Co-authored by Richard Alfred and James Hlawek
A Massachusetts Superior Court judge recently invalidated an arbitration class action waiver, even though the U.S. Supreme Court found in its AT&T Mobility LLC v. Concepcion ruling earlier this year that federal law preempts state laws that interfere with an employer’s ability to enforce arbitration agreements with class action waivers. This ruling shows that, at least in Massachusetts, courts may still be willing to invalidate class action waivers in arbitration agreements, particularly where the waivers are not carefully drafted or where small claims are at stake.
In Feeney v. Dell, Inc., two plaintiffs sought to bring a consumer class action against Dell arising out of Dell’s collection of sales tax on their computer service contracts. Their claims were both worth less than $250. The plaintiffs’ contracts with Dell required arbitration and prohibited arbitration class actions. The arbitration provision did not allow consumers to be awarded anything more than the value of their claims.
In 2009, the Massachusetts Supreme Judicial Court invalidated Dell’s class action waiver because it found that the waiver was contrary to public policy. The SJC ruled that, given the small amount of damages at stake, aggregation of claims was the only realistic option for the consumers to pursue their claims against Dell.
After the SJC’s ruling, the U.S. Supreme Court ruled in AT&T Mobility v. Concepcion that the Federal Arbitration Act (“FAA”) preempted a California rule that banned class action waivers in a certain category of consumer arbitration agreements. The Supreme Court found that the California rule required companies with certain arbitration agreements to allow class-wide arbitration, even though class actions are more formal, riskier, and less efficient than individual arbitrations. The Supreme Court therefore decided that the rule frustrated the company’s ability to resolve disputes efficiently, thereby interfering with one of the purposes of the FAA.
The Supreme Court pointed out that arbitration class action waivers could not be invalidated simply because claims were likely to involve small amounts that would not be prosecuted on an individual basis. The Supreme Court added that the claim before it was likely to be prosecuted on an individual basis because the company agreed to pay claimants at least $7500 and twice their attorneys’ fees if they obtained an arbitration award greater than the company’s last settlement offer.
After Concepcion was issued, Dell argued in Massachusetts Superior Court that the SJC’s earlier ruling was no longer valid because, similar to Concepcion, the SJC required Dell to allow arbitration class actions, thereby frustrating the purpose of the FAA. The Superior Court judge, however, found that, unlike the arbitration provision in Concepcion, Dell’s provision did not include features that would make individual-based arbitration of small claims feasible. The judge concluded that the SJC’s ruling did not frustrate the purpose of the FAA because efficient, individual-based arbitration was not a realistic option for Dell’s consumers. The judge added that he would have upheld Dell’s class action waiver if Dell had made individual-based claims feasible.
Employers, at least in Massachusetts, should be aware of the Feeney decision because it shows that, regardless of Concepcion, some judges may continue their skepticism towards arbitration class action waivers, particularly where small-dollar claims are involved. However, given the Supreme Court’s broad ruling in Concepcion, those waivers should be enforceable. Employers that have or plan to have arbitration agreements with class action waivers may nonetheless want to consider taking a relatively conservative approach in their arbitration agreements that include class action waivers by making individual-based arbitrations more feasible for small-dollar claims.
As the law in this area is evolving rapidly, it is important for employers to consult with their employment counsel before implementing any new policies or programs in this area.