Corporate Accountability

High court to decide dispute over taxes on ‘free’ cell phone

Washington (CNN) — Supreme Court cases often turn on tricky interpretations of a word or phrase that serve to buttress a broader legal principle. The magic word at Tuesday’s oral arguments was “unconscionable,” and how it applies to consumer disputes and arbitration.

The dense hour of debate revealed little of the justices’ thinking. At issue is whether a company’s arbitration clause in contracts that ban larger class-action lawsuits is permissible. The high court will decide whether federal law has sway — or “pre-empts”– state contract laws. Several states have tossed out many class-action barriers by businesses as “unconscionable” and therefore unenforceable.

The financial stakes are huge and both sides of the case have lined up an impressive list of allies. Consumer protection groups say a ruling against them will make it easier for companies to use the fine-print in business and employment contracts to get away with widespread fraud to consumers and discrimination of its own workers.

But business groups worry a flood of frivolous lawsuits would ensue if consumers can file large class-action lawsuits — involving perhaps thousands of plaintiffs — which industries say would be costly to the economy and to competition.

The current dispute involves Vincent and Liza Concepcion, who signed a purchase agreement eight years ago for cellular phone service in California. AT&T Mobility advertised a “free” Nokia phone with the purchase of a $150 Motorola phone. The company then charged sales tax on both devices, totaling about $30. The Concepcions objected, but because of the small amount at stake, they did not want to sue by themselves. They decided to sue on behalf of other phone purchasers as well.

The service agreement the couple signed included the phrase, in capital letters: “You and AT&T agree that each may bring claims against the other only in your or its individual capacity, and not as a plaintiff or class member in nay purported class or representative proceeding.”

After the lawsuit was filed, AT&T revised its arbitration provisions that a federal court concluded greatly benefited the consumer. But federal courts also agreed the Concepcion class-action lawsuit could proceed, citing California law that said some contracts can be considered unenforceable if they are built on deception, are too-one sided, or violate broader public policy.

The company then appealed, citing the Federal Arbitration Act, an 85-year-old congressional law permitting class-action exemptions to stand when combined with arbitration. AT&T wants the phone dispute handled by a private arbiter that would only weigh the specific competing claims and render a binding ruling. It is a generally faster and cheaper alternative to a civil trial that could drag on for years, including appeals. Adding class-action status often only adds to the time and money expended. Jury verdicts can also in some cases lead to massive judgments against firms convicted of corporate wrongdoing.

In oral arguments, much of the debate turned on the term “unconscionable” and whether it can be used by states when arbitration agreements may in fact be very consumer-friendly. AT&T lawyer Andrew Pincus said federal law set a high standard for states to exempt contractual agreements barring class-action arbitration.

The California provision “statute had general principles to be applied to all contractual provisions to determine unconscionability: It must shock the conscience,” he said.

Justice Stephen Breyer used one of his famous colorful hypotheticals to suggest that while each case is different, class-action was appropriate in the cell-phone dispute.

“It’s like Switzerland having a law saying, we only buy milk from cows who are in pastures higher than 9,000 feet. That discriminates against milk from the rest of the continent. But to say we want cows that have passed the tuberculin test doesn’t. So I guess we have to look at the particular case,” he said. “And here, my impression is the class arbitration exists. It’s not like having a jury trial. You could have it in arbitration. You can have it in litigation. So where is the 9,000-foot cow, or whatever it is? Where is the discrimination” alleged by the company against using arbitration, he asked.

Breyer said the issue can extend beyond cell phone companies, cable providers, banks, and credit card companies.

Deepak Gupta, representing the Concepcions, warned that a ruling in the company’s favor would hurt consumers lacking deep pockets.

“The state has made a judgment 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.”

But Justice Samuel Alito — supported in part by Chief Justice John Roberts and Justice Antonin Scalia — voiced concern about giving class-action status to similar disputes, which he said was against the whole idea of arbitration — to handle small disputes quickly and cheaply.

“That traditional unconscionability [standard] in California and elsewhere focuses on unfairness to the party who is before the tribunal,” said Alito. “So here it would be unfairness to the Concepcions, rather than unfairness to other members of the class who are not before the court.”

The Concepcions are supported by two dozen consumer, civil rights, and worker rights groups, among them the Constitutional Accountability Center.

“Corporations shouldn’t be allowed to commit fraud a few dollars, and one consumer, at a time,” said the group’s chief counsel Elizabeth Wydra. “Concepcion should be an easy case. Because state courts are vital in protecting the rights of American consumers, the Federal Arbitration Act specifically preserves a critical role for state law.”

But a variety of business interests urged the high court to uphold its precedent in related cases. The U.S. Chamber of Commerce’s litigation arm filed an amicus brief that said “class arbitration does not deter misconduct, but rather forces parties into costly litigation.”

The high court in two separate appeals this spring gave victories to big business over enforceability of arbitration requirements in contracts.

The case is AT&T Mobility LLC v. Concepcion (09-893). A ruling is expected by next spring.

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