Economics and Technology, Inc. -- Views and News, June 2011

June 2011

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How far does Concepcion actually go in blocking consumer class action cases against wireless carriers?

[The following discussion is offered as a policy analysis of the effects of the Supreme Court's decision. It is not, and should not be taken as, legal opinion.]

At first glance, it appeared that the April 27 US Supreme Court decision in AT&T Mobility LLC v. Concepcion had broadly eliminated the ability of consumers to bring class action lawsuits in situations where mandatory arbitration clauses and class action waivers are included in customer contracts (Views and News, April 2011). If you ask those wireless service providers whose form Customer Service Agreements contain such provisions, that's certainly what they'll tell you. But does the Supreme Court ruling actually go as far as the wireless carriers contend?

First, is the ruling as general in its applicability as some have contended, or is it limited to consumer agreements containing provisions that roughly correspond to those extant in the AT&T Mobilty contract upon which the Supreme Court expressly relied in making its determination:

The version [of the AT&T Mobility Customer Agreement] at issue in this case reflects revisions made in December 2006, which the parties agree are controlling.

The revised agreement provides that customers may initiate dispute proceedings by completing a one-page Notice of Dispute form available on AT&T's Web site. AT&T may then offer to settle the claim; if it does not, or if the dispute is not resolved within 30 days, the customer may invoke arbitration by filing a separate Demand for Arbitration, also available on AT&T's Web site. In the event the parties proceed to arbitration, the agreement specifies that AT&T must pay all costs for nonfrivolous claims; that arbitration must take place in the county in which the customer is billed; that, for claims of $10,000 or less, the customer may choose whether the arbitration proceeds in person, by telephone, or based only on submissions; that either party may bring a claim in small claims court in lieu of arbitration; and that the arbitrator may award any form of individual relief, including injunctions and presumably punitive damages. The agreement, moreover, denies AT&T any ability to seek reimbursement of its attorney's fees, and, in the event that a customer receives an arbitration award greater than AT&T's last written settlement offer, requires AT&T to pay a $7,500minimum recovery and twice the amount of the claimant's attorney's fees.

In reaching its conclusion, the majority expressly relied upon these provisions in the AT&T contract:

As noted earlier, the [AT&T] arbitration agreement provides that AT&Twill pay claimants a minimum of $7,500 and twice their attorney's fees if they obtain an arbitration award greater than AT&T's last settlement offer. The District Court found this scheme sufficient to provide incentive for the individual prosecution of meritorious claims that are not immediately settled, and the Ninth Circuit admitted that aggrieved customers who filed claims would be "essentially guarantee[d]" to be made whole. Indeed, the District Court concluded that the Concepcions were better off under their arbitration agreement with AT&T than they would have been as participants in a class action, which "could take months, if not years, and which may merely yield an opportunity to submit a claim for recovery of a small percentage of a few dollars.

The Supreme Court's ruling is thus inextricably linked to the fact set contained in the AT&T contract, using its specific arbitration provisions to overcome claims of the type voiced in the dissent:

What rational lawyer would have signed on to represent the Concepcions in litigation for the possibility of fees stemming from a $30.22 claim? [Citing Carnegie v. Household Int'l, Inc., "The realistic alternative to a class action is not 17 million individual suits, but zero individual suits, as only a lunatic or a fanatic sues for $30").

The specific provisions of the arbitration agreement that operate to make a claimant "better off ... than they would have been as participants in a class action" are thus critically dependent upon, in this instance, AT&T's commitment that such claimants "would be 'essentially guarantee[d]' to be made whole" irrespective of the outcome of the arbitration proceeding itself. That outcome, of course, would not be the case where the arbitration agreement requires that the claimant pay his or her own costs or worse, the provider's costs as well, if the outcome is ultimately in the provider's favor. The Supreme Court is utterly silent as to the supremacy of the Federal Arbitration Act (FAA) over state law prohibitions against mandatory arbitration and class action waivers where the specific circumstances of the AT&T agreement are not present.

Federal preemption

Another area in which the Supreme Court is entirely silent is with respect to federal telecommunications law and regulation that may be at odds with the FAA. 47 U.S.C. §332(c)(3) provides that "no State or local government shall have any authority to regulate the entry of or the rates charged by any commercial mobile service or any private mobile service, except that this paragraph shall not prohibit a State from regulating the other terms and conditions of commercial mobile services." Emphasis supplied. While the question as to what exactly constitutes a federally-preempted "rate" or an "other term and condition" whose regulation is expressly reserved to the states has been the subject of considerable controversy, mandatory arbitration requirements and class action waivers unambiguously fall into the "other terms and conditions" category. Ironically, despite the fact that the dispute in Concepcion involved a wireless common carrier subject to both federal and state telecommunications regulation, nowhere in the Supreme Court's ruling is there any mention of, or reference to, the FCC, state PUCs, or federal or state telecom statutes. Thus, the supremacy of the Federal Arbitration Act vis-a-vis inconsistent state contract law that appears to have been controlling in the Supreme Court's holding, is nowhere even addressed, let alone decided, as to conflicting federal or state telecommunications law.

Attorneys' and experts' fees and other costs of litigation

"What rational lawyer would have signed on to represent the Concepcions in litigation for the possibility of fees stemming from a $30.22 claim?" Indeed. The Concepcion court sidesteps this problem by its reliance upon AT&T's self-imposed requirement that it "pay all costs for nonfrivolous claims" and the provision in the AT&T arbitration agreement that "denies AT&T any ability to seek reimbursement of its attorney's fees, and, in the event that a customer receives an arbitration award greater than AT&T's last written settlement offer, requires AT&T to pay a $7,500minimum recovery and twice the amount of the claimant's attorney's fees." But what if commitments such as these are absent from a customer agreement that, like AT&T's, requires arbitration and prohibits class actions? While the Court does not say explicitly, its reliance upon the presence of such commitments implies that the ruling in Concepcion does not apply where such commitments are absent.

While there is certainly some relationship between the dollar amount in dispute and the amount that litigants will be willing to expend to support or to defend their respective positions, that relationship is certainly not linear. Small disputes cannot, as a practical matter, be litigated where the amount of money involved is less than the costs associated with such litigation. Class action lawsuits overcome this problem by combining a large number of similar small disputes and thereby creating a closer alignment between the costs of the litigation and the aggregate dollar amount at issue. If customers are forced to settle small dollar disputes by individual arbitration, they are effectively denied the opportunity to present an affirmative case, producing an environment in which the entity whose adhesion contract compelled such individual arbitrations will necessarily win each such dispute by default. The ruling in Concepcion cannot be reasonably read to deny plaintiffs their "day in court," and where plaintiffs can demonstrate that the costs of effective litigation outweigh the amount in dispute, the rational conclusion must be that any mandatory arbitration provisions and class action waivers that had been included in the customer agreement are unconscionable and invalid.

If you would like more information on this subject, please contact Dr. Lee L. Selwyn.

Read the rest of Views and News, June 2011.

About ETI. Founded in 1972, Economics and Technology, Inc. is a leading research and consulting firm specializing in telecommunications regulation and policy, litigation support, taxation, service procurement, and negotiation. ETI serves a wide range of telecom industry stakeholders in the US and abroad, including telecommunications carriers, attorneys and their clients, consumer advocates, state and local governments, regulatory agencies, and large corporate, institutional and government purchasers of telecom services.