July 30, 2014

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July 30, 2014

Recent Class Arbitration Decisions by Massachusetts Supreme Judicial Court and U.S. Supreme Court in Conflict

When a person agrees to a contract that prohibits class-wide proceedings — whether in court or in arbitration — can a court refuse to enforce that contract because it would make no economic sense for an individual to spend thousands of dollars arbitrating over a $13 charge? In Feeney v. Dell, the Massachusetts Supreme Judicial Court considered the ability of individual plaintiffs with small-value claims to aggregate them against a retailer when all potential claimants had accepted an arbitration agreement with a class-waiver provision. The SJC recognized that its earlier ruling in the case (known as Feeney I) — that contract provisions requiring the waiver of class-wide proceedings were categorically unenforceable as contrary to public policy — was invalidated by the United States Supreme Court’s ruling in AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011). But in its new Feeneyopinion, the SJC held that such class-waiver provisions still are unenforceable “where the plaintiff can demonstrate, as a factual matter, that the class action waiver effectively denies him or her a remedy or insulates the defendant from private civil liability” — in other words, where the provision requires bilateral arbitration of a claim that has a dollar value far below the likely cost to arbitrate. This holding is based on a rationale that pushed to limit the reach of (and arguably distorted) Concepcion. More significantly, it is based on reasoning that was flatly rejected by the U.S. Supreme Court’s most recent pronouncement on arbitration, the ruling in American Express v. Italian Colors Restaurant, 570 U.S. __ (June 20, 2013).

The facts of Feeney are simple. Mr. Feeney purchased a Dell computer and a service contract. Dell charged him a $13.65 “tax” on the service contract, which he paid. Mr. Feeney alleged that no Massachusetts taxing authority imposed such a tax and claimed that Dell’s charging it was an “unfair or deceptive act or practice” prohibited by the Massachusetts consumer protection act, G.L. c. 93A, §§ 9(2) and 11. When Mr. Feeney commenced a putative class action, Dell moved to compel arbitration. The parties had agreed to resolve such claims “exclusively and finally” by arbitration and that the arbitration would be “limited solely to the dispute or controversy between the Customer and Dell,” which effectively barred class arbitration.

In Feeney I, the SJC held that the arbitration agreement was unenforceable because it “contravenes Massachusetts public policy.” 454 Mass. 192, 199 (2009). The court reasoned that such agreements are “a waiver of the right to proceed in a class action under G.L. c. 93A” and thus could allow companies “to insulate themselves from small value consumer claims,” leaving customers “without an effective method to vindicate their statutory rights.”

In Feeney II, the SJC reconsidered its prior ruling in light of the Supreme Court’s intervening decision inConcepcion. 465 Mass. 470 (June 12, 2013). In Concepcion, the Supreme Court rejected a California rule that, likeFeeney I, generally invalidated arbitration agreements with class-waiver provisions. The Supreme Court built on its prior rulings explaining that class arbitration is qualitatively different from traditional bilateral arbitration and the former cannot be compelled against a party absent consent. Because, under the FAA, arbitration is a matter of consent and because the FAA is federal law, the FAA preempts conflicting state laws, like the California rule rejected in Concepcion. The SJC acknowledged that Feeney I could not survive after Concepcion: “Essentially, because the FAA prohibits a State from requiring a judicial forum for a particular type of dispute, and becauseStolt-Nielsen prohibits a court from compelling nonconsensual class arbitration, any State law rule guaranteeing class proceedings effectively guarantees a judicial forum, and is preempted by the FAA.” (Citations omitted.)

Nevertheless, the SJC concluded that Concepcion does not bar a rule that would invalidate class waivers if “an individualized factual inquiry” shows that “class proceedings are the only viable way for a consumer plaintiff to bring a claim against a defendant,” due to the complexity of the claims, small damages or lack of “safeguards” in the arbitration agreement. The SJC relied on a statement from the Supreme Court’s 1985 ruling in Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth that if contract clauses operate as “a prospective waiver of a party’s right to pursue statutory remedies,” they would not be enforced. The SJC also relied on a distinction developed by other courts: that Concepcion rejected rules addressing a customer’s incentive to bring claims (e.g., financial incentive), but not rules protecting the means to vindicate their rights. That distinction was based on an effort to understand the statement in Concepcion, in response to the dissent’s view that “class proceedings are necessary to prosecute small-dollar claims that might otherwise slip through the legal system,” that “States cannot require a procedure that is inconsistent with the FAA, even if it is desirable for unrelated reasons.” In concluding Feeney II, the SJC ruled that the factual record supported the showing required to invalidate the arbitration agreement with Dell due to the complexity of the tax issues and the low value of an individual claim, and ordered the case to proceed as a putative class action in court.

