|October 27, 2011|
Previously published on July 5, 2011
To increase your sales, you offer a free upgrade to everyone who buys a new car during Presidents' Day week - "Buy now, and receive a free portable GPS system." Several weeks later, however, your new customers cry foul when FTC rules prohibit "free" offers as part of your sales promotion. The upgrades are not really "free" as advertised, they claim, and worse yet, these several hundred new customers file a class action against you in federal court, each seeking to recover the few extra dollars they paid for the free product.
You and your lawyers huddle and review your standard sales contract for defenses - and thankfully, there is a provision requiring that all disputes be arbitrated and, further, that the customers waive their ability to bring a class action in that arbitration. Game, set, and match, right? Until the Supreme Court's recent decision upholding class action waivers in arbitration agreements, the enforceability of those waivers was far from certain - and several states, including California, specifically struck those provisions down as being against public policy.
AT&T Mobility v. Concepcion
The above scenario with "free" stuff is not far-fetched. The Supreme Court's AT&T Mobility v. Concepcion decision began when two customers complained that AT&T's offer of "free" cell phones was false because of the $30.22 in sales tax customers were required to pay. Despite the small amount of damages to the Concepcions themselves, they filed false advertising and fraud claims in the California federal courts on behalf of a large class of AT&T customers who purchased the supposedly "free" phones. When AT&T moved to compel arbitration under the terms of the Concepcions' customer agreement and to assert the class action waiver to which they had agreed, the trial court and the appeals court both rejected the effort and ruled that California state law precluded the class action waiver - even though the parties agreed to it - because it was "unconscionable," a legal term meaning a contractual provision is so unfair as to "shock the conscience" and is therefore void. In a decision split along the often cited conservative-liberal lines of the Supreme Court, four justices joined Justice Scalia in reversing the lower courts and declaring that California's rule against class action waivers violated the spirit and purpose of the Federal Arbitration Act (FAA). The majority reaffirmed that arbitration agreements which waive the right to bring a class action will be upheld and enforced against state laws which, while neutral on their face, seek to invalidate class action waivers and may "have a disproportionate impact on arbitration agreements."
The Aftermath of Concepcion
What does Concepcion mean going forward, and, more particularly, how will it affect consumers and providers in transactions? Whether one agrees or disagrees with the decision, it will undoubtedly mean less consumer class actions. While consumers may still try to invalidate arbitration class action waivers under other aspects of state laws - by arguing, for example, that these provisions are invalid because they were procured by fraud or duress - those challenges are unlikely to succeed. The decision means predictability in that a waiver of the ability to bring a class action and the requirement of arbitration will more likely be enforced. There is another benefit for dealers that use such a waiver: Individual consumers may be less likely to pursue valid claims that they have been wronged because the amounts of money at issue are relatively small for the effort required to recover it. As Justice Breyer put it, "Only a lunatic or a fanatic sues for $30" when a class action is the more appropriate vehicle for vindicating the rights of an entire group. Here are a few points to consider and watch for following the Concepcion decision:
Tune up your documents. If your dealership's basic documents - sales and service invoices and the like - don't already have them, speak with your lawyer about adding provisions which broadly require all customer disputes to be resolved by arbitration. If you already have those provisions, now is a good time to have them reviewed to make sure they are as broad as possible under Concepcion. Make sure that your arbitration procedures are fair. A large part of the majority's opinion in Concepcion centered around the fairness of the AT&T arbitration provisions for consumers: AT&T agreed to pay all costs for nonfrivilous claims; arbitration takes place in the county in which the customer is billed; for claims of $10,000 or less, the customer may choose whether the arbitration proceeds in person, by telephone, or based only on submissions; claims may be brought in small claims court rather than in arbitration; full relief, including injunctions, is available in the arbitration; and when the customer receives an arbitration award greater than AT&T's latest offer to settle, AT&T must pay a minimum of $7,500 and twice the amount of the customer's attorneys fees. Not that your documents must provide the same generous (or, to some, overly generous) provisions, but you should make sure that arbitration is not so onerous that a customer is effectively discouraged from using those procedures altogether.
Continue to review the documents you sign. Whether it's a purchase order with a computer vendor or your contract with a lead-generation software company, always review (preferably with legal counsel) what you are asked to sign before you sign it. Chances are these same arbitration class action waivers will appear in contracts you sign with your vendors. While there may be some room to negotiate more favorable terms for your company, there likely will not be. In any event, you should know what procedures you will have to follow if a dispute arises between you and your vendor. Employment issues. Do any of your employees sign employment agreements?
Nondisclosure or non-solicitation agreements? If you don't know what these are, you should speak with a lawyer and consider whether they may be of use to your company. If you have a large number of employees, disputes arising from wage and hour issues; overtime pay; theft of trade secrets; and claims of age, gender, or racial discrimination are always likely. Though you try to make sure these don't occur, your employee agreements - or your employee handbook if your employees don't have agreements - should adequately protect you to the full extent allowed by the Concepcion decision.
Websites. Do you operate a website, provide information through a website or the Internet, or sell goods or services over the Internet? If you do, you may already use what are called "click-wrap" agreements, where customers "click" their acceptance to terms of usage before viewing information or completing a transaction on a website. During periodic review of these agreements with your lawyers, make sure that you consider using arbitration class action waiver provisions which are consistent with Concepcion.
To arbitrate or not to arbitrate. Arbitration rights were strengthened by the enactment of the FAA in the 1920s, and this was done because of the hostility of state courts and legislatures to arbitration generally. While arbitration rights have surely been strengthened by the Supreme Court's Concepcion decision, you should step back and ask whether arbitration meets your company's goals and whether your customers' waiver of arbitration class action rights is in your best interest to resolve widespread customer disputes in the most efficient way. As with most laws, rarely does one size fit all.
Did the Supreme Court's recent decision in Concepcion effectively kill class actions in the consumer arena? While consumer class actions are unlikely to become extinct, Concepcion certainly will cut back greatly on a consumer's ability to claim large damages under the threat of joining hundreds or thousands of plaintiffs in one massive lawsuit. The bottom line for any company dealing regularly with consumers is to review with your counsel the Concepcion decision and how you may use it to better define the rights between you and your customers.