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Supreme Court Blocks ATT Class Action

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By Stephanie Rabiner, Esq. on May 04, 2011 6:48 AM

A lawsuit challenging AT&T's practice of charging tax on the full retail price of a free cell phone may have just rendered class action lawsuits obsolete.

In the recently decided AT&T Mobility v. Concepcion, the Supreme Court determined that the Federal Arbitration Act preempts state law that invalidates contractual clauses that bar classwide arbitration.

AT&T's consumer contract includes an arbitration clause, which bars litigants from banding together and arbitrating as a class. In other words, each individual consumer must "sue" AT&T and go through arbitration.

Under California law, arbitration clauses that ban classwide proceedings will not be enforced if individual claims involve small amounts and bargaining power between the parties is uneven. AT&T's arbitration clause was thus invalid under state law.

The company appealed this decision, arguing that the Federal Arbitration Act, which was passed with the purpose of facilitating "informal, streamlined proceedings," preempted state law.

The Court agreed.

Writing for the majority, Justice Scalia pointed to the "liberal federal policy favoring arbitration," stating that the Federal Arbitration Act only permits courts to void arbitration clauses when the contract, as a whole, is voidable.

California's policy of voiding arbitration clauses that bar classwide action is thus preempted by federal law.

The general consensus is that, as a result of AT&T Mobility v. Concepcion, companies will start placing no-class arbitration clauses in contracts with employees, shareholders and consumers.

The end result would be that plaintiffs won't be able to arbitrate or litigate as a class, leading to a lack of challenges, as no one is going to individually fight a company over small amounts.

It remains to be seen if this will actually happen, but if it does, Congress can always step in and change the law.

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