What you need to know:  

Massachusetts’s highest court invalidated class action waivers in consumer contracts, ruling they are contrary to public policy.  

What you need to do:  

Companies that enter consumer contracts should review the contracts’ dispute resolution and waiver provisions.

Massachusetts Joins Other Jurisdictions Invalidating Class Action Waivers  

The Massachusetts Supreme Judicial Court, in this month’s Feeney v. Dell, Inc. decision, invalidated a class action waiver located in the arbitration clause of a consumer contract. A provision in Dell’s computer services contract purported to eliminate a consumer’s right to bring a class action. The Court held that this provision “is not enforceable because it is contrary to the fundamental public policy of the Commonwealth favoring consumer class actions” under the Massachusetts consumer protection statute, Chapter 93A. This Massachusetts ruling joins a rising national trend.  

Background  

An individual consumer and a small business purchased computer hardware and computer service contracts from Dell. Dell collected state sales taxes on the service contracts. Dell paid the taxes over to the state Department of Revenue, but the plaintiffs alleged they should never have been charged. One plaintiff paid $13.65 in sales tax, and the other paid $215.55. They filed a class action lawsuit under Chapter 93A seeking multiple damages and attorneys fees on behalf of numerous consumers.  

Dell’s service contracts contained a mandatory arbitration clause. Dell successfully moved to compel arbitration. The arbitrator denied the plaintiffs’ motion for class certification because the arbitration clause barred a class action proceeding. The plaintiffs eventually appealed to the Massachusetts Supreme Judicial Court, arguing that they should have the right to proceed on behalf of a class.  

The Supreme Judicial Court Held that Class Action Waivers Violate Public Policy

The Court invalidated the class action waiver, struck down the arbitration clause and voiced strong language favoring consumer class actions. The Court wrote that the “right to a class action in a consumer protection case is of particular importance where … aggregation of small claims is likely the only realistic option for pursuing a claim.” Enforcing the waiver would create “the potential for countless customers to be without an effective method to vindicate their statutory rights.”  

In addition to invalidating the class action waiver, the Court also overrode the contract’s choice of law provision. Dell’s computer service contracts specified that Texas law was to govern the contract. Current Texas law upholds class action waivers. The Massachusetts Court ruled, however, that Massachusetts has a fundamental interest in protecting consumers through class action proceedings, which trumped Texas’s interest in reducing legal expenses. Thus the Massachusetts Court refused to apply Texas law on this issue.

National Trend of Invalidating Class Action Waivers  

Courts are split over enforcing class action waivers, but the trend is toward invalidating them. In the federal courts, five circuits (the First, Second, Third, Ninth, and Eleventh Circuits) have invalidated waivers in consumer contracts – while four circuits have upheld waivers (the Fourth, Sixth, Seventh, and Eighth Circuits). State courts currently are divided: at least four states (Washington, Illinois, New Jersey, and California) have invalidated waivers – while at least seven states (Colorado, Florida, Hawaii, Kansas, Maryland, New York and Tennessee) have upheld them. State legislatures are also split: New Mexico and Oklahoma have passed laws declaring waivers are illegal – whereas Utah’s legislature has passed a law declaring class action waivers are enforceable.  

Class Action Arbitrations are Still Possible  

The Massachusetts Supreme Judicial Court explicitly preserved arbitration as a potential forum for class actions. The Feeney Court noted that class arbitrations can and do occur. There is an open issue, though, whether an arbitrator can impose class proceedings when the arbitration clause does not mention class proceedings. In June 2009, the US Supreme Court granted certiorari in Stolt- Nielsen SA v. AnimalFeeds International Corp., to decide the issue next year.  

In the view of many companies, class arbitrations may be worse than class actions in some courts. For example, in arbitration, there often is no general right of appeal from decisional errors.  

Dell Won on the Merits as the Court Expanded a 93A Defense  

Notwithstanding its pro-consumer language, the Feeney Court rejected the plaintiffs' claims on the merits. The two plaintiffs complained about Dell's actions in collecting sales tax. They argued that Dell's sales to them took place in “trade or commerce” and therefore were governed by the Massachusetts consumer protection statute, Chapter 93A. The Supreme Judicial Court ruled that the tax portion of the transaction was not part of “trade or commerce” and could not be attacked under Chapter 93A. In the future this ruling will offer a new line of defense in some cases, as defendants may seek to apply a separate analysis to each of the component parts of a transaction.  

Next Steps  

With the law in flux, companies should review the dispute resolution sections of their consumer contracts to see whether they contain a class action waiver of the type voided by the recent Massachusetts ruling. In considering whether to amend their form of contract, companies should consider whether class arbitrations are better – or worse – than class actions in court.