Class Actions as Instruments of Corporate Punishment

A law school professor once opened a class with the observation, “This morning we will be considering a case from the Ninth Circuit.  Nevertheless….” 

The U.S. Supreme Court has granted cert in AT&T Mobility v. Concepcion, which has claimed the attention of many ADR wonks for its ramifications on class action waivers in arbitration clauses.  I read a more alarming teaching in the Ninth Circuit’s holding:  namely, that the purpose of a civil court is not to make deserving claimants whole, but to punish defendants that owe them the money beyond the amount of the money they owe them. 

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That is to say, offering to pay a claimant a hundred cents on the dollar is not justice enough. 

The facts are these:  When AT&T advertized “free cell phones” it did not state that California sales tax on the value of the phone would have to be paid.  So claimant Vincent Concepcion hired a lawyer and sued in California state court seeking $18.60 on behalf of himself, and another untold millions on behalf of every person in California who had accepted a free cell phone.  AT&T moved to stay the court action on the ground that the cell phone agreement contained an arbitration clause. 

The arbitration clause provided that AT&T would pay the arbitrator’s cost and, if the arbitrator found that AT&T owed the claimant more than AT&T’s offer, would pay the claimant another $7,500.  This policy was, all agree, an incentive for AT&T to offer to settle all claims submitted pursuant to the process at  100% of their value, and for customers to accept that offer.  It was designed to make consumers whole, out of court.

In addition to every imaginable consumer protection (waiver of AT&T fees, no waiver of small claims court, no confidentiality, full court remedies including injunctive relief, AAA consumer arbitration rules, proceedings at consumer’s location, etc.) the arbitration clause featured a class action waiver.  That is, the claimant agreed not to take part in a class action with respect to the claim arising from the agreement.

After first renewing his service agreement with AT&T, Concepcion pursued his court case on the ground that the class action waiver rendered the entire arbitration agreement unenforceable.  This argument seemed to be “You owe me $18.60 and you can’t make me accept it!”  He won at the trial level and won again at the Ninth Circuit — victories that must have taken quite a chomp out of his $18.60.

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I focus on only one aspect of this perplexing decision.  The Ninth Circuit accepts that AT&T is prepared to pay Mr. Concepcion every cent that he claims he is owed.  But it adopts the posture of the California Supreme Court in holding that the purpose of class actions is not to provide efficient treatment of multiple claims with the attributes of numerosity, commonality, typicality and adequacy, but rather to “serve the important policy function of deterring and redressing wrongdoing….” 

Thus, the fact that AT&T has given consumers an incentive to assert claims, and itself an incentive to satisfy them, is irrelevant to the court.  “We must determine only whether the [procedure] provides adequate incentive to pursue individual arbitration, not informal resolution.”

Indeed, the Ninth Circuit is explicit in expounding on this Alice-in-Wonderland logic:

AT&T will simply pay the face value of the claim…. Thus, the maximum gain to a customer for the hassle of arbitrating a $30.22 dispute is still just $30.22. … As a result, aggrieved customers will predictably not file claims… thereby “greatly reduc[ing AT&T’s] aggregate liability. [fn 7]

In my life, if I got paid $30.22 every time somebody owed my $30.22 I’d be overjoyed.

The court’s logic seems to be that our justice system is not there to make sure that people who file claims get their claimed damages, but to make sure that defendants pay all claims, including ones that have not been made.  (While bemoaning the civil claims that are not pursued, the court conveniently ignores the infinitessimal number of members of putative classes who choose to participate in ultimate classwide relief — a rate some estimate at as low as 3%.)

I was involved in a case once where the claimant had bought a game from a big toy chain, and it looked like the box had already been opened.  His attorney brought an action against the toy chain on behalf of every purchaser from any store in North America, seeking the cost of “every used toy that had been fraudulently sold as new” as well as punitive damages, attorney fees, etc.  We took a picture of a 10′ x 14′ sign in the front of the store that announced: WE WILL GLADLY ACCEPT ANY UNSATISFACTORY PRODUCT YOU WISH TO RETURN WHETHER PURCHASED AT THIS STORE OR NOT and handed the photo to the court.  We got summary judgment.  The reasoning?  The claimant, and all claimants he purported to represent, could be made whole simply by returning the defective game to the store, no questions asked.  No class action, no law suit, and no lead attorney’s fee.

