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When AT&T slowed down Matt Spaccarelli’s unlimited data plan on his iPhone, the unemployed truck driver from Simi Valley, Calif. took the country’s largest phone company to court. And as a surprise to all, he won.
Declan McCullagh/CNET
But Spaccarelli’s victory rings hollow. In fact, the route he was forced to take — suing AT&T by himself as opposed to employing a more influential and wider ranging class-action lawsuit — illustrates just how difficult it is to change a carrier’s business practice through legal means. Rather than big changes and a return of his unlimited high-speed access, he ended up with $850 and a lot of disappointment.
Spaccarelli sued AT&T because, as he argued, AT&T had stopped offering him an unlimited data service. Instead, he said the company was slowing down his service when he used 1.5 GB to 2GB of data in a given month. Spaccarelli’s service was “throttled” as a result of a new AT&T policy designed to curb heavy data usage by its unlimited subscribers.
But thanks to a Supreme Court decision in 2011, which upheld a company’s right to include a clause in contracts prohibiting subscribers from suing the company as part of a class action, Spaccarelli had only two options when fighting AT&T’s new policy: He could enter into an AT&T-funded arbitration program or file his suit in small claims court. Spaccarelli opted for small claims court.
What this meant for AT&T was that instead of facing a multimillion dollar lawsuit, which represented thousands of disgruntled subscribers, the company only had to deal with a single subscriber and damages of $850. Even though AT&T lost its case and paid Spaccarelli the court-awarded damages, the company was not forced to change its throttling policy. And in fact, it still slows down service on what it considers its heaviest data customers, even though AT&T still calls the plan “unlimited.”
Consumer advocates warn that allowing companies, such as AT&T, to ban class actions is bad for consumers for several reasons. For one, it’s inefficient since it requires individual consumers to fight the same complaint in court or in arbitration multiple times. It creates inconsistent rulings. Some consumers may win their cases while others lose, even though the facts of the cases are very similar. And because it requires more effort on behalf of more individuals, it’s unlikely that everyone affected by the wrongdoing will get retribution. But most importantly, individual claims — whether they’re in arbitration or in small claims court — lack the necessary financial muscle to prevent future corporate abuses, or even to correct current ones.
Because all four major wireless carriers in the U.S. include such arbitration-only clauses in their contracts, wireless customers, in particular, are more vulnerable to potential abuses by large companies. And in a market where more than 90 percent of the population subscribes to wireless service, that means that millions of consumers no longer have access to a full range of legal options when their carrier breaks the law.
“Companies should not be able to effectively insulate themselves from liability when they rip off their customers,” said Senator Al Franken (D-Minn.), who has sponsored a bill that would prohibit companies from inserting arbitration clauses in consumer contracts. “But that’s what a recent decision by the Supreme Court has allowed them to do.”
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The case: AT&T vs. Concepcion
How did consumers lose their right to file class action lawsuits? Well, it started with a couple named Vincent and Liza Concepcion, who sued AT&T in California for deceptive practices. The couple claimed that they had received free cell phones from AT&T as part of a promotion for its service. But they were later charged sales tax on the full price of the phones and service. Because thousands of other customers also were charged full tax for devices they received at a discounted price, the Concepcions filed their case as a class action lawsuit.
But AT&T claimed that the couple could not sue the company as part of a class action, because in the contract, AT&T stipulates that customers must resolve disputes with the company through arbitration or via small claims court.
Initially, the lower courts sided with the Concepcions. A California federal district court and the Ninth Circuit struck down the contract, ruling that it violated the state’s consumer protection laws.
AT&T appealed the decision and it went all the way to the U.S. Supreme Court. In the case AT&T vs. Concepcion, AT&T argued that the Federal Arbitration Act of 1925 pre-empts state contract law. And therefore the class-action exemption, when arbitration is included as an alternative, should be honored as any other part of a legal contract.
In April last year, the Supreme Court in a 5-4 decision that was divided among traditional liberal and conservative lines ruled in AT&T’s favor. Writing for the majority Justice Antonin Scalia supported AT&T’s arguments. And he said the case couldn’t proceed as a class action because it was inconsistent with the Federal Arbitration Act.
In his dissent Justice Stephen Breyer said that it was unreasonable to require consumers to arbitrate their cases individually because the amounts in dispute would likely be so small that many people would simply not file a claim.
