by Scott L. Nelson
The United States Court of Appeals for the Eleventh Circuit has become the latest court to hold that an arbitration clause that contains a waiver of a consumer's right to bring a class action may be unconscionable if its application would effectively prevent consumers from vindicating their rights. The opinion, issued this Tuesday, September 4, in the case of Dale v. Comcast Corp., can be found here.
Dale involved a suit against Comcast by cable subscribers claiming that Comcast improperly collected excessive franchise fees from them. The amounts that were alleged to have been improperly collected within the limitations period added up to less than $11 for each subscriber, making an individual action obviously impractical. Comcast sought to derail the litigation by invoking a provision in its subscriber agreement providing for mandatory arbitration of all claims at the election of either party and prohibiting arbitration or litigation of any claims on a class basis.
Applying Georgia law, the Eleventh Circuit held that the class-action prohibition was unconscionable -- that is, so one-sided that it cannot in good conscience be enforced. The court held that as applied to a claim such as the one in this case, the prohibition on class actions is unconscionable because "[w]ithout the benefit of a class action mechanism, the subscribers would effectively be precluded from suing Comcast" for the violations at issue. As the court explained, "[t]he cost of vindicating an individual subscriberâs claim, when compared to his or her potential recovery, is too great." Permitting Comcast to avoid litigation through the class-action waiver, the court held, would "allow Comcast to engage in unchecked market behavior that may be unlawful. Corporations should not be permitted to use class action waivers as a means to exculpate themselves from liability for small-value claims." (emphasis added).
In so holding, the Eleventh Circuit joined an increasing number of state and federal courts that have held class-action waivers in atrbitration agreements unenforceable. Other very recent examples include the California Supreme Court's August 30 holding that the class-action prohibition in Circuit City's employment agreements could not be applied to a wage-and-hour class action (Gentry v. Superior Court), the Ninth Circuit's August 17 decision that a class-action waiver in Cinguler Wireless's subscriber agreement was unenforceable under California law (Shroyer v. New Cinular Wireless Services), and the Washington Supreme Court's July 12 holding that Cingular's class-action ban was unenforceable against a consumer class action under Washington state law (Scott v. Cingular Wireless, 161 P.3d 1000 (2007)).
The Eleventh Circuit's decision is likely to be particularly influential because that court had previously issued two widely cited opinions enforcing class-action waivers in arbitration clauses, Jenkins v. First Am. Cash Advance of Ga., LLC, 400 F.3d 868, 877-78 (11th Cir. 2005); Randolph v. Green Tree Fin. Corp., 244 F.3d 814, 819 (11th Cir. 2001). This week's opinion in Dale distinguishes those rulings on the ground that the circumstances of those cases (including among other things the possibility that a prevailing plaintiff would be entitled to an award of attorneys' fees) were different in ways that, according to the court, made it conceivable that the plaintiffs' claims could, as a practical matter, be vindicated through individual arbitration. (The idea that attorneys' fee awards are really enough to make it feasible to pursue small-value claims in individual arbitration strikes me as pretty dubious, but because the prior opinions gave credence to this notion, it provided the Dale court with a ready means of distinguishing them.) Dale thus makes clear that the Eleventh Circuit's previous rulings do not mean (as many lower federal courts both within and outside that circuit seem to have mistakenly thought) that a class-action waiver is automatically enforceable.
Dale also adds to the growing consensus of federal and state appellate courts that the Federal Arbitration Act does not preempt state-law contract principles that prevent enforcement of class-action waivers, as long as those principles apply equally both inside and outside arbitration. (Here, the Eleventh Circuit's analysis treats arbitration and non-arbitration contracts even-handedly, because it would find the ban on class-actions unconscionable as applied to actions in court as well. Indeed, the effect of its ruling was to allow the class action to proceed in federal court, because Comcast's arbitration agreement provided that if the class-action ban were held unenforceable, the arbitration agreement as a whole would no longer apply.)
Since the California Supreme Court decided the Discover Bank case a little more than two years ago (Discover Bank v. Superior Court, 113 P.3d 1100 (2005)), there has been a gathering trend among both state and federal courts toward the recognition that, at least under some circumstances, enforcement of class-action waivers can unfairly stifle the enforcement of the rights of consumers and employees. On Tuesday, the Eleventh Circuit joined that trend. It was a good day for justice in Atlanta.