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Feeney v. Dell Inc.: A Critical Analysis

July 17th, 2009 Arbitrability, Class Action Arbitration, Class Action Waivers, Massachusetts Supreme Judicial Court 3 Comments » By Philip J. Loree Jr.

Introduction

In part I of a two-part post (here), we summarized the Supreme Judicial Court of Massachusetts’ decision in Feeney v. Dell Inc., ___ Mass. ___, slip op. (July 2, 2009).  The Court there refused to enforce an arbitration agreement in a consumer contract because it contained a class action waiver that the Court found violative of Massachusetts public policy favoring class actions under G.L., c. 93A, and which the Court found not to be severable from the remainder of the arbitration agreement.  The Court also refused to enforce on public policy grounds a choice-of-law clause providing that Texas law — which apparently permits class action waivers — would govern the parties’ agreement.  In this part II we discuss whether the decision comports with the Federal Arbitration Act.

The critical issue in Feeney was whether a state public policy against class action waivers was preempted by the Federal Arbitration Act, the preeminent purpose of which is to enforce according to their terms arbitration agreements falling within its scope.  With all due respect to the SJC, we think Feeney was a tough case and that the preemption issue was a close call.  The Court obviously worked hard to justify the outcome and drilled down on the preemption issue, but at the end of the day its arguments simply proved too much. 

Discussion

As discussed in yesterday’s post, each party agreed with the Dell entities that it would arbitrate its claims, and only its claims, against those entities.  Each party agreed that Texas law – which permits class action waivers – would govern.  The agreements were not unconscionable, entered into under duress or otherwise subject to a defense applicable to contracts generally. 

But the SJC refused to enforce the arbitration agreement, including the choice-of-law clause.  While it went to great lengths in one breath to say that class action arbitration under c. 93A would not offend Massachussets policy, in the next breath it tossed out not only the class action waiver and the choice-of-law clause, but the entire arbitration agreement.  Why?  Because the arbitration agreement and the class action waiver were apparently so inextricably intertwined that the Court could not “sever” the class action waiver from the arbitration agreement itself.  That is another way of saying that the Court, to excise the class action waiver, would have had to rewrite the arbitration agreement to impose class action arbitration on the parties.  And if the Court rewrote the parties’ agreement to permit class arbitration it would have violated the Federal Arbitration Act because it would have imposed on the parties an arbitration procedure to which they never expressly or impliedly agreed.  So instead, the Court said that it would not enforce the arbitration agreement at all, which also violated the Federal Arbitration Act.

The flip side of the Court’s severability analysis was this:  If the Court said the arbitration agreement was severable from the class action waiver, then, under the doctrine of severability the question whether the class action waiver was enforceable would have been for the arbitrators to decide.  The arbitrators had, in fact, already decided that it was enforceable, and, given the Texas choice-of-law provision, the Court could hardly have vacated the arbitrators’ award on excess of powers grounds, or any other ground.  The arbitrators did nothing but enforce all aspects of the parties’ contract, which is exactly what arbitrators are supposed to do.  Had the parties opted to apply Massachusetts law to their contract, then there might have been some basis for the court to vacate the award and remand the matter to a new arbitration panel, provided there was no colorable basis for the award under Massachusetts law.  But that is not what the parties agreed and that is not what happened. 

The analysis and outcome here should give us pause.  The Court was correct when it said that principles of state contract law that “‘arose to govern issues concerning the validity, revocability and enforceability of contracts generally .  .  .  ” are applicable to arbitration agreements under the FAA.  (internal quotation and citation omitted)  Those are the basic state law principles that apply to all contracts.  They are not displaced by the FAA because the purpose of the FAA is to put arbitration agreements on the same footing as ordinary contracts. 

In an exceedingly broad sense the Court was probably correct when it said “the tenet that a contract may be invalidated on grounds that it violates public policy” is a state law principle that is applicable to contracts generally.  But to the extent that states have public policy defenses that apply to contracts across the board, those defenses are usually reflected in the law of contracts.  For example, states generally have a public policy in favor of freedom of contract, but that policy is reflected in state law prohibiting enforcement of contracts entered into under duress or against a party who lacks the capacity to contract.  So if the Dell entities had entered into an arbitration agreement with a minor, or if a representative of Dell procured plaintiffs’ assent to the arbitration agreements by pointing guns at the plaintiffs’ heads, then surely the arbitration agreements would have been unenforceable for public policy reasons reflected in state law applicable to contracts generally. 

