The Class Actions Post-Concepcion: A Defining Moment in American Jurisprudence Whatever happened to state’s rights, Justice Scalia?
On April 27, 2011 Antonin Scalia, joined by a conservative majority in court, authored an opinion fundamentally changing class actions. In AT&T Mobility v. Concepcion, the Supreme Court ruled that the Federal Arbitration Act (“FAA”) pre-empts California state law which allowed class arbitration waivers for consumers who signed contracts of adhesion and seek small amounts of money.1
Understanding The Class Action: Its Roots in American Jurisprudence
The first “modern” class action occurred in the Channel Islands, in 1309.2 In Discart v. Otes, a wealthy land owner charged all debts owed to him to be paid in French, rather than local currency. The result of the currency preference was that he was paid triple the original value of all debts. In response, a large group of locals banded together and sued him in court. Jordan Discart, who was the first to sue, became the class representative.
Since inception, class actions have allowed those who could not individually afford to sue, the opportunity to band together and share in the expense of trial.3 From civil rights cases,4 securities fraud,5 asbestos reforms,6 tobacco controls,7 environmental regulations,8 and breast implant litigation9—class actions have given a forum to the injured, the deceived and the segregated. Class actions have, throughout American history, served as the best way to litigate group rights.
Fundamentally, class actions aim to promote efficiency and fairness. In fact, a class will not be certified if it is not the most efficient, or fair, method to resolve a dispute.10 In other words, the class action is an aggregation device used when individual claims are not realistic or practical. It accomplishes this task by grouping together people who suffered a similar harm caused by a single or a few defendants.11
Class actions come in different forms. One of the most common forms is the so-called “negative value” class action.12 The negative value class action allows for people with small monetary claims, usually against a corporation, to group together so that the cost of litigation is shared across multiple plaintiffs. This structure gives individuals assess to courts who otherwise could not afford a trial. This type of class action, as well as others, became increasingly under attack by those championing “tort reform.”
The most significant attack, before Concepcion, came with the Class Action Fairness Act (“CAFA”), passed in 2005, which further limited the availability of class actions.13 CAFA, a bill adopted by the Republican Congress under the second President Bush, achieved its goals of crippling class actions by funneling practically every conceivable action into federal court. The class certification process became increasingly difficult due to antagonistic precedent under federal law.14
Plaintiffs who attempted to craft class actions that could stay in state court found CAFA nearly impossible to escape. As a result of CAFA, class actions found their way into federal courts where fewer and fewer went on to succeed. Some scholars of class litigation believe that CAFA led to the death of the class actions as we knew it. If CAFA was indeed the death of the class action, Concepcion wrote the obituary. Concepcion put to rest any hopes of utilizing class action as a method of deterrence and regulation of corporate misconduct.
Concepcion and the Death of The Class Action
Justice Antonin Scalia authored a 5-4 opinion effectively destroying the class action. In AT&T Mobility v. Concepcion, the issue litigated before the court was whether contract provisions from large corporations can override consumer rights to bring class actions pursuant to California state law. In less precise terms, the question was, can corporations ban class actions within the fine print of their contracts? The conservative court, under the guidance of Justice Scalia answered, “Yes!” The Court determined that the Federal Arbitration Act pre-empts state law.
The Concepcion family purchased two cell phones that were advertised as free, yet, when they examined their phone bill, it was discovered that the Concepcion’s were charged $30.22 in hidden fees.15 The amount may seem small, but when considered in the aggregate, AT&T made billions of dollars by overcharging consumers. The class action is properly structured for situations where companies are getting rich by wagering that consumers will not cause a fuss. Although consumers may be aggravated by the thirty dollar overcharge, perhaps even calling AT&T to express their frustration, when they consider the time, effort and expense of litigation they will trend toward acquiescence. So, even though the consumers have a claim, and even though AT&T broke the law, AT&T will get rich, and the consumer will be forgotten, that is, unless they band together forming a class.
The Concepcions decided to form a class with similarly affected individuals. As it turns out, AT&T had an “arbitration” clause buried within the pages of their contract. This clause requires grievances be settled by AT&T’s selected arbitrators. This clause would mean that the class could not proceed forward to a traditional court, with traditional rules of procedure; rather, the claims must be filed individually and handled by AT&T’s “arbitration” process. California state law, however, permitted class actions, in certain situations, to go forward in the teeth of “unconscionable” contract provisions.
In Discover Bank v. Superior Court the court decided that a class proceeding waiver is unconscionable if three criteria are met:
(1) it is in a contract of adhesion;
(2) it governs disputes over small amounts of money; and
(3) it is alleged to be part of a scheme to deliberately cheat consumers out of individually small amounts of money.16
The Concepcion case fit perfectly into these criteria. The lower courts of California and the 9th Circuit agreed with the Concepcions—permitting the class to go forward to litigation. However, the Supreme Court disagreed, holding that the Federal Arbitration Act pre-empts California law. The Court struck down Discover Bank holding that “class arbitration is inconsistent with the substantive conception of what arbitration should be under the FAA.”17
The FAA became law in the 1920’s and was designed to facilitate arbitration between disputing companies. Over the years, the Supreme Court has interpreted the FAA to also apply to consumer and civil rights claims so that they can be sent to mandatory arbitration. The result has been that contractual provisions containing arbitration clauses have become ubiquitous; they are present in cell phone, credit card and nursing home contracts. Almost any contract signed with a large company now contains an arbitration clause. Not only do arbitration clauses save the company money, but, if companies can influence the choice of arbitrator, take advantage of the informal rules of arbitration, limit discovery of incriminating evidence, or avoid general contract defenses that are unavailable in arbitration (like unconscionability), then companies can exercise more control over the result of an action; a traditional trial by jury, in the view of these companies, is just too risky.
The state courts of California, like many states, held that these sorts of contract provisions were unconscionable as applied to class actions. The reasoning being that standard-form contracts are signed by consumers who have no right to negotiate its terms. They are written in language that the layperson cannot understand. Indeed, these contracts are drafted by the company’s lawyers who attempt to maximally insulate their client from any conceivable proprietary loss. And the contract are offered as “take-em-or-leave-em” to customers who must, in the case of AT&T, either: A) try to live in 2011 without a cell phone, or B) try to find a cellular carrier without such a provision (good luck with either, especially post-Concepcion).
The Decision of the Supreme Court to overrule Discover Bank was confusing to say the least. Why the court believes that class arbitration is inconsistent with the FAA is a mystery; however, what is clear is the effect of the court’s decision. Companies that include arbitration provisions into their consumer adhesion contracts will have Supreme Court precedent declaring the provisions pre-emptive over state law unconscionability defenses. In more simple terms, companies may now insulate themselves from the threat of a class action by embedding arbitration clauses into the terms of contract that consumers cannot negotiate—how’s that for free enterprise?
Down Stream Issues
Do class actions make lawyers rich? They can. Are they often abused? Sure. Are they a burden on commerce? Only if our goal is to maximize profit at the expense of safety, civil rights, and environmental protections. Class actions do, from time to time, arise out of frivolity. Like every tool, class actions too can be used as a weapon. But just like a hammer that can either bludgeon or build, the class action has shaped the architecture of our nation. The Concepcions could not have individually brought a claim against AT&T for $30.22. But when they banded together with scores of other people, they could afford to bring their case. At the end of the day, the case was not about the small amount of money the Concepcions were charged, it is about the aggregate affect on all consumers; it is about AT&T’s profiting from its deception; this case is about fairness.
Philosopher John Rawls tells us to imagine a scenario, he calls it the “veil of ignorance,” in which we are blinded as to our race, we are unaware of which nationality we are, our age, our sex, and, perhaps most importantly, our wealth. He asks us in this “original position” to envision which rules of justice we would construct. What would be our rules if we didn’t know at which position in society we would fall? Do you think that we would develop rules that attempt to protect the most vulnerable members of society, because, of course, that might be you? Or, do you think that your goal would be to have social stratification, the wealthy feeding off of the ignorance and privation of the poor? These contracts are useful to companies precisely because of social stratification, specifically because there is a lack of oversight.
Companies will seek profit. Indeed, there is a reasonable argument to be made that this ought to be their only objective. However, in seeking profit, some companies will destroy the environment, abuse human rights, deceive consumers, and manufacture unsafe products. Imagine a world in which corporations did not have adequate deterrents to malfeasance. Unless a regulatory agency, with high agency costs, is funded (through higher tax dollars most likely) sufficiently to catch every single abuse, Americans will suffer. Class actions have been our primary mechanism to discourage corporate misconduct. It is not enough to expect individuals to sue if they are exposed to a little bit of lead in their water, causing headaches every now and then. Rational actors will weigh their opportunity costs and determine it is better to “suck it up” and forget about a complicated, expensive, law suit and just accept a bit of insomnia.18 Best to take the sleeping pills—manufactured by another corporation, right? Too bad if those have side-effects too! In the meantime, the lead producer continues to produce greater concentrations of lead. Perhaps the worst that happens is that a few people get sick every now and then, but perhaps, the result is worse. Perhaps “profit” has its own opportunity costs.
If we want to ban class actions, let’s have that national discussion. Let’s weigh the pros and cons. Let’s allow the legislature to go through the process of presenting a new law banning class action to the American public for approval. What is not acceptable is for the Court to behave as pro-business constitutional “activists,” changing hundreds of years of state precedent in the process.
In the words of Justice Scalia,
We Americans have a method for making the laws that are over us. We elect representatives to two Houses of Congress, each of which must enact the new law and present it for the approval of a President, whom we also elect. For over two decades now, unelected federal judges have been usurping this lawmaking power by converting what they regard as norms of international law into American law. Today’s opinion approves that process in principle, though urging the lower courts to be more restrained. This Court seems incapable of admitting that some matters - any matters - are none of its business.19
Wise words—if only he’d followed them.