Published by LawTechie - April 28, 2011 - LawTechie

The Supreme Court ruled this week that a Terms of Service arbitration clause can prevent consumers from pursuing class actions against corporations. AT&T Mobility LLC v. Concepcion et ux., No. 09-893, 563 U.S. ___ (2011). The Concepcions brought a class action against AT&T for falsely advertising a mobile phone discount which was advertised as free with the service contract renewal, but the Concepcions were charged sales tax on the full retail price of the phone.

In response to the class-action, AT&T invoked the arbitration clause in its Terms of Service stating that consumers must arbitrate claims on an individual basis. The 9th Circuit held that such arbitration clauses in contracts of adhesion (contracts that users must agree to in order to use the product they buy, e.g., Terms of Services) are unconscionable and, therefore, cannot be used to mandate arbitration. The Supreme Court disagreed:

Arbitration is a matter of contract, and the FAA requires courts to honor parties’ expectations.

[T]he FAA’s preemptive effect might extend even to grounds traditionally thought to exist “at law or in equity for the revocation of any contract…” [A] court may not “rely on the uniqueness of an agreement to arbitrate as a basis for a state-law holding that enforcement would be unconscionable…

The Federal Arbitration Act (FAA) provides, among other things, that state courts should favor arbitration unless they can find a state law reason that the entire contract with the arbitration clause is unenforceable. Accordingly, California passed a law stating that arbitration clauses which prohibit class actions are unconscionable and, therefore, unenforceable. The Supreme Court specifically disagreed with this reasoning, finding that such state laws which, in essence, fabricate new reasons for holding a contract unconscionable, are merely technical loopholes that cause the FAA to undermine its own objective of favoring arbitration.

Takeaway: As stated above, Terms of Service are contracts of adhesion and now it seems that arbitration clauses in such contracts must be honored. Most lawsuits involving privacy disputes would never be brought without class action certification because the damage to any single defendant is usually a very small amount of money — attorneys would not sue a company to recover $45 dollars for example. Now it seems that companies can preempt most privacy suits by including an arbitration clause in their Terms of Service or Privacy Policy.

It should also be noted that AT&T’s arbitration clause was EXTREMELY consumer friendly: It provided that AT&T could never recover attorneys’ fees from the consumer, even if AT&T won the arbitration. It also provided a minimum of $7500 recovery to the consumer if they ended up winning more than AT&T’s final settlement offer. Finally, it provided that the consumer could recover twice its attorneys’ fees if it won the arbitration. So while the Court ruled that laws finding all anti-class arbitration unconscionable are preempted by the FAA, we can see why, in reality, the Court probably did not have a very hard time viewing AT&T’s arbitration clause to be far from unconscionable.

LawTechie is a blog focusing on trends in tech and digital media. Areas covered include intellectual property, cyberlaw, venture capital, transactions and litigation as they relate to the emerging sectors. The blog is edited by the firm's partner Tim Bukher with contributions from the firm's experts in their respective areas of law.

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