|June 20, 2013|
Previously published on June 14, 2013
On June 12, the Massachusetts Supreme Judicial Court (SJC) issued two companion opinions ? one in the consumer contract realm, Feeney v. Dell Inc., SJC-11133, and one in the employment/independent contractor context, Machado v. System4 LLC, SJC-11175 ? which clarify that class action waivers contained in valid arbitration agreements are enforceable unless a plaintiff can demonstrate the waiver effectively denies him or her a remedy. In these opinions the SJC sought to bring Massachusetts law in line with the U.S. Supreme Court's decision in AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011). In doing so, however, the SJC has left open substantial questions that will need to be addressed by future litigation. A brief summary of these cases and their lessons follows.
In 2003, John Feeney and Dedham Health Athletic Complex filed a class action against Dell, claiming Dell's collection of sales taxes on certain service contracts constituted unfair or deceptive trade practices in violation of Chapter 93A of the Massachusetts General Laws. Dell moved to stay the class action and compel arbitration pursuant to arbitration clauses contained in the service contracts mandating that such claims proceed on individual bases. The Superior Court granted Dell's motion to compel, and an arbitrator ultimately found in Dell's favor.
In February 2008, the plaintiffs moved the Superior Court unsuccessfully to vacate the arbitrator's award. Plaintiffs appealed, and the SJC granted their application for direct appellate review. In its Feeney I decision, 454 Mass. 192 (2009), the SJC reversed the order compelling arbitration and invalidated the arbitration clause, holding the class action prohibition contravenes Massachusetts public policy favoring class actions in Chapter 93A claims. The case was subsequently remanded to the Superior Court.
While Feeney was on remand, the U.S. Supreme Court issued its ruling in Concepcion, which involved a cell phone service contract containing an arbitration clause that similarly precluded class arbitration. The district court and the U.S. Court of Appeals for the Ninth Circuit found the clause unconscionable because it conflicted with California's fundamental public policy favoring consumer class actions. The Supreme Court reversed the Ninth Circuit, holding that the overarching purpose of the Federal Arbitration Act (FAA) is "to ensure the enforcement of arbitration agreements according to their terms so as to facilitate streamlined proceedings." It further held that "[r]equiring the availability of classwide arbitration interferes with fundamental attributes of arbitration and thus creates a scheme inconsistent with the FAA" (emphasis in original). In so holding, the Supreme Court recognized that "arbitration is a matter of contract, and the FAA requires courts to honor parties' expectations." It also rejected the policy argument that class actions are necessary to prosecute small claims that "might otherwise slip through the legal system," noting, "States cannot require a procedure that is inconsistent with the FAA, even if it is desirable for unrelated reasons."
After the Concepcion opinion was issued, the Feeney defendants filed a motion to confirm the arbitrator's award, arguing that Concepcion abrogated the SJC's ruling in Feeney I. The Superior Court denied defendants' motion, and the SJC again granted direct appellate review, this time to reconcile Feeney I with Concepcion. In Feeney II the SJC considered "under what conditions a State court may still invalidate an arbitration agreement containing a class action waiver as unconscionable or against public policy without running afoul of the FAA." The SJC concluded that, although Concepcion precludes the invalidation of class action waiver clauses because such clauses contravene Massachusetts public policy, class action waivers will be invalidated "where a plaintiff can demonstrate that he or she effectively cannot pursue a claim against the defendant in individual arbitration according to the terms of the agreement, thus rendering his or her claim nonremediable." The SJC found, in light of the complexity of the case and the fact that the amount in controversy for each putative class member (no more than several hundred dollars) could not possibly justify the expense of individual litigation, the Feeney plaintiffs had met their burden of demonstrating they could not effectively pursue their claims under the individual arbitration process envisioned by the service contract. Accordingly, the SJC invalidated the arbitration agreement, affirmed the Superior Court's order denying Dell's motion to confirm the arbitration award, and remanded the case to the Superior Court for class litigation.
The SJC issued its decision in Machado the same day. In Machado, plaintiff individuals had entered into franchise agreements with the defendant to provide commercial janitorial services to third parties. Those agreements contained arbitration clauses that barred class proceedings. The plaintiffs subsequently filed a class action under the Massachusetts Wage Act, Mass. Gen. Laws ch. 149, § 148B, alleging they had been misclassified as independent contractors and were due unpaid wages and other remedies under the statute. As in Feeney, the defendants moved to stay the proceedings pending arbitration. However, here the Superior Court invalidated the arbitration clauses as violative of Massachusetts public policy, relying on the reasoning of Feeney I. Consistent with its newly stated position in Feeney II, the SJC held that Massachusetts public policy favoring class actions is not a basis for invalidating such an arbitration clause in a Wage Act claim such as this, unless the plaintiffs can demonstrate they "lack the practical means to pursue a claim in individual arbitration." Unlike in Feeney II, however, the SJC held here that the plaintiffs had not, on these facts, demonstrated their claims could not be remedied effectively in individual arbitration. Among other things, in Feeney only a few hundred dollars (at most) were at issue in each individual claim, whereas in Machado potential damages ranged from $9,000 to almost $22,000. Noting that the magnitude of potential damages "may be the most important factor" in considering whether a claim can be remedied in individual arbitrations, the SJC held the damages were not so small in Machado as to require class proceedings. It thus declined to invalidate the class action waiver.
In Machado the SJC also addressed a provision of the parties' agreement that prohibited plaintiffs' recovery of multiple damages in any arbitration proceeding. That clause conflicted with Mass. Gen. Laws ch. 149, § 150, which provides for mandatory treble damages and attorney fees if a violation of the statute is proven, and with the "special contracts" language of Mass. Gen. Laws ch. 149, § 148, that prohibits parties from seeking to exempt themselves from the reach of the Wage Act. The SJC declared the waiver of multiple damages unenforceable and severed it from the agreement. In so doing, the court stated, "[T]he availability of statutorily mandated multiple damages does not impinge on any fundamental characteristic of arbitration," and thus the FAA did not preempt the SJC from holding that waiver of multiple damages in these circumstances is void as contrary to Massachusetts public policy.
Feeney II and Machado leave many open questions. For example, most challenges to class action waivers seemingly will now turn on the nature of their claims and whether the plaintiffs can demonstrate the lack of an effective remedy in individual arbitration proceedings. This necessarily will be a fact-driven determination, potentially adding to the complexity of proceedings to compel arbitration. Unfortunately, the SJC's opinions do not provide much guidance on the factors, other than the potential damages, courts should consider in making those determinations. Those factors presumably will be fleshed out in future litigation. In any event, these cases serve as important reminders that the validity of class action waivers in arbitration agreements is far from settled and likely will continue to evolve as more courts consider, and seek to distinguish, the holding of Concepcion.