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Justice for Sale, Part Three: The War on Consumer Class Actions

California was once a bastion of consumer protection, but a big Supreme Court decision in 2011 was a game-changer, essentially wiping out many consumer class actions in favor of private arbitration.

This is the final story in our three-part series that looks at the extraordinary growth in mandatory arbitration clauses in contracts for everything from jobs to cell phones to medical care. Check out Part Two and Part Three.

Hal Rosner was apoplectic.

The Scripps Ranch lawyer turned ever-darker shades of pink as he outlined what he called the U.S. Supreme Court’s war against consumers. He was brandishing a 28-inch, yellow automobile purchase contract and waving it like a pennant.

“It’s a basic, fundamental attack on the United States Constitution, and it’s why our Supreme Court should walk around with shame,” Rosner said. “Our Supreme Court violated the United States constitutional right to jury trial like a group of little whores.”

Rosner’s a trial lawyer, so it’s fair to chalk up some of his outrage down to the natural theatrics of his profession.

But he’s also got good reason to be mad. And so do consumers.

In a game-changing 2011 decision, the U.S. Supreme Court dealt a huge blow to consumer advocates. In a 5-4 ruling, the court essentially said that not only is it OK for companies to put clauses in their contracts forcing customers to settle disputes in private arbitration, but they can also bar customers from bringing class action lawsuits against them or even arbitrating their disputes as a class.

The decision in the case, AT&T Mobility v. Concepcion, a class action lawsuit that originated in San Diego, involved customers who had been charged small amounts for phones advertised as “free,” overturned years of law developed in the California Legislature and upheld by its courts to protect consumers against a seemingly unstoppable trend.

For decades, businesses across the country have increasingly been writing their way out of the judicial system. By inserting “mandatory arbitration clauses” into their contracts, companies ranging from auto dealers to cell phone companies to health care providers have cut off their customers’ access to the courts, forcing them instead to settle disputes in private arbitration.

That has long concerned consumer advocates and even some industry insiders, who say arbitration is biased in favor of big business. But, for many observers, those worries are nothing compared with the U.S. Supreme Court’s 2011 decision.

“It’s earth-shattering. It takes away your right to hold companies accountable for transactions that we all engage in every day,” said Deepak Gupta, one of the attorneys who represented the plaintiffs in the Concepcion case before the U.S. Supreme Court. “We all assume that we have a right to hold a company accountable if they’re cheating us. We assume the consumer protection laws will apply. What’s frustrating is the average person doesn’t know that when they take out a contract … they’ve given away their rights.”

The Golden State for Consumer Protection

Historically, California hasn’t been a bad place to be a consumer.

The Legislature in the Golden State has spent the last few decades trying to protect the little guys, and successive big court decisions have upheld consumer rights.

In the 1990s and early 2000s, as mandatory arbitration clauses became all the rage for corporations across the country, the California Legislature pounced, passing a slew of laws in 2002 aimed at protecting consumers from the ever-growing trend toward private justice. (Though one of the key laws has since been widely ignored by much of the arbitration industry).

The activism wasn’t limited to lawmakers. Several high-profile lawsuits concerning arbitration clauses found their way to the California Supreme Court. The granddaddy of these was a case called Discover Bank v. Superior Court, in 2005.

The California Supreme Court ruled in that case that companies couldn’t put blanket bans on class action lawsuits in their contracts. To do so was “unconscionable” in legalese. It wouldn’t fly.

Over the next few years, at least 13 other states ruled that blanket class action bans by companies were illegal, according to a research paper by Myriam Gilles of the Cardozo School of Law and Gary Friedman, a New York attorney.

Then, in 2011, California’s groundbreaking rules were put to the ultimate legal test.

The Concepcion case originated in 2006, when a San Diego couple, Vincent and Liza Concepcion, signed a deal offered by AT&T to receive a “free” phone if they signed a two-year cell phone contract. The couple was later charged $30.22 in sales tax for the phone, and they sued AT&T in a class action.

But AT&T had a mandatory arbitration clause in its contract with the Concepcions and other customers barring them from suing the company in court. The clause also said that each customer had to arbitrate his or her case individually, and that groups of consumers couldn’t come together to fight their cases as a class arbitration.

AT&T asked the U.S. District Court in San Diego to dismiss the class action based on that clause. But the court refused, citing the rule that had been established in the Discover Bank case. AT&T appealed to the 9th Circuit and eventually, the U.S. Supreme Court agreed to hear the case in 2010.

The high court’s ruling — which found that the Federal Arbitration Act trumped individual states’ decisions to forbid class action bans — largely dismantled California’s years of consumer protection efforts.

The impact of the ruling was swift and far-reaching.

A 2012 report by Public Citizen, an advocacy group, and the National Association of Consumer Advocates, found that judges nationwide had struck down 76 potential class action cases since the ruling.

“These cases undoubtedly would have included the claims of thousands — if not hundreds of thousands — of consumers,” the report states.

