• New Mexico Supreme Court Invalidates Arbitration Agreement Containing Class Action Waiver
  • August 6, 2008 | Authors: Michael Isaku Begert; Beth I. Z. Boland; Janice W. Howe; Melissa G. Liazos
  • Law Firms: Bingham McCutchen LLP - San Francisco Office; Bingham McCutchen LLP - Boston Office
  • The New Mexico Supreme Court recently held in Fiser v. Dell Computer Corporationi that contractual prohibitions on class actions for small consumer claims are contrary to New Mexico’s fundamental public policy and therefore unenforceable. The case raises several issues for the use of arbitration clauses in consumer contracts, including:

    • Will courts enforce a class action waiver in an arbitration clause;
    • Does including a class action waiver threaten the enforceability of the arbitration clause as a whole;
    • What is the future of arbitration clauses in consumer contracts generally; and
    • What key terms should businesses consider when drafting arbitration agreements?

    We briefly address these questions below.

    Summary of the Fiser Case

    In Fiser, the plaintiff claimed that defendant made misrepresentations on its website, resulting in a monetary loss to computer purchasers of approximately $10 to $20 each. Fiser sought to represent a class of similarly situated persons in state court, in spite of the mandatory arbitration clause in his purchase contract which precluded customers from proceeding on a class-wide basis in either litigation or arbitration. The terms and conditions also stated that Texas law would apply, and Texas courts have enforced class action waivers.ii

    The New Mexico Supreme Court held that New Mexico public policy strongly supports the resolution of consumer claims and that, as a practical matter, preventing class actions for small consumer claims would prevent consumers from obtaining any relief due to the cost of individually litigating such claims. The court viewed class actions not “merely [as] a procedural tool,” but rather as “a gatekeeper to relief when the cost of bringing a single claim is greater than the damages alleged.” The court also found that applying Texas law would be contrary to New Mexico’s public policy. As a result, it applied New Mexico’s law, under which it found the class action ban to be unconscionable, and therefore unenforceable.iii

    Additionally, the court held that the class action ban could not be severed from the arbitration provision and therefore declined to enforce the arbitration provision in its entirety.

    Will Courts Enforce Class Action Waivers?

    Courts across the country are divided on whether or not to enforce class action waivers. State supreme or appellate courts in California,iv Alabama,v Florida,vi Missouri,vii New Jersey,viii West Virginiaix and Washingtonx also have struck down bans on consumer class actions in cases involving small amounts of damages. The First Circuit has held that, where claims are subject to arbitration, the question of whether the contract can forbid class actions is a question of contract interpretation that the arbitrator should decide in the first instance,xi  unless the parties have specified that the court should make this determination.xii  In Skirchak, the First Circuit found the class action waiver there to be unconscionable “under the[] circumstances,”xiii but did not address whether such a waiver is independently objectionable.

    On the other end of the spectrum, a number of courts have found that arbitration clauses that bar class actions are not unconscionable, and they have enforced them.xiv  For example, in Texas, the appellate court upheld a class action waiver in an arbitration agreement.xv  Unlike the New Mexico Supreme Court, which saw the class action mechanism in effect as a substantive right, the Texas appellate court saw the class action mechanism as a procedural right only that may “not be construed to enlarge or diminish any substantive rights or obligations of any parties to any civil action,” and noted that the Texas Supreme Court had made clear that the FAA was part of the substantive law of Texas.

    Additionally, although the supreme courts in California, Illinois and North Carolina struck down class action bans, they did not do so universally, but rather held that this determination must be made on a case-by-case basis.xvi  And in some cases, even where the forum state’s law renders a class action ban unconscionable but the contract contains a choice-of-law provision applying the law of another state that allows class action waivers, the courts have applied the law of the chosen state — resulting in enforcement of the class action ban.xvii 

    The cases upholding class action waivers demonstrate that it is possible to have such waivers enforced. This is particularly true where the damages claimed are significant and the class action waiver is explicit and obvious.

    By Including a Class Action Waiver, Do You Threaten the Enforceability of the Entire Arbitration Clause?

