The U.S. Supreme Court on Wednesday handed businesses such as AT&T Inc. a major victory by upholding the use of arbitration for customer disputes rather than allowing claims to be brought together as a group.
By a 5-4 vote, the high court ruled that an AT&T unit could enforce a provision in its customer contracts requiring individual arbitration and preventing the pooling together of claims into a class-action lawsuit or class-wide arbitration.
The plaintiffs, Vincent and Liza Concepcion, filed their class-action lawsuit in 2006, claiming they were improperly charged about $30 in sales taxes on cellphones that the AT&T Mobility wireless unit had advertised as free.
AT&T, the No. 2 U.S. mobile service, was backed in the case by a number of other companies and by the U.S. Chamber of Commerce business group, while consumer and civil rights groups supported the California couple.
Companies generally prefer arbitration as a less expensive way of settling consumer disputes, as opposed to costly class actions, which allow customers to band together and can result in large monetary awards.
Customer arbitration agreements are widely used by cellphone carriers, cable providers, credit card companies, stock brokerage firms and other businesses.
Vanderbilt University law professor Brian Fitzpatrick said it may be the most important class action case ever decided by the Supreme Court.
"Because companies can ask all of their consumers, employees, and perhaps even shareholders to sign arbitration agreements, this decision has the potential to permit companies to escape class action liability in almost all of their activities," he said.
Shares of AT&T closed up 1.55 percent at $31.42 on the New York Stock Exchange.
AT&T defends arbitration as fair
AT&T praised the ruling, saying the Supreme Court recognized that arbitration often benefits consumers. "We value our customers, and AT&T's arbitration program is free, fair, fast, easy to use, and consumer-friendly," the company said.
AT&T said its arbitration agreements required it to pay at least $7,500 if the arbitrator awarded more than the company's final settlement offer and to pay all arbitration costs for nonfrivolous claims.
Deepak Gupta, an attorney at the consumer advocacy group Public Citizen who represented the couple, denounced the decision and said class actions had been an essential tool to achieve justice in U.S. society.
"The U.S. Supreme Court dealt a crushing blow to American consumers and employees, ruling that companies can ban class actions in the fine print of contracts," he said.
AT&T had argued that a federal law that encourages the use of arbitration, the Federal Arbitration Act, trumped a California consumer protection law at issue in the case.
In its ruling, the Supreme Court's conservative majority agreed.
"The California law in question stands as an obstacle to the accomplishment of the purposes and the objectives of the FAA. It is accordingly preempted," Justice Antonin Scalia said for the majority in reading his opinion from the bench.
Scalia cited a federal judge's conclusion in the case that the couple was better off under the AT&T arbitration agreement than under a class action, which could take months or years and could result in their winning just a small amount of money.
The ruling, which reversed a decision by a U.S. appeals court in California, was the latest in a series by the Supreme Court in recent years that generally favored arbitration.
The court's four liberal justices dissented. "The Court is wrong to hold that the federal act preempts the rule of state law," Justice Stephen Breyer wrote in dissent.
The Supreme Court case is AT&T Mobility v. Concepcion, No. 09-893.
(Reporting by James Vicini, Editing by Lisa Von Ahn, Gary Hill)