WASHINGTON – The Supreme Court dealt a blow to class-action lawsuits that involve small claims affecting thousands or even millions of people, ruling that corporations may use arbitration clauses to block dissatisfied consumers or disgruntled employees from joining together.
In a 5-4 decision Wednesday, the justices said the Federal Arbitration Act of 1925, originally aimed at disputes over maritime and rail shipments, trumps state laws or legal rulings in states that limit arbitration clauses deemed to be “unfair” to consumers.
Vanderbilt law professor Brian Fitzpatrick, an expert on class actions, called the ruling “the biggest ever on class actions in the court’s history. It gives companies a green light to exempt themselves from all class actions from their customers or from their employees. Companies can basically escape from the civil justice system. And why wouldn’t a company take advantage of that?” he asked.
It is routine now when someone opens a bank account, buys a cellphone, cable TV service, a computer or a new car or makes a purchase online that they agree to arbitrate disputes. Many employers include the same kind of fine print for new hires, blocking class-action suits for employees with discrimination or wage complaints.
These arbitration clauses typically require individuals to bring claims on their own, and not as a group. Nonetheless the California Supreme Court in 2005 said companies should not be allowed to “deliberately cheat large numbers of consumer out of small amounts of money” by shielding themselves from being sued.
But on Wednesday, the court’s conservative majority overruled those state judges and said arbitration clauses must be enforced even if they may be unfair.
Justice Antonin Scalia said companies like the “streamlined” arbitration proceedings because they are faster and cheaper.
Deepak Gupta, the Public Citizen lawyer who represented a California couple who sued over a “free cellphone” that turned out to cost about $30.22, agreed that the ruling in their case will have a broad impact. It allows companies to use “the fine print of take-it-or-leave-it contracts” as a “shield against corporate accountability.”
Not all products or services come with arbitration clauses, but many do, he said. Some products, such as appliances, come with a box that includes fine print contracts and an arbitration clause. These have been upheld as binding, even if the consumer did not sign the agreement, several lawyers said.
But several business lawyers said class-action claims rarely work to the benefit of consumers. “I think this decision will help consumers, not hurt them,” said Alan Kaplinsky, a Philadelphia lawyer for the American Bankers Association. “The only people who do well in the class-action suits are the lawyers. The attorneys get millions in fees, and the consumers get a worthless coupon. For them, it’s better to go through arbitration.”
Still pending before the court is a major dispute over class-action suits involving job discrimination. Lawyers for Wal-Mart have asked the justices to throw out a sex-discrimination claim brought on behalf of 1.5 million current and past female employees. While the Wal-Mart case has attracted far more attention, Wednesday’s ruling on arbitration contracts could have a greater impact in blocking future class-action suits on behalf of employees.