    In Fiser, the court refused to enforce the arbitration clause at all. It found that the class action waiver could not be severed, rendering the entire clause invalid. A California appellate court reached a similar conclusion.xviii 

    Aside from the risk of losing the benefit of an arbitration clause altogether, companies that implement arbitration agreements should consider the impact of a finding that terms in the agreement are “unconscionable.” Given the growing authority for the proposition that class action waivers in consumer contracts are unfair and oppressive, the use of such terms may affect a company’s credibility with judges, arbitrators or juries. For example, the California Supreme Court is currently considering the question of whether inserting an unconscionable arbitration clause in a consumer contract, by itself, constitutes a violation of its Consumer Legal Remedies Act.xix

    What is the Future of Arbitration Clauses in Consumer Contracts?

    Fiser appears to reflect an overall trend toward invalidating arbitration clauses in certain contexts. Moreover, Congress is currently considering legislative measures to limit the use of arbitration in consumer contracts.xx While such legislation typically moves slowly, Congress already has passed one bill this year limiting the use of predispute arbitration agreements in certain circumstances.xxi  These developments indicate that new laws may be on the horizon, and that the business community should exercise care in drafting arbitration clauses, particularly in consumer contracts.

    Key Drafting Questions

    There are a number of terms that businesses should consider when drafting arbitration agreements:

    • Restrictions on other rights: where the main objective of including an arbitration clause is to avoid the courts, businesses should carefully evaluate whether to include provisions that impact other important rights (e.g., discovery restrictions or damage limitations, as well as class action bans). Asking for too much could risk losing the arbitration clause.
    • Choice of law: consider including a very clear choice of law provision in order to increase the chances of having the court or arbitrator interpret the agreement under the laws of the state most likely to enforce the waiver. If the clause includes a choice of law provision, have a reasonable basis for choosing the forum state.
    • Offer to advance costs: think about a provision stating that the company will advance the costs of arbitration to the customer.
    • Opt-out provision: consider a procedure allowing the customer to reject arbitration.
    • Severability: decide whether, if forced to choose, the company would prefer to have class certification decided by a judge or an arbitrator. Then, specify whether the class action waiver is severable from the agreement to arbitrate.
    • Jurisdiction: clearly state who decides (the judge or the arbitrator), in the first instance, whether the case must go to arbitration.

    Although there is no guarantee that an arbitration clause containing a class action waiver will be enforced, careful drafting may elevate the chances of enforcement, at least in states where such waivers are not per se illegal.

