Why Class-Actions Against Cell Phone Carriers Fail
Posted on by Jon Colgan.
Read any rant about how a cell phone carrier wronged a consumer, and you’ll find proximate posts littered with calls for class-actions. For example:
@sprintcare Hoping the class action lawsuits force Sprint & their fraudulence to that final collapse, Sprint got themselves almost there
So, consumers seem to be familiar with the concept of collective action, but I find that few actually know why these calls to (class-)action will never bear fruit. I decided to answer this question: why do class-actions against cell phone carriers fail? So in this post, I will present the history of collective action in the US, and I will show why consumer class-actions against cell phone carriers are not presently a viable solution.
Production > Labor Strikes
The modern history of collective action in the US begins with the Industrial Revolution.
The upside of industrialization was that productivity increased when each worker specialized in one step of manufacturing a good. The downside was that specialized workers cloistered together in factories suffered in common ways and thus pushed back in union. Labor unions leveraged collective actions in negotiations through organized labor strikes.
Regardless of their varying disagreements, both employers and employees agreed on the importance of finding a way to get back to work. Employers needed the profit, and union employees needed to eat. So Congress intervened in 1925 by passing the Federal Arbitration Act to allow both sides to contractually compel the other to arbitrate disputes. The idea was to eliminate the theatrics and volatility of dealing in ultimatums and to preclude labor strikes. This is how mandatory arbitration became part and parcel of the history of collective action in the US.
Standardization > Customization
Just as industrialization improved production efficiency by introducing repeatable and standardized processes into the manufacture of goods, in the early twentieth century big businesses improved bargaining efficiency by introducing standard-form contracts into almost every type of transaction. In order to not dilute the efficiency of standardization, these contracts–which today are more commonly referred to as “contracts of adhesion”–were offered on a take-it-or-leave-it basis.
As consumer processes became more efficient and automated for large-scale transactions, these same efficiencies created common problems derived from common sources.
Courts define an adhesion contract as “a standardized contract, which, imposed and drafted by the party of superior bargaining strength, relegates to the subscribing party only the opportunity to adhere to the contract or reject it.” It’s here in the predetermined pages of adhesion contracts that mandatory arbitration clauses found a ready-made home. Mandatory arbitration clauses in adhesion contracts dispersed like malaria in mosquitoes.
Reduced Transaction Cost > Limited Scope of Review
Big businesses favored mandatory arbitration over litigation almost immediately. Following passage of the FAA, mandatory arbitration clauses began popping up in numerous types of business contracts. To big businesses, the pros outweighed the cons. Here’s the analysis from the perspective of big businesses:
Pros:
- Reduced transaction costs
- Less adversarial than litigation
- Fair, expeditious process to resolve disputes
- May dissuade plaintiff’s lawyer from pursuing shakedown collective actions
Cons:
- Could allow plaintiffs to pursue claims that would be priced out of court
- Even weak claims can proceed to hearing on the merits
- Limited scope of review could hurt businesses if they get a bad decision
From here, collective action in the US quietly co-evolved as a component part of mandatory arbitration case law, and this didn’t change for almost eight decades.
Federal Law > State Law
Despite criticisms, from 1925 onward, courts tended to enforce mandatory arbitration clauses under the FAA–a federal law. However, with a fair amount of success, some plaintiffs still challenged these clauses by invoking state laws. The most common strategy was to focus on a mandatory arbitration clause’s denial of access to courts. Some state laws held that any clause requiring a party to waive his rights would be voided. Thus plaintiff’s would sometimes prevail in convincing a court to not enforce a mandatory arbitration clause because it denied the plaintiff his Seventh Amendment and otherwise statutory rights.
As a matter of strategy, this avenue was closed in 1984 when the US Supreme Court decided Southland Corp. v. Keating. Chief Justice Warren Burger wrote for the majority opinion:
In enacting § 2 of the federal Act, Congress declared a national policy favoring arbitration and withdrew the power of the states to require a judicial forum for the resolution of claims which the contracting parties agreed to resolve by arbitration.
According to legal scholar and attorney Thomas Burch, “Southland is perhaps the most controversial case in the Supreme Court’s history of arbitration jurisprudence.” In essence, the Court ruled that the FAA preempts state law, even when violations of state law could be shown. Even when state law guarantees plaintiffs the right to redress at a jury trial, the FAA may be invoked to deny it.
