Beware of What You Wish For: The Nationwide Class Action Trap

Companies that do business with consumers nationwide often hope to ensure uniformity in case of disputes. Likewise, those that primarily do business in Illinois may want to make sure they will be able to resolve all disputes in Illinois and that Illinois law will apply. As many companies are learning, that very rational approach is having unforeseen and dire consequences.

In order to ensure uniformity, a company might insert into its contracts, license agreements and other documents a clause requiring that all disputes be subject to Illinois law and be resolved either in the Illinois courts or before an Illinois arbitration panel. Some companies, however, are now finding out that this seemingly innocuous provision is used by resourceful plaintiff's counsel as a basis to file nationwide class actions. Although onerous consumer class actions have been generally disfavored under recent Illinois decisions (see Avery v. State Farm Mut. Auto Ins. Co.), plaintiff's counsel have been much more successful when a dispute resolution clause is involved. Indeed, this is what happened in Hall v. Sprint Spectrum LP, a very recent decision by the Illinois appellate court.

In that case, a nationwide class filed suit against Sprint, accusing the company of wrongful conduct in connection with the cancellation of telephone accounts. Because there was a contract provision mandating that Illinois law must apply to all customers, the plaintiffs were able to convince both the trial and appellate courts to certify a nationwide class, overcoming the obstacles that often prevent class certification in other similar cases.

Taking a lesson from the Sprint case, if your business sells products to consumers throughout the country and you include license agreements containing provisions that require, for example, the application of the law of a particular state, you should seriously reconsider that approach. Perhaps it would be sufficient simply to require that disputes be resolved in a particular state, but leave the question of the applicability of the law to be determined ad hoc. This model would give you the benefit of having your choice of forum and still allow you to defend against the certification of a nationwide class.

In this litigious age, even the most careful companies face the threat of class actions. One way to reduce your risk and lessen potential damages, especially for a nationwide class, is to revise your forum selection clauses. Uniformity is not always the best course.