Reed R. Kathrein, partner, leads Hagens Berman’s San Francisco office. He focuses on financial fraud and securities litigation.

Most investors understand that if they are defrauded or lied to about an investment, they have the right to take legal action to recover lost funds. Furthermore, investors know that there is safety in numbers and that they have the right to join together claims with other investors in a class-action setting.

However, thanks to a new Supreme Court decision, that right may not be as solid as it has been in the past. Last April, the United States Supreme Court handed down a decision in the case AT&T Mobility v. Concepcion. The case involved consumers who purchased phones from AT&T that were allegedly advertised as free. However, when all applicable fees and taxes were included, the phones were not free, the plaintiffs claimed, and they sought to bring together their claims in a class action. The plaintiffs had signed an agreement with AT&T which required that they waive their right to a class-action lawsuit and agree to handle disputes in arbitration proceedings. In a contentious 5-4 decision, the court ruled that the agreement should be enforced and that the plaintiffs must pursue any disputes with AT&T as individuals in arbitration.

Following the decision, companies in a variety of industries have added forced arbitration clauses to contracts with consumers. The investment business is no exception.

One private equity firm, The Carlyle Group, recently added a section in its registration statement that would have required any disputes be handled by arbitration. The firm ultimately backed down and withdrew the provision after the SEC pushed back on the effective date of the statement. Nevertheless – investors should always be careful when signing agreements and examine registration statements carefully. Moving forward, private equity firms may attempt to limit investors’ legal rights by using forced arbitration provisions to eliminate the right to a class-action lawsuit.

Tips for Trustees

Arbitration is not an equal substitute for a genuine court of law and investors should be wary of signing away their legal rights. If you have questions about your rights or how to proceed with legal action after suffering significant losses, you can contact our attorneys by emailing [email protected] or calling (510) 725-3000.