Explicit > Implicit
Then in 2003, collective action regained the spotlight from mandatory arbitration when the US Supreme Court decided Green Tree Financial Corp. v. Bazzle. Whereas most of the legal wrangling to that point had regarded whether mandatory arbitration clauses were enforceable, this case hinged on whether the FAA permitted collective action in arbitration. The company being sued had allegedly wronged lots of consumers in the same way, so the plaintiffs hoped to band together in pursuing their common claim. Although the governing contract required arbitration, it was not explicit on whether an arbitrator could certify a class proceeding–a collective action.
Attorneys for the company argued what amounts to a logical fallacy. They argued that, since the FAA is not explicit as to whether class proceedings may be heard in arbitration, the FAA did not grant such permission. Their argument, then, was that the absence of evidence was evidence of absence. They lost. The Court ruled “that, unless specifically banned in the contract, class-wide arbitration could be permitted by the courts.” In essence, the court left it up to the arbitrator to decide whether the collective action was permitted when the contract was not explicit on this point.
So businesses wised up and added explicit class-action waivers to their contracts. Problem solved and vengeful throngs neutralized–until 2005.
Discover Bank Test > Class-Action Waiver
In 2005, consumers scored a huge victory when the California Supreme Court introduced a new litmus test in deciding Discover Bank v. Superior Court. The Discover Bank test determined whether a class-action waiver in a mandatory arbitration clause was enforceable.
Discover Bank’s contract included a mandatory arbitration clause with a class-action waiver. The Court ruled “that a waiver of class action arbitration in a consumer contract of adhesion is unconscionable under certain circumstances” and that the FAA “does not preempt the prohibition of class action waivers in arbitration agreements.”
Justice Carlos R. Moreno, writing for the majority of the California Supreme Court, noted that both the California and the US Supreme Courts have endorsed a policy that lies at the core of the class-action mechanism “to overcome the problem that small recoveries do not provide the incentive for any individual to bring a solo action prosecuting his or her rights. A class action solves this problem by aggregating the relatively paltry potential recoveries into something worth … an attorney’s labor.”
The question is whether the class-action waiver, given the facts of the case, is unconscionable.
[A]lthough adhesive contracts are generally enforced, class-action waivers found in such contracts may also be substantively unconscionable inasmuch as they may operate effectively as exculpatory contract clauses that are contrary to public policy. [Thus] one-sided, exculpatory contracts in a contract of adhesion, at least to the extent they operate to insulate a party from liability that otherwise would be imposed under California law, are generally unconscionable.
The Court took the clear position that victims should not be denied the option of collective action if the result of such denial were that businesses would escape liability for their misdeeds. This was a watershed moment in the history of collective action and a victory for consumers.
Objectives of Congress > Deterring Unconscionable Terms
The party ended six years later in 2011 when the US Supreme Court overruled Discover Bank v. Superior Court in it’s AT&T Mobility LLC v. Concepcion decision. Discover had relied on state law to devise the Discover Bank test by ruling that the FAA did not preempt this new test’s state law basis. The US Supreme disagreed entirely on whether FAA preempted state law.
The majority held that California’s Discover Bank rule is preempted by the FAA because the state rule “stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress.”
The California Supreme Court had devised the Discover Bank test to preserve for plaintiffs an avenue to redress grievances and to hold companies liable. But the US Supreme court held that “objectives of Congress” mattered more. One panel of big business attorneys agreed with Concepcion:
Class arbitration, to the extent it is manufactured by Discover Bank rather than consensual, interferes with fundamental attributes of arbitration “The switch from bilateral class arbitration sacrifices arbitration’s informality and makes the process slower, more costly, and more likely to generate procedural morass than final judgment.”
This implies a dichotomy of opinion, with the California Supreme Court on one side and the US Supreme Court on the other. What precisely are the “objectives of Congress” that the US Supreme invoked? And did Congress intend for these objectives and our Seventh Amendment rights to be mutually exclusive?
Where are we today?
In the wake of Concepcion, the chance of certifying a class-action suit against a common wrongdoer is, for consumers, like that of pulling the sword from the stone. Given the Concepcion decision and the class-action waivers common to many adhesion contracts, big businesses are sadly insulated from liability for their misdeeds. This is a HUGE problem for consumers. The option of collective action is absolutely essential to maintaining a balance of power, enough to deter widespread wrongdoing and to seek redress against endemic minority wrongdoers. Unfortunately though, Concepcion all but foreclosed the prospect of class-actions against a cell phone carrier entirely. This is why, if you were to bring or join a class-action against a cell phone carrier today, the action will almost certainly fail.