The Glade 4.0

WASHINGTON — In a dispute that could affect consumers nationwide, the Supreme Court took up a case Tuesday revolving around the terms of a cellphone contract and testing when disgruntled customers can file a class-action lawsuit rather than be forced to arbitrate out of court.

The case, begun by a couple in California who were charged $30 in taxes for a "free" cellphone when they signed up for service, pits the terms of federal arbitration law against a state policy permitting class-action lawsuits.

The dispute has also set civil rights organizations, such as the NAACP Legal Defense Fund, against business groups including the Chamber of Commerce. The NAACP legal fund contends the leverage of class-action lawsuits are often the only way to protect consumers or deter employer misconduct. The chamber counters that arbitration serves both sides by eliminating costly and time-consuming litigation.

Tuesday's dispute could determine when a large number of people with small-dollar grievances may collectively obtain a court remedy. The legal question is whether the Federal Arbitration Act overrides California law that says an arbitration contract that bans class-action lawsuits cannot be enforced.

Vincent and Liza Concepcion brought a class-action lawsuit in 2006 against AT&T Mobility alleging fraud under California law because the company charged them for state taxes on what was supposed to be a "free" phone.

AT&T argued that the Concepcion's class-action claim was barred by a provision of their contract requiring any aggrieved customer to submit individual complaints to arbitration. But under California law, AT&T's categorical ban on class-action lawsuits was deemed "unconscionable," that is, so grossly one-sided that it could not be enforced.

Lower federal courts in California rejected AT&T's argument that the Federal Arbitration Act — which says states cannot discriminate against arbitration — pre-empted California law.

In its appeal, AT&T asserted that its arbitration provision favors consumers because a customer complaining about the phone tax can arbitrate for free and win a possible $7,500 remedy. It also said that if the Supreme Court invalidated its class-action ban, the result would hurt consumers because companies would end up passing on the potentially higher litigation costs.

The Supreme Court in recent cases has strengthened arbitration policy, over consumer complaints, and in agreeing to hear AT&T reinforced the notion that a corporation's interest in arbitration may again prevail. Yet, Tuesday's discussion was unusually dense and did not reveal how broadly a majority might rule. Much of the discussion focused on California's test for an "unconscionable" contract provision.

Andrew Pincus, arguing on behalf of AT&T, said California law wrongly considered how third parties and not just the Concepcions might be hurt by the terms of the cellphone deal. Pincus described the contract as "more than fair."

Justice Ruth Bader Ginsburg suggested that states might have wide latitude in their standards for when an arbitration deal will not be enforced: "Maybe across the board, California is saying: We think that unconscionability should have a broader meaning: Is it unfair to the weaker party to the bargain?"

Yet Justice Samuel Alito appeared more open to AT&T's position and noted that its arbitration provision could allow "nearly all consumers who pursue the informal claims process," rather than go to court, to be compensated promptly and in full.

Deepak Gupta, arguing on behalf of the Concepcions, urged the court to defer to California law and broadly consider all AT&T customers who were wronged.

"It's not a question of whether the Concepcions, once they have chosen to make a claim, whether the contract is fair to them; it's whether it's fair to any AT&T customer," Gupta said.

The state of California, he said, "has made a judgment that if you preclude class-wide relief, that will gut that state's substantive consumer protection laws because people will … not be able to bring those cases."

Siding with the Concepcions are Illinois, Maryland, Minnesota, Montana, New Mexico, Tennessee, Vermont and the District of Columbia.

They say federal courts should not second-guess decades of state contract law and they describe class-action suits as "an important complement to government efforts at safeguarding consumers against fraudulent and deceitful practices."

Two states, South Carolina and Utah, entered the case on the side of AT&T Mobility. They said class-action filings are not "necessary to vindicate consumer claims when consumers have the incentive and a full and fair opportunity to resolve their claims on an individual basis."