Class action waivers hit a wall
the pendulum has begun swinging favorably toward consumers, with courts striking down class action waiver terms as unconscionable and refusing to compel arbitration.  The most recent example came last week in the 9th U.S. Circuit Court of Appeals, which overturned the standard class arbitration waiver in a New Cingular Wireless contract as unconscionable under California law and rejected the notion that the Federal Arbitration Act preempts the state law. Shroyer v. New Cingular Wireless, No. 06-55964.

The National Law Journal
Class action waivers hit a wall

Pamela A. MacLean / Staff reporter
August 27, 2007

 See the decision: United States Court of Appeals For The Ninth Circuit

Courts initially approved consumer contracts with mandatory arbitration terms that also required consumers to waive the right to pursue small claims as class actions.

But the pendulum has begun swinging favorably toward consumers, with courts striking down class action waiver terms as unconscionable and refusing to compel arbitration.

The most recent example came last week in the 9th U.S. Circuit Court of Appeals, which overturned the standard class arbitration waiver in a New Cingular Wireless contract as unconscionable under California law and rejected the notion that the Federal Arbitration Act preempts the state law. Shroyer v. New Cingular Wireless, No. 06-55964.

That ruling followed a July decision in the Washington state Supreme Court that held a class action waiver in arbitration for a cellular service contract substantively unconscionable. Scott v. Cingular Wireless, 161 P.3d 1000 (2007).

"Five years ago, these clauses were not prevalent," said Michael L. Kelly of Kirtland & Packard in El Segundo, Calif., who represented Kennith Shroyer and class plaintiffs in a dispute over Cingular services.

"But the industry discovered they could use them to ban class actions and began drafting them into agreements," he said.

New Cingular Wireless' attorney, Donald M. Falk of Chicago-based Mayer, Brown, Rowe & Maw's Palo Alto, Calif., office, declined to comment on the issue.

A 'definite trend'

Counts began finding that if a consumer, generally with a small individual claim, could not redress their claims because of the class waiver the contract was unconscionable.

"There has been a definite trend over the last couple of years of striking down class action bans," said Leslie A. Bailey, Oakland, Calif., attorney for Trial Lawyers for Public Justice. The companies know that if you can't bring a claim on a class action basis you can't bring it at all, so they inserted the bans into contracts, she said.

Now the California Supreme Court is considering a request by wireless carrier T-Mobile USA Inc. to throw out a class action challenging its early termination fees and force customers to submit to binding arbitration. Gatton v. T-Mobile USA Inc., 152 Cal. App. 4th 571 (2007). It seems like a long shot in light of the California court's decision two years ago laying out the test for unconscionability in Discover Bank v. Sup. Ct. of Los Angeles, 36 Cal. 4th 148 (2005). The 9th Circuit in Shroyer cited it.

A company spokeswoman declined to comment on the appeal or allow its lawyer to be interviewed.

Dissenting Washington Supreme Court Justice Barbara A. Madsen pointed out that both the 4th and 11th circuits have rejected arguments that arbitration clauses precluding class actions were unconscionable. Snowden v. Checkpoint Check Cashing, 290 F.3d 631 (4th Cir. 2002); Jenkins v. First Am. Cash Advance of Georgia, 400 F.3d 868 (11th Cir. 2005).

'Helpful' cases

"We were the minority view when we started," said Douglas S. Dunham of Crane Dunham in Seattle, who represented the consumers in the Washington case. "But then case after case began coming down across the country that was helpful," he said.

Bailey noted that Cingular's contract in the 9th Circuit case did not allow severability of the arbitration terms if the class waiver was struck down.

"It's clear that most corporations are not interested in arbitrating cases with their customers — their only goal is to ban class actions in order to avoid consumer protection laws," Bailey said.

Earlier this year, a Wisconsin appellate court stated that although a majority of state and federal courts have enforced class action waivers and found them not unconscionable, "we are, however, persuaded by what appears to be a growing minority of courts that a waiver of class-wide relief is a significant factor in invalidating an arbitration provision as unconscionable." Coady v. Cross Country Bank, 729 N.W.2d 732 (Wis. Ct. App. 2007).

In the past year, courts in 12 states as well as the 1st Circuit have issued rulings finding unconscionable those consumer contracts that mandate arbitration and require waiver of class action claims.

Click here: http://www.ca9.uscourts.gov/ca9/newopinions.nsf/D8524371EDD4FDAB8825733A004BEA0
C/$file/0655964.pdf?openelement