a fair and balanced way of sorting out differences.
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Pixelation, 27 Apr 2011 @ 9:00pm

As a business owner, go arbitration!

My lawyer suggested an arbitration clause in my contract. His comment was, "If we go to court for money someone owes you, by the time you are done paying me there will be very little left for you". One of the few lawyers in the world I appreciate.
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Anonymous Coward, 27 Apr 2011 @ 9:59pm

"saying that there were advertisements for free mobile phones, but sales tax was still applied on the full retail price meaning the phones weren't really free."

So maybe the government is the right one to sue here.
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Anonymous Coward, 27 Apr 2011 @ 9:59pm

Re:
Where have you been the last ....
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Anonymous Coward, 27 Apr 2011 @ 10:05pm

Re: Re: Re:
I actually believe that criminals should always have the option of not paying any fines whatsoever and to serve time in jail instead (with the option of not doing any labor in jail). This would cut down on governments passing laws that target victimless criminals and it would also cut down on governments passing bad laws. If 'criminals' don't have to fund bad laws (ie: by paying fines) but governments must pay for their enforcement at the same time (ie: governments pay for jail time) then only crimes worth enforcing will be funded.

Back in the days (ie: if you ever saw Any Griffith) that was the thinking behind allowing 'criminals' the option of not paying any fines. I think today fines can be mandatory?
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Anonymous Coward, 27 Apr 2011 @ 10:07pm

Re: Re: Re: Re:
and the same thing should be enforced civilly. If you commit a tort and someone sues you, perhaps you should be given the option to serve time in jail, with no labor, instead of making any payments. This would cut down on victimless torts, like copy protection infringement.
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Rekrul, 28 Apr 2011 @ 12:04am

I can't wait until corporations start putting in clauses which say that if the government does business with them, the company can't be fined for any wrong-doing.
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Antoine Clarke, 28 Apr 2011 @ 3:07am

Caveat emptor
The SCOTUS rulung makes it more likely I'd offer a product for sale in the USA in future. Without it, I would refuse to offer any product or service there (if I knew how to I'd consider banning Americans from reading my blogs to avoid possible litigation). If class action suits are bad, then imagine how bad they are for foreign companies and individuals: juries tend to be very generous with other peole's money, especially strangers. I worked on a start up project which might have developed a useful tool for uninsured Americans to get cheaper healthcare. The project was abandoned, and the litigation culture of the USA was a significant element of me abandoning the project (if Obamacare gets killed, plus this ruling, we could be back in business). I assumed that anything that works will be targeted by ambulance chasers, BECAUSE we're good and would have the resources to pay up.
As for consumers: the best approach is to read everything ("caveat emptor") or rely on the company's PR and marketing people to take a generous interpretation of the contract. With a cell phone contract, for instance, how long I'm tied in is crucial, because exit is the real leverage.
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Rich, 28 Apr 2011 @ 7:28am

I once received a settlement letter in the mail (as I'm sure a lot of you have). It was for a defective TV that cost $1000 (and that was several years a go). The lawyers got about 26 million dollars, and I got a $30 coupon for another crappy TV from the same company.
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Idobek (profile), 28 Apr 2011 @ 8:22am

Be careful when advocating the reform of arbitration
I don't want to have to explain to my wife that I read the blog of man who had Judge Judy cancelled.
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Anonymous Coward, 28 Apr 2011 @ 11:36am

I personally prefer aleatory contracts as they allow a lot more leeway to the consumer than they do to the business.

Such one-sided contracts, however, should not be able to unconditionally waive your right to legal suit.

In addition, I don't see how a forced waiver is upheld in this type of scenario. You can't be a part of the injured class if you don't purchase - yet at the same time, once you do purchase you can't assert your position as a member injured class.

IANAL -- Thank God! :)
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Anonymous Coward, 28 Apr 2011 @ 2:12pm

Re: Re:
If businesses can choose how you legally deal with them, then the citizen basically has no real rights any more of freedom, and equal justice. The legal rules are not applied equally in this case, the corporations is choosing their legal path for them at no free choice of possible said victims, and thats simply wrong.

