The Supreme Court faces yet another assault on state consumer protection efforts. This time, states are trying to protect the rights of consumers to organize class action lawsuits in order to fight unruly corporations with unfair practices. These corporations have tried to thwart consumer protection efforts by requiring that customers sign away their rights to access the courts and prohibit them from using class actions to vindicate their rights.
A class action lawsuit allows a group to file a claim collectively against a defendant. Often, the defendant has treated the group of individuals in the same way, for example, by using the same business practices. Class actions are most valuable where the individual claims of the group members are small, such that filing a claim individually is too costly. By pooling their claims, consumers can increase the value of their case, making it easier to finance and secure representation.
Without class actions, most people would never file these claims, because the amounts they might recover are too small to make a legal battle worthwhile. This is why a large corporation might try to eliminate the class action mechanism. That way, they can get away with unfair business practices without anyone filing a claim, as long as the harm to each individual isn’t too high.
Many corporations simply put a prohibition on participation in class actions in their customer contracts; the elimination of class actions is a condition of doing business. Others will achieve the same result by requiring mandatory arbitration, which prevents consumers from accessing the courts. Arbitration is unlike court, where consumers have extensive rights and judges must apply the law. If consumers are forced into arbitration and locked out of court, there can be no class actions.
Some courts have found that contracts containing these provisions are unconscionable. They are so one-sided as to be unenforceable. There is no bargaining power on the part of consumers entering into these contracts. Furthermore, the rights they are being asked to forfeit are essential to ensuring that the parties to the contract act in good faith. If consumers cannot pool their grievances in order to enable themselves to enforce their rights under their contracts in the courts, what guarantee do consumers have that the corporation will live up to its end of the bargain? If there can be no class actions, there is no assurance that the contract will be enforceable.
Consumer contracts are not the only place where class action bans would be devastating. These provisions are making their way into employment contracts as well. Because class actions have historically been critical in enforcing anti-discrimination laws, their elimination by these fine print prohibitions could lead to more illegal discrimination.
Courts should be very wary of attempts to eliminate this extremely important mechanism for consumer and employee protection. Otherwise, manipulative and illegal practices can go unpunished. By spreading the costs over consumers generally, and prohibiting class actions, these companies can hold on to millions of dollars in compensation that will never be recovered by consumers and employees who have been subject to illegal practices.