F. Paul Bland, a senior attorney at Public Justice, a public interest law firm in Washington, D.C., and one of the country’s leading consumer advocates, said the U.S. Supreme Court took away the only method by which consumers can get justice when they’ve been bilked out of small amounts of money.

Companies are now free to scam their customers out of small amounts, Bland said, and even if the customers realize they’re being scammed, they’re almost certainly not going to bother fighting the company in an individual arbitration.

And, even if they wanted to challenge the company, few lawyers would be willing to take on such small cases, he said.

[rtb-pushquote]”Concepcion is being interpreted in a way that lets corporations get away with cheating people, in complicated ways, out of sums of money that aren’t that big to the individual, but add up to hundreds of millions of dollars to the company,” Bland said.[/rtb-pushquote]

Creating a Better System

Andrew Pincus, the attorney who argued the Concepcion case on AT&T’s behalf, said the shift away from class actions is actually good for consumers.

Pincus said AT&T’s mandatory arbitration clause provides excellent remedies for consumers who have been legitimately wronged. Consumers can recoup bonuses from the company worth thousands of dollars more than their claim, he said, and lawyers have impetus to fight arbitrations, since they’re entitled to double their fees if they win.

Mandatory arbitration clauses like AT&T’s are a much better way to filter out frivolous claims against companies, Pincus said.

Pincus’ arguments would have more merit in a world where every business has an arbitration clause that provides legitimate, generous bonuses to successful plaintiffs, Gupta countered. But many arbitration clauses don’t, and only allow wronged consumers to recoup the small amounts of money they have lost, he said.

And Gupta argued there’s no incentive for companies to provide such bonuses in their contracts.

The End for Consumer Class Actions?

Jeremy Robinson, a class action attorney at San Diego firm Casey Gerry, said the Concepcion decision has undoubtedly had a dampening effect on his firm’s class action business.

But that doesn’t mean consumer class actions are dead, Robinson said. His firm’s lawyers still look closely at all potential class actions brought to them, even if the consumers have signed a contract that bars class actions.

That’s because the U.S. Supreme Court left another door for consumers open just a crack.

At its core, the Concepcion case was all about the legal concept of “unconscionability.” The key question was whether it was unconscionable for companies to flat-out bar class actions in their contracts. The U.S. Supreme Court said no, it wasn’t.

But in the same decision, the court left open the possibility that mandatory arbitration clauses in consumer contracts can be found unconscionable for other reasons.

There are all sorts of ways that mandatory arbitration clauses can, and are, struck down by the courts. A company is unlikely, for example, to get away with a mandatory arbitration clause that includes a $10,000 bill to consumers for arbitrating the case.

That’s where Rosner, in Scripps Ranch, comes in.

Rosner currently has a big case pending before the California Supreme Court. The lawsuit hinges on that long, yellow contract that Rosner is fond of waving about.

Rosner’s case, Sanchez v. Valencia Holding Co. LLC, argues that the standard-issue contract long used by California car dealerships is unconscionable for a number of reasons, including the fact that the mandatory arbitration clause is printed on the back of the form.

The lawsuit is significant because it’s an opportunity for the California Supreme Court to further define what is allowable in a contract, Bland said.

But it’s also limited — if the court finds that the specific form of contract the car dealers were using was not allowed, they can simply rewrite the contract, he said.

To avoid class action lawsuits, then, all big companies need to do is to bar customers from bringing such lawsuits in their contracts, and make sure the contracts are otherwise legally airtight, Bland said.

Rosner’s case illustrates the remarkable sea change that’s taken place in consumer laws in California: Not long ago, California was pioneering measures that enshrined consumers’ rights. Now consumer attorneys must pore through corporate contracts, picking apart clauses or insertions that might be unfair and asking courts to toss them out in a piecemeal attempt to regain some of those rights.

All Eyes on Washington

For consumer advocates, this issue has pretty much hit a dead end in the judicial branch of the American political system.

Unless the U.S. Supreme Court makes a U-turn on arbitration clauses, advocates like Bland are only going to get incremental help from the court system.

That leaves the legislative branch and executive branches.

“Until something comes out of Washington, D.C., consumers, workers, patients, investors, are in a lot of trouble,” said San Francisco attorney Cliff Palefsky, a longtime opponent of mandatory arbitration.

On the legislative side, Sen. Al Franken (D-Minn.) re-introduced legislation he wrote in response to the Concepcion ruling. But several consumer advocates said the Arbitration Fairness Act is dead in the water, given that the Republican House majority is unlikely to even consider the bill.

That leaves the executive branch.

Last year, President Obama’s newly minted Consumer Financial Protection Bureau launched a public inquiry into arbitration clauses.

That was more than a year ago, and there’s been little movement from the agency since.

Without action from the very top, Californians will just have to live with the fact that a longtime remedy against the companies they spend their money on is rapidly disappearing.

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