Introduction
The validity of class action waivers in arbitration agreements is a controversial subject at the moment. There is an obvious tension between the pro-enforcement policies of the Federal Arbitration Act and competing state and federal policies favoring class action arbitration or litigation as a vehicle for vindicating consumer rights. The United States Supreme Court may provide some hint of where it stands on this issue when it decides the Stolt-Nielsen case (blogged here and here), which raises the related issue whether imposing class action arbitration is consistent with the Federal Arbitration Act when the parties’ contract is silent on that score. And the Supreme Court may directly address the issue of whether class action waivers comport with federal policy if it decides to grant certiorari in the American Express Merchants’ Litigation (blogged here). Today we examine a case in which the question was whether a state policy in favor of consumer class actions could trump the enforcement of an arbitration agreement containing a class-action waiver.
On July 2, 2009, in Feeney v. Dell Inc., ___ Mass. ___, slip op. (July 2, 2009), the Massachusetts Supreme Judicial Court (the “SJC”) ruled that a class action waiver contained in a consumer arbitration agreement violated a fundamental Massachusetts public policy favoring class actions, even though the parties had agreed that Texas law, which allows class action waivers, would govern their agreement. This violation of Massachusetts public policy, said the Court, rendered the arbitration agreement unenforceable because the class action waiver was unenforceable and could not be severed from the remainder of the arbitration agreement. But, in an interesting turn of events, the Court dismissed the consumers’ claims with leave to replead, because they failed to state a claim under Mass. G.L., c. 93A, the applicable consumer protection law.
The case is somewhat different from other decisions voiding class action waivers because the agreement was voided on state public policy grounds, rather than on state unconscionability grounds, and because the court refused to enforce not only the class action waiver but also a choice-of-law clause indicating the parties’ desire that Texas, not Massachusetts, law would govern the class action waiver issue. The case gives rise to serious questions concerning federal preemption of Massachusetts state policy.
In this part I of a two-part post, we summarize the Feeny case. In part II, which will follow tomorrow or the next day, we shall provide our critical analysis. Because the publicly available copy of the case does not feature official pagination, we have eliminated jump cites, but provide after quotes pertinent information about internal citations, quotations and the like.
Facts
Dell Catalog Sales Limited Partnership (“Dell Catalog”) and Dell Marketing Limited Partnership (“Dell Marketing”), wholly-owned subsidiaries of Dell Inc. (“Dell”), sold computers and related products to businesses and consumers and, in connection with those sales, sold hardware service contracts. BancTec, Inc. (“BancTec”), QualxServe LLC or Dell Marketing provided services under those contracts.
The two plaintiffs purchased Dell computer hardware from Dell Catalog and Dell Marketing, and service contracts administered by either Dell Marketing or BancTec. Dell Catalog and Dell Marketing collected Massachusetts sales taxes in the amount of $13.65 from one plaintiff and $215.55 from the other.
The “Terms and Conditions of Sale” applicable to each sales contract contained an arbitration agreement requiring that claims against the Dell entities “arising from or relating to this Agreement” be resolved “exclusively and finally” through arbitration. The arbitration agreement also provided that arbitration “will be limited solely to the dispute or controversy between customer and [the] Dell [entities].” This provision effectively barred buyers with claims against the Dell entities from participating in class action arbitration or litigation. The Terms and Conditions of Sale also provided that “[t]his agreement and any sales thereunder shall be governed by the laws of the state of Texas, without regard to conflicts of laws rules.”
The plaintiffs commenced a putative class action against Dell Computer Corporation (“Dell Computer”). The complaint alleged that Dell Computer had a “deliberate and systematic practice” of collecting from plaintiffs and other Massachusetts residents money falsely described as a lawful sales tax on the service contracts, and that this practice violated Mass. G.L., c. 93A and related implementing regulations. The complaint alleged that the plaintiffs and other Massachusetts residents had been damaged because Dell Computer caused them to pay a “tax” that had not been imposed by Massachusetts taxing authorities. The plaintiffs sought class certification under c. 93A, § 9(2), which expressly authorizes class actions.
Dell Computer moved to stay the litigation and compel arbitration under Federal Arbitration Act Sections 3 and 4. Plaintiffs opposed the motion, claiming that the unilateral bar on class actions was unconscionable. The trial court disagreed and compelled arbitration.
The plaintiffs proceeded to arbitration under protest. An arbitrator from the National Arbitration Forum denied their request for class certification, conducted a consolidated hearing of plaintiffs’ claims, and rendered an award in favor of defendants.
