In a resounding victory for businesses, the Supreme Court ruled Wednesday that a company can require its customers or employees to arbitrate disputes individually rather than joining forces in a class action.
The 5-4 decision overturned a 2005 California Supreme Court ruling allowing customers who signed arbitration agreements to form a class with other buyers who had similar grievances, even if the arbitration clause prohibited class actions.
A lawyer for the plaintiffs, a Southern California couple contesting a $30.22 cell-phone fee from AT&T, called the ruling "a crushing blow to American consumers." AT&T said the court recognized arbitration as a speedy and effective procedure that often helps consumers.
Justice Antonin Scalia's majority opinion - which said businesses facing class actions "will be pressured into settling questionable claims" - could also signal difficulties for a pending sex-discrimination case on behalf of at least 500,000 past and present female employees of Wal-Mart. The court is due to rule by the end of June on whether that case can proceed as a class action.
The ruling gives new force to the clauses that businesses commonly include in product and service contracts, and sometimes in employment contracts, shifting disputes from the courts to private arbitration panels with little judicial review. Although individuals are theoretically free to refuse, they rarely read the fine-print language and usually have few practical options.
State courts, whose laws regulate contracts, have refused to enforce some arbitration clauses that they consider one-sided and unfair. The 2005 California ruling said class-action bans shield companies from accountability for misconduct, reasoning that individuals with small sums at stake would be unable to find lawyers.
Courts in nearly half the states have issued similar rulings allowing customers and employees to file class actions, either before arbitration panels or in court, said plaintiffs' lawyer Deepak Gupta of the nonprofit group Public Citizen.
His clients, Vincent and Liza Concepcion, had complained that AT&T charged $30.22 in sales taxes for a cell phone the company advertised as free when they signed up for service in 2002.
Their contract required individual arbitration, with a clause that awarded $7,500 to customers who won their cases. But a federal appeals court, relying on the 2005 California ruling, said the Concepcions could pursue a class-action arbitration on behalf of other AT&T customers.
The nation's high court, however, said states that impose such restrictions on arbitration run afoul of a 1925 federal law designed to protect arbitration from "judicial hostility."
That law makes arbitration agreements enforceable on the same terms as other contracts and prohibits states from singling out arbitration for unfavorable treatment, said Scalia, writing for the court's conservative majority. He said the California ruling, which allows customers to pursue class actions in arbitration, "interferes with fundamental attributes of arbitration."
Arbitrating cases for a large number of customers at once "makes the process slower, more costly and more likely to generate procedural morass," said Scalia.
He said class-wide arbitration also "greatly increases the risk to defendants" and may coerce settlements.
Dissenting Justice Stephen Breyer accused the majority of disregarding traditional state authority over the fairness of contracts while leaving consumers in the lurch.
Bans on class actions "can lead small-dollar claimants to abandon their claims rather than to litigate," said Breyer, joined by Justices Ruth Bader Ginsburg, Sonia Sotomayor and Elena Kagan.
Gupta said the ruling would encourage more companies to impose similar restrictions.
"Now, whenever you sign a contract to get a cell phone, open a bank account or take a job, you may be giving up your right to hold the companies accountable," the plaintiffs' lawyer said.
But Deborah La Fetra, lawyer for the business-backed Pacific Legal Foundation, said the ruling allows consumers as well as businesses "to freely choose arbitration for settling disputes, and it rebuffs lawyers who want to herd consumers into wasteful and inefficient class-action lawsuits."
The case is AT&T vs. Concepcion, 09-893. The ruling can be viewed at sfg.ly/l10wvu.