But that is as far as it goes.  Typically, a contract is not enforceable on public policy grounds because state law prohibits enforcement of a particular type of contract.  Gambling contracts, contracts that require the performance of an illegal act, and choice of law provisions that purport to require the application of laws that contravene a fundamental public policy of the forum state are a few examples. 

These “public policy” based rules of contract enforcement do not, by definition, apply to contracts generally.  The state public policy prohibition in Feeny  is no exception.  It targets a specialized subset of contracts:  those waiving the class action procedure provided by G.L., c. 93A in both an arbitral or judicial forum.  As a practical matter that subset of contracts consists almost entirely of arbitration clauses.  And while the Court tries to sidestep this fact by pointing out that any contract that purported to waive a party’s resort to class action procedures would violate the policy — even if the parties had not agreed to arbitrate –such contracts, if they exist at all, are, as far as we know, rare indeed.  But in fairness to the SJC we should give the Court the benefit of the doubt and assume that such contracts are common.  Yet even then the public policy prohibition does not apply to contracts generally. 

If readers have lingering doubts consider this.  We do not think anyone versed in Supreme Court precedent concerning FAA preemption of state law would seriously argue that Massachusetts (or any other state) could refuse to enforce an FAA-governed agreement to arbitrate solely on the ground that it had a state public policy against the enforcement of arbitration agreements.  But the Court’s reasoning – that public policy is a defense to the enforcement of contracts generally without regard to what the public policy prohibits – would squarely support such a result.   

At the risk of gilding the lily, there is yet another reason why the Court’s analysis missed the mark.  The parties agreed that Texas law would govern their arbitration agreement and the SJC acknowledged that Texas law “likely” permitted class action waivers.  But the Court refused to enforce that part of the parties’ agreement, not because state law principles applicable to contracts generally required non-enforcement, but because state conflict-of-law rules (which by definition are not applicable to contracts generally) allow the forum state not to enforce the parties’ choice of law on public policy grounds. 

We certainly appreciate that the Court had nothing but good intentions — it wanted to protect an important state public policy favoring class litigation and arbitration in cases governed by c. 93A.  There is nothing wrong with that policy, and it may well be a good one.  But, as important as that policy may be to Massachusetts, and as wise as that policy may be, we believe the federal substantive law of arbitrability trumped it in this case.

         

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3 Responses to “Feeney v. Dell Inc.: A Critical Analysis”

  1. If I understand you correctly, your argument is premised on the proposition that common law courts cannot invalidate contracts on public policy grounds except to the extent that those policies are embodied in pre-existing contract doctrine or positive law of another sort. Thus, for example, you’d concede that contracts under duress are unenforceable (they violate pre-existing contract doctrine that has long been understood to override the freedom of contract) and that illegal contracts are unenforceable (because they violate public policy expressly stated in legislation, regulations, and the like). But a court cannot, you are contending, override the freedom of contract on purely “public policy” grounds. That has never been the case, and in fact these are not the first time contractual agreements to arbitrate have been struck down on public policy grounds derived by courts from policies supporting existing law.

    The Restatement (Second) of Contracts in Section 178 makes clear that as a matter of contract law provisions can be unenforceable for public policy grounds apart from contravention of statute:

    A promise or other term of an agreement is unenforceable on grounds of public policy if legislation provides that it is unenforceable or the interest in its enforcement is clearly outweighed in the circumstances by a public policy against the enforcement of such terms.

    As stated in 5 Williston on Contracts § 12:1 (4th ed.), the Restatement’s articulation of the rule reflects the reality of the common law:

    Common law, as distinguished from statutory development, forbids the actual performance of certain acts opposed to social welfare and proscribes various types of executory agreements. Illegal bargains have been classified both by the common law and in statutory enactments as those opposed to positive law, those which are contrary to morality and those which offend public policy. The Restatement of Contracts (Second) eschews the characterization of terms or promises as illegal, preferring to focus on the question whether a particular term or promise is unenforceable on grounds of public policy rather than on the question whether a particular bargain is illegal . . . . Id. (footnote omitted)

    Thus, while “whenever the performance of an act would be either a crime or a tort, a promise or agreement to do that act would also be illegal and void or unenforceable, . . . many acts which are themselves neither criminal nor tortious may not be made the subject of a contract . . . .” Id.

