In the wake of Supreme Court Justice Antonin Scalia’s death, many pundits debated his impact on hot-button issues like affirmative action, the Second Amendment, and same-sex marriage.
But largely absent from this dialogue was a discussion on the area of law where Scalia had perhaps the greatest impact over the last decade: consumer rights. Historically, when consumers fell victim to unfair or abusive business practices, they could fight back by joining together in court as part of class action lawsuit permitting for one or a few individuals to sue on behalf of a larger group of individuals who were harmed in a similar manner.
For example, say your cell phone provider, X-Wireless, included a hidden fee of 25 cents on your cell phone bill each month for a year. While overcharges totaling $3 seem relatively inconsequential on an individual basis, if X-Wireless charged the same hidden fee to each of its 50 million customers over the same period, then X-Wireless would walk away with $150 million in ill-gotten profits in just one year. Pursuing a case against X-Wireless as a class action permits the customers to combine their efforts and resources to pursue claims they would not pursue individually, and level the playing field by attracting capable attorneys willing to take on their case. Perhaps more importantly, X-Wireless is disincentivized from continuing to charge the hidden fee and X-Wireless’s competitors are deterred from charging a similar fee.
But today, the fine print in the X-Wireless customer contract would prohibit you from participating in this type of class action. In fact, it would prohibit you from even taking your dispute with X-Wireless to court. Instead, you would be forced to submit all disputes with X-Wireless to a private arbitrator instead of a judge. While private arbitration can be an efficient alternative to court when it is negotiated between sophisticated parties with equal bargaining power, arbitration agreements contained in consumer contracts are presented to consumers on a take-it-or-leave-it basis. Historically, courts have refused to enforce arbitration agreements that contain one-sided or unfair terms, such as waiving a party’s right to participate in a class action.
Beginning in 2010, however, Justice Scalia authored a series of controversial opinions, each on behalf of the same 5-4 majority, effectively using arbitration as means to eliminate most consumer class actions. The most significant was Scalia’s majority opinion in the 2011 case AT&T Mobility v. Concepcion, which held that courts must enforce arbitration agreements even when they contain language prohibiting individuals from participating in class actions (known as “class action waivers”). In 2013, Scalia wrote for the majority in American Express Co. v. Italian Colors Restaurant, which went a step further and held that arbitration agreements must be enforced even if the cost of pursuing an individual arbitration outweighs the individual’s maximum possible recovery.
Thus, in our fictional example above, the only recourse a customer has against X-Wireless for its $150 million theft is to pursue an individual arbitration worth $3. Even then, the cost of initiating the arbitration would far outweigh the individual’s possible recovery — making it economically unviable for customers to try and hold X-Wireless accountable. As appellate judge and economist Richard Posner observed: “The realistic alternative to a class action is not 17 million individual suits, but zero individual suits, as only a lunatic or a fanatic sues for $30.” So X-Wireless’s only incentive relating to the hidden fee is to increase it, knowing that its competitors will do the same and its customers are contractually prohibited from joining together and seeking recourse in court.
Unsurprisingly, companies are now incentivized to include arbitration agreements with class action waiver clauses in just about everything. If you look closely when you sign up for a cell phone, book a hotel room, accept a new job, update iTunes, or even shop online, you will almost assuredly see an arbitration agreement and class action waiver lurking in the fine print.
While this deprivation of consumer rights largely went unnoticed by the general public, the non-judicial branches of government have taken note. In 2015, the Consumer Finance Protection Bureau (CFPB) released a 410-page study concluding that consumers benefit from class actions far more than arbitration and that arbitration is being used by companies as a means to insulate themselves from liability. The CFPB has hinted that it is in the process of promulgating rules that will prohibit arbitration agreements in consumer financial contracts. As recently as February 2016, members of the Senate introduced a bill seeking to “prevent companies from imposing forced arbitration in cases covered by consumer protection laws, as well as in employment discrimination and other civil rights matters.”
But with a divided Congress, the best hope for consumers wanting to regain their access to court may lie with Scalia’s replacement on the Supreme Court. Indeed, the liberal wing of the Supreme Court has been highly critical of Concepcion and Italian Colors, with Justice Ginsburg stating in a recent dissent that: “These decisions have predictably resulted in the deprivation of consumers’ rights to seek redress for losses” and Justice Kagan referring to the Scalia-majority’s use of arbitration as a “betrayal” of Supreme Court precedent and a mechanism to “insulate wrongdoers from liability.” With the Supreme Court currently at a 4-4 ideological split, whoever replaces the late justice could have a meaningful impact on consumer rights for years to come.
J. Austin Moore is an attorney at Kansas City-based law firm Stueve Siegel Hanson LLP where he handles consumer class actions and represents companies in complex business disputes on a contingency-fee basis.