If some corporation can tell me what type of layer i must use, then our legal system is screwed royally. We all need our free right to choose ourselves not have some bias corporations pick for them, and their benefits.
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Rekrul, 28 Apr 2011 @ 2:28pm

Re: Caveat emptor
The SCOTUS rulung makes it more likely I'd offer a product for sale in the USA in future. Without it, I would refuse to offer any product or service there (if I knew how to I'd consider banning Americans from reading my blogs to avoid possible litigation).

So you basically want blanket immunity from legal action if you offer a sub-standard, defective or dangerous product or service?
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Justin Olbrantz (Quantam), 28 Apr 2011 @ 7:32pm

Re: Re: Caveat emptor
Well, to be fair, the US is the laughing stock of the world when it comes to ridiculous civil suits and judgements, so it's certainly understandable that he wouldn't like operating in the US. Of course mandatory binding arbitrary goes way too far in the other direction; but that's somebody else's problem...
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Adrian Lopez, 28 Apr 2011 @ 7:44pm

Private Justice (for Some)
Essentially, the Supreme Court has just granted corporations the right to prevent customers from pursuing contractual disputes in court, forcing these to instead be handled by arbitrators whose interpretation of the contracts as a whole will likely favor those who write the contracts over those who "agree" to those contracts by purchasing products of services.
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Anonymous Coward, 28 Apr 2011 @ 10:12pm

Re: Arbitration
It's likely that the replacement is just as much as sucker, sadly.
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Anonymous Coward, 29 Apr 2011 @ 5:33am

Re: Re: Caveat emptor
Not sure what you encompass by the term "sub-standard", but as to the remainter of your terms the answer is "no".
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Rekrul, 1 May 2011 @ 5:33am

Re: Re: Re: Caveat emptor
Not sure what you encompass by the term "sub-standard",

A product that is poorly made. Like a DVD player that's so fragile it easily breaks during what would be considered normal use. Or a pair of speakers that sound like crap.

A service that doesn't live up the marketing hype, or the normal expectations of the consumer. Like offering a house painting service, but when you're done some of the original paint is showing through. Or offering to transfer old home movies from VHS to DVD and giving the customers a finished product that looks inferior to the original recording.

but as to the remainter of your terms the answer is "no".

How so? If your contract demands that all disputes be settled by arbitration, then you most certainly do want blanket immunity from legal action.
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Anonymous Coward, 7 May 2011 @ 1:58pm

Re:
No a handwritten part of a contract controls over typed writing.
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Anonymous Coward, 18 Jul 2011 @ 1:42pm

Class actions are a often times a good thing. Those of you that have such negative attitudes toward class action lawsuits are simply bending to the corporate will and spitting out unfounded blabber fed to you by corporate lobbyists. In other words, you're sheep. Sure, the lawyers take a percentage (usually around 25%), but that's because they front millions of dollars and spend several years litigating with no guarantee that they will be paid. The issue is not about lawyers making money, it's about whether we want to allow companies to insulate themselves from lawsuits when the amount of money at stake isn't large. That's what this case does and in the end it's not good for consumers.

AT&T can charge every customer $3 more per month and force you to arbitrate that claim. Is it worth your time to arbitrate a claim like that? No, it's not. Is it worth it for a law firm to bring a class action on behalf of all AT&T customers? Of course. Because of this ruling, that may now be impossible.

So if you honestly believe that America is better off, there is no helping you. Go vote for Bachmann and support tax cuts for corporations (which of course create jobs - even though taxes are lower than they have been in 50 years and we've had the lowest job growth since the great depression while those taxes were in place.)
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Shine (profile), 24 Oct 2011 @ 2:20am

abused
A lot of laws and processes are ok...for the good of the people. The problem is the implementation. It gets either misused or abused. Sad.......
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Joy, 2 Jan 2012 @ 10:58am

It not really nice to sue companies for the purpose of making or getting money from them. The purpose of suing should be so that nobody will get victimized again.
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Ann, 31 Mar 2012 @ 12:53am

Whenever I read about class action, I remember the Julia Roberts movie, Erin Brockovich.
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