U.S. Supreme Court case could eviscerate consumer class actions Case is expected to turn on whether state laws on unconscionability are viable

By Sylvia Hsieh

The Daily Record Newswire

BOSTON, MA -- Class action lawyers who represent consumers and employees are bracing themselves for the possible end of practice as they know it.

The cause of their anxiety: a U.S. Supreme Court case that has garnered little attention but could wipe out class actions involving consumer contracts or employment agreements that contain arbitration provisions.

The Court agreed to decide whether the Federal Arbitration Act preempts state laws on the unconscionability of class action waivers.

"There are some class action lawyers who think their whole practice is going to disappear," said Paul Bland, a staff attorney with Public Justice in Washington, D.C. who litigates consumer class actions.

At risk are consumer claims against banks and credit card, telecom and other companies, as well as wage and hour disputes whose small individual values make them practical only if brought as class actions.

Class action attorneys fear the Court only took the case because it plans to make a broad statement.

"I suppose there are legalistic lawyerly gymnastics the Court could fabricate to arrive at a narrow ruling, but my sense is that the Court wouldn't have granted review if that's where it was headed," said Michael Donovan, a class action plaintiffs' attorney with Donovan Searles in Philadelphia.

Donovan, who filed an amicus brief in the case, said that a defense win would "effectively destroy consumer remedies across 50 states."

Some lawyers are already feeling the effects of the case, which is scheduled for oral argument in November.

Defendants are moving, sometimes successfully, to stay cases, or plaintiffs are waiting to file new cases, pending the Court's ruling, said Bland.

The case is expected to turn on whether state laws on unconscionability that courts have applied to class action waivers are hostile to the Federal Arbitration Act, which preempts laws that are anti-arbitration, or whether those state laws are viable because they apply to all contracts without singling out arbitration.

The Supreme Court will review a 9th Circuit case, AT&T Mobility v. Concepcion, in which AT&T customers alleged that an offer to receive a "free" phone if they signed up for wireless service was fraudulent because the company then charged sales tax on the retail value of the phone.

AT&T sought to force the plaintiffs to arbitrate under a mandatory arbitration provision that required arbitration and barred class actions.

A U.S. District Court found that the class action waiver was unconscionable under state law and therefore unenforceable, and that the Federal Arbitration Act did not preempt state law.

The 9th Circuit agreed.

It said the agreement failed a three-part unconscionability test for class action waivers in consumer contracts because the agreement was a contract of adhesion, the disputes involved small amounts of damages, and the party with superior bargaining power was alleged to have defrauded a large number of people out of small sums of money.

The court also addressed an incentive clause added to the arbitration agreement after litigation began. The clause allowed a customer who ultimately won an arbitration award greater than AT&T's last offer before the arbitrator was selected to collect a "premium payment" equal to the maximum claim in small claims court ($7,500 in California).

But the 9th Circuit said the clause didn't change its analysis, because AT&T could simply agree to pay the claimed damages, in this case $30.22, to avoid having to pay the $7,500 premium.

"The actual damages a customer will recover remain predictably small, thus...AT&T's class action waiver is in effect an exculpatory clause, hence substantively unconscionable," the court said.

Given a line of Supreme Court cases addressing arbitration and the justices' recent penchant for taking a broad brush to narrow questions, how worried should plaintiffs' class action lawyers be?

"Terrified," said Michael Rubin, an employment lawyer with Alschuler Berzon in San Francisco.

The case, he said, is "the other shoe waiting to drop" after last term's ruling in Stolt-Nielson v. AnimalFeed International Corp., in which the Court held that classwide arbitration was inconsistent with the Federal Arbitration Act unless the parties expressly agreed to class actions in the arbitration agreement.

Plaintiffs' lawyers say the Court's willingness to adopt pro-business arguments has emboldened companies to go for the kill.

"What AT&T is going for is huge," said Bland. "Here's a case that could literally wipe out 90 percent of class actions."

Defense lawyers don't disagree.

"Given that this is the Roberts Court and in the last year or two [they] have gone broader than a lot of commentators predicted, I'd say the chances are better than average the Court will find preemption," said Andrew Trask, a class action defense lawyer with McGuire Woods in McLean, Va.

But even if the Court does find preemption, he noted, savvy plaintiffs' lawyers can still look to the federal common law on unconscionability, however sparse, in their efforts to have class action waivers stricken.

Others suggest defendants are overconfident.

Brian Wolfman, a visiting professor at Georgetown University Law Center, said the plaintiffs have a strong argument.

"Unconscionability is a generally applicable doctrine that applies to any contract, not just arbitration," he said. "Sometimes when lots of litigation is percolating, the Court for whatever reason wants to jump in rather early and put a halt to something."

Wolfman represented the consumer in Wyeth v. Levine -- another preemption case that provoked similar angst and foreboding among plaintiffs' lawyers who predicted they would no longer be able to sue drug companies; the Court ended up rejecting the preemption argument.

"In that case too there was no conflict [in the lower courts] and the issue hadn't bubbled up. People were concerned. But I thought we had good legal arguments," Wolfman said.

However, he declined to predict what the Court might do this time, saying, "We're going to know next spring. I'm a litigator, not a bookmaker."

Published: Thu, Sep 2, 2010