The Supreme Court dealt a blow to class-action lawsuits that involve small claims affecting thousands or even millions of people by ruling that corporations may use arbitration clauses to block dissatisfied consumers or disgruntled employees from joining together.
In a 5-4 decision, the justices said Wednesday the Federal Arbitration Act of 1925, originally aimed at disputes over maritime and rail shipments, trumps state laws and court rulings in California and about half the states that limit arbitration clauses deemed to be “unfair” to consumers.
The ruling was “the biggest ever” on class actions, said Vanderbilt University law professor Brian Fitzpatrick, an expert on such litigation.
“It gives companies a green light to exempt themselves from all class actions from their customers or from their employees,” Fitzpatrick said. “Companies can basically escape from the civil justice system. And why wouldn’t a company take advantage of that?”
It has become routine now that when someone opens a bank account, subscribes to a cable TV service, buys a cellphone, a computer or a new car or makes a purchase online, he or she agrees to let disputes go to arbitration.
Many employers include the same kind of fine print for new hires, blocking class-action suits for employees with discrimination or wage complaints.
These arbitration clauses typically require individuals to bring claims on their own, not as a group.
Nonetheless, the California Supreme Court in 2005 said companies should not be allowed to “deliberately cheat large numbers of consumer out of small amounts of money” by shielding themselves from being sued.
But on Wednesday, the court’s conservative majority overruled those state judges and said arbitration clauses must be enforced even if they may be unfair.
Justice Antonin Scalia said companies like the “streamlined” arbitration proceedings because they are faster and cheaper.
Deepak Gupta, the Public Citizen lawyer who represented a California couple who sued over what was purported to be a free cellphone but cost about $30.22, agreed that the ruling in their case would have a broad effect.
It allows companies to use “the fine print of take-it-or-leave it contracts” as a “shield against corporate accountability,” he said.
Not all products or services come with arbitration clauses, but many do, he said. Some products, such as appliances, come with a box that includes fine-print contracts and an arbitration clause. These have been upheld as binding, even if the consumer did not sign the agreement, legal experts said.
Several business lawyers said class-action claims rarely work to the benefit of consumers anyway.
“I think this decision will help consumers, not hurt them,” said Alan Kaplinsky, a Philadelphia lawyer for the American Bankers Assn. “The only people who do well in the class-action suits are the lawyers. The attorneys get millions in fees, and the consumers get a worthless coupon. For them, it’s better to go through arbitration.”
Still pending before the court is a major dispute over class-action suits involving job discrimination.
Lawyers for Wal-Mart Stores Inc. have asked the justices to throw out a sex-discrimination claim brought on behalf of 1.5 million current and past female employees. Though the Wal-Mart case has attracted far more attention, Wednesday’s ruling on arbitration contracts could have a greater effect in blocking future class-actions suits on behalf of employees.
The decision is in line with a series of pro-arbitration rulings from the high court since the 1980s. They are all based on an obscure 1925 law that speaks of “maritime transactions.” It was passed to protect shippers and dealers who exchanged goods across the country. It said that if they agreed to arbitrate disputes, those deals would have to be enforced.
But in recent years, the court’s conservative majority has wielded that law to knock down objections to unfair arbitration clauses involving consumers.
Vincent and Liza Concepcion, who live in the San Diego area, were charged $30.22 in sales tax for what was promoted as a free cellphone. They tried to join a class-action suit against AT&T Mobility, but the company said the they would have to go to arbitration as individuals. Their cellphone contract prohibited class-action claims, the company said.
Judges in California — both federal and state — agreed with the Concepcions and ruled that the company could not enforce its ban on class-action claims. The Supreme Court reversed that decision in AT&T Mobility vs. Concepcion.
“Arbitration is poorly suited to the higher stakes of class litigation,” Scalia said. He was joined by Chief Justice John G. Roberts Jr. and justices Anthony M. Kennedy, Clarence Thomas and Samuel A. Alito Jr.
The dissenters said a practical ban on class actions would be unfair to cheated consumers.
Justice Stephen G. Breyer said the California courts have wisely insisted on permitting class-action claims. Otherwise, he said, it would allow a company to “insulate” itself “from liability for its own frauds” by denying consumers a practical remedy.
Breyer added that a ban on class actions would prevent lawyers from representing clients for small claims.
“What rational lawyer would have signed on to represent the Concepcions in litigation for the possibility of fees stemming from a $30.22 claim,” he wrote. Justices Ruth Bader Ginsburg, Sonia Sotomayor and Elena Kagan joined his dissent.
The court itself divided along partisan lines. All five Republican appointees formed the majority, while the four Democratic appointees dissented.