Litigation: Two is not always a crowd

Recent decisions regarding class action waivers in arbitration provisions

In April 2011 the U.S. Supreme Court held in AT&T v. Concepcion that California's Discover Bank rule did not invalidate a class action waiver within an arbitration provision in the context of a consumer transaction. The Discover Bank rule provided generally that a class action waiver found in a consumer contract of adhesion, under which a dispute would inevitably involve a small amount of damages, was unconscionable under California law and therefore unenforceable because it exempted the party with superior bargaining power from responsibility for fraud or willful injury. In finding that the rule could not trump the Federal Arbitration Act (FAA), the high court found that "States cannot require a procedure that is inconsistent with the FAA, even if it is desirable for unrelated reasons. Moreover, the claim here was most unlikely to go unresolved."

Since AT&T was issued almost 18 months ago, courts have reached widely varying outcomes when faced with whether to enforce a class action waiver within an arbitration provision. Most recently, courts have followed the trend of finding a class action waiver unenforceable where enforcing the provision would deprive plaintiffs of the ability to pursue a federal statutory right. For example, the 2nd Circuit held in In re American Express Merchants’ Litigation a mandatory class action waiver to be unenforceable where the plaintiffs demonstrated that the practical effect of such enforcement would be to preclude their ability to bring a federal antitrust claim due to the financial impossibility of pursuing individual arbitration or litigation. (Also see In re D.R. Horton, Inc., in which the National Labor Relations Board invalidated a class action waiver where it unlawfully restricted an employee's substantive rights under National Labor Relations Act.)

Additionally, courts have recognized that generally applicable contract defenses are still viable as a means of defeating the class action waiver. In Carey v. 24 Hour Fitness, USA, Inc., a former employee signed an employee handbook containing an arbitration provision that prohibited class actions, but which also permitted the employer to revise the handbook unilaterally. The 5th Circuit held that the arbitration clause was illusory because it provided the employer with the ability to make changes that could have retroactive effect, stripping the right of arbitration from an employee who had already attempted to invoke it.    

There are some recent decisions, however, that have followed AT&T in upholding a class action waiver in an arbitration provision. In Kilgore v. KeyBank, Nat. Ass'n, the 9th Circuit court upheld a class action waiver in the arbitration clause of a student loan agreement, where the clause was conspicuously located, comprehensively explained the rights being waived and permitted the students to opt-out by notification in writing within 60 days of signing the promissory note. Similarly, the 11th Circuit in Pendergast v. Sprint Nextel Corp. confirmed the validity of a class action waiver within the arbitration provision in a purported class action brought by a wireless telephone customer claiming he and others were charged improper roaming fees, on the basis that the FAA preempts any Florida law that might invalidate the waiver

Based on the decisions issued post-AT&T, it appears that, in order to be enforced, an arbitration provision containing a class action waiver must provide a realistic opportunity to arbitrate, should include terms favorable to a consumer, including options to make the process easier and less expensive, and should include incentives for the company to be fair to a consumer during negotiations. However, despite best efforts of a company to fashion an enforceable waiver, the waiver may still be invalidated if a substantive federal right is involved in the dispute.

Contributing Author

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Brigid Carpenter

Brigid M. Carpenter is a shareholder at Baker, Donelson, Bearman, Caldwell & Berkowitz, PC (Nashville). Her practice focuses on products liability and other tort/personal injury...

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