In one of the most sweeping victories for corporate interests yet handed down by the Corporate Court under Chief Justice John Roberts, the Supreme Court held yesterday in AT&T Mobility v. Concepcion that the Federal Arbitration Act (FAA) preempts states from protecting consumers and employees from unconscionable corporate contract provisions that require them to waive their rights to class-action arbitration or litigation when the corporation engages in widespread wrongdoing. The Court has essentially given companies a “license to steal” from consumers, and a “license to discriminate” against employees, by preventing states from voiding contractual waivers that prevent consumers or employees from banding together to fight wrongdoing in court.

This case arose after AT&T defrauded thousands of customers who signed a two year service contract for “free” phones by charging them as much as $30 in sales tax on the phones. When the Concepcions filed a class action lawsuit to recover on behalf of themselves and all other customers who had been similarly cheated, AT&T claimed that the Concepcions’ only recourse was to pursue individual arbitration because their service agreement contained a mandatory arbitration agreement and a class action waiver clause. In drafting its take-it-or-leave-it service contract, AT&T knew that very few consumers would file arbitration claims to recoup $30 – indeed, between 2003 and 2007, only 180 of its 90 million customers had filed arbitration claims. AT&T also knew that if it could force consumers into case-by-case arbitration, it could reap millions from its “free” phone deal.

The Ninth Circuit struck down this scheme as unconscionable under a rule announced by the California Supreme Court in Discover Bank v. Superior Court:

“[W]hen the [class action] waiver is found in a consumer contract of adhesion in a setting in which disputes between the contracting parties predictably involve small amounts of damages, and when it is alleged that the party with the superior bargaining power has carried out a scheme to deliberately cheat large numbers of consumers out of individually small sums of money, then . . . the waiver becomes in practice the exemption of the party ‘from responsibility for [its] own fraud, or willful injury to the person or property of another.’ Under these circumstances, such waivers are unconscionable under California law and should not be enforced.”

California’s rule recognized that only class action arbitration and class action lawsuits make the pursuit of small claims worthwhile for claimants and attorneys. Amazingly, the ultra-conservative block on the U.S. Supreme Court struck down this consumer protection rule, thereby reinstating AT&T’s unconscionable contract. This will force the Concepcions and all other consumers to pursue claims individually in arbitration to recoup the wrongfully charged fees. The Court’s decision to overturn the rule demonstrates the degree to which federalism and states’ rights take a back seat when corporate interests are at stake.

Justice Scalia based the Court’s decision on a convoluted reading of Section 2 of the FAA, which states that a contract with an arbitration clause “shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” Although the California rule applied equally to class action arbitration or litigation waivers, the Court held that it disfavored arbitration agreements, because by disallowing class-action waivers in those agreements, it would force companies into class-wide arbitration where they had committed widespread wrongdoing. Because class-wide arbitration is worse for companies than class-wide litigation, the Court reasoned, the California rule would make it less likely for companies to include forced-arbitration provisions in contracts, which would in turn violate the FAA’s policy against disfavoring arbitration.

The dissenting opinion, authored by Justice Breyer, responded that the FAA only seeks to place contractual arbitration provisions on equal footing with all other contract provisions: “California is free to define unconscionability as it sees fit, and its common law is of no federal concern so long as the State does not adopt a special rule that disfavors arbitration.” Justice Breyer noted that California applied “the same legal principles to address the unconscionability of class arbitration waivers as it does to address the unconscionability of any other contractual provision.” By treating class action arbitration provisions the same as class action litigation provisions, California did nothing that would justify federal preemption by the FAA. The dissent added that the majority could find no support for its decision in Supreme Court precedent.

AT&T v. Concepcion is a landmark decision because many aspects of Americans’ everyday lives are controlled by contracts that individuals must sign to receive a job, a product, or a service. Employment terms, health care coverage, car loans, insurance plans, credit cards terms, cell phone agreements, and hundreds of other things are governed by contracts, most of which have forced arbitration provisions that require individuals to submit any claims for corporate wrongdoing to an arbitrator selected by the company. These mandatory arbitration clauses often go further and require consumers and employees to agree to bring any claim on an individual basis and give up the right to form a class when the company’s wrongdoing has affected thousands of people. After AT&T, these clauses are likely to appear as a matter of course.

The Supreme Court’s ruling in this case ensures that companies can eliminate the possibility of being sued in a class action lawsuit. Now companies will be able to defraud their customers or mistreat their employees, knowing that they could never be held fully accountable because at most a small subset of injured parties would ever seek to arbitrate their grievances.

To provide a telling example, consider the case of Wal-Mart, which has been sued for widespread discrimination against more than a million of its female employees. If Wal-Mart inserted in all of its employment contracts a mandatory arbitration clause with a class-action waiver, no matter how many women it cheated of pay and promotion opportunities, it could never be held accountable by those employees banding together as a class. As soon as the women employees would have filed a class action, Wal-Mart could have forced employees out of court and into case-by-case arbitration, knowing that only a tiny handful of the women it discriminated against would ever file individual arbitration claims.

This decision should not be allowed to stand. Senators Al Franken (D-MN) and Richard Blumenthal (D-CT), and Representative Hank Johnson (D-GA) intend to introduce the Arbitration Fairness Act next week to undo the Court’s mangled reading of the FAA.

For more information on the case, click here for AFJ’s special report.

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