Two recent decisions by the Massachusetts Supreme Judicial Court (“SJC”) illustrate the application of the concept, adopted by some courts, that arbitration agreements with class action waivers can be invalidated “where the plaintiff can demonstrate that he or she lacks the ability to pursue a claim against the defendant in individual arbitration,” without violating the principles set forth by the U.S. Supreme Court in AT&T Mobility LLC v. Concepcion. The SJC’s reasoning and conclusions are similar to and an extension of the Second Circuit’s opinion in In re American Express Merchants’ Litigation, currently on appeal before the United States Supreme Court in American Express Co. v. Italian Colors Restaurant (Amex).
In Feeney v. Dell Inc., the SJC invalidated an arbitration agreement containing a class action waiver because it found the plaintiffs had demonstrated they could not pursue their state law claims individually, given the complexity of the case, costs to pursue it, and small damages that each individual plaintiff could recover. Like the Second Circuit in Amex, the SJC relied on the U.S. Supreme Court’s statement in Green Tree Financial Corp. v. Randolph “that the existence of large arbitration costs could preclude a litigant . . . from effectively vindicating her federal statutory rights in the arbitral forum.” Based on Randolph, which the SJC concluded had not been overruled by Concepcion, the SJC minimized the significance of the U.S. Supreme Court’s rejection of the argument, in Concepcion, that “small-dollar claims” might slip through the legal system if class proceedings are unavailable. Concepcion addressed that argument, stating, “[s]tates cannot require a procedure that is inconsistent with the FAA, even if it is desirable for unrelated reasons.”
In Machado v. System4 LLC, another decision issued the same day as Feeney, the SJC applied the same principles, but reached a different result. Machado involved a putative class action by individuals who claimed they had been misclassified as franchisees, rather than employees, under the Massachusetts Wage Act (Wage Act). In contrast to Feeney, in Machado, the court rejected the plaintiffs’ contention that their claims could not be pursued in individual arbitration because the cost “would more than surpass any potential recovery that they might be entitled to.” Rather, the court found that the potential individual amounts recoverable – from approximately $9,500 to over $21,000 – made individual arbitration a viable option. “Although the magnitude of potential damages is not the sole criterion to be considered in determining whether a claim is remediable in individual arbitration according to the terms of the arbitration agreement,” the SJC stated, “it may be the most important factor.” Significantly, the SJC also emphasized that the Wage Act provided for mandatory recovery of attorneys’ fees and costs to the prevailing party, a common feature of employment-related statutes.
The SJC also noted that the arbitration agreement at issue in Machado waived multiple damages, which are available under the Wage Act. Because treble damages are mandatory under the Wage Act, and cannot be waived, the court found the multiple damages waiver invalid and severed that provision.
One potentially significant distinction between the Amex case pending before the U.S. Supreme Court, on the one hand, and Feeney and Machado, on the other, is that the former involves federal statutory rights, whereas the latter two involved state statutory rights. In fact, one of the arguments being advanced in Amex to distinguish Concepcion is that Concepcion addressed a claim under state common law and held that the state’s public policies must yield to the federal policy under the FAA.
The SJC’s opinions in Feeney and Machado increase anticipation of the U.S. Supreme Court’s decision in Amex, which could be issued any day. The U.S. Supreme Court must decide whether the reasoning in Randolph, relied upon by the Second Circuit and the SJC, is a legitimate basis to refuse to enforce an FAA-governed arbitration agreement and, if so, how plaintiffs can demonstrate they cannot effectively vindicate their rights without the availability of class proceedings. The U.S. Supreme Court could find it has already addressed this issue in Concepcion and that this argument is another “device and formula” (a phrase from Concepcion) to invalidate an otherwise enforceable arbitration agreement. The Court also may review the federal statute upon which the claim was based to determine whether there was any congressional intent to limit arbitrations, which is what it did in CompuCredit v. Greenwood, stating that congressional limitations on arbitration of statutory claims must be expressly stated in the statute.
Stay tuned for more analysis of these issues as soon as the Amex decision is issued.