AT&T Mobility v. Concepcion seems to be at odds with this logic.  It seems to stand for the proposition that court procedures exist for a purpose independent of making claimants whole in an efficient and effective way.  In opining on convoluted esoterica of waiver, class actions, unconsciounability, arbitration and so on, the AT&T Court marginalizes, or even ignores, the underlying purpose of the whole exercise: How to provide consumers with meaningful redress for damages.

  1. Well, is the underlying purpose of the whole exercise to provide consumers with redress for damages? Or is there some other purpose? That is the question. I think you can make an argument that the real underlying purpose of all kinds of consumer litigation has nothing much at all to do with providing people with effective redress, but is instead a means of enforcing compliance with government regulations. Let me give some examples. We have statutes requiring businesses to make accommodations for the handicapped. Putting aside the question of whether these regulations are reasonable or not, once they are enacted, the legislature has two choices in enforcing them. Either establish a bureaucracy with inspectors and fines, etc. to police businesses’ compliance with the regulations, or draft a statute that gives private attorneys sufficient incentive to pursue claims against the businesses that do not comply with the law. Guess which method the legislature usually chooses? That’s right, the one that is much more expensive for businesses and vastly wasteful and expensive for the litigants. And of course those costs are passed down to all of us by every business. And the reason for that is that it is cheaper for the taxpayers to leave enforcement up to private attorneys instead of hiring state employees to enforce the law with fines and inspectors. We do the same thing with wage and hour laws. And with enforcement of the corporations code. And with enforcement of consumer protection laws as in the example you are citing.

    So I would argue that the real villain is the mentality that is so against raising taxes to pay for the government employees who are needed to enforce the law, that we would rather subsidize an army of private attorneys to enforce those laws. But that is good for the business of trial lawyers and probably mediators as well, so I should probably just shut up.

  2. I’ve been thinking some more about this case, and I think you could go so far as to argue that the people who had to pay $18 in taxes for their free phone were not injured at all, even if they were surprised that they owed those taxes. Most people know that when you win a prize or receive something else of value, you still have to pay taxes on that. We are not injured in any way by paying those taxes. Maybe it is even a mistake to think of the $18 these free phone purchasers had to pay as damages. How are you injured by having to pay taxes like everyone else? And why do you need compensation if you are not injured? The proof that it is not compensation is that even someone who fully understood and expected to have to pay taxes on a “free” phone would still be entitled to the settlement payment, even though those people clearly were not deceived in any way. All of this leads me to think that the Ninth Circuit was right in some sense that offering consumers free arbitration to gain compensation for their “injury” really doesn’t solve the underlying problem of enforcing the statutes prohibiting false advertising.

    The people who are actually injured by false advertising are all of the people who see the false or misleading advertising. False or misleading advertising harms everyone who is exposed to it, by cheapening our commercial discourse and making us distrustful of anyone trying to sell us anything. And the settlement that the company had to pay for engaging in false advertising is really just a penalty that is meant to deter everyone from engaging in false advertising. It is not compensation at all. But in a lot of consumer class action cases, we have to pretend there is a group of injured people so as to justify making the company pay for its violation of the law. So the only problem is that we have designed a system that requires defendants to pay a lot of money to lawyers to enforce false advertising laws, but as I mentioned in my first comment, that kind of highly inefficient and expensive enforcement mechanism represents a choice that politicians have made because raising taxes to pay for a more sensible enforcement mechanism seems to be a harder choice. In some cases, it might make more sense if we just paid the lawyers for the cost of bringing these enforcement actions, and forgot about trying to find and compensate all of the “victims.”

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