Federal Courts and Nominations

Class actions on the ropes? Not likely

A victory for consumers and class action litigators seemed possible on Tuesday as the Supreme Court heard arguments in a high-stakes dispute over clauses that block class actions as a way of resolving contract disputes.

Justices seemed reluctant to second-guess a California court ruling that was the basis for deciding that such clauses are “unconscionable” under state law and cannot be enforced, even when they are embedded in arbitration clauses.

“Are we going to tell California what it has to consider unconscionable?” Justice Antonin Scalia asked dubiously at one point. “We have to serve as reviewers of state law?” asked Justice Sonia Sotomayor in a similar tone.

The questioning came in the case of AT&T Mobility v. Concepcion, which has been billed as a major showdown between companies and consumers that could be the death knell either for class actions or arbitration.

A California couple launched a class action to challenge a $30 fee that was tacked onto what was advertised as a free cell phone. AT&T invoked an arbitration clause in the sales contract, under which customers agreed to arbitration and to resolve disputes on an individual, not class, basis. Applying California law and precedents, the federal district court and appeals courts ruled the clause foreclosing class action litigation was unconscionable. Under state contract law, contract clauses deemed excessively unfair to one side can be voided as unconscionable.

AT&T appealed to the Supreme Court, arguing that the Federal Arbitration Act, which fosters dispute resolution through arbitration, pre-empted state contract law.

That proved to be a hard sell for Mayer Brown partner Andrew Pincus, who represented the phone company. He repeatedly tried to make the case that the California standard for determining if contract clauses are unconscionable discriminated against arbitration in a way that is not permitted under federal pre-emption doctrine. “They have made up a special rule for arbitration,” Pincus insisted.

But several justices did not see it that way, seeming to accept that if state contract law is evenly applied, the federal law promoting arbitration does not prevail. “The rule is the same whether it’s litigation or arbitration,” Justice Ruth Bader Ginsburg told Pincus.

“A majority of the justices seemed to agree with the Concepcions that the Federal Arbitration Act does not preempt state law protecting consumers and employees,” said Elizabeth Wydra, chief counsel for the Constitutional Accountability Center, who attended the arguments and filed a brief on the side of the consumers in the case.

Arguing for the cell phone customers was Deepak Gupta, attorney for the Public Citizen Litigation Group. (He was profiled in Monday’s Supreme Court Insider.)

Gupta urged the Court to “start from a position of deference” toward state law and court decisions, and he defended class actions as a necessary option for consumers making small claims. “A class action incentivizes lawyers and others to detect this fraud,” said Gupta. “It makes it economically justifiable to come forward with these kinds of claims.”

California, Gupta said, should be allowed to make the determination it has made here, namely that “if you preclude class-wide relief, that will … gut the state’s substantive consumer protection laws, because people will in the context of small frauds not be able to bring those cases.”

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