April 27, 2011 at 5:06 PM ET
Fine print in everyday consumer contracts can include provisions that require Americans to surrender their rights to file class-action lawsuits, the U.S Supreme Court ruled Wednesday, overturning a lower court ruling.
The ruling could have immediate impact on consumers' ability to fight against companies when they feel their rights have been violated. It also raises questions about the future of class-action cases.
Consumer advocates roundly criticized the decision.
"(The ruling) is a devastating and far-reaching betrayal of the most fundamental principles of American justice," said Nan Aron, president of the Alliance for Justice, a civil rights advocacy organization. "(The court) has effectively removed any incentive for corporations to behave within the law."
When consumers sign up for everything from cell phone service to rental cars, terms of the contracts signed often compel them to forgo traditional legal mechanisms when a dispute arises, forcing them to mandatory binding arbitration instead. Such provisions have been struck down in many state cases as "unconscionable," with various courts deciding consumers could not be compelled to surrender basic legal rights granted by the state. That is especially true in what are known as "contracts of adhesion" -- standard form contracts offered on a "take it or leave it" basis, where consumers have little bargaining power, the courts have said.
Last year the U.S. Supreme Court agreed to review a case filed in a California federal court in which AT&T's arbitration clause had been voided, a decision that was later upheld by a federal appeals court.
By a 5-4 margin, the Supreme Court overturned the appeals court ruling on Wednesday, with the majority essentially saying that federal law encouraging use of arbitration trumps state laws aimed at preserving consumer rights.
“Because it stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress ... the judgment of the Ninth Circuit is reversed," wrote Justice Antonin Scalia in his opinion.
Justice Stephen Breyer wrote the dissent for the divided court.
"California courts believe that the terms of consumer contracts can be manipulated to insulate an agreement’s author from liability for its own frauds by ‘deliberately cheat(ing) large numbers of consumers out of individually small sums of money,’ " he wrote. "Why is this kind of decision — weighing the pros and cons of all class proceedings alike — not California’s to make?"
Class-action lawsuit advocates say that grouping consumers together is often the only way to force a misbehaving company to clean up its act. Most consumers can't or won't complain about small transgressions, such as erroneous $30 fees -- and many companies ignore such complaints. But pooled together, the voices of a million complaining consumers have much more power, and the ability to attract professional legal help.
Detractors say that victims in class-action cases often receive minimal compensation – sometimes, only a coupon -- while lawyers earn millions in legal fees. Binding arbitration, they say, can result in larger awards for consumers and dramatically reduce their legal fees.
Tort reform advocate Ted Frank, writing before the Supreme Court decision was issued, argued that class-action lawyers would benefit most from a decision against AT&T.
“In every single one of my cases, my clients would have been better off … with the AT&T Mobility arbitration provision than with what class-action attorneys negotiated for them,” he wrote. “The media is uniformly describing this case as one of consumers vs. businesses, when it's really one of consumers vs. lawyers trying to protect their monopoly on dispute resolution procedures.”
But some studies have called into question the fairness of arbitration boards, and their composition. In 34,000 California arbitration cases filed with the National Arbitration Forum between 2003 and 2007 and studied by Public Citizen, consumers prevailed only 4 percent of the time.
Harvey Rosenfield, founder of California-based organization Consumer Watchdog, said the Supreme Court ruling "effectively eliminates" protections against unfair small print.
"This decision means it will be open season on consumers,” Rosenfield said. “It slams the courtroom doors shut on Americans who are nickeled and dimed by big corporations. Knowing they can never be held accountable, American corporations will be emboldened to fleece their customers."
Now, consumer advocates are worried that Americans will have a hard time standing up to large companies when small-dollar issues are involved.
"Through this ruling, the court’s ultra-conservative majority continues its relentless effort to shift power to corporate interests while hobbling the ability of everyday Americans to band together within the legal system to fight back against corporate misbehavior," said Aron, the Alliance for Justice president. "After today’s ruling, corporations will now be able to decide on their own which civil rights and consumer protections they want to obey, knowing that there will be no effective means available to their victims to find redress."
The issue of binding arbitration isn't settled, however. The financial reform law passed by Congress last year that created the Consumer Financial Protection Bureau mandated that the agency study the arbitration issue and ban techniques that are deemed "anti-consumer." The law creating the agency gives it the task of conducting a six-month study of arbitration agreements, then grants it the ability to void such agreements in contracts involving consumer financial issues.
Legislation banning binding mandatory arbitration clauses in consumer contracts also has been introduced in Congress, most recently by former Sen. Russ Feingold, D-Wis., and Rep. Ed Markey, D.-Mass., but has stalled several times.
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