On June 20, 2013, eight days after the SJC decided Feeney II, the Supreme Court issued its decision in American Express Co. v. Italian Colors Restaurant, et al. In a 5–3 decision, the Supreme Court reversed the lower federal court’s holding that the arbitration agreement between American Express and its vendors, which contains a class waiver, was unenforceable because it effectively precluded plaintiffs from vindicating their antitrust claims due to the “prohibitive” cost of arbitrating such claims relative to an individual plaintiff’s potential damages. The Supreme Court ruled that “the antitrust laws [which were enacted before the federal rule allowing class actions] do not guarantee an affordable procedural path to the vindication of every claim.” (Emphasis added.) The Court then explained that, despite plaintiff’s lack of economic incentive to pursue individual antitrust claims, the “effective vindication” doctrine (based on Mitsubishi Motors) does not apply: “the fact that it is not worth the expense involved in proving a statutory remedy does not constitute the elimination of the right to pursue that remedy.” (Emphasis in original.) The Supreme Court noted that Concepcion “all but resolves this case,” citing its rejection of the concern over “claims that might otherwise slip through the legal system” and adding that “the FAA’s command to enforce arbitration agreements trumps any interest in ensuring the prosecution of low-value claims.” Finally, the Court considered destructive the “preliminary litigating hurdle” imposed by a factual inquiry of the type required byFeeney II, that is, a determination of “the legal requirements for success on the merits claim-by-claim and theory-by-theory, the evidence necessary to meet those requirements, the cost of developing that evidence, and the damages that would be recovered in the event of success.”

Although the SJC was aware that American Express was pending when it issued Feeney II, it chose to hand down that ruling shortly before the end of the Supreme Court’s term, when a decision in American Express was expected. Having admitted that Concepcion undermined the rationale of Feeney I, the SJC seems compelled to reach the same conclusion about Feeney II after American Express. The SJC may address this issue shortly, as the Feeney defendants have already filed a petition for rehearing.

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TRENDING LEGAL ANALYSIS


About this Author

Evan Nadel, Technology, Litigation, Attorney, Mintz Levin, Law Firm
Member

Evan's complex litigation practice is focused on technology-related litigation and class actions involving intellectual property, commercial contract disputes, along with trade secret, unfair competition, and other Internet-related litigation. Evan has spent more than a decade defending putative class actions in California and elsewhere, including consumer products, false advertising, and other product liability claims. The majority of these lawsuits involved claims under California's Unfair Competition Law, California's False Advertising Act, and California's Consumer...

415-432-6016
Kevin McGinty, Corporate, Class Action, Attorney, Mintz Levin, Law Firm
Member

Kevin concentrates in complex corporate and class action litigation. He chairs the firm's Class Action Working Group and has extensive experience defending consumer, antitrust, unfair trade practice, contract, mass tort, and employment class actions.

He has also represented corporations, professionals, and individuals in business acquisition disputes. Kevin’s clients have included health care–related entities (including pharmacies, PBMs, and managed care organizations), insurers (including life, auto, and casualty companies), retailers, manufacturers, and accounting...

617-348-1688
Chip Phinney, Corporate Litigation, Attorney, Mintz Levin Law Firm
Member

Chip practices in the area of complex corporate litigation, with a primary focus on shareholder and securities litigation and advising officers and directors on fiduciary duties and corporate governance. Chip has tried shareholder suits in both state and federal courts and has represented corporations, directors, and officers in securities class actions, derivative suits, and matters involving the Securities and Exchange Commission. In addition, Chip has handled a wide variety of other kinds of business litigation, including cases involving trade secrets, contract disputes, and lender...

617-348-3061