    ENDNOTES

    i No. 30,424 (N.M. Supr. Ct. June 27, 2008).
    ii See AutoNation USA Corp. v. Leroy, 105 S.W.3d 190, 199-201 (Tex. App. 2003) (contractual prohibition against class actions is not fundamentally unfair or in violation of public policy).
    iii The court also held that the Federal Arbitration Act (FAA) did not preempt its ruling. See also Discover Bank v. Superior Court, 36 Cal. 4th 148, 165-66, 113 P. 3d 1100, 30 Cal. Rptr. 3d 76 (2005).
    iv Discover Bank, 36 Cal. 4th 148. See also Cal. Civ. Code § 1751 (stating that any waiver of the provisions of the CLRA “is contrary to public policy and shall be unenforceable and void.”)
    v Leonard v. Terminix International Co., 854 So.2d 529 (Ala. 2002).
    vi Powertel, Inc. v. Bexley, 743 So.2d 570 (Fla. Dist. Ct. App. 1999).
    vii Whitney v. Alltel Communications, Inc., 173 S.W.3d 300 (Mo. Ct. App. 2005).
    viii Muhammad v. County, 189 N.J. 1, 22 (2006).
    ix State v. Berger, 211 W.Va. 549, 567 S.E.2d 265, 278 (W.Va. 2002).
    x Scott v. Cingular Wireless, 161 P.3d 1000 (Wash. 2007).
    xi See Skirchak v. Dynamics Research Corp., 508 F.3d 49, 56 (1st Cir. 2007), Anderson v. Comcast Corp., 500 F.3d 66 (1st Cir. 2007) and Kristian v. Comcast Corp., 446 F.3d 25 (1st Cir. 2006).
    xii Skirchak, 508 F.3d at 56.
    xiii The circumstances included that the waiver was buried in an attachment to an e-mail sent to employees two days before Thanksgiving, which did not highlight that it contained a class action waiver.
    xiv See Jenkins v. First Am. Cash Advance, LLC, 400 F.3d 868, 877-78 (11th Cir. 2005) (holding arbitration provisions precluding class action relief enforceable in putative class action alleging violations of state usury statutes and the Georgia Racketeer Influenced and Corrupt Organizations Act); Iberia Credit Bureau, Inc. v. Cingular Wireless L.L.C., 379 F.3d 159, 174-75 (5th Cir. 2004); Blaz v. Belfer, 368 F.3d 501, 504-505 (5th Cir. 2004); Livingston v. Associates Fin., Inc., 339 F.3d 553, 557 (7th Cir. 2003); Snowden v. CheckPoint Check Cashing, 290 F.3d 631, 638 (4th Cir. 2002); Randolph v. Green Tree Fin. Corp., 244 F.3d 814, 818 (11th Cir. 2001); Burden v. Check Into Cash of Kentucky, 267 F.3d 483, 492-93 (6th Cir. 2001); Johnson v. West Suburban Bank, 225 F.3d 366, 369, 373-74 (3d Cir. 2000) (holding class relief under the Truth in Lending Act and the Electronic Fund Transfer Act precluded by provisions of arbitration clause); Champ v. Siegel Trading Co., Inc., 55 F.3d 269, 277 (7th Cir. 1995); Bischoff v. DirecTV, Inc., 180 F. Supp. 2d 1097, 1108 (C.D. Cal. 2002); Strand v. U.S. Bank National Association ND, 693 N.W.2d 918, 926 (N.D. 2005); Ranieri v. Bell Atl. Mobile, 304 A.D.2d 353, 759 N.Y.S.2d 448, 449 (N.Y. App. Div. 2003); Edelist v. MBNA Am. Bank, 790 A.2d 1249, 1260-61 (Del. Super. Ct. 2001) (finding bar on class action claims in arbitration agreement enforceable because "[t]he surrender of that class action right was clearly articulated in the arbitration amendment"); Gras v. Associates First Capital Corp., 346 N.J. Super. 42, 786 A.2d 886, 892 (2001); Pyburn v. Bill Heard Chevrolet, 63 S.W.3d 351, 363 (Tenn. Ct. App. 2001); Rains v. Foundation Health Sys. Life & Health, 23 P.3d 1249, 1253 (Colo. Ct. App. 2001).
    xv AutoNation USA Corporation v. Leroy, 105 S.W.3d 190 (Tex. App. 2003); see also Carter v. Countrywide Credit Industries, Inc., 362 F.3d 294 (5th Cir. 2004) (applying Texas law).
    xvi Discover Bank, 36 Cal. 4th at 162-63; Kinkel v. Cingular Wireless LLC, 223 Ill. 2d 1, 29 (2006); Tillman v. Commercial Credit Loans, 362 N.C. 93, 107-09 (2008).
    xvii See Carideo v. Dell, Inc., 520 F. Supp. 2d 1241 (W.D. Wash. 2007) (Washington public policy did not prevent honoring parties’ choice of Texas law and enforcing class action waiver, at least where value of the individual claims was not insignificant); Hubbert v. Dell Corp., 359 Ill. App. 3d 976 (2005) (applying Texas choice-of-law provision and enforcing arbitration agreement); see also Discover Bank, 36 Cal. 4th at 174 (remanding for a determination of whether Delaware law applies, under which a class action waiver might not be unconscionable.)
    xviii Klussman v. Cross Country Bank, 134 Cal. App. 4th 1283, 1300 (2005).
    xix Meyer v. Sprint Spectrum, LP, 59 Cal. Rptr. 3d 309 (2007), petition for rev. granted, 65 Cal Rptr 3d 142 (2007); see Cal. Civ. Code § 1770(19) (CLRA section listing “Inserting an unconscionable provision in the contract” as a proscribed practice).
    xx See, e.g., Arbitration Fairness Act, H.R. 3010 and S. 1782, 110th Cong. (2007); Consumer Fairness Act, H.R. 1433, 110th Cong. (2007); Predatory Mortgage Lending Practices Reduction Act, H.R. 2061, 110th Cong. § 5 (2007); Automobile Arbitration Fairness Act, H.R. 5312, 110th Cong. (2008).
    xxi Fair Contracts for Growers Act (limiting the use of predispute arbitration agreements in livestock and poultry contracts), enacted into law as part of the Food and Energy Security Act of 2007, Pub. L. No. 110-234, § 11005, § 210 (2008).