Class Arbitration Waivers: The "Severability" Doctrine and Its Consequences

Article excerpt

Cases continue to come out of the issue of classwide arbitration waivers. The author examines the 1st Circuit's most recent decision on this issue, discusses its implications for practitioners and offers some drafting tips.

Whether parties can be forced into a classwide arbitration, even when their arbitration clause explicitly precludes this kind of proceeding, is an issue that continues to create unrest. Most recently, the 1st Circuit held that a class arbitration waiver1 was unenforceable. And rather than striking the provision in its entirety, the court severed the class prohibition and enforced the remaining portion of the arbitration clause. The net result was a proceeding to which neither party agreed.

Drafting dispute resolution clauses for commercial agreements is becoming increasingly more specialized because of a growing body of case law. Although the broad issue of the enforceability of arbitration clauses is well established, courts are addressing narrower enforceability issues, such as the validity of punitive damages clauses and clauses expanding or contracting the right to appeal, as well as the enforceability of class arbitration waivers.

On April 20, 2006, the 1st Circuit became the latest federal circuit court to address the validity of class arbitration waivers and the first to address such waivers in the context of antitrust claims. In Kristian v. Comcast Corp.,2 the 1st Circuit held that the waiver was unenforceable on the grounds that it (1) prevented the claimant from vindicating federal and state antitrust claims and (2) conflicted with Rule 23 of the Federal Rules of Civil Procedure (FRCP).

Features of Class Arbitration

A class arbitration proceeding is something of a procedural and conceptual oddity. It is neither a class action nor a traditional arbitration; rather it combines features of the two, importing collective action into the arbitration context. Class arbitrations involve claims brought by representative claimants using procedures resembling the class action procedures in FRCP Rule 23.3

In Green Tree Financial Corp. v. Bazzle,4 the U.S. Supreme Court implicitly validated the use of classwide arbitration by not prohibiting clauses that call for that procedure. Although the Court did not give class arbitration a ringing endorsement, it held that an arbitrator, not courts, should decide whether an otherwise silent binding arbitration agreement encompassed class claims. The Court reasoned that under such circumstances, whether to allow a collective arbitration to occur under the agreement was a matter of contract interpretation and arbitration procedure, both of which are matters to be decided by an arbitrator (as opposed to a court).

Seeking to avoid the linguistic ambiguity that spawned Bazzle, many companies have drafted arbitration clauses that expressly prohibit classwide arbitration.5 Consumer-plaintiffs have challenged these waivers under state unconscionability doctrines with limited success.6 As the 1st Circuit's recent Comcast decision demonstrates, class arbitration waivers are also being attacked on the ground that they prevent the vindication of statutory rights.7

Comcast Decision

In the Comcast litigation, the plaintiffs, Bostonarea cable-subscribers, alleged violations of state and federal antitrust laws.8 Specifically, they claimed that the defendants had engaged in anticompetitive practices that inflated the price of cable services by agreeing to exchange cable television assets with other cable service providers. Essentially, the plaintiffs contended that Comcast was trading territory in order to eliminate competition for cable by consolidating areas of service through "swapping agreements."

In 2001, Comcast added an arbitration clause to its customer service agreement. The arbitration clause provided that all disputes would be resolved through binding arbitration. Amendments to the clause added in 2002-2003 added various terms and conditions to arbitration, including a prohibition against treble damages under federal antitrust statues, a bar against recovery of attorney fees and costs, and a waiver of the use of collective action mechanisms, including class actions and consolidated proceedings, unless provided for under state law. …