The Enforceability of Class Action Waivers in Arbitration Agreements:
Will Your Class Arbitration Waiver be Upheld?

The First Circuit recently held certain class arbitration waivers to be unenforceable, and courts in the Ninth Circuit, including California state courts, routinely refuse to enforce such class arbitration waivers. In Kristian v. Comcast Corp., the First Circuit held that a class action waiver in an arbitration provision was unenforceable as it would severely impair the ability of the plaintiffs to enforce their statutory antitrust claims. The Court severed that portion of the arbitration clause that contained the class action waiver and allowed the parties to proceed with arbitration as a class. Thus, the arbitration clause remained in effect; only that part that contained the class action waiver was deemed unenforceable.

In Discover Bank v. Superior Court, the California Supreme Court invalidated a class action waiver contained in a consumer contract of adhesion. The Discover court formulated a two-pronged test for determining when a class arbitration waiver is unconscionable: when (1) the dispute between the parties involves relatively small amounts of money that would be burdensome to contest on an individual basis; and (2) where it is alleged that the party with the superior bargaining power has carried out a scheme to deliberately cheat large numbers of consumers out of individually small sums of money. The court reasoned that to uphold class arbitration waivers under such circumstances would exempt the party with the superior bargaining power from responsibility.

California is not the only state to refuse to enforce a class action waiver in an arbitration agreement. Courts in a number of other states, including Illinois, New Jersey, Wisconsin, Missouri, and Pennsylvania, have also refused to enforce class arbitration waivers where those courts deemed such provisions to be unconscionable. In Kinkel v. Cingular Wireless, LLC, the Supreme Court of Illinois deemed a class action waiver unconscionable where the waiver was "contained in a contract of adhesion that fails to inform the customer of the costs to her of arbitration, and that does not provide a cost-effective mechanism for individual customers to obtain a remedy for the specific injury alleged in either a judicial or an arbitral forum." In Kinkel, as in Discover Bank, the court placed an emphasis on the prohibitive cost for an individual consumer to pursue arbitration, when compared with the relatively small amount of damages at issue.

Although a number of courts have invalidated explicit class arbitration waivers, many jurisdictions have upheld such waivers. The Seventh Circuit has held that class action waivers are not void as against public policy. The Third, Fourth, Fifth, and Eleventh Circuits have reached similar conclusions, as have a variety of district and state courts. Courts are especially reluctant to hold a class action waiver unconscionable when the applicable arbitration provision affords the consumer or complainant other measures of protection in lieu of a class mechanism.

Because of the confusion and uncertainty created by the courts' varying decisions as to the validity of class arbitration waivers, there is no definite means of ascertaining whether a class arbitration waiver will be upheld. Thus, when preparing an agreement that contains an arbitration provision, especially in a contract that may be considered a consumer contract of adhesion, the drafters should become familiar with the law of their particular jurisdiction before drafting an arbitration provision that purports to waive classwide relief.

If you wish to waive the parties' rights to pursue a classwide remedy in arbitration, then do so explicitly and conspicuously. The other parties to the agreement should be aware that by accepting the agreement, they waive any and all rights to class relief in an arbitral forum. If the agreement includes such an express waiver of class arbitration, then any questions as to the enforceability of such a provision will be left to the courts. If the agreement is silent or ambiguous, then it will be left to the arbitrator to determine whether to allow class certification and the presumption is that class arbitration is allowed unless contractually prohibited.

You should also consider whether you would prefer no arbitration at all, rather than submit to class arbitration. If you are opposed to class arbitration under any circumstances, then add a provision stating that the whole arbitration clause will be invalidated if any one part of the arbitration clause is deemed unenforceable, including the class action waiver. In the event the class action waiver is deemed unenforceable, this prevents a court from severing the class action waiver and allowing the arbitration to proceed on a classwide basis.

No court has held class arbitration waivers to be per se unconscionable. If your arbitration agreement will be subjected to the law of a jurisdiction that routinely refuses to enforce class action waivers, then it may be necessary to afford the other party additional protections. If your waiver is part of a consumer contract, you may consider expedited arbitration procedures that reduce costs when the amount in dispute is small. Depending upon how imperative it is to your business to avoid classwide arbitration, you may consider adding a provision that gives consumers the option of recovering attorney fees if they are victorious in a case that involves only a small amount of damages. This may negate an argument by the consumer that individual arbitration would be prohibitively expensive.

Most importantly, know the applicable law before drafting a class action waiver. Determine under what circumstances courts in your jurisdiction have upheld class arbitration waivers, and draft your waivers accordingly.

Brandi Bennett is an associate with the Firm's Litigation Group.

This publication is intended for general information purposes only and does not and is not intended to constitute legal advice.  The reader must consult with legal counsel to determine how laws or decisions discussed herein apply to the reader's specific circumstances.