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No-Class Action

When a corporation cheats each of their customers out of a small amount of money, it generally isn’t worth it for an individual to sue them. Consider the California couple who objected to a questionable $30 charge on their cellphone bill.

This problem is exactly why class-action lawsuits were invented. By banding together, disgruntled consumers can make the stakes high enough to warrant legal action against misbehaving corporations. Instead of suing for their puny $30, if a million consumers were overcharged they can join forces in a single $30 million lawsuit.

But the Supreme Court has declared once again that Corporations are more equal than real people. By a 5-4 decision (with all five Republican appointees siding with corporate power and four Democratic appointees against), the court ruled that it is legal for corporations to include language in their user agreements that prohibits class-action suits and forces customers to face off individually against teams of corporate lawyers.

Your only other alternative is to not buy products from companies that include such language in their user agreements. Of course, good luck finding such a company now.

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11 Comments

  1. Sammy wrote:

    And if EVERY company in a given industry (take your cell phone company case, where there is a very limited number of competitors) all invoke the same policy, the consumer is screwed.

    Wednesday, April 27, 2011 at 6:25 pm | Permalink
  2. Dan wrote:

    For some reason I was being charged for my daily horoscope and some other “premium” service that I knew nothing about. I called the cell company, stopped it, and put a lock on my numbers (have 5). Makes me wonder how much of a kick back is given to allow anyone to start charging a fee on cell phones without the owner knowing it? Could it have been started by someone randomly entering my daughter’s number on a website?All I can say is call your cell provider and put a lock on. Honestly, did anyone expect less from the “trickle-downers?”

    Wednesday, April 27, 2011 at 7:13 pm | Permalink
  3. starluna wrote:

    What is not clear here, though, is what exactly the fraud was. If I understand correctly, customers were charged sales taxes on phones that were “free.” If CA law requires that, then it can only be fraud if AT&T did not warn customers in advance of the purchase of the phone that sales taxes might apply. And even in such a case, there might be a legitimate argument that collecting sales taxes on the value of the product does not rise to level that makes the arbitration provision unconscionable. The phone is free because they are effectively giving you a rebate, not because it is really “free.” If the numbers related in the article are accurate, the litigant is balking at paying sales tax on a $300 cell phone that the company is willing to eat the price on very likely to get a service contract out of him.

    If CA does require the collection of sales taxes on the original value of phones that were “free” and AT&T collected them but did not actually forward the sales tax to CA, then AT&T is in violation of CA tax law and the state itself would have to sue.

    But, if CA does not require collection of sales taxes on “free” phones, then yes, this would be fraud. At least it would be true fraud if AT&T did not forward the sales taxes to the state, and again in this case, the harm is as much to the state as the individual (possibly more so given the sorry state of fiscal affairs in CA).

    I see at least two solutions. One, Congress should revise the Federal Arbitration Act. Two, state AGs should simply enforce consumer protection laws more aggressively. As it is, class action suits put the burden of social welfare protection on individuals rather than on the state, where some would argue it belongs. Of course, the first requires that Congress be interested in protecting consumers (and the House certainly doesn’t appear so inclined) and the second requires that states have large enough budgets to have adequate staff in their AGs offices to do this.

    But I do agree that this potentially bodes badly for the Walmart case.

    Wednesday, April 27, 2011 at 7:38 pm | Permalink
  4. PatriotSGT wrote:

    I personally think Cell phone user agreements are evil anyway. But, to offer a suggestion we have had our service for 10+ years with the same company. Hence, I don’t have any user agreement that I and bound by concerning maintaining my service. If I don’t like the way I’m treated I can go somewhere else and port my numbers to the new company. Now I’d have a 2 yr serice contract with the new company, but I do hve a choice.
    I’ve often thought about consumer unions and how they could be used to negotiate with big business. I think it would be especially useful as a group of shareholders banding together to have a single voice (and 1 collective vote)and perhaps reduce some of the outrageous executive pay, etc. Any legal scholars want to elaborate, clarify, add on or tell me why it can’t work? I see at sort of trickle up.

