The Supreme Court on Wednesday issued a decision that will make it harder for consumers to bring class-action lawsuits against providers of products and services such as mobile phones and cable TV.
The court ruled on a case instigated by a California couple who had accused AT&T of committing fraud when it charged them US$30 for phones that were advertised as being free.
Like many telecommunications operators, AT&T's contract includes a clause that says its customers can use arbitration to settle disputes with the operator but may not file class-action lawsuits.
However, high courts in some states, including California, have held that if a consumer must sign a contract for a service, and if the dispute will involve small amounts of damages, then consumers are entitled to file class-action lawsuits against a provider, even if the contract says otherwise.
In its decision Wednesday, the U.S. Supreme Court overturned those rules in California and other states.
"Today's ruling says that the law of the land in all 50 states is that those attacks on arbitration agreements on the ground that they are unfair are preempted by federal law," said Jerry Maatman, a lawyer with Seyfarth Shaw who is not involved in the case.
The court said that the Federal Arbitration Act, which makes arbitration agreements valid and enforceable, prohibits states from allowing people to file class-action suits when a company tries to compel them to use arbitration instead.
AT&T characterized the decision as good news for consumers. "We value our customers, and AT&T's arbitration program is free, fair, fast, easy to use, and consumer friendly," it said. It pointed to the Supreme Court opinion, which says the plaintiffs would have benefitted more had they used AT&T's arbitration process than if they spent the time and money on an uncertain class action that might have paid them less money.
However, others said the decision is a bad one, particularly for consumers who feel they have been cheated out of a relatively small sum of money. If class-action suits are not permitted then consumers have little avenue for recourse, because lawyers are unlikely to take on an individual's case when only $20 is at stake, he said.
"Public policy will only be enforced if large numbers of consumers can band together and bring a complaint," Maatman said.
Other legal experts said companies will have less incentive to improve their business practices if consumers are unable to sue them.
"If people don't sue, businesses know they can cheat people out of small amounts with impunity," Brian Fitzpatrick, an associate professor of law at Vanderbilt Law School, wrote in an article about the Supreme Court case for the San Francisco Chronicle last year.
If the Supreme Court decision had been in place over the past few years, some important class suits might never have been brought. For instance, all four nationwide mobile operators have faced class suits over their early termination fees. Each of them settled, agreeing to pay tens of millions of dollars to their customers. They also restructured their early termination fees so that people pay increasingly less as their contract proceeds.
A class-action suit and subsequent investigation by the U.S. Federal Communications Commission led Verizon to agree to refund as much as $90 million to customers who were inadvertently charged for data services. That suit may not have been allowed if Wednesday's ruling had been in place.
Still, Maatman doesn't expect the Supreme Court's ruling to be the final word on the matter. Lawyers may find ways to get around the ruling, and legislation could force changes.
"As a result of this ruling, we'll see this issue debated again. The issue will be, is this a sound decision and good policy, or should the Supreme Court decision legislatively be overturned?" he said.