Consumer Class Actions: Have They Reached the Vanishing Point?

Have we just heard the death knell for class action lawsuits? Probably not, but the distant sounds of court decisions undermining the power and scope of class actions are coming from just over the horizon.

In April 2011, the United States Supreme Court issued a ruling which held that the Federal Arbitration Act (“FAA”) preempted the California Supreme Court ruling which outlawed class action bans in many consumer contracts “because it ‘stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress.’” AT&T Mobility LLC v Conception, 131 S.Ct. 1740, 1742 (U.S., 2011).

In that case, Conception brought this lawsuit in the federal court claiming that AT&T had engaged in false advertising and fraud by charging sales tax on “free” phones. Id. The cell phone contract between the parties provided for arbitration of all disputes in individual capacity but did not permit class action arbitration. Id. Although AT&T moved to compel arbitration, the District Court and the Ninth Circuit Court of Appeals denied AT&T’s motion on the grounds that the arbitration provision was unconscionable because it disallowed class actions. Id. In issuing this ruling, the District Court relied on the California State Supreme Court’s ruling in  Discovery Bank v Superior Court, 36 Cal 4th 148 (Cal., 2005). The Ninth Circuit Court of Appeals also found that the ruling in Discovery Bank was not preempted by the Federal Arbitration Act because Section 2 of FAA permits arbitration agreements to be not enforced “upon such grounds as exist at law or in equity for the revocation of any contract.” Id.

However, the U.S. Supreme Court held that although Section 2’s “saving clause preserves generally applicable contract defenses”, it does not “preserve state-law rules that stand as an obstacle to the accomplishment of FAA’s objectives” of enforcing arbitration agreements according to their terms to facilitate an informal and streamlined proceeding. Id at 1743. Justice Breyer dissented stating that “a single class proceeding is surely more efficient than thousands of separate proceedings for identical claims. Thus, if speedy resolution of disputes were all that mattered, then the Discover Bank rule would reinforce, not obstruct, that objective of the Act.” Id. at 1759.

Following this lead, another Federal Circuit Court, the 11^th Circuit U.S. Court of Appeals, has ruled that a clause in AT&T’s user agreement compelling individual arbitration can be enforced despite a Florida law against such class-action bans. Cruz v. Cingular Wireless, LLC, 648 F.3d 1205 (C.A.11 (Fla.),2011). Once again, the Court held that the class action waiver in the plaintiff’s arbitration agreement is enforceable under FAA because FAA preempted Florida state law since the state law would “stand [ ] as an obstacle to the accomplishment and execution” of the FAA. Id. at 1207. These holdings are not favorable to the consumers and are in fact depriving the consumers of “class actions”, a powerful tool by which consumers can recover and also change some unlawful corporate practices.

Recently, Sony changed its terms and conditions of use for the PlayStation Network (PSN) to include class action waivers. Thus, under the new terms and conditions, users must now agree to forgo their right to join a class-action lawsuit against Sony. Sony’s new terms and conditions apply to the new as well as the existing customers and the existing customers may decline these new terms by sending a letter to Sony.

Thus, the day when the majority of companies will follow Sony’s footsteps in adding class action waivers to their arbitration contracts may be on the horizon. Change is coming.