Class Arbitration Waiver Provisions Under Attack In Third Circuit Decision

Roger A. Lewis and Jonathan H. Claydon


March 9, 2009

One of the most contentious issues in consumer class action litigation in recent years has been the enforceability of class action waiver provisions in mandatory arbitration clauses (hereinafter, "class arbitration waivers").  These clauses in consumer contracts restrict consumers' rights to pursue complaints through the courts, and require potential plaintiffs to forgo the leverage provided by the class action procedure.  Not surprisingly, plaintiffs' attorneys have sought to invalidate these contractual provisions, and, although many courts have confronted this issue, no consensus has as of yet been reached.  A recent decision by the Third Circuit, however, indicates that the pendulum may be swinging toward the consumer. 

On February 24, 2009, the Third Circuit Court of Appeals issued its decision in a case brought against American Express Company by G.R. Homa, a citizen of New Jersey alleging that American Express had misrepresented the terms of the cash rewards program applicable to his credit card.  Homa v. American Express Co., No. 07-2921, 2009 U.S. App. Lexis 3688 (3d Circ. Feb. 24, 2009).  Upon issuance of Homa's American Express card by American Express Centurion Bank, a Utah-based bank, a document entitled Agreement Between American Express Credit Cardmember and American Express Centurion Bank (hereinafter, the "Agreement") was mailed to Homa.  The Agreement required that all claims between the parties be submitted to arbitration, and specifically set forth that all claims "be arbitrated on an individual basis … [with] no right or authority for any Claims to be arbitrated [as] a class action."  Significantly, the Agreement also included a choice of law provision providing that disputes would be governed by Utah law, a state which expressly allows class-arbitration waivers in consumer credit agreements. 

The Agreement's selection of Utah law is significant because although the validity of arbitration provisions in general was established by federal law pursuant to the Federal Arbitration Act, the United States Supreme Court has instructed that courts must look first to the relevant state law of contracts to determine whether a particular arbitration agreement is valid.  Simply put, state law contractual defenses that are generally applicable to all contracts, e.g., fraud, duress, unconscionability, may be applied to invalidate class arbitration waiver provisions.  Accordingly, by virtue of selecting the application of Utah law by and through the Agreement, American Express Centurion Bank sought to ensure that the class arbitration waiver in the Agreement would be valid and binding. 

Ultimately, however, the contractual protections built into the Agreement did not withstand the Third Circuit's hostility to the class arbitration waiver.  Analyzing the Agreement's choice of Utah law, the court determined that the law of New Jersey – the plaintiff's home state – would not allow the Agreement's selection of Utah law to be enforced.  Specifically, the court held that the class arbitration waiver at issue violated the state of New Jersey's fundamental public policy of allowing consumers to effectively pursue their statutory rights under consumer protection laws by use of the class action vehicle where the dispute involves such a small amount of damages so as to preclude relief if the dispute were to be decided individually – i.e. where no economically rational justification would exist to expend the amounts necessary to vindicate such a small claim.  Consequently, the court ruled that New Jersey law would apply, and that the class arbitration waiver would be unconscionable and invalid under New Jersey law should it be shown upon remand to the lower court that the claims at issue were of such low value as to effectively preclude relief if decided individually. 

Although the Third Circuit's decision was fairly unique to the extent that the court seemed to stretch to find a basis, or applicable state law, upon which to attack the Agreement, other courts have similarly struck down class arbitration waivers.  For example, the California Supreme Court has stated that a class arbitration waiver in a credit card agreement would be unenforceable under the California law of unconscionability if it precluded class treatment of small consumer claims.  See Discover Card v. Superior Court, 113 P.3d 1100 (Cal. 2005).  The Ninth Circuit Court of Appeals recently followed this decision and upheld a lower court's refusal to enforce an arbitration provision because it was "found in a consumer contract of adhesion in a setting in which disputes between the contracting parties predictably involve small amounts of damages and . . . it is alleged that the party with the superior bargaining power has carried out a scheme to deliberately cheat large numbers of consumers out of individually small sums of money."  Davis v. Chase Bank, USA, N.A., No. 07-55561, 2008 U.S. App. Lexis 23014 (9th Cir. Nov. 3, 2008).  While there remain many jurisdictions that view class arbitration waivers as valid contractual provisions, it appears that a true split among the courts of the United States is arising on this issue.

RISK PREVENTION MEASURES

The lesson to take away, therefore, is one of caution.  Because of the changing legal landscape on these issues, litigation results are often unpredictable.  As a primary protection, it is advisable to include a nonseverability clause in the arbitration provision stating that the arbitration provision cannot be enforced if the class arbitration waiver is invalidated.  Most companies do not want to find themselves in "class" arbitration, which has all or more of the usual risks of class litigation but without the protection of a meaningful right of appeal.  Instead, most prefer to face class claims with the protections of the court system in place. 

Prior to the dispute or litigation stage, however, there are many steps that companies can take to maximize the likelihood that arbitration and class action waivers will be enforced.  Indeed, making sure that the contract containing the class arbitration waiver is presented to the consumer in as fair a manner as possible, as well as ensuring that the arbitration procedures are fair – or even slightly tilted in favor of the consumer – are advisable practices.  For instance, Goldberg Kohn was recently successful in enforcing a class arbitration waiver and compelling a consumer to arbitrate on an individual basis on behalf of a client that had taken substantial steps to ensure that the consumer knowingly agreed to the class arbitration waiver.  See Pivoris v. TCF Fin. Corp., No. 07 C 2673, 2007 U.S. Dist. Lexis 90562 (N.D. Ill. Dec. 7, 2007) (applying Illinois law of contract).  The contract contained large, capitalized and bolded type face informing the consumer of the class arbitration waiver and required the consumer both to sign the agreement and to separately initial the key language.  The contract also entitled the consumer to reject the arbitration provision by mailing a written rejection notice within thirty days, without any effect on any other provision of the contract.  Further, with regard to the actual arbitration procedures, the contract provided that the company would bear all fees charged by the arbitrator up to $2,500 and would consider reasonable requests to bear additional fees that the arbitrator might charge.  The arbitration provision explicitly provided that the company would not seek to recover from the consumer any fees or costs paid by the company for the arbitration, although it authorized the arbitrator to award all remedies – including attorneys' fees – permitted by the substantive law that would apply should the action have been brought in court.  This class arbitration waiver withstood the standards of Illinois law, which generally provides that a consumer must be given a meaningful opportunity to reject the contractual term, and must not be too limited in the ability to obtain a remedy for the particular claim in an efficient and cost-effective manner. 

While the results of litigation may be unpredictable from a state to state and forum to forum basis, ensuring that your consumer contracts contain similar protections enhances the likelihood that your company will be able to enforce an arbitration provision and be insulated from the potential cost and expense of defending a class action.