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Enforceability of Class Action Waivers

The Massachusetts Supreme Court recently issued two important opinions dealing with the enforceability of class waivers in arbitration agreements: Feeney v. Dell, SJC-11133 (Mass. June 12, 2013) (click here for a copy of the opinion), and Machado v. System4, LLC, SJC- 11175 (Mass. June 12, 2013) (click here for a copy of the opinion).

The Massachusetts Supreme Court in Dell issued a very detailed opinion distinguishing Concepcion and recognizing that under certain circumstances, courts may invalidate class waivers in arbitration agreements.  The Massachusetts Supreme Court acknowledged that the Federal Arbitration Act would preempt a state law guaranteeing a judicial forum or a state law declaring class waivers void as a matter of public policy, like the California rule at issue in Concepcion.   However, according to the Massachusetts Supreme Court, the Federal Arbitration Act does not preempt an individualized, fact-specific finding that the enforcement of a class waiver in a particular case may in effect immunize a party from civil liability or prevent a party from vindicating statutory rights granted by state law.  Under such particular circumstances, a court may invalidate a class waiver because the Federal Arbitration Act was intended to help resolve disputes, not immunize wrongdoing.

In Dell, the plaintiffs filed a class action claiming that Dell improperly collected a sales tax that had not been imposed by any Massachusetts taxing authority, and such actions violated the state’s unfair trade practices law.  The terms and conditions of sale contained an arbitration clause with a class waiver, and the Massachusetts Supreme Court found that class waiver was unenforceable.  The Massachusetts Supreme Court reasoned that the plaintiffs’ claims in Dell were complex, while the false advertising and fraud claims in Concepcion were more straightforward.  Also, for these complex claims in Dell, the damages were rather minimal and amounted to only tens or perhaps hundreds of dollars.   Furthermore, the arbitration clause at issue in Concepcion provided consumer-friendly incentives to bring claims, and no such incentives existed here in the Dell case.  Thus, the Massachusetts Supreme Court found the class waiver was not enforceable because the plaintiffs had made a particular showing that they could not effectively vindicate their rights granted by state law.  The court also invalidated the arbitration clause in its entirety and held that the case can proceed as a class action in court, reasoning as follows:

“It is hardly unreasonable to force nonconsensual class litigation on a business defendant where the need for that nonconsensual class litigation stems directly from the defendant’s attempt at absolving itself from liability by promulgating an unconscionable, exculpatory arbitration agreement that denies the right to proceed on a class basis while at the same time providing none of the mitigating features found in the Concepcion agreement.”

In the companion case issued by the court on the same day, Machado, the plaintiffs filed a class action lawsuit against corporate defendants involving with janitorial cleaning “franchises.”  The plaintiffs alleged the defendants used their services in the guise of a franchise and independent contractor relationship.  However, the plaintiffs claimed they were in fact employees, and the defendants were in violation of state wage laws.  The “franchise” agreements contained arbitration clauses with class waivers.  The Massachusetts Supreme Court ruled these class waivers were enforceable, and this case was distinguishable from the Dell case, because the wage claims were not complex and involved significant damages of at least ten thousand dollars. Also, attorneys fees could be awarded. Hence, the plaintiffs could still vindicate their rights in individual arbitration.

These two Massachusetts cases are similar to the American Express case pending before the U.S. Supreme Court, and a decision in American Express is due any day now.  If the American Express case leaves room to invalidate class waivers, I expect lower courts may adopt reasoning similar to the Massachusetts Supreme Court in Dell.

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