Using Arbitration to Eliminate Consumer Class Actions: Efficient Business Practice or Unconscionable Abuse?
Sternlight, Jean R., Jensen, Elizabeth J., Law and Contemporary Problems
Companies are increasingly drafting arbitration clauses worded to prevent consumers from bringing class actions against them in either litigation or arbitration. (1) If one looks at the form contracts she receives regarding her credit card, cellular phone, land phone, insurance policies, mortgage, and so forth, most likely, the majority of those contracts include arbitration clauses, and many of those include prohibitions on class actions. (2) Companies are seeking to use these clauses to shield themselves from class action liability, either in court or in arbitration. (3)
Companies' attempts to avoid class action exposure through arbitration give rise to both legal and policy questions. From a legal standpoint, is class action preclusion permitted under existing law, and if so, should it be? While many courts have allowed companies to use arbitration clauses to elude class actions, an increasing number are striking such clauses as unconscionable. (4) From a policy perspective, what should one make of companies' attempts to use arbitration clauses as a shield against class actions? (5) Is this an efficient business practice that will benefit consumers in general, or is it an abuse of customers and the public at large? Similarly, how should one view the courts' regulation of class action prohibitions through the unconscionability doctrine? Is case-by-case analysis the best way to examine the legitimacy of this practice?
This Article addresses these questions. Part II examines courts' reliance on the unconscionability doctrine to regulate the use of arbitration clauses to preclude class actions. Part III considers whether, from a policy perspective, companies should be permitted to protect themselves against class actions in this way. Specifically, it examines the economic argument that permitting companies to eliminate class actions benefits consumers at large by lowering prices, suggesting that such an analysis is incomplete and that good reasons support preserving the consumer class action. Part IV discusses whether, assuming class actions should be protected, unconscionability claims are the best mechanism for determining which arbitration clauses are valid. It argues that while the unconscionability doctrine offers some protections, case-by-case adjudication is a costly means of attacking class action prohibitions. Thus, Part IV proposes that the interests of both public policy and efficiency would be better served by federal legislation prohibiting companies from precluding consumer class actions.
IS IT UNCONSCIONABLE TO USE ARBITRATION CLAUSES TO ELIMINATE CLASS ACTIONS?
A. The Unconscionability Defense to Mandatory Arbitration
While the Supreme Court views arbitration favorably, it has always made clear that unconscionable arbitration clauses should not be enforced. Section 2 of the Federal Arbitration Act (FAA) provides that arbitration agreements "shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract." (6) Throughout the pro-arbitration era that commenced in the 1980s, (7) the Court has emphasized that unconscionability, along with other generally applicable contract defenses, is an appropriate ground for revoking an arbitration agreement. (8) Similarly, the Court has frequently stated that it will compel arbitration of federal statutory claims only "so long as the prospective litigant effectively may vindicate his or her statutory cause of action in the arbitral forum, such that the statute will continue to serve both its remedial and deterrent function." (9) Thus, in Green Tree Financial Corp. v. Randolph, (10) the Court recognized that if it could be proven that a company had designed an arbitration process so costly that the consumer could not vindicate her rights, the arbitration clause imposing that process would not be enforced. (11) While all the claims raised in the Supreme Court to date have involved federal statutory claims, there is no reason to believe that the Court would treat the use of arbitration to eliminate common law or state statutory claims any differently. …