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Supreme Court hears challenge on class-action arbitration suits

By Robert Barnes
Washington Post Staff Writer
Tuesday, November 9, 2010; 10:32 PM

Vincent and Liza Concepcion were looking for a phone, not a lawsuit, when they decided in 2002 to go with AT&T Mobility. At a California store, they got a deal for a Motorola and a "free" Nokia - and, according to AT&T, signed away their right to initiate a class-action suit against the company.

In the fine print of the service agreement, the couple said they would settle disputes through arbitration and as individuals, not as part of a class of complaining customers. Such arbitration agreements are common for "transactional" contracts, such as those for credit cards and cellphones, and increasingly for employers and their workers.

On Tuesday, the Supreme Court took up the Concepcions' complaint that they were charged $30.32 for a phone that was supposed to be free.

The case has been billed as one of the court's most important on consumer rights in years, with civil rights organizations and consumer groups on one side and, on the other, businesses worried about the costs of lawyer-driven class-action suits.

The first group said individual claims such as the Concepcions' are too small to interest lawyers or even other consumers who may have been cheated. But the overcharges could add up to millions of dollars for the company, and the only way to stop such and to punish the company is for customers to band together.

The businesses, on the other hand, argue that the costs that come with such suits are so great that companies must settle even when they have done nothing wrong, and that lawyers, rather than consumers, benefit from the huge settlements.

But what had been billed as an epic battle played out during the one-hour oral argument more like a law school seminar on contract law: Phrases such as "contract of adhesion," "obstacle preemption" and "unconscionability" dominated the debate.

The justices' questions suggested a more limited ruling on the facts of the specific case rather than the broad decision on class-action suits that the 26 groups submitting friend-of-the-court briefs had addressed.

The arguments also raised questions about states' rights. State and federal courts in California agreed with a state law that said businesses' attempts to ban arbitration class-action suits unfairly tilt the field against consumers. And some justices indicated that the decision should be up to the states.

"Who are we to say that the state is wrong about that?" Justice Elena Kagan asked.

But Washington lawyer Andrew Pincus, representing AT&T, said the California ruling undermines the the Federal Arbitration Act, which was designed to keep states and courts from erecting barriers to arbitration. Businesses say arbitration is a more economical way than lawsuits to handle disputes.

The groups backing AT&T say that class-action suits open a business to unlimited liability and that there would be no reason for a company to choose arbitration, because adverse decisions cannot be appealed.

If Tuesday's arguments were technical and somewhat inaccessible, the issue at the heart of the case is familiar for consumers, who are confronted with a growing scroll of fine print whenever they, for instance, sign up for Internet service or apply for a credit card.

Even Chief Justice John G. Roberts Jr. recently commented on the disclaimers and legalese that accompany modern life, such as in a package of medication. "The smallest type you can imagine, and you unfold it like a map," he said last month during an appearance at Canisius College in Buffalo.

But on Tuesday, Roberts and Justice Samuel A. Alito Jr. seemed more sympathetic to AT&T. The company argued that lower courts had wrongly held that the ban on class-action arbitration suits was "unconscionable."

Alito said the "heart" of AT&T's argument was that the traditional test of whether a contract is unconscionable "focuses on unfairness to the party who is before the tribunal. So here it would be unfairness to the Concepcions, rather than unfairness to other members of the class who are not before the court."

"That's exactly right, JusticeAlito," Pincus replied.

The couple filed their class-action suit in 2006, arguing that AT&T had charged them $30.32 in sales taxes and other fees for the Nokia phone. After the complaint was filed, the company introduced a generous settlement policy for those who thought they had been overcharged. But the company maintained that a class-action suit was banned by the agreement.

Deepak Gupta, a lawyer for the consumer group Public Citizen who represented the Concepcions, said class-action suits are important because few consumers take legal action.

A class-action suit, he said, "makes it . . . economically justifiable to come forward with these kinds of claims."

Gupta said the court should defer to California's desire to protect its citizens. "The state has made a judgment that if you preclude class-wide relief . . . that will gut the state's substantive consumer-protection laws."

Interest groups on both sides emphasize the impact of a broad ruling by the court.

The U.S. Chamber of Commerce said that with a class-action suit, a claim that "might be worth only a few hundred dollars or less can instantly metastasize into a potentially catastrophic judgment of hundreds or millions or even billions of dollars of damages."

But workers rights groups and the NAACP said such suits are the best way to win relief for people who have faced discrimination in employment or areas such as mortgage lending.

The case is AT&T Mobility v. Concepcion .

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