Class Actions

Let’s say you sign a contract for a new cell phone. Maybe one reason you sign is that the phone company promises you a free phone. Your first problem is that you might not think the phone is actually free after you find out you still have to pay sales tax on the phone’s value. Your next problem is that if you feel aggrieved or misled by this contract, the company requires you to arbitrate all disputes with them, and that just might not be worth the time and trouble over $30 in sales tax.

One solution might be better regulation, to determine whether the phone company has engaged in misleading conduct, and perhaps fine them or compel them to issue refunds if their conduct were found to have crossed the line. It could be argued that regulation is more efficient than forcing consumers to battle the telephone behemoths themselves. But that is not the American way. We distrust bureaucratic solutions. The American solution is the class action lawsuit, which incentivizes attorneys, with the promise of enormous fee awards, to aggregate thousands of small claims into gigantic lawsuits that generally get settled. Because they are expensive to litigate, they may act as a deterrent to improper corporate conduct, but they are generally regarded in corporate suites as a gigantic nuisance or worse. Consumers may not be as troubled because, well, who doesn’t want to get one of those confusing legal notices in the mail, with the promise of a coupon or a small check down the road?

That solution ran up against a major roadblock this week, in the form of the United States Supreme Court, which held in the case of AT&T Mobility, LLC v. Concepcion, that the company’s arbitration clause should be enforced. What seems notable as a matter of legal doctrine is that the Court went so far as to deprive state court systems of some of their power to develop the common law of contract, in this case the doctrine of unconscionability. If common law contract doctrine is deemed to run afoul of the Federal Arbitration Act, the California Supreme Court no longer has the power to prevent businesses from requiring arbitration of claims that could be brought as a class action. (For those who still think that this particular conservative Supreme Court favors state’s rights, here is another example to show that they do not.) This case may be seen as one more battle in the ongoing war between judicial hostility to consumer arbitration clauses on the state level, and judicial favoring of arbitration on the federal level (especially the Supreme Court in recent years, as I have discussed in previous posts). So far the U.S. Supreme Court would seem to have more clout in this war, but they may go so far toward enforcement of consumer arbitration clauses that Congress will simply outlaw them altogether. In other words, if the Supreme Court is simply trying to prevent effective enforcement of consumer rights, that view seems short-sighted and likely to run up into a strong reaction.

It might be more constructive to step back and think more carefully about the problems we are trying to solve, and how to solve them. Is the real underlying problem mandatory pre-dispute arbitration? As I have argued previously, pre-dispute arbitration clauses in consumer cases are difficult to justify. On the other hand, if we view the problem more broadly, as a problem of law enforcement–whether we are talking about false advertising laws, or securities laws, or corporate codes, or labor laws–we might be looking at the problem too narrowly if we only see the options of arbitration of individual claims vs. class action lawsuits. Maybe there is a better way of enforcing the rules that now seem to call for enforcement by means of class action lawsuits. Maybe we only got to the point where consumer rights advocates think we need to outlaw arbitration because we haven’t developed a better solution for protecting consumer rights than vindicating those rights in court, which in small cases, it only makes sense to do through the class action mechanism. In my proposed civil procedure rules for utopia, there is no provision for class actions. I left that out because such cumbersome, expensive litigation seems antithetical to the more streamlined procedures I was suggesting. But we can only leave the class action remedy out if we develop another more effective way of protecting the interests of masses of small claim-holders.

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