Consumer Law & Policy Blog

Eleventh Circuit Strikes Down Arbitration Clause Containing Class-Action Waiver

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 subscriber’s 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).

A Stinging Dissent on Arbitration

In an otherwise unremarkable case involving a homeowner's personal injury dispute, a Florida appeals court judge recently issued a remarkable dissent on the evils of mandatory binding arbitration. It opens with a somewhat sarcastic how-to guide for home manufacturers who want to deprive consumers of their judicial remedies and then launches into a critique of the state of the law. Here's an excerpt:

What we have begun to see is that virtually all consumer transactions, no matter the size or type, now contain an arbitration clause. And with every reinforcing decision, these clauses become ever more brazenly loaded to the detriment of the consumer -- who gets to be the arbitrator; when, where, how much it costs; what claims are excluded; what damages are excluded; what statutory remedies are excluded; what discovery is allowed; what notice provisions are required; what shortened statutes of limitation apply; what prerequisites even to the right to arbitrate are thrown up -- not to mention the fairness or accuracy of the decision itself. The drafters have every incentive to load these arbitration clauses with such onerous provisions in favor of the seller because the worst that ever happens, if the consumer has the resources to go to court, is that the offending provisions are severed. The state courts, demoralized by the United States Supreme Court's disapproval, have too often allowed these overreaching provisions to succeed. Most consumers can't read them, won't read them, don't understand them, don't understand their implication and can't afford counsel to help them out.

It is the role of the state courts to determine whether an arbitration provision is unconscionable and it is time that we take that responsibility seriously.

This dissent doesn't say anything that hasn't been said many times before, but it does say it forcefully--and at a time when Congress is beginning to take notice. Ultimately, the question isn't whether state courts take their role seriously, but whether federal law should stand in the way, and only Congress can decide that question. (Thanks to Paul Bland for the tip.)

Ninth Circuit Strikes Cingular Class Arb Waiver

Arbitration junkies will want to read today's Ninth Circuit opinion in Schroyer v. New Cingular Wireless Services, written by Judge Reinhardt. "In this case," the opinion begins, "we consider whether a class arbitration waiver in New Cingular Wireless Service Inc.'s standard contract for cellular phone services is unconscionable under California law, and whether the Federal Arbitration Act preempts a holding that the waiver is unenforceable." Building on the California Supreme Court's decision in Discover Bank, and the Ninth Circuit's prior decisions in Ingle, Ting, and Nagrampa, the court holds that the waiver is unconscionable, and, thus, unenforceable, and that the invalidation of the contract provision is not preempted by the FAA.

The Problem of Undisclosed Conflicts in Arbitration

The New York Times has a story titled When Arbitrators Are Their Own Judges containing another anecdote about the perils of arbitration. In arbitration with his brokerage, a retiree discovered four days before his scheduled hearing that one member of the three-member panel had previously represented the  brokerage, as had other lawyers in his firm. Arbitrators are trusted to disclose conflicts of interests on their own initiative, but that does not always happen. 

Arbitration Anecdote

Over at the excellent Credit Slips blog, Elizabeth Warren has an intriguing post titled "Arbitration First-Hand" about the efforts of an attorney in an arbitration to persuade the arbitrator to rule for his or her client when the creditor's attorney failed to show up or call in for the arbitration.

An Academic Who Opposes Amending the Federal Arbitration Act

Alan Scott Rau of the University of Texas at Austin School of Law argues against amending the FAA in his article "Federal Common Law and Arbitral Power, forthcoming in the University of Nevada Las Vegas Law Review.  Here's his abstract:     

In the face of an overwhelming preference - at least in
the academic community - for the reform of our "outdated" and
"skeletal" federal arbitration statute, I make a brief plea here
to leave the FAA completely alone.

The point is not simply that courts are more likely than
legislators to "get it right" (although I believe they are); nor
is it that the inevitable missteps and misjudgments of statutory
revision may be expected to be particularly resistant to change;
nor does my preference for legislative inaction rest entirely on
what is conjured up by the prospect of revisiting received
entitlements - the classic image of Pandora's Box.

I canvass a number of examples of both existing state
legislation, and current proposals for statutory amendment, all
of which seem to exemplify what we would have every reason to
expect from an ongoing process of legislative reform:

- a tendency to codify conceptualism,

- the unthinking aping of foreign models with no thought for
their congruence with American practice,

- the glittering temptation of sweeping systematization born of
overconfidence.

I end, finally, by turning to what will be the subject of a
second, longer article: The respective roles of courts and
arbitrators in deciding whether to refer a dispute to arbitration
is of course a recurring problem in any legal system, and the
treatment of the problem in American courts has exemplified the
common law at its best, able over time to get the job done well
enough, if roughly, and to forge sensible, durable,
commonly-accepted understandings.

You can find the article at http://ssrn.com/abstract=996481

Opt-out arbitration

I was surprised to receive my arbitration notice from Comcast containing an "opt-out" provision. It says I may opt-out by giving written notice or visiting their website within 30 days. They claim that my decision to opt-out will have no adverse effect on my relationship with Comcast. I wonder why they are doing this? It may be they want to be nice to consumers, or more likely, they want to have an enforceable clause and this makes it look like I have voluntarily agreed.

It also seems to be a very fair provision with respect to costs. It states that Comcast will advance all costs and that I am responsible for my share only f I lose and only "up to the extent awardedable in a judicial proceeding. I assume that means I do no have to pay the arbitrators fees, which is not a cost I would be responsible for in a judicial proceeding.

The notice also prohibits class actions, which may be all they really want.

Consumers Win 1.6% of Arbitrations

The Christian Science Monitor analyzed a year of data from the top ten biggest arbitrators and found that they decided in favor of the consumer only 1.6% of the time. Smaller arbitrators decided for the consumer 38% of the time.

[via Consumerist]

Comprehensive Arbitration Fairness Act to be Introduced in Congress Tomorrow

Tomorrow, Senator Russ Feingold (D-WI) and Representative Hank Johnson (D-GA) will introduce the Arbitration Fairness Act of 2007, comprehensive legislation to ban mandatory binding arbitration clauses in employment, consumer, franchise and civil rights disputes.  There'll be a press conference at the Capitol tomorrow at noon.  In addition to Sen. Feingold and Rep. Johnson, the speakers will be Joan Claybrook, the President of Public Citizen; Jordan Fogal, a consumer who was denied access to the courts because of a mandatory arbitration agreement in her contract to buy her home; other people harmed by mandatory arbitration agreements; and representatives from the American Association for Justice, Center for Responsible Lending, Consumer Federation of America, Homeowners Against Deficient Dwellings, Home Owners for Better Building, National Association of Consumer Advocates, National Consumer Law Center (on behalf of its low income clients), National Consumer Coalition for Nursing Home Reform, National Employment Lawyers Association and Public Justice.

NPR on Arbitration

From NPR's Marketplace, July 9, 2007:

The SEC is expected to sign off soon on a merger of the NASD and the NYSE. Critics fear combining the two self-regulatory groups will make it even harder for investors to get action on their complaints. Amy Scott reports.

Listen now.