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A bogus $11.72 charge for a “free” cell phone could ultimately determine whether American businesses will be able to prevent consumers from bringing class-action lawsuits.

The U.S. Supreme Court today heard arguments as to whether siblings Vincent and Liza Concepcion of San Diego should be able to pursue a class-action case against AT&T Mobility for charging them and thousands of other customers a few dollars in 2002 for a phone that was advertised to be free.

A federal judge and the 9th Circuit Court of Appeals threw out fine print in AT&T’s consumer contracts banning class actions, calling it unenforceable under California law.

If the Supreme Court justices disagree, their decision could severely limit the role of courts as a check against consumer fraud.

AT&T, like many businesses in the past decade, have begun forcing customers to waive their right to a jury trial and take their complaints to a private system of justice known as arbitration.

It’s common practice to include an arbitration clause in consumer contracts, such as when buying a car, taking out a loan, or signing up for a service. It’s a controversial business practice because consumers rarely read the fine print in contracts and don’t realize that they are giving up a Constitutional right.

Consumer lawyers contend that arbitration is stacked against consumers, because arbitrators can depend on income coming from companies before them. Arbitrations are secret and the decisions cannot be appealed.

Supreme Court already expanded arbitration

But the U.S. Supreme Court has for more than a decade been the driving force in allowing businesses to enforce arbitration agreements against consumers. In opinions from the mid-1990s, the court first cited a 1925 federal arbitration law to preempt state laws, including elements of consumer protection laws.

The AT&T decision may ultimately hinge on “whether the court’s respect for state courts trumps their love of arbitration,” said Deepak Gupta, an attorney for the consumer advocacy group, Public Citizen, who argued the case before the high court.

AT&T bans class-action lawsuits as part of its arbitration agreement. But the California Supreme Court has ruled that such a ban in standard consumer contracts is unenforceable when companies are deliberately cheating a large number of customers out of a small amount of money.

Otherwise, as Justice Stephen Breyer said during today’s arguments, “the waiver becomes in practice the exemption of the party from responsibility for its own fraud.”

Noting that California law holds class-action bans to be “unconscionable” in certain situations, Justice Antonin Scalia asked the AT&T lawyer, “Are we going to tell the State of California what it has to consider unconscionable?”

The court gave no clear indication of how it will rule in the AT&T case, and is expected to issue a decision in the spring.

Consumer bureau to examine arbitration

Attempts by Congress to ban mandatory arbitration in consumer contracts have floundered, although the financial reform law prohibits arbitration clauses in home loans. The Dodd-Frank law also instructs the new Consumer Financial Protection Bureau to study whether it should limit mandatory arbitration in other areas of lending.

After the Concepcions filed their lawsuit, AT&T changed its arbitration rules to pay consumers big premiums if an arbitrator gives them more than AT&T offers in settlement talks. Critics contend that the system pays off the few consumers who would bring a case to arbitration for $11.72 to avoid repaying millions of customers for the bogus fee.

Business lawyers argue that class action lawsuits are often frivolous and don’t really help people like the Concepcions, while arbitration is faster, cheaper, and easier.

“Consumers don’t want to be part of class-action lawsuits, which are brought for the benefit of lawyers,” said Alan Kaplinsky, a Philadelphia lawyer and one of the architects of consumer arbitration.

But Gupta said from the steps of the U.S. Supreme Court building on Capitol Hill, “If they want to ban class actions, they should go across the street and ask Congress to ban class actions.”

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