“What rational lawyer would have signed on to represent the Concepcions in litigation for the possibility of fees stemming from a $30.22 claim?”
What does this mean for consumers?
The Supreme Court ruling did not outlaw class action lawsuits. Instead, what it did was give large companies the option to insert clauses that would force customers to go through arbitration instead of allowing them to file a class action. Brian Fitzpatrick, an associate professor at Vanderbilt Law School, said he’s already seeing more companies insert these clauses into their customer contracts. Today, the four largest nationwide wireless operators each include arbitration clauses in their contracts with customers, which means that most wireless customers are unable to sue their wireless carrier in a class action lawsuit.
“Class action lawsuits are really the last mechanism that consumers have to hold big businesses accountable to the law,” said Michael Aschenbrener, founder and a principal at Aschenbrener Law, a firm that specializes in consumer rights. “Consumers today are forced to accept contracts that they have no ability to negotiate that limits their rights. And it allows big businesses to break the law and get away with it.”
In the past, class action lawsuits have helped push the industry to make changes in how they do business. For example, there were several class action cases filed around the country in which consumers argued that the early termination fees that carriers charged for ending service early were unfair.
Most of the cases were settled before they went to trial. Verizon Wireless settled a case in July 2008 and agreed to pay $21 million to former subscribers. T-Mobile USA settled a case filed in 2008 for about $11.5 million. And Sprint lost its case in California in 2009. A judge ordered the company to pay back $18.2 million in collected fees to consumers.
In some instances, the damages paid to individual consumers was very small. But these lawsuits helped draw attention to the outrage over these fees, which resulted in some public hearings regarding early-termination fees. The Federal Communications Commission had even considered regulating early-termination fees to establish a national policy. The agency backed off when the industry reformed the policies on their own. Now all four major wireless carriers prorate their early termination fees, so that subscribers pay less to end their contracts toward the final months of their contracts than in the beginning of the contract period.
But sometimes the settlements themselves include provisions in which companies promise to change their practices to prevent future wrongdoing. For example, Verizon Communications settled a class action lawsuit earlier this year for allegedly billing its landline phone customers for charges from third party companies that were not authorized by the customer. The practice is known as “cramming.”
While Verizon did not admit any wrongdoing as a condition of the settlement, which is typical of most class action cases, the company did agree to refund customers who were overcharged. In some instances, customers may recover hundreds or even thousands of dollars in refunds.
But the most meaningful part of the settlement included specific changes to Verizon’s billing practices that prevent “cramming” in the future. It’s this change in how Verizon conducts its business that offers all consumers the most benefit.
“Without class action lawsuits, consumers are really in trouble,” said Fitzpatrick. “They have lost what is probably their most powerful device to hold companies accountable. Even if you never get a penny as a result of a class action lawsuit, all consumers still benefit because these lawsuits can result in better business practices that affect all consumers.”
Big business says it knows what’s best for consumers.
While plaintiffs’ attorneys and consumer advocates believe that class action lawsuits are useful deterrents, big business argues that they are too expensive and only really benefit attorneys rather than consumers.
In the AT&T vs. Concepcion case, AT&T argued that arbitration benefits consumers, because it’s fast, less expensive than a class action suit and often yields a higher settlement than what can be gotten via a class action legal system. The company’s argument in a nutshell was that if an individual consumer could settle his grievance quickly and get a substantial amount for it, he would do better under arbitration than in a class action lawsuit.
“Class action lawsuits are only an engine for lawyers to make money,” said Andrew Pincus, an attorney with the law firm Mayer Brown in Washington, D.C. Pincus argued AT&T’s case before the Supreme Court. “You have to look at what brings more justice to more people. And the reality is that individual consumers can get more through arbitration than they can get through a class action suit. “
The Supreme Court agreed with AT&T. And in the decision, the justices noted that “the Concepcions were better off under their arbitration agreement with AT&T than they would have been as participants in a class action, which could take months, if not years, and which may merely yield an opportunity to submit a claim for recovery of a small percentage of a few dollars.”
Marty Richter, a spokesman for AT&T, said that members of a class action often don’t even file claims because the payout is so small.
“The District Court cited studies that show class-action members rarely receive more than pennies on the dollar for their claims,” he said. “And that few class members–approximately 1 percent to 3 percent–bother to file a claim when the amount they would receive is small,” he said.
He added that almost all of AT&T’s customers are able to resolve their concerns informally through customer service. And for those that can’t, he said that AT&T’s arbitration process is fair, fast and customer friendly. AT&T even pays the cost of arbitration, and it provides an economic incentive to assert claims, that some consumers might otherwise have not felt was worthwhile.
For example, under AT&T’s arbitration policy, if a consumer receives an award that is greater than the pre-arbitration settlement offer, the AT&T agreement requires the company to pay the greater amount of either the arbitration amount or $10,000. In addition, the company will pay twice the amount of the consumer’s attorney’s fees.
“We strongly believe that small claims and arbitration are viable options for concerned customers,” Richter said. ” That’s why we have embraced both options in our customer agreements, and we have seen countless other companies take a similar approach. We believe those options are the most fair, efficient, and pro-consumer way for customers to resolve their concerns.”
And when it comes to pressuring companies to change how they operate, Pincus argues that customers get quicker results at little to no expense by using social media to voice their concerns.
He pointed to two recent examples. In December, consumers outraged by Verizon Wireless’s plans to charge its customers $2 to pay their bills online took to Twitter and Facebook. The frenzy caught the attention of the FCC, which said it planned to investigate. Within a day of the $2 fee being leaked, Verizon caved to the pressure and did not introduce the fee.
This followed a similar campaign that consumers launched against Bank of America over fees it planned to charge debit card users. After a deluge of social media attention with consumers threatening to boycott Bank of America and a potential inquiry from regulators, the bank relented and reversed its decision on the charge the $5 fee.
Even AT&T made small concessions to angry unlimited data plan users whose service was being throttled. After months of bad publicity and consumer outrage regarding the new policy, AT&T clarified its position. Now, instead of slowing down the top 5 percent of heavy data users, the company slows its 3G customers after they consume 3GB of usage.
“The real power for consumers is in social media and pressuring the brands. Not in lawsuits,” Pincus said. “People talk about class action lawsuits as deterrents, but what’s really effective is the threat of regulation and government attention. And you don’t need a lawsuit to get that. Consumers have many powerful tools available to them today to collectively raise awareness.”
But what about choice?
Consumer advocates and legal experts agree that social media is a powerful tool. But they say it’s simply not enough. For Senator Al Franken (D-Minn.) the issue is really that consumers have no choice. He concedes that arbitration may sometimes benefit consumers. And he agrees social media can draw awareness to consumer issues. But consumers should be able to decide for themselves, which avenue is best for them.
And that’s why last year he introduced the Arbitration Fairness Act of 2011, which forbids companies from forcing its customers into arbitration when they sign a contract. Franken along with 16 other senators that are co-sponsoring the bill, believe that the Federal Arbitration Act of 1925 was not meant to apply to contracts made between companies and their customers, but between two companies doing business with one another. And it was not meant to limit an individual’s choices before a dispute even arises.
“Customers should have the option to bring a claim before our courts–including a class action claim–if that is the only way to get justice,” he said. “If they choose to use arbitration, fine. If they choose to band together with other consumers and file a class-action suit, that’s fine too. All my bill does is restore their right to make a choice.”
But Pincus who argued for AT&T in the Supreme Court says that offering consumers such a choice is unrealistic because it’s too expensive for companies.
“Companies can’t afford to maintain two dispute systems,” he said. “Consumers get better relief through arbitration. So this has to be the only system in place, otherwise it’s simply too expensive.”
Fitzpatrick, a law professor at Vanderbilt, said he isn’t buying this argument.
“How is it really more efficient for a company to deal with thousands of individual claims instead of allowing people to present their case as a single group?” he asked. “Class action lawsuits actually streamline the process and correct wrongdoing often for people who didn’t even realize they were being cheated.”
As for Spaccarelli, who is one of the few who took on AT&T and won, he said he’s happy about the victory. But he added that since AT&T’s wireless service is the only service that’s available where he lives, he’s still a customer. And he’s disappointed AT&T is still “throttling” unlimited subscribers.
“This wasn’t really about the money,” he said. “The $850 they paid me means nothing to AT&T. And it hasn’t changed the fact that I am still not getting the unlimited service I was promised. I’d rather get my unlimited service back.”
