The Federal Arbitration Act and Class Action Waivers in Consumer Contracts: Are These Waivers Unenforceable?

By Goldstein, Marc J. | Dispute Resolution Journal, August-October 2008 | Go to article overview

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

In Gay v. Creditinform,3 the 3rd Circuit affirmed a district court judgment enforcing an arbitration clause in a customer agreement of a so-called "credit repair" company.4 The arbitration clause required all disputes to be resolved in arbitration "on an individual basis and not consolidated with any other claim.'" The agreement provided that the "terms of use" are governed by Virginia law without regard to its choice of law principles. The customer, who argued that Pennsylvania law, the law of the forum, should apply, sought to invalidate the arbitration clause on unconscionability grounds.

The rest of this article is only available to active members of Questia

Sign up now for a free, 1-day trial and receive full access to:

  • Questia's entire collection
  • Automatic bibliography creation
  • More helpful research tools like notes, citations, and highlights
  • Ad-free environment

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

The Federal Arbitration Act and Class Action Waivers in Consumer Contracts: Are These Waivers Unenforceable?
Settings

Settings

Typeface
Text size Smaller Larger
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Full screen

matching results for page

Cited passage

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited passage

Welcome to the new Questia Reader

The Questia Reader has been updated to provide you with an even better online reading experience.  It is now 100% Responsive, which means you can read our books and articles on any sized device you wish.  All of your favorite tools like notes, highlights, and citations are still here, but the way you select text has been updated to be easier to use, especially on touchscreen devices.  Here's how:

1. Click or tap the first word you want to select.
2. Click or tap the last word you want to select.

OK, got it!

Thanks for trying Questia!

Please continue trying out our research tools, but please note, full functionality is available only to our active members.

Your work will be lost once you leave this Web page.

For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

Already a member? Log in now.