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Consumer Arbitration Case Divides U.S. Supreme Court

U.S. Supreme Court justices, wrestling with an arbitration case involving an AT&T Inc. unit, debated how much ability companies should have to prevent customers from banding together to press legal claims.

In an hour-long hearing in Washington today, the justices signaled they are likely to divide in the case, which stems from $30.22 in sales taxes charged to two California consumers.

Business groups say states are undermining the cost savings arbitration offers by requiring that customers be allowed to press claims as a class. In the case before the justices, a federal appeals court invalidated the class-action ban in AT&T Mobility LLC’s customer contracts, saying the provision was “unconscionable” under California law.

Several members of the court today indicated they were hesitant to second-guess California’s rules designed to protect consumers from one-sided contracts. “Who are we to say that the state is wrong about that?” Justice Elena Kagan asked.

Other justices suggested that California might be violating a federal law that requires states to treat arbitration agreements the same as any other contract. Chief Justice John Roberts said the state was evaluating the fairness of arbitration accords using “a different mode of analysis than I’m familiar with under basic contract law.”

The case could affect tens of millions of arbitration agreements in California alone, according to AT&T. Inc., Earthlink Inc., DirecTV Inc., Comcast Corp., Dell Inc. and the U.S. Chamber of Commerce all filed briefs supporting AT&T in the case.

‘Free’ Phone

Customers Vincent and Liza Concepcion say they were improperly charged sales tax on a mobile phone AT&T advertised as free. Their lawyer, Deepak Gupta, argued that the stakes in some cases are so small that that many customers won’t press claims if forced to do so individually.

“People will in the context of small frauds not be able to bring those cases,” he argued.

AT&T points to what it says are consumer-friendly provisions in its current arbitration agreement. The accord requires the company to pay a minimum of $7,500 if the arbitrator issues an award greater than AT&T’s last settlement offer. AT&T also must pay all arbitration costs for non-frivolous claims and can’t seek reimbursement for its legal fees.

AT&T’s lawyer, Andrew Pincus, told the justices that California’s courts scrutinize arbitration agreements using rules that don’t apply to other types of contracts, violating the Federal Arbitration Act.

“The test that is applied has nothing to do with the test that is applied in every other context,” he argued.

The case is AT&T Mobility v. Concepcion, 09-893. The court will rule by July.

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