    Courts also frequently will strain to fit decisions that are purely matters of public policy within existing categories of contract doctrine in order to avoid the more controversial move of entering explicitly into areas of public policy. No doubt this is in no small part the result of sound lawyering strategy – why confront charges of asking a court to tread on the domain of the legislature if you can convince the court to reach the right result applying the doctrine of consideration? That’s what the result in Harris v. Blockbuster, Inc. (N.D. Tex. April 15, 2009) looks like to me. As I discussed in Part 2 of my piece, holding that a contract is “illusory” because it can be amended unilaterally without notice is a strained extension of the consideration doctrine. The contract in Harris had not been amended. Plainly, both the plaintiff and the defendant’s promises, without amendment, were supported by consideration. But, given the fact the mandatory arbitration and class waiver provision effectively left the consumer without a remedy for breach, would I argue that the threat of an amendment that under the laws of many states would be deemed to be unsupported without consideration made the original contract illusory? You betcha!

    But I do like to understand the factual bases for a court’s decision that a given provision is unenforceable; it helps a lot to understand what really drove a court’s decision apart from an unpredictable extension of doctrine originating in times that did not share our values. (And therefore is helpful in providing advice and in drafting enforceable contracts.) Thus, I think the decisions in the last month by the New Mexico Supreme Court and the Massachusetts Supreme Judicial Court are a refreshing expression of what’s really at stake in the subject we are discussing.

    And I can’t escape the impression that in consumer contracts arbitration is often if not usually used not to serve its legitimate purposes – providing an efficient means of resolving disputes – but instead is being used to shield sellers of goods and services for their breaches of contract.

    Here are a few relevant cases I found in connection specifically with arbitration pretty quickly: Exxon Shipping Co. V. Exxon Seamen’s Union, 11 F.3d 1189, 1196 (3d. Cir. 1993)(striking down arbitration award reinstating an able-minded seaman on an oil tanker who was found to be highly intoxicated while on duty as against public policy expressed in, among other things, federal environmental laws, and stating expressly that the result was appropriate even though the award ordered no conduct that violated any statute, regulation, or other manifestation of positive law.); Alexander v. Anthony International, L.P., 341 F.3d 256, 270, (3d Cir. 2003)( refusing to enforce agreement to arbitrate requiring 30-day notice, restricting remedies and attorney’s fees, and requirements regarding arbitrator’s fees and expenses as “one sided and unreasonable.”).

    Finally, invalidating contracts on grounds of “unconscionability” is often a judicial way station on the way from invalidating unacceptable terms on doctrinal grounds and explicit confrontation with the public policy reasons those terms are unacceptable. Courts did exactly that – invalidating consumer agreements on grounds of “unconscionability” in anticipation of the original wave of consumer protection legislation back in the 1950’s and 1960’s. And that has happened too in the particular subject we are discussing — mandatory arbitration provisions and class waivers. Scott v. Cingular Wireless, 160 Wash.2d 843, 161 P.3d 1000 (2000)(refusing to enforce mandatory arbitration clause and class waiver on grounds of unconscionability); Lowden v. T–Mobile USA, Inc., 512 F.3d 1213, 1218 (9th Cir. 2007)(same).

    There’s nothing wrong with courts doing justice in individual cases as common law courts have always done. But, of course, legislation is a broader and even more effective remedy for unacceptable conduct. The real question, then, is whether mandatory arbitration clauses that foreclose class actions are acceptable. If so, there’s no legitimate complaint about court’s so finding, but there remains great reason for legislatures to step in.

    Finally, your suggestion that these cases are analogous to a case that invalidates a requirement merely to arbitrate isn’t very persuasive to me. Plainly, given the FAA, Congress has preempted that question and state courts cannot constitutionally hold arbitration itself contrary to state public policy. But what reason is there to believe Congress intended to prevent state courts from invalidating arbitration agreements that deprive consumers of effective remedies for breach? Has Congress preserved the state right to invalidate those provisions on grounds of “unconscionability”? On grounds of a failure of consideration? I can’t believe you would support either one of those arguments. There’s no reasoned basis for distinguishing the reasoning of Fiser and Harris from those arguments.

  2. Philip J. Loree Jr. says:

    Peter,

    Many thanks for your comment. I wanted to let our readers know that the two of us have decided to feature your comment as a guest post to which I shall respond.

    Congratulations once again on the excellent, two part guest post you did for Disputing! (Available here: http://www.karlbayer.com/blog/?p=3901 (part I) and here: http://www.karlbayer.com/blog/?p=3940 (part II).)

    Phil Loree Jr.

  3. […] Peter recently wrote a two-part guest post for Disputing concerning class action waivers and mandatory arbitration agreements in consumer, online arbitration agreements, and whether courts should enforce such agreements.  (Available here and here)  That guest post discussed, among other things, the Massachussets Supreme Judicial Court’s decision in Feeney v. Dell Inc., ___ Mass. ___, slip op. (July 2, 2009),  which we had covered in two earlier posts, here and here.    […]