NY Times
Justices Question Contracts That Block Class Actions

By JESS BRAVIN

WASHINGTON—The Supreme Court seemed disinclined to let companies use legal fine print to block class actions, with several justices suggesting they might defer to state courts that ruled in favor of consumers.

An AT&T Inc. unit tried to prohibit class actions with arbitration clauses in the contracts it imposes on mobile-phone customers. But courts in California ruled the provision unenforceable.

Backed by banks, utilities and other customer-service industries, AT&T appealed to the Supreme Court, arguing that its arbitration provision was fair.

The case involves a California couple who complained they had to pay a $30.22 sales tax on cellphones advertised as free, and wanted class action status to represent other consumers who also were allegedly defrauded.

In a 2005 opinion involving a different case, the California Supreme Court ruled that when a company is accused of a "scheme to deliberately cheat large numbers of consumers out of individually small sums of money," a clause prohibiting class actions was unconscionable because it left consumers with no practical remedy.

Federal courts applied that ruling to the AT&T case.

At Tuesday's Supreme Court arguments, several justices seemed disinclined to second-guess state courts applying a bread-and-butter aspect of state law.

"Are we going to tell the state of California what it has to consider unconscionable?" Justice Antonin Scalia asked Andrew Pincus, the lawyer for AT&T.

Mr. Pincus argued that contract provisions couldn't be voided unless they "shock the conscience"—and that California courts had to stretch well beyond that standard to interfere with AT&T's arbitration clause.

Justice Ruth Bader Ginsburg said there was no evidence California had applied its laws unfairly against arbitration clauses. "Maybe across the board, California is saying: We think that unconscionability should have a broader meaning," she said.

Typically, the Supreme Court favors arbitration provisions, reading the Federal Arbitration Act as a broad congressional mandate to promote a private dispute-resolution system that advocates say is more efficient than traditional litigation.

Chief Justice John Roberts was cautious about letting the AT&T arbitration clause be thrown out. He asked whether there was any precedent in California for ruling a contract "unconscionable" not because it hurt one of the parties to the contract but because it hurt third parties—in this case, other consumers allegedly harmed.

Deepak Gupta, a lawyer representing the California couple, cited an 1872 state law as justification for such a ruling.

Neither Mr. Gupta nor Mr. Pincus seemed able to provide the justices what they wanted most: a clear formula for distinguishing across-the-board state laws that legitimately protect consumers from pretexts to interfere with arbitration clauses.

Class actions aggregate small claims against a defendant—say a $1 overcharge to one million customers—into a single complaint. The goal is to prevent a defendant from enriching itself through small frauds on a massive scale, since no one would file a complaint over $1. Critics say class-action lawyers exploit the system with cases that generate high attorneys' fees but provide little or no compensation to victims.

Arbitration clauses force consumers to file claims with a private arbitrator, which companies say is cheaper and more efficient than fighting a lawsuit. Critics argue the system favors companies, which are repeat customers while consumers typically have a one-off case, and the confidential proceedings deny the public information about questionable business practices they would learn through a normal trial.

A decision is expected before July.

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