Consumer Class Action Litigation: Manage Your Exposure with Mandatory Arbitration and Class Action Waivers

If you do business with consumers, you may be concerned about your exposure to consumer class action litigation. If so, you should be aware that recent United States Supreme Court jurisprudence may pave the way for you to minimize your risk of consumer class action litigation. The pivotal decision? AT&T Mobility v. Concepcion.

In that decision, the Supreme Court held that the Federal Arbitration Act (FAA) preempted a state's ability to nullify a class action waiver provision in an arbitration agreement on public policy grounds (e.g., that the waiver provision was "unconscionable.") On that basis, the Supreme Court held that AT&T could enforce arbitration terms in its customer service contracts to (a) compel a pair of dissatisfied cell phone customers to pursue their claims in arbitration (instead of before a court); and (b) deny the customers' request for class arbitration, forcing them to proceed individually for only the harms they allegedly suffered.

There's a catch. Although the AT&T court held that the arbitration clause could not be stricken on unconscionability grounds, the court also acknowledged that the FAA does not require an arbitration provision to be enforced if the provision is defective for reasons other than public policy or unconscionability. Other contract principles under state law, such as those governing the formation and interpretation of an agreement, may still pertain to these agreements, subject to the overarching objectives of the FAA.

Thus, although AT&T is generally viewed as having rewritten the rules on mandatory arbitration and class action waivers, an appropriately worded contract is a must for such provisions to be enforceable. For instance, AT&T specifically recognized that courts may invalidate arbitration and class action waiver clauses on grounds that the parties did not mutually consent to them. As a result, it is generally important (among other things) for arbitration and class waiver provisions to be presented with emphasis and clarity in a consumer contract.

Furthermore, while adding arbitration and class waiver provisions may seem enticing, these types of provisions are simply not an option in some industries. The Truth in Lending Act, for example, prohibits arbitration clauses in residential mortgage loans. In addition, the logistics and costs of arbitration (which can be significant) may outweigh the risk of class litigation to your business, making mandatory individual arbitration a less desirable option. In short, an assessment of your business model and risk is important to determine whether mandatory arbitration and class waiver provisions make sense for you. Carefully crafted language compliant with state contract formation principles is also a must.