Legislation that overwhelmingly passed the Maryland House of Delegates and is headed for consideration in the State Senate would deprive consumers, employees, and businesses of the opportunity to use arbitration as a forum for resolving disputes.

House Bill 729 would render unenforceable any written agreement made before a dispute arises that waives or has “the practical effect of waiving the rights of a party to that agreement to resolve the dispute by obtaining relief as a representative or as a member of a class of similarly situated persons.”

Some state and federal courts outside Maryland have invalidated class action waivers in arbitration agreements, but none has held that class action waivers are per se invalid. Nor has the federal government or any state enacted a similar bill. However, if this legislation clears the Maryland Senate, it is likely similar bills will appear in other state legislatures.

The Senate Judicial Proceedings Committee has scheduled a hearing at 1 p.m. March 29, 2011, on the Bill, which passed the House by a vote of 108-32. (Click here for a history.)

The Bill does not mention arbitration but appears designed to invalidate class action waivers in arbitration agreements. If enacted, it would overrule the 2005 decision by Maryland’s highest court in Walther v. Sovereign Bank, 386 Md. 412, 872 A.2d 735, and a string of other State appellate opinions following it. Walther upheld the validity of a class action waiver in an arbitration agreement in light of “the strong policy made clear in both federal and Maryland law that favors the enforcement of arbitration provisions.”

The Bill applies broadly to all types of arbitration agreements with class action waivers, including contracts between (1) businesses and consumers, (2) employers and employees, and (3) businesses and businesses, such as franchise agreements. Even negotiated contracts are covered. The Bill provides that the ban is to be retroactive and applied to any written agreement in existence on or after the date the law takes effect.

Court decisions outside Maryland that have invalidated class action waivers in arbitration agreements typically focused on arbitration provisions that the court considered to be unfair, such as a limitation on remedies or a requirement that the consumer bear arbitration fees exceeding court filing fees, and/or that had the effect of clearing defendants from liability because of the small dollar amount of the claims and the belief that the consumers would not have been able to find attorneys willing to represent them in individual arbitrations. In contrast, House Bill 729 would ban all class action waivers regardless of the nature of the contract, the type or dollar amount of the claim(s), and/or the consumer’s ability to find representation.

(Click here for “A Scorecard on Where Federal and State Appellate Courts and Statutes Stand on Enforcing Class Action Waivers in Pre-Dispute Consumer Arbitration Agreements.”)

The Bill raises serious constitutional questions. Section 2 of the Federal Arbitration Act (FAA) requires courts to enforce written arbitration agreements except “upon such grounds as exist at law or in equity for the revocation of any contract.” However, the Bill aims to invalidate a specific type of contract—an agreement containing a class action waiver. In AT&T Mobility, LLC v. Concepcion, the U.S. Supreme Court is poised to decide whether a state policy favoring class actions can override Section 2 ’s broad command to enforce arbitration agreements as written. (Click here for a prior legal alert on Concepcion.)

In seeking to retroactively apply the legislation to agreements predating its effective date of October 1, 2011, it may be contrary to the Contracts and Due Process Clauses of the U.S. Constitution. If the Bill becomes law, consumers, employees, and businesses will be deprived of opportunities to use arbitration as a forum for resolving disputes.

Empirical data shows that arbitration is faster and more cost-effective than the courts for resolving disputes. The data also establishes that consumers and employees do at least as well in arbitration as they do in court. See, for example, the studies conducted by the Searle Civil Justice Institute of Northwestern University School of Law during 2009, which are published at C. Drahozal and S. Zyontz, “An Empirical Study of AAA Consumer Arbitrations,” 25 Ohio St. J. on Disp. Resol. 843 (2010), and C. Drahozal and S. Zyontz, “Creditor Claims in Arbitration and in Court,” 7 Hastings Bus. L. J. 77 (2011).

There is no empirical data showing that consumers and employees are treated unfairly in arbitration or that class actions provide them with a better option of obtaining redress than pursuing individual claims in arbitration. Indeed, evidence demonstrates that consumers very seldom obtain meaningful relief as a member of a class and that the only real beneficiaries are plaintiffs’ class action lawyers.

Finally, the Bill would result in the already overburdened Maryland courts becoming a magnet for class actions that might otherwise have been brought in other states.