The Federal Arbitration Act and Class Action Waivers in Consumer Contracts: Are These Waivers Unenforceable?
Goldstein, Marc J., Dispute Resolution Journal
The conflicting case law of the federal courts of appeal.
Consumer class actions have flooded the courts for many years. The stakes are high for corporations named as defendants in these cases because even though the individual consumer's claim is small, the class size is large and the fees sought by the attorneys for the plaintiff class are high. For this reason, most consumer class actions filed in court eventually settle. To protect themselves from the possibility of runaway jury awards, many consumer companies began to require their customers to arbitrate disputes. Then they began to ban the use of any kind of collective proceeding (i.e., a class action) in litigation, arbitration or administrative proceedings. One of the most important issues facing these companies is whether the consumer's right to commence a class action in court can be waived simply by an agreement to arbitrate all disputes. Another is whether the waiver precludes classwide arbitration. There is case law addressing whether class action waivers are unenforceable under the state law principle of unconscionability. The cases also address whether state law principles of unconscionability can be applied without offending the Federal Arbitration Act (FAA).1 For arbitration practitioners, the question of FAA preemption is probably more compelling. This article examines this issue.
Section 2 of the FAA makes an arbitration clause enforceable unless a state law contract defense, whether legal or equitable, would apply. It provides that an arbitration agreement "is valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract."
If a court determines that a waiver of the right to proceed as a class action runs afoul of state law, and the waiver is not severable from the arbitration clause, the issue presented is this: Is the state law ground for finding the class action waiver unenforceable a ground "for the revocation of any contract?" On this point, recent decisions by the federal courts of appeals in the 3rd and 9th Circuits have reached completely opposite, and not reconcilable, conclusions.
This article explores these cases and concludes that the 9th Circuit's approach-which answers the question in the affirmative and therefore denies enforcement of unconscionable class action waivers in arbitration agreements-is both more persuasive and more attuned to settled principles of federal arbitration law.
Case Law Overview
The cases follow a predictable procedural pattern. The representative plaintiff commences a putative class action lawsuit in federal court.2 Members of the plaintiff class have each signed a consumer contract with the defendant corporation that requires all disputes involving or relating to the contract to be resolved by arbitration. The contract also provides that the consumer waives any right to proceed in arbitration or in court in a collective action, including a class action, and undertakes to pursue his or her claims only in an individual proceeding. Based on the agreement to arbitrate and the class action waiver, the defendant corporation moves to compel arbitration under the FAA and to stay or dismiss the action. The plaintiff files opposing papers arguing that the waiver is unconscionable under applicable state law and its presence renders the entire arbitration agreement unenforceable.
The 3rd Circuit Position