    Wednesday, April 27, 2011 at 7:43 pm | Permalink
  5. starluna wrote:

    PatriotSgt – the first hurdle a consumer union would have to overcome from the legal perspective is legal recognition. There are definitely ways to make it work but it wouldn’t be incorporated like a labor union. There are “consumer unions” for different types of services. One of the organizations I am on the Board of Directors for runs the local union for public transit users. It is part of the non-profit’s environmental justice work. So, it has legal standing because of previous court decisions and MA state law that gives it legal recognition.

    The real hurdle is not so much legal but economic. The free-rider effect is huge here. Lots of people will benefit but not everyone contributes to it. Without financial support the capacity to enforce laws or advocate for better protections is reduced.

    Wednesday, April 27, 2011 at 7:59 pm | Permalink
  6. Jay Banks wrote:

    The way some companies are treating their customers is already bad. However, I expect the situation to get even worse when those companies will have arbitration clauses and the consumers will not be able to sue. I think this decision puts the rights of consumers into danger.

    Thursday, April 28, 2011 at 6:40 am | Permalink
  7. Sarah Hanneken wrote:

    Is there a list of companies that are prohibiting class-action suits? Also, are we only talking about cell-phone companies here?

    Thursday, April 28, 2011 at 10:52 am | Permalink
  8. Iron Knee wrote:

    That’s the problem — the ruling allows any company to insert language in their user agreement that prohibits class-action lawsuits. So this applies to any product that comes with a user agreement. I fully expect any day now to see groceries start coming with user agreements so you can’t do a class action suit when you get salmonella from a contaminated product. :-(

    I was a bit surprised that Starluna was worried about what the actual fraud was in this case. That’s not the point — the courts in California (all the way up to the California Supreme Court) had already found that there was fraud. The only issue the US Supreme Court was addressing was whether or not California State Law (which allows class action lawsuits even if the user agreement prohibited it) trumped the Federal Arbitration Act. They said it did not. So much for conservative claims to love state’s rights.

    Thursday, April 28, 2011 at 11:47 am | Permalink
  9. starluna wrote:

    When I read the syllabus to the case, I did not see any indication that there was an actual ruling on fraud. The cases up to this point had only been about whether class action status can be allowed. There has been no adjudication on the merits of the case.

    The reason why I am curious about whether there is actual fraud in the case is because there is a problem with bad cases going to court and creating the conditions for these kinds of rulings. The thing about the courts, and especially the Supreme Court, is that the outcomes are actually indeterminate. We really don’t always know how the court is going to decide something. What worries lawyers, especially progressive cause lawyers, is a case that might possibly create a rule that is contradictory to their interests. Corporations, and their law firms, are often able to eat short term losses to avoid going to court to avoid decisions that will have long term negative consequences to their bottom line.

    In this case, if there was truly fraud going on, the vast majority of corporations would have eaten the short term losses in order to ensure that there would not be a ruling that would say that CA law preempts the federal FAA. As long as there is no rule that says so, they will at least have that in their toolkit of arguments for future cases. However, if the case did not involve fraud that rose to the level of unconscionable, then it is worth the gamble to get the ruling that they got.

    I suspect that if the fact pattern as described in the syllabus is more or less accurate, this was a bad case to be making this decision about because there doesn’t seem to have been unconscionable fraud actually occurring. Although there is the myth that the Supreme Court only looks at the law when deciding a case, that is simply not true. They look at the facts of the particular case as well as the law. As one lawyer I heard once said, bad fact patterns made for bad decisions.

    Granted, this particular Supreme Court is not entirely pro-consumer, but they have made some pro-consumer decisions in the not so distant past. If there was true, invidious fraud occurring it is possible that a different kind of decision may have been made. I do completely disagree with the decision, primarily on states-rights grounds (I do not believe their interpretation of FAA is valid). But I also know that it is actually fairly easily fixed if Congress got their heads out of their patooties and clarified the law (as they did in the Lilly Ledbetter case.

    Thursday, April 28, 2011 at 8:43 pm | Permalink
  10. RK wrote:

    I didn’t think the language addressed class action suits, per se. It only stated that the user had to pursue a binding arbitration agreement. Then they claimed that that took precedence over the class action suit.

    Saturday, April 30, 2011 at 9:13 am | Permalink
  11. Iron Knee wrote:

    The language is not material here. If the user agreement can force you to adhere to individual dispute arbitration instead of a class-action lawsuit, it is the same result.

    Saturday, April 30, 2011 at 11:48 am | Permalink