Supreme Court Imposes Limits On Class Actions

The U.S. Supreme Court has handed corporations a major victory. By a 5-4 vote, the court ruled Wednesday that companies can enforce contracts that bar consumers and employees from banding together to bring class action suits.

Ever read that long cell phone contract you signed when you enrolled for service? Well, look again. It likely has a provision requiring all disputes to be resolved by arbitration and barring consumers from banding together in a class action. Your credit card agreement, your cable agreement and maybe even your employment agreement have similar clauses.

Many states have ruled such contracts illegal and unenforceable, among them California. In Wednesday's case, a California couple sued on behalf of themselves and others who were charged $30.22 in sales tax for the supposedly free phone they got when signed up for service with AT&T Mobility. If they won, the class could potentially win millions of dollars versus the small amount — possibly only $30.22 — that each person would win in an individual arbitration.

If you take a job at a fast-food restaurant or a big-box retailer, if you sign up for a credit card or a cell phone, chances are you're going to be signing away your right to bring a class action.

But on Wednesday, the U.S. Supreme Court ruled that the federal arbitration law enacted to encourage arbitration trumps the state law, effectively blocking consumers from bringing their claims as a group.

Justice Antonin Scalia, writing for the five-justice majority, said that federal law favors arbitration because it is faster and cheaper than formal trials. But "arbitration is poorly suited to the higher stakes of class litigation," he said, and allowing class action would "destroy arbitration as we know it."

The court's four liberal justices dissented, with Justice Stephen Breyer writing that requiring consumers to arbitrate disputes individually could deprive them of their claims because the suits would not be worth enough to attract a lawyer.

"What rational lawyer would have signed on to represent [the couple in this case] in litigation for the possibility of fees stemming from a $30.22 claim?" he asked.

Consumer and civil rights advocates blasted the decision as a sweeping shield for corporate America. Public Citizen's Deepak Gupta, who argued the case for the consumers, said that after Wednesday's decision, "if you take a job at a fast-food restaurant or a big-box retailer, if you sign up for a credit card or a cell phone, chances are you're going to be signing away your right to bring a class action."

Alan Kaplinsky, who filed a brief in the case for the American Bankers Association, agrees that corporations will now feel free to increase their use of arbitration contracts. But, he contends, that will be good for consumers.

Organizations like the American Arbitration Association have been conducting arbitrations for a decade, he says, and "there is empirical data showing that consumers do very well in arbitration."