The plaintiffs moved to vacate the award and defendants cross-moved to confirm. The trial court denied the motion to vacate and granted the motion to confirm. The SJC agreed to hear the case on direct review.
The SJC’s Decision
The SJC reversed the trial court’s decision and held that the class action waiver violated Massachusetts public policy. The Court found that all three branches of Massachusetts state government had expressed a public policy favoring class actions under G.L., c. 93A. First, the legislature expressly provided for such class actions under c. 93A, and the legislative history of c. 93A indicated that the statute’s express provision for class actions was designed to allow plaintiffs to vindicate small-dollar claims that might otherwise not be pursued for economic reasons. Second, the SJC had previously recognized that c. 93A’s provision for class actions was designed to provide an “effective private remedy” for small-dollar consumer claims, and that the requirements for class certification were less onerous than those applicable to ordinary class actions under Massachusetts’ civil procedure code. Third, the Court noted that the Commonwealth’s attorney general had filed an amicus brief asserting that class action waivers violated public policy in favor of class actions.
The Court said the right to class action relief was particularly important here, where plaintiffs’ claims were unlikely to be pursued in the absence of such relief, and noted two “additional reasons” why the class action waiver contravened Massachusetts public policy:
First, it undermines the public interest in deterring wrongdoing. Second, the loss of an individual consumer’s right to bring a class action negatively affects the rights of those unnamed class members on whose behalf the class action would proceed. In this sense, the right to participate in a class action under G.L., c. 93A is a public – not merely a private – right; it protects the rights of consumers as a whole.
(citations and parenthetical quotations omitted).
The Court emphasized that its decision was not predicated on the particular forum chosen – arbitration versus court – but “on a determination that in the circumstances of a case such as this (small value claims sought under our consumer protection statute, G.L., c. 93A), a clause effectively prohibiting class proceedings in any forum violates the public policy of the Commonwealth.” But the Court, noting that the “contracts at issue here do not contain a severability or savings clause,” held that the class action waiver could not be severed from the arbitration agreement in which it was contained, and therefore found that the entire arbitration agreement was unenforceable. The Court offered little explanation for this part of its decision, saying that it “did not rest solely on the absence of a savings clause,” and noting that the class action waiver itself was “part of the arbitration provision” and “central to the mechanism for resolving the dispute between the parties.” (citations and quotations omitted). The Court’s severability analysis was at odds with its suggestion that its decision was forum neutral.
The Court also had to deal with the parties’ choice-of-law clause, which required the application of Texas law to the class action waiver. Since Texas law would likely have required the class action waiver to be enforced, and since enforcement of the Texas choice-of-law clause would have violated Massachussets public policy, the Court refused to enforce the clause, invoking the familiar state conflict-of-law rule allowing courts not to enforce choice-of-law clauses where doing so would violate a fundamental public policy of the forum state.
Finally, the Court addressed the question whether the FAA preempted a defense to enforcement of the arbitration agreement based on Massachusetts public policy. The Court began its preemption analysis by noting that it “may apply generally applicable State-law contract defenses to . . . an arbitration agreement and may invalidate an arbitration agreement on such grounds without contravening the FAA.” (citations omitted) It went on to say “[b]ecause the tenet that a contract may be invalidated on grounds that it violates public policy is a principle of State contract law that ‘arose to govern issues concerning the validity, revocability and enforceability of contracts generally,’ our conclusion that the class action prohibition is unenforceable on those grounds is not preempted by the FAA.” (citations omitted; quoting Perry v. Thomas, 482 U.S. 483, 492-93 n.9 (1987)):
While the defendants are correct that the FAA prohibits courts from ‘singling out arbitration provisions for suspect status,’ our conclusion does not selectively target arbitration. The problem with Dell’s terms is not that they compel arbitration but that, by mandating individual arbitration, they compel a procedure for resolving claims that effectively eviscerates the c. 93A right to participate in a class action. Simply put, a prohibition on class actions ‘has nothing to do with a valid agreement to arbitrate.’ It is the effective ban on class actions – not the mandating of arbitration – that is repugnant to the public policy of the Commonwealth. Our decision is not, as the defendants argue, ‘tantamount to a policy against arbitration,’ but rather the logical corollary of our fundamental public policy in favor of preserving the ability of consumers and businesses to vindicate their rights under c. 93A.
(citations omitted; parenthetical quotations omitted)
In part II of this post, we shall discuss whether the Court’s decision is consistent with the Federal Arbitration Act, so stay tuned. . . .
Tags: American Express Merchants' Litigation, c. 93A, Class Action Waiver, Class Actions, Class Arbitrations, Consumer Arbitration, