THE BLOG

A Poor Concepcion of Consumer Rights

04/28/2011 06:12 pm ET | Updated Jun 28, 2011

AT&T Mobility strikes again. But this time they won, and consumers will pay for it. The United States Supreme Court handed down a major ruling that will severely limit consumers' ability to enforce their rights against companies. AT&T Mobility v. Concepcion was a 5-4 opinion written by Antonin Scalia that prevents consumers from banding together to take on a company that defrauds them if their contract has a binding arbitration agreement.

The facts of the case were simple: Mr. and Mrs. Concepcion purchased cellphone service that advertised free cellphones with their wireless plan. A bill arrived for $30.22: the sales tax on the retail price of the cellphones. The Concepcions sued AT&T for false advertising and fraud for charging sales tax on a "free" phone, and their complaint was consolidated with others into a class action. Yesterday's Supreme Court Ruling says that the Concepcions, and all other defrauded customers, must go it alone if the company says so.

The Concepcions' contract with AT&T contained a binding arbitration clause--a prohibition on suing AT&T or aggregating claims for arbitration. People don't tend to read or understand lengthy consumer contracts, even though they often give up significant rights simply by clicking a box on a software agreement or tacitly agreeing to the terms of the contract by purchasing service. The contract that became the focus of the lawsuit was not even signed by the Concepcions, but was amended and sent to them four years after they purchased their wireless service--just another piece of junk mail from their phone company. Such "adhesion contracts" are necessary for big businesses like AT&T, but the fact that they give so much power to the companies that draft the contract and none to the consumer means that they need to be tightly regulated to make sure that they do not free companies to abuse their customers or employees with impunity without any recourse in court.

California tried to regulate unconscionable arbitration clauses, but the Concepcion decision said that a federal law favoring arbitration agreements trumps state law. A great irony of this case is that the opinion by Scalia, supposedly a fervent defender of states' rights, dispensed with states' power to regulate contracts in favor of federal dominance of contract law above and beyond the text of the Federal Arbitration Act.

This case is a big loss for consumers. It means that companies get to decide what goes into arbitration agreements, even if utterly unconscionable, and there is nothing a consumer can do about it. What's the problem with arbitration instead of court? Although arbitration is faster than litigation, arbitrators are not necessarily neutral decision makers like judges. They are usually hired and paid by the companies that use them, and arbitrators can be fired for ruling against their corporate clients too often. A Public Citizen study found that credit card customers who arbitrate disputes with their credit card companies lose 94% of the time. That either means that 94% of the customers' claims were frivolous, or the system is rigged in favor of the companies.

Without the ability of consumers' to aggregate their claims, companies will not be deterred from stealing small amounts of money from large numbers of people. No lawyer would take a case with $30.22 in damages, and most consumers wouldn't bother to file such small claims. But if consumers multiply that $30.22 by AT&T's millions of customers, and let a few lawyers represent all the defrauded customers without requiring each one to file their own claim, class actions or class arbitrations can make companies think twice before taking your 30 dollars. After Concepcion, AT&T Mobility and other companies are now free to defraud customers with impunity, knowing that the threat of their consumers banding together to demand restitution is empty. 30 dollars might not mean much to each customer, but it means untold millions in ill-gotten gains for AT&T. Regardless of the amount, I don't like someone stealing from me and aggregating claims is an important way to deter corporate theft.

Concepcion makes it clear that the federal government has the only say in what can and can't go into mandatory binding arbitration agreements. In the Dodd-Frank Wall Street Reform and Consumer Protection Act, Congress ordered the new Consumer Financial Protection Bureau to examine arbitration agreements and come up with rules to regulate them. With the new agency under attack from the right and Chamber of Commerce, the companies we use every day will continue writing their own rules and deciding their own cases when they hurt us. The political fight to regulate binding arbitration agreements will pit big business against a new, embattled agency (and the American public) but with Elizabeth Warren at the helm of the CFPB, the Wild West of mandatory binding arbitration could soon fade into history.