Corporate Governance

From the Pages of The Pomerantz Monitor: Supremes to Take Another Look at Class Actions in Arbitration

By Carolyn Moskowitz

As reported in the recent issue of The Pomerantz Monitor, it has become increasingly obvious that the main risk in signing a contract with an arbitration clause is not that you will deal with an arbitrator rather than a judge and jury, but that you will lose your right to bring any disputes you may have as a class action.

First, as The Pomerantz Monitor previously reported, in its recent Stolt-Nielsen decision the Supreme Court held that arbitration agreements that do not specifically provide for litigation of claims on a class-wide basis cannot be interpreted to permit a plaintiff to bring a class action. The court reasoned that, absent express consent, no party can be compelled to arbitrate claims on a class-wide basis. It remains to be seen how far afield this reasoning will be applied. 

Now, in AT&T Mobility, comes the flip side of this question: what if the arbitration agreement is not merely silent but actually specifically bars class action litigation? Some states, like California, have made such provisions unenforceable under circumstances which would make them ?unconscionable.? Now the Supremes have granted certiorari in a case where the class action bar was struck down under that statute.

The case is a consumer class action contending that AT&T Mobility committed fraud when it offered a ?free? phone to all who signed up for service, but then charged substantial sales tax to each consumer. The phone purchase agreement required arbitration of any disputes, and barred class actions. Because the average plaintiff?s injury was about $30, litigation of an individual case would not make financial sense, leaving the class action as the only economically feasible way to proceed.

Both the District Court and the Ninth Circuit held that the clause barring class actions was unconscionable under California law. California has a ?sliding scale? approach to unconscionability which, as applied in this case, bars such waivers when they appear in ?consumer contracts of adhesion? that will typically generate disputes involving ?small amounts of damages.? The theory is that such a waiver will make arbitration prohibitively expensive in view of the small size of the potential claims, and thereby effectively insulate the defendant from responsibility for fraudulent conduct.

But the contract contained an unusual clause that complicated this analysis: if the arbitrator awards a claimant more than the company offered to resolve the matter, the claimant gets a bonus of $7,500. This, AT&T argued, made it economically feasible for individual arbitrations to go forward and removes any necessity for leaving open the class action route.

In light of this bonus system, the Court granted cert to decide ?whether the Federal Arbitration Act preempts States from conditioning the enforcement of an arbitration agreement on the availability of particular procedures ? here, class-wide arbitration ? when those procedures are not necessary to ensure that the parties to the arbitration agreement are able to vindicate their claims.? The way this question is phrased may hint at the direction the Supremes are heading in this case.

Full post as published by PomTalk on September 14, 2010 (boomark / email).