The Lawletter Vol 35 No 2, January 21, 2011
Paul Ferrer, Senior Attorney, National Legal Research Group
Courts in a number of states have addressed the enforceability of an arbitration clause prohibiting one party to a contract from bringing a class action against the other party. For example, in Scott v. Cingular Wireless, 161 P.3d 1000 (Wash. 2007) (en banc), the representative plaintiffs had purchased cellular telephones and calling plans from Cingular. The contracts they had all signed were standard preprinted agreements that included a provision requiring mandatory arbitration. That arbitration provision, in turn, contained a clause prohibiting consolidation of cases, class actions, and class arbitration. The plaintiffs in Scott nevertheless filed a class action against Cingular, alleging that it had overcharged individual consumers between $1 and around $45 per month by unlawfully adding roaming and other hidden charges. Obviously, the ability to bring this suit as a class action was crucial because, as the plaintiffs alleged, while no individual consumer suffered a significant overcharge, Cingular unilaterally overcharged the public by very large sums of money in the aggregate.
The trial court granted Cingular's motion to compel individual arbitration, finding that although Cingular's contract was one of adhesion, it was neither procedurally nor substantively unconscionable. On appeal, the Washington Supreme Court, sitting en banc, reversed. Reviewing prior cases decided in other jurisdictions, the court found a clear split of authority on the issue. While a majority of courts addressing the question had previously found class action waivers in arbitration agreements to be enforceable, an increasing number of courts were beginning to find such waivers to be substantively unconscionable. See id. at 1004-05 (collecting cases). The Washington court sided with the latter group. The court reasoned that "class actions are a critical piece of the enforcement of consumer protection law" because, "[w]ithout class actions, many meritorious claims would never be brought." Id. at 1006. Further, "by mandating that claims be pursued on an individual basis, the class arbitration waiver undermines the legislature's intent [in enacting the Washington Consumer Protection Act] that individual consumers act as private attorneys general by dramatically decreasing the possibility that they will be able to bring meritorious suits." Id. Accordingly, the court concluded that the class action waiver clause was a substantively unconscionable violation of the State's public policy to protect consumer rights. Id.
Note that in a state that finds such provisions to be contrary to public policy, a party may not be able to avoid this result simply by also including in a contract containing a class-action waiver a choice-of-law clause providing that the contract is to be governed by the law of a state that does permit such waivers. In what was, in nearly all respects, a companion case to Scott, McKee v. AT&T Corp., 191 P.3d 845 (Wash. 2008) (en banc), the Washington Supreme Court concluded that "New York law, which allows waiver of class‑based relief, conflicts with our state's fundamental public policy to protect consumers through the availability of class action." Id. at 852. As a result, the court held that the New York choice-of-law provision in the defendant's consumer services agreement was also unenforceable as against Washington "public policy in support of the use of class action claims to pursue actions for small‑dollar damage claims under the Washington State Consumer Protection Act." Id. This line of authority presents a rare example of a situation in which a plaintiff may be able to avoid a clause requiring arbitration of a dispute between the parties.
