A recent Massachusetts Superior Court decision, which invalidated a class action waiver in an arbitration agreement, serves as a warning to Massachusetts employers that arbitration class actions remain possible in this state even if an employer has a class action waiver in its employment arbitration agreement. The decision illustrates that, even though the U.S. Supreme Court found in its AT&T Mobility LLC v. Concepcion ruling earlier this year that federal law preempts state law that forces companies with arbitration provisions to allow arbitration class actions, at least in Massachusetts, class action waivers still may be found unenforceable, particularly when small claims are involved or when arbitration provisions are not carefully drafted.
In Feeney v. Dell two plaintiffs sought to bring a consumer class action challenging Dell's collection of sales tax on computer service contracts. The plaintiffs' claims were small?one claim was worth $13 and the other was worth $215. The plaintiffs' contracts with Dell included a provision requiring arbitration of any claims against Dell and prohibiting class action arbitration. The arbitration provision apparently did not contain a provision allowing the consumers to recover anything more than the value of their claims as part of an arbitration. In 2009, before the Supreme Court's decision in Concepcion, the Massachusetts Supreme Judicial Court ("SJC") found that Dell's arbitration class action waiver was unenforceable because it was contrary to public policy. The SJC found that the plaintiffs' right to bring a class action was particularly important to maintain because, given the small amounts of damages likely to be at stake, aggregation was the only realistic option for the consumers to pursue their claims against Dell.
AT&T v. Concepcion
After the SJC's ruling but before issuance of a final judgment in the Feeney matter, the Concepcion decision was issued. In Concepcion, the Supreme Court ruled that federal law (the Federal Arbitration Act "FAA") preempts a California rule, known as the Discover Bank rule, that banned class action waivers in consumer arbitration agreements where disputes between the parties were likely to involve a small amount in damages, and the consumer alleged a deliberate scheme to defraud. The Supreme Court found that, through the Discover Bank rule, California required companies with arbitration provisions to allow class-wide arbitration, even though class actions result in heightened formality, additional costs, procedural complexity, extra risks, and a slower pace of resolution. In so doing, the rule frustrated one of the purposes of the FAA, which was to allow parties to resolve disputes efficiently.
The Supreme Court pointed out that, while states could still prohibit arbitration provisions for certain reasons, such as where fraud was involved, they could not invalidate an arbitration class action waiver simply because claims were likely to involve small dollar amounts that would not be prosecuted on an individual basis. The Supreme Court added that the claim before it was likely to be prosecuted on an individual basis because the agreement had a provision under which the company agreed to pay claimants at least $7500 and twice their attorneys' fees if they obtained an arbitration award greater than the company's last settlement offer.
The Superior Court's Feeney Decision
After the Concepcion decision, Dell argued before the Superior Court that the SJC's ruling in Feeney was no longer valid because, as was the case in Concepcion, the SJC's ruling required Dell to allow arbitration class actions, which frustrated the purpose of the FAA. The Superior Court, however, distinguished Dell's agreement from the agreement in Concepcion. The Superior Court found that, unlike the arbitration provision in Concepcion, Dell's provision did not include features that would make individual-based arbitration of small claims feasible, such as the provision requiring the company to pay claimants at least $7500 and twice their attorneys' fees if they obtained an arbitration award greater than the company's last settlement offer. Thus, the Superior Court found that the SJC's ruling did not frustrate the purpose of the FAA (i.e., allowing parties to resolve disputes efficiently) because efficient, individual-based arbitration was not a realistic option under the terms of Dell's agreement.
The Superior Court acknowledged that its reasoning was inconsistent with the Supreme Court's finding that arbitration class action waivers cannot be invalidated simply because claims were likely to involve small dollar amounts that would not be prosecuted on an individual basis. However, the Superior Court downplayed the Supreme Court's finding by saying that it was nothing more than a single sentence in the Concepcion decision. Instead, the Superior Court focused on the Supreme Court's discussion that, regardless of the class action waiver, the consumer in Concepcion had incentive to pursue his claims on an individual basis. The Superior Court added that it would have upheld Dell's class action waiver if Dell had made individual-based claims feasible.
Consequences of Feeney
Although Dell has stated publicly that it intends to appeal the Superior Court's decision and the decision may therefore be overturned, employers should be aware of the Feeney decision because it shows that, regardless of Concepcion, some courts, at least in Massachusetts, may continue their skepticism towards arbitration class action waivers, particularly where small-dollar claims are involved. However, given the Supreme Court's broad ruling in Concepcion, those waivers should be enforceable. Employers that have or plan to have arbitration agreements with class action waivers may nonetheless want to consider taking a relatively conservative approach in their arbitration agreements that include class action waivers by making individual-based arbitrations more feasible for small-dollar claims.
Employers seeking to implement arbitration class action waivers should have their arbitration provisions drafted carefully and in a manner that maximizes the likelihood that they will be enforced. As the law in this area is evolving rapidly, it is important for employers to closely monitor the legal landscape and to consult with their employment counsel before implementing any new arbitration policies or programs.