The U.S. Supreme Court in Green Tree Financial Corp. v. Bazzle, 539 U.S. 444 (2003), failed to address the enforceability of a mandatory arbitration clause within a consumer contract that prohibits class, mass, collective or consolidated proceedings. Moreover, the opinion did not answer whether a class action waiver within a mandatory arbitration agreement is unconscionable or invalid as a matter of state law and, if so, whether the Federal Arbitration Act (“FAA”) would preempt such a determination. No Supreme Court decision to date has provided further guidance or instruction, and consequently the battle between plaintiffs and defendants over the issue of arbitration agreements and class actions continues to be hard fought and contentious.
Faced with an onslaught of class actions and certification proceedings fraught with abuse and due process violations, corporate defendants and their counsel, relying on the Green Tree decision, drafted mandatory arbitration clauses within their consumer contracts that limited the scope of the arbitrator’s authority and prohibited class, mass, collective or consolidated proceedings. Many courts enforce these class action waivers in arbitration agreements.
See Dale v. Comcast Corp., No. CIVA 1 :05CV331 5 WCO, 2006 WL 2720624, at *7 (N.D. Ga. Sept. 8, 2006), (noting that the 11 th Circuit has upheld arbitration agreements precluding class action relief); Provencher v. Dell Inc., 409 F. Supp. 2d 96 (C.D. Cal. 2006) (applying Texas law, finding that the arbitration provision and class action waiver do not violate a fundamental policy of California, and granting Dell’s motion to compel arbitration); Gentry v. Super. Ct., 37 Cal. Rptr. 3d 790 (2006) (holding that class action waiver in pre-employment arbitration agreement was neither procedurally nor substantively unconscionable and thus was enforceable); Spann v. Am. Express Travel-Related Servs. Co., No. M2004-02786-COA-R3CV, 2006 WL 2516431 (Tenn. Ct. App. Aug. 30, 2006) (affirming the trial court’s order granting the motion to compel arbitration and reversing that portion of the order striking the class arbitration clause in the cardmember agreements, finding that they were neither substantively nor procedurally unconscionable under Utah law)
Recent Rulings Favoring Plaintiffs
However, a number of recent rulings favor plaintiffs and their counsel, who characterize mandatory arbitration provisions with bans on class, mass, collective or consolidated proceedings as a means to immunize corporations from liability altogether – a vehicle for escaping liability for wrongful conduct. Critics of prohibitions on class, mass, consolidated or collective proceedings in arbitration agreements argue that the class or consolidated action is the only effective way to redress exploitation of consumers and contend that, though a class action is not a substantive right in the consumer context, the class device is inextricably linked to the vindication of substantive rights. Persuaded by these arguments, an increasing number of courts have struck down class action waivers in arbitration agreements as procedurally and substantively unconscionable and counter to public policy. See Discover Bank v. Super. Ct., 11 3 P.3d 00 (Cal. 2005) (denying Discover Bank’s motion to compel arbitration and striking class action waiver for unconscionability); Winig v. Cingular Wireless, No. C064297MMC, 2006 WL 2766007 (N.D. Cal. Sept. 27, 2006) (holding that Cingular’s service agreement was a contract of adhesion and was procedurally and substantively unconscionable, and that the FAA does not preempt the California rule of unconscionability as applied to class action/class arbitration waivers; Cingular’s motion to compel arbitration was denied); Kinkel v. Cingular Wireless, No. 100925, 2006 WL 2828664 (Ill. Oct. 5, 2006) (finding class action waiver in service agreement to be unconscionable and unenforceable).
A kaleidoscope of conflicting decisions continues to emerge across state and federal courts nationwide, and there are seemingly inconsistent rulings within a single jurisdiction. Accordingly, outside and in-house counsel must be vigilant in monitoring these legal developments and be strategic in both drafting arbitration agreements and filing motions to compel arbitration in the defense of class actions, which now carry with them an increased risk of court-ordered, class-wide arbitration.
The most recent circuit court to examine an arbitration agreement that clearly prohibited any type of class or consolidated action is the 1 st Circuit in Kristian v. Comcast Corp., 446 F.3d 25
(1st Cir. 2006). Significantly, the court found that the “arbitration agreement’s language ostensibly conflicts with the Federal Rules of Civil Procedure, which provide for class actions.” Kristian, 446 F.3d at 54. While the st Circuit recognized that the 3rd, 4th, 7th and th Circuits all enforce consumer arbitration clauses barring the use of the class mechanism (class action and/or class arbitration), it found the underlying facts of Kristian distinguishable from the other circuit decisions because plaintiffs in Kristian were prosecuting antitrust claims. The court ruled: “If the class-mechanism prohibition here is enforced, Comcast will be essentially shielded from private consumer antitrust enforcement liability, even in cases where it has violated the law. Plaintiffs will be unable to vindicate their statutory rights. Finally, the social goals of federal and state antitrust laws will be frustrated because of the ‘enforcement gap’ created by the de facto liability shield.” Id. at 61 . The court in Kristian ruled that the ban on class-wide proceedings within the arbitration agreement was invalid and severed that provision from the agreement. The court ruled that the arbitration could go forward with the provisions of the arbitration agreement barring the recovery of treble damages, attorney fees and costs, and class arbitration severed. Rather than face a class-wide arbitration, Comcast ultimately withdrew its motion to compel arbitration.
Practical Advice for Practitioners
What are the important practical implications for practitioners? One must carefully examine not only the law, but also the facts of one’s case. The FAA requires courts to enforce written agreements to arbitrate in contracts affecting interstate commerce “save upon such grounds as exist at law or equity for the revocation of any contract.” 9 U.S.C. § 2. With the enactment of the FAA, Congress decreed a liberal policy favoring the enforcement of written agreements to arbitrate commercial disputes applicable nationwide. Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth Inc., 473 U.S. 61 4 (1 985). The goal was to protect and foster the national economy by enabling contracting parties to enter into enforceable agreements to have commercial disputes resolved by arbitration. Dean Witter Reynolds Inc. v. Byrd, 470 U.S. 21 3 (985). However, the FAA does not leave states powerless to “protect their own citizens and others within their jurisdiction from the enforcement of all written arbitration agreements, no matter how unjust or contrary to a state’s public policy.” Spann, 2006 WL 251 6431 , at *8. The Illinois Supreme Court in the recent Kinkel decision made the following insightful observation, to which both corporations and practitioners should pay attention:
[A] class action waiver will not be found unconscionable if the plaintiff had a meaningful opportunity to reject the contract term or if the agreement containing the waiver is not burdened by other features limiting the ability of the plaintiff to obtain a remedy for the particular claim being asserted in a cost-effective manner. If the agreement is so burdened, the “right to seek class-wide redress is more than a mere procedural device.” Where it is not economically feasible to obtain relief within the traditional framework of a multiplicity of small individual suits for damages, aggrieved persons may be without any effective redress unless they may employ the class action device.
Kinkel, 2006 WL 2828664, at *20 (citations and internal quotations omitted).
While one may not agree with the Illinois Supreme Court’s ruling, underlying it is an old Southern saying that counsel should take to heart: “Pigs get fat, but hogs get slaughtered.”
Below are a few “best practices” that I have found helpful in my practice, though unfortunately none is the silver bullet to stop class actions in light of the recent trend of striking or severing prohibitions on class, mass, consolidated or collective proceedings in arbitration agreements.
Best Practices for Corporations in Drafting Arbitration Agreements
- The language in the arbitration agreement must be prominent, clear, conspicuous
- The arbitration agreement should indicate whether the FAA or state arbitration statutes
- The arbitration agreement should contain language that limits the arbitrator’s scope of authority to resolving individual disputes involving just one consumer and the company.
- The arbitration agreement should expressly prohibit the arbitrator from determining as an initial matter whether class, mass, collective or consolidated relief is permitted. The arbitration agreement should include choice-of-law language (select the law of a forum that enforces waivers of class, mass, collective or consolidated proceedings) and, potentially, a forum-selection clause.
- The arbitration clause within the consumer contract should include language that the mandatory arbitration provision will be rendered null and void in its entirety if a court (or arbitrator) determines that the waiver of class, mass, collective or consolidated relief is unenforceable.
- The arbitration agreement should provide some “benefit” to the consumer in exchange for their waiver of class, mass, collective or consolidated relief.
- The company should include non-enforcement language in the arbitration agreement regarding specific states (California, for example).
- The company should give the consumer a choice and meaningful opportunity to reject the arbitration agreement with the company when the product or service is purchased.
- The company should bear the cost of the arbitration of individual disputes and offer to conduct them within 30 miles of the residence of the consumer.
Best Practices for Evaluating When to File A Motion to Compel Arbitration
- Review and analyze the law in the jurisdiction in which your case is pending to determine if there are controlling decisions regarding the enforceability of a mandatory arbitration agreement that prohibits class, mass, collective or consolidated proceedings and whether a class action waiver within an arbitration agreement is unconscionable or invalid as a matter of state law and, if so, whether the FAA would trump such a determination.
- Review and analyze the jurisdiction’s law regarding substantive and procedural unconscionability generally.
- Review and analyze the jurisdiction’s law regarding enforceability of choice-of-law provisions and forum-selection clauses.
- Evaluate whether, as a matter of public policy, the court may strike the prohibition on class, mass, collective or consolidated proceedings within an arbitration agreement in light of the specific causes of action asserted by the class and rights sought to be enforced by the class.
- Review and analyze the jurisdiction’s law regarding contracts of adhesion and determine whether the contract at issue is one of adhesion.
- Evaluate whether the amount of damages sought by individual class members and the availability of statutory and exemplary damages, as well as attorney fees, make individual suits more likely or not.
- Evaluate whether the consumer contract containing the class action waiver is burdened by other features in the contract that limit the ability of the plaintiff to obtain a remedy or render it cost-prohibitive.
- Determine whether class-wide arbitrations are routine within the jurisdiction and whether courts have ordered them. Examine the totality of the circumstances – the jurisdiction, the underlying facts of the case, the conduct at issue, the claims asserted, the individual damages of class members and the consumer contract/agreement as a whole – take your lawyer hat off and put your common sense hat on, and engage in a cost-benefit analysis.
This writer believes that a class, mass, collective or consolidation waiver within a mandatory arbitration agreement does not exempt corporations from the consequences of their actions or shield them from liability. Rather, these agreements limit the means by which an individual consumer may enforce his substantive rights. Federal Rule of Civil Procedure 23 is a procedural device, not a constitutional right. And Congress’ recent findings of the abuses of the class action device that have adversely impacted interstate commerce and unjustly punished many corporations cannot be ignored.
Put simply, class actions are by no means the only mechanism by which consumers are protected, and it is undisputed that class actions have often done an injustice to consumers, who receive nothing in settlements or litigation. There is no reconciling the positions of plaintiffs and defendants on this issue. Arbitration agreements can be both a blessing and a curse in the context of class action litigation, depending on the jurisdiction and the specific facts of one’s case. The U.S. Supreme Court will ultimately weigh in, though, like Green Tree, any future decision may also raise more questions than answers.