Consumers win as Supreme Court upholds freedom of contract

Author: Deborah J. La Fetra

The United States Supreme Court today ensured that consumers will continue to be able to enter into contracts with companies to arbitrate any future disputes that will arise.  Individual consumer arbitration speedily resolves disputes in an informal forum, providing benefits to consumers and businesses alike.  Today’s decision ensures that these consumers and businesses cannot be forced into inefficient, expensive, and time-consuming class action procedures when they agreed to proceed on an individual basis.

Consumers Vincent and Liza Concepcion signed a contract with AT&T that any disputes arising out of their ownership and use of AT&T cellphones would be submitted to arbitration on an individual basis (that is, no “class” arbitration analogous to a class action in court).  The Concepcions were improperly charged sales tax on a “free” phone and sued, claiming that the no-class-action provision in the arbitration agreement was unconscionable and unenforceable.

The lower courts noted that the arbitration agreement in this case was extremely consumer friendly, describing it as “quick, easy to use” and likely to “prompt full or even excess payment to the customer without the need to arbitrate or litigate” and noting that the terms were so favorable to an individual consumer, that consumers who were members of a class would likely be worse off.

California law, which applied in this case, has basically made it impossible for companies to include a “no class action” provision in arbitration contracts.  The Supreme Court dubbed this the Discover Bank rule, after the primary California case that adopted the rule, Discover Bank v. Superior Court, 36 Cal. 4th 148 (2005).  This morning, the Court ruled 5-4 that the California cases were preempted by the Federal Arbitration Act (FAA), which makes arbitration agreements “valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.”

Justice Scalia, writing for the majority, explained,

The overarching purpose of the FAA ... is to ensure the enforcement of arbitration agreements according to their terms so as to facilitate streamlined proceedings. Requiring the availability of classwide arbitration interferes with fundamental attributes of arbitration and thus creates a scheme inconsistent with the FAA.

Because the California cases placed arbitration contracts on a different footing than other contracts, the Court held that they stood as an obstacle to the federal protection of arbitration agreements.  California has led the nation in hostility to arbitration as courts in other states relied on Discover Bank to justify invalidating arbitration contracts.  Therefore, the decision today, which thoroughly disapproves Discover Bank and the theories that supported it, will have national implications.

Importantly, the Court spent considerable time explaining why unilateral imposition of class arbitration by an arbitrator or judge interferes with the fundamental attributes of the individualized arbitration of disputes that the parties agreed to.  Consumers benefit from the informal, streamlined procedures of individual arbitration.  But class arbitration is neither informal nor streamlined; in fact, it imports nearly all the time-consuming, expensive procedures of a regular class action in court, but severely restricts the right of appeal.  Under those circumstances, companies would rather do away with arbitration altogether than submit to a class arbitration.  And that makes dispute resolution all that much more expensive for consumers.

PLF’s brief on the merits is here.