Supreme Court Rejects Consumers’ Right to Class Action Arbitratio

Alright, I’m back!  I had to stay up late to get this published, but it was worth it, I thinkMore to follow soon.

Ah, spring, the time when a Supreme Court justice’s thoughts turn to stomping all over consumers’ rights…  I’m not sure if that’s exactly how that line goes, but that is pretty much what happened yesterday when a 5-to-4 majority of justices ruled that state laws allowing class action arbitration violate the Federal Arbitration Act of 1925.  What does that have to do with virtual worlds and social networks, you ask?  A lot, actually.  Read on!

If you’ve ever actually read the Terms of Use/Terms of Service/End User License Agreement for any of the online services you use (which, admit it, is about 1% of you) you know that they all have some form of arbitration agreement and class action waiver.  These are included to allow the company to resolve most minor (usually less than $10,000) disputes without going to court.  Often this can be a mutually agreeable alternative to court because the costs can be lower and the process quicker.  Arbitrating individual cases, however, only makes sense when there’s an issue that’s worth at least $1,000 otherwise it’s hard to justify the expense (which is before any legal fees if you decide not to be an idiot and hire an attorney to represent you).  When it comes to most virtual worlds and social networks or pretty much any other service with a contract, many disputes are for substantially less money.  The amount at issue in the Concepcion case was only $30 (for sales tax charged to customers who were offered a “free” phone when they signed up for a wireless plan) and potentially included thousands of plaintiffs.

The California Supreme Court, in a case called Discover Bank, ruled that class action waivers are unconscionable in adhesion contracts where disputes are likely to involve small amounts of damages.  This is logically sound, especially for something like a virtual world where most disputes will be over a few dollars’ worth of tokens (a/k/a virtual currency).  If there’s an unfair policy that affects all users of the service, it makes sense to combine them all into one consolidated matter.  If the parties cannot bring the matter to court because of a valid arbitration clause, however, this decision would bar consumers from banding together to resolve common disputes.

This ruling could be viewed as a victory for consumers in that, as Justice Scalia wrote for the majority, arbitration is a poor forum for class disputes because there is no option for appellate review as there would be in a traditional court.  He also contends that arbitration is designed for simple, bilateral procedures and would be overwhelmed if it was forced to take on matters as a class.  I’m not a huge fan of arbitration because of its lack of transparency and ability for future arbitrants to know how previous matters were resolved.  Essentially, every consumer goes into arbitration with a clean slate, yet the company has all of the knowledge and experience from its previous disputes to shape its strategy.  It’s like a 5 year old playing chess with Gary Kasparov.  Gary’s played thousands of games and the kid is still figuring out that the bishop can only move diagonally.

Justice Scalia further contends that parties should have the right to decide how they want to resolve disputes through mutual agreement by contract.  That’s all well and good, but the reality today is that most contracts people encounter these days are standard form adhesion contracts.  The whole problem with adhesion contracts is that only one side decides what goes in the contract and consumers are left to take it or leave it.  If they have a problem with how the contract is applied or interpreted, individual consumers are at a considerable disadvantage.  There is some room to throw out arbitration clauses if there are few reasonable market alternatives to a particular service, which is partly how Marc Bragg got around Second Life’s arbitration clause back in 2007.  While there is a lot more competition and choice out there in the market, that doesn’t mean that there’s much competition on contract terms.  Since, as I mentioned earlier, no one reads their contracts few people base their decision on the terms of the contract.  This is further compounded if the person becomes attached to the service and thus finds it difficult to leave if they later find objectionable terms in the agreement or in the way they are treated by the company.

I could go on and on about this for hours, and I’m sure you’re already a little bored, so I’ll cut to the chase.  The bottom line is that this ruling is a further slap in the face to ordinary citizens by the Roberts court which has shown itself to be one of the most business-friendly courts in history.  I think that we will see a lot attempts to bring ordinary class action suits in regular courts before this ruling is truly understood and digested by practitioners and consumers , but that’s the nature of the industry.


About Justin Kwong

An attorney in the Twin Cities and adjunct professor at William Mitchell College of Law where I teach a seminar on the law of virtual worlds.
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