Supreme Court: Binding Arbitration Clauses In Consumer Contracts Trump California Law

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California consumers who are angry about being hit with unexpected fees can be forced to air their complaints individually before an arbitrator rather than in a class-action lawsuit, under a decision handed down Monday by the U.S. Supreme Court.

The justices by a 6-3 vote overturned a state ruling and threw out a class-action lawsuit against DirecTV over its termination fees for customers who canceled its service.

The high court said the Federal Arbitration Act calls for honoring arbitration agreements that are written into company contracts, regardless of whether there are more consumer-friendly protections set by states such as California.

The decision is consistent with a series of rulings in recent years that have given corporations a legal way to bypass the courts. Company lawyers say arbitration can be a faster, less expensive and fairer way to resolve disputes.

Consumer-rights advocates and plaintiffs lawyers mostly disagree. They say that many consumer complaints, including over unexpected charges and fees, are too small to justify someone going through an arbitration hearing. The DirecTV fee, for example, could be as high as $480. If consumers cannot join a class-action suit, such complaints will go unheard, advocates say.

“This is another troubling day for American consumers who are ripped off by corporate greed and malfeasance, whether it’s a satellite TV system that doesn’t work, unlawful credit card fees or a defective vehicle,” said Harvey Rosenfield, founder of Consumer Watchdog, and one of the lawyers who represented consumers in the litigation. “The Supreme Court has taken away Americans’ only right to obtain justice: their day in court.”

The DirecTV case began in 2008 when Amy Imburgia filed a class-action suit on behalf of herself and others alleging she was wrongly charged an early termination fee. The company's lawyers pointed to her DirecTV contract, which said disputes will be "resolved only by binding arbitration."

But a judge in Los Angeles and a state appeals court refused to enforce the arbitration clause on the grounds that it was blatantly unfair and that "unconscionable" contracts cannot be enforced in California. The state Supreme Court refused to hear the company's appeal.

The U.S. Supreme Court intervened and ruled for the company in DirecTV vs. Imburgia.

Justice Stephen Breyer, writing for the majority, noted that the high court had already rejected, in a 2011 ruling, the view that Californians could cite their state law to bypass an arbitration agreement.

Because the California judges did not "give due regard to the federal policy favoring arbitration," their decision is reversed, he said. Chief Justice John G. Roberts JR. and Justices Antonin Scalia, Anthony M. Kennedy, Samuel Alito and Elena Kagan agreed.

There were two dissents. Justice Clarence Thomas restated his view that that the Federal Arbitration Act applies only in federal court, and not to disputes in a state court.

In a broader dissent, Justice Ruth Bader Ginsburg faulted the majority for having "insulated powerful economic interests from liability for violations of consumer-protection laws." She said these "take-it-or-leave agreements mandating arbitration" should not be honored as though they were contracts between equals. Justice Sonia Sotomayor joined her dissent.

Twitter: @DavidGSavage

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