June 13, 2013

Massachusetts evades federal arbitration law

By Deborah J. La Fetra Senior Attorney

In 2011, the United States Supreme Court decided in AT&T Mobility v. Concepcion that courts could not invalidate arbitration contracts that require individual arbitration (as opposed to a class-wide proceeding) simply because a state’s public policy favors class actions.  In the two years since, state courts have largely been upholding arbitration contracts containing class-action waivers.  Yesterday, however, the Massachusetts Supreme Judicial Court adopted a new way to ignore Concepcion.

A little history:  In 2009, the Massachusetts court held in Feeney v. Dell Computer (Feeney I) that class action waivers in arbitration contracts violated the state’s public policy favoring class actions in “consumer protection” cases.  The case was down in the lower courts when Concepcion was decided and Dell asked the Supreme Judicial Court to take another look at the case, because Feeney I no longer appeared to be good law.  The high court agreed, PLF filed an amicus brief arguing that Feeney I was abrogated by Concepcion, and yesterday the court issued its decision in Feeney II.

Feeney II does acknowledge the obvious point that the rationale of Feeney I did not survive Concepcion.  So the court came up with a new rationale:

“where a court determines, following an individualized factual inquiry, that class proceedings are the only viable way for a consumer plaintiff to bring a claim against a defendant, as may be the case where the claims are complex, the damages are demonstrably small and the arbitration agreement does not feature the safeguards found in the Concepcion agreement, a court may still invalidate a class waiver.  In such circumstances, a class waiver may be declared invalid pursuant to the FAA’s savings clause not because the clause violates a public policy favoring class actions …, but because it violates the public policy against agreements that immunize business defendants from private civil liability for consumer injuries.”

Applying this new test, the court noted that the plaintiff’s claims were “complex,” requiring “advanced knowledge of the tax codes,” that the claimed damages were small, and that the arbitration provision did not contain any special pro-consumer provisions (as the contract in Concepcion did).  Therefore, the court held, as a practical matter, the only way to avoid immunizing the defendant for its actions would be to allow class proceedings.  And because the Supreme Court held in Stolt-Nielsen v. AnimalFeeds that courts cannot compel class arbitration, the Massachusetts invalidated the entire contract to permit the plaintiffs to file a class action in court.

This decision invites plaintiffs to phrase their claims in as complex manner as possible so as to avoid their contractual agreements to arbitrate consumer disputes.  But the creativity of the Massachusetts court may have only a short-term effect.  The United States Supreme Court will be deciding American Express Co. v. Italian Colors Restaurant in the next couple weeks, which addresses the issue of whether courts may invalidate arbitration contracts with class action waivers if a class proceeding is necessary to “effectively vindicate” federal statutory rights.  Depending on what the Court says, we may well see Feeney III winding its way through the Massachusetts courts.

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