Illinois Supreme Court Holds Class Action Waiver Unconscionable

by Scott Nelson

On October 5, the Illinois Supreme Court issued its opinion in Kinkel v. Cingular Wireless LLC, No. 100925, holding that a provision in Cingular's arbitration agreements with its customers that purported to bar class actions was unconscionable.  The Illinois Supreme Court has now joined the California Supreme Court in holding that such class action waivers are, at least in some circumstances, unenforceable.  At the same time, the Illinois court held that the class action ban was severable from the arbitration agreement itself, with the result that the consumer claims at issue may become the subject not of a class action heard in the Illinois courts, but rather a class arbitration.

The Kinkel opinion is narrowly written in that it does not condemn all class action waivers under all circumstances.  The opinion also carefully states that its unconscionability analysis is equally applicable to class action waivers in arbitration agreements and those that are not tied to arbitration clauses, thus avoiding the argument that its state-law-based analysis discriminates against arbitration and is preempted by the Federal Arbitration Act (FAA).  The court's solid analysis on this point should "cert-proof" its opinion against any effort by Cingular to request review by the U.S. Supreme Court on the preemption issue -- though that may not stop Cingular from trying, given the vehemence with which industry litigants have sought to enforce class action waiver provisions.

The Facts

The case arose from the claim of Donna Kinkel, a former Cingular customer, that a $150 early-termination penalty in her cell-phone contract was unenforceable under Illinois law.  Kinkel filed a class action in state court in Madison County, Illinois, claiming that imposing the termination fee was a breach of contract and a violation of the Illinois Consumer Fraud and Deceptive Business Practices Act.

Unfortunately, Kinkel's contract also contained an arbitration clause that forbade any arbitrator to order consolidation or class arbitration.  The clause also precluded punitive or other non-actual damages and effectively required Kinkel to bear at least some of the costs of arbitration.

The trial court refused to enforce the arbitration agreement, finding that the class action waiver provision was unconscionable and could not be severed from the rest of the arbitration clause.  The intermediate appellate court agreed with the trial court on unconscionability, but disagreed on severability, and ordered that the claim proceed to arbitration minus the class prohibition.  Cingular sought and obtained leave to appeal to the Illinois Supreme Court.

The Illinois Supreme Court's Opinion

The Illinois Supreme Court affirmed.  The court began by rejecting Cingular's attempt to substitute an amended arbitration agreement, which it had developed after the fact, for the one to which Kinkel had been a party.  The new agreement had fewer anti-consumer provisions, but the court held that Cingular could not rely on an agreement that it unilaterally modified after the contractiaul relationship between the parties had already ended.

Preemption:  The court next turned to the issue of federal preemption.  The court noted that Supreme Court opinions hold that the FAA preempts state laws that refuse to enforce arbitration agreements on the same terms as other contracts, but permit states to apply generally applicable contractual defenses, such as unconscionability, to arbitration agreements.  The court acknowledged that it could not apply such doctrines in a manner that discriminated against arbitration agreements, but it made clear that its analysis did not do so: "Because our analysis on the question of class action waivers is applicable to all contracts governed by Illinois law, it can be applied to render the class action waiver in an arbitration clause unenforceable without undermining the goals and policies of the FAA."

Unconscionability:  Turning to unconscionability, the court first reiterated its recent ruling in Razor v. Hyundai Motor America, 222 Ill. 2d 75 (2006), that under Illinois law either procedural or substantive unconscionability can render a contract unenforceable.  Both are not required.

As to procedural unconscionability, the court held that Cingular's form contract of adhesion had some elements of procedural unconscionability, but not enough to render it unenforceable without more.  The court thus based its holding primarily on substantive unconscionability.

Canvassing most of the other leading federal and state opinions on the question of unconscionability of class action waivers, including the California Supreme Court's Discover Bank decision, the court concluded that the various arguments they embodied failed to support a per se rule either way on the enforceability of a class action waiver.  Rather, the court summed up the lesson to be learned from the cases as follows: "If there is a pattern in these cases it is this: a class action waiver will not be found unconscionable if the plaintiff had a meaningful opportunity to reject the contract term or if the agreement containing the waiver is not burdened by other features limiting the ability of the plaintiff to obtain a remedy for the particular claim being asserted in a cost-effective manner."  However, the waiver will be found unconscionable "[I]f the agreement is so burdened."

Here, the court concluded that Cingular's agreement was unconscionable in the circumstances of the claim at issue in the case because it reflected an effort by Cingular to "insulate itself from liability."  Various provisions of the clause, including the cost provisions and the limits on remedies, "operate together to create a situation where the cost of vindicating the claim is so high that the plaintiff's only reasonable, cost-effective means of obtaining a complete remedy is as either the representative or a member of a class."  Because the class waiver would foreclose the only practicable remedy, the court found it unconscionable.

In so holding, the court also rejected Cingular's arguments that the ability of a consumer to bring an individual action in small-claims court or the ability of the Illinois Attorney General to bring an action to enforce state law rendered the class action device unnecessary.

Severability:  Finally, the court rejected Cingular's argument that the class waiver could not be severed from the arbitration clause.  Ironically, Cingular had argued in the trial court that the class waiver could be severed, while Kinkel had disagreed.  The court did not see the parties' changes in position as an obstacle to reaching the issue, and it concluded that the waiver was severable largely because the agreement contained a severability provision, and the court saw no reason to think that class claims were incompatible with arbitration.  Moreover, the court stated that "the strong public policy in favor of enforcing arbitration agreements weigh[s] in favor of enforcing the arbitration clause without the offending class action waiver."

The Significance of Kinkel

The Illinois Supreme Court's opinion seems likely to add considerably to the influence of the view (already bolstered by Discover Bank and the New Jersey Supreme Court's August 6 opinion in Muhammad v. County Bank of Rehoboth Beach) that class waivers may, at least under some circumstances, be unconscionable.  The measured tone of the opinion, and its convincing handling of the preemption issue, lend it considerable persuasive force. 

Precisely for that reason, the commitment of industry defendants and their lawyers to defending class action waivers may lead them to seek certiorari on the preemption issue, though my own view is that their chances of success are small.  If that avenue proves unsuccessful, and more opinions like Kinkel follow, industry groups may put more pressure on legislatures to validate class action waivers.

Meanwhile, however, these decisions pose a dilemma for defendants, as they may be forced to choose which they want more: to be in arbitration, or to avoid class arbitrations.  Alan Kaplinsky, who is probably the leading advocate of class action waivers, has stated publicly on more than one occasion that class arbitration is a defendant's worst nightmare, and that defendants should prefer a class action in court if their class action waivers are held unenforceable.  Industry clients who heed his advice will probably respond to decisions like Kinkel by rewriting arbitration clauses to provide that anti-class action provisions cannot be severed from the arbitration clause.  Of course, the effect of such provisions will be to put plaintiffs who succeed in knocking out a class action waiver exactly where they always wanted to be, too:  Back in court.

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The Illinois Supreme Court affirmed and the new agreement had fewer anti-consumer provisions, but the court held that Cingular could not rely on an agreement that it unilaterally modified after the contractiaul relationship between the parties had already ended.

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