Beyond Unconscionability: Class Action Waivers and Mandatory Arbitration Agreements

Article excerpt


We live in an age of convenience. From financial transactions to electronic correspondence, we frequently deal with large corporations that provide services in our daily lives. One of the prices we pay for the convenience of these transactions, however, is that our commercial relationships increasingly are based on standard form contracts written by large corporations. While these standard form contracts are necessary to an economically efficient society, the growing use of mandatory arbitration provisions and clauses that prohibit class actions in these contracts raises the spectre of corporate abuse.

This reality of modern commercial life brings into conflict two particular trends in the civil justice system: increased acceptance of mandatory arbitration clauses and more frequent use of the class action device as a means to vindicate individual claims.1 Both the class action and the arbitration device are exceptions to more general rules: the arbitration device is an exception to the general rule that disputes between parties are resolved in courts of law, and the class action device is "an exception to the usual rule that litigation is conducted by and on behalf of the individual named parties only."2

Corporations faced with the prospect of an enormous number of claims arising out of their frequent transactions with consumers have increasingly sought to channel such claims to arbitration, while at the same time denying claimants the right to proceed through class actions. The confluence of mandatory arbitration and class action waivers is particularly problematic for "negative-value claims"3 where the expected recovery does not justify the cost of a stand-alone claim, and where, as a result, corporations have the greatest incentive to write class action waivers into mandatory arbitration provisions.4 For example, imagine you are the victim of a fraudulent scheme by a credit-card company to charge fees that are higher than advertised. You suddenly discover that not only are you unable to bring your claims in court, but also your individual expected recovery (the difference between the advertised fee and the charged fee) is too low to justify an attorney's time and expense. Unless you can aggregate your claims with those of others, you may have no effective recourse to vindicate your claims.

Faced with problems such as this, plaintiffs' lawyers have raised various challenges to mandatory class action waivers. Prominent among these challenges is that class action waivers in contracts of adhesion are unenforceable under state-law doctrines of unconscionability. This strategy has met with some success, as a few state courts have used the unconscionability doctrine to solve the problem of class action waivers in adhesion contracts. On the whole, however, the unconscionability doctrine has had limited effectiveness in addressing the core problem created by class action waivers in adhesion contracts, namely, that there may be a sufficiently close nexus between the class action waiver and non-waivable substantive rights such that these waivers should not be left to private bargaining.

This Note urges a re-examination of the issue of class action waivers, and suggests that courts should take a new approach to the problem posed by such waivers. Rather than rely on a patchwork of state-law unconscionability doctrine, courts should adopt a federal standard under the Federal Arbitration Act ("FAA") that would guarantee that arbitration agreements do not thwart the vindication of substantive rights. Part I of this Note briefly outlines the rise of judicial acceptance of arbitration as a dispute resolution mechanism in general, and of adhesion contracts as a vehicle for requiring arbitration in particular. Part I also surveys the principal criticisms of mandatory arbitration agreements. Part II discusses how companies have used class action waiver provisions in mandatory arbitration agreements in an effort to reduce or eliminate aggregated procedures. …