In DirecTV Case, Consumers Lose Again When It Comes to Arbitration

Mandatory arbitration's winning streak continues.

Mandatory, or forced, arbitration clauses are an increasingly prevalent tool companies use to resolve disputes outside courtrooms. These clauses often bar class-action lawsuits, and the result of the arbitration proceeding is typically sealed, so other consumers in the same position won’t even learn about the case.

Arbitration decisions also are usually binding, with no appeal option available. Mandatory arbitration clauses are in the fine print of hundreds of millions of consumer contracts for products and services.

The latest decision involves DirecTV customers in California who claimed they were charged illegal cancellation fees of up to $480. The 6-3 decision means they can't join together to sue the company in court.

DirecTV, now part of AT&T, is the largest satellite TV provider in the U.S. with over 19 million customers. The lawsuit alleged that DirecTV's customers were forced to pay cancellation fees even if their equipment could not be installed, or they moved and DirecTV service wasn’t available in their new location, or the equipment simply stopped working.

California courts had routinely held that mandatory arbitration clauses with bans on class actions were “unconscionable.” Some companies, including DirecTV, had an extra condition in their contract terms that voided the entire arbitration clause “if the law of your state” did not permit agreements barring class actions. In 2014 the California Court of Appeals had ruled that DirecTV’s arbitration clause was illegal and therefore unenforceable under California contract law, and allowed a class action to proceed.

The Supreme Court didn’t rule on the merits of the complaint against DirecTV, but was instead asked to decide if the dispute had to be resolved through individual private arbitration or if the class-action lawsuit could move forward. The Supreme Court ruled that, under its earlier Concepcion and Italian Colors decisions, the Federal Arbitration Act overrode the “law of your state” on which the California court was relying. In other words, the state law no longer applied, the Supreme Court said, and the class-action ban, along with the entire mandatory arbitration clause, was valid and enforceable.

But in her dissent, Justice Ginsburg pointed out that the parties to the agreement had intended for the state law to apply. With this decision, the Supreme Court is reversing a state court’s interpretation of what the parties intended under state contract law, a legal issue traditionally left to state courts to decide. The majority of the Court has “misread” the Federal Arbitration Act to “deprive consumers of effective relief against powerful economic entities that write no-class-action arbitration clauses into their form contracts,” she wrote. Justice Ginsburg was joined in her dissent by Justice Sotomayor; Justice Thomas wrote a separate dissent.

DirecTV applauded the decision.

“The ruling affirms the strong federal policy favoring arbitration agreements that efficiently allow consumers and businesses to resolve disputes without further burdening our overloaded courts.” says DirecTV spokesman Robert Mercer.

But consumer groups see the decision as a further weakening of consumer rights under the law.

“This is another troubling day for American consumers who are ripped off by corporate greed and malfeasance, whether it’s a satellite TV system that doesn’t work, unlawful credit card fees, or a defective vehicle,” Harvey Rosenfield, founder of Consumer Watchdog and one of the lawyers who represented consumers in the litigation, said in a statement. “The Supreme Court has taken away Americans’ only right to obtain justice: Their day in court."

George Slover, senior policy counsel at Consumers Union, the policy and advocacy arm of Consumer Reports, concurs. "This decision hammers another nail in the coffin for consumer access to the courts and holding corporations accountable. Congress needs to act to restore these fundamental consumer rights."

What You Can Do

Look for mandatory arbitration clauses in the fine print of contracts before you sign up for a product or service. They’re in the terms for car loans and leases, credit cards, checking accounts, insurance, investing accounts, student loans, and even certain employment and nursing home agreements; you can be legally bound to mandatory arbitration by signing a contract or by clicking “I agree” on a website.

If you find an arbitration clause, see if you can opt out. A few contracts, such as certain nursing home agreements, allow it.

When you can, do business with companies that don’t use arbitration clauses. It’s difficult to find a credit-card, mobile-phone, or checking-account agreement where arbitration isn’t required. But according to a Consumer Financial Protection Bureau’s study on arbitration clauses in financial products and services, midsized banks and credit unions are more likely not to have forced arbitration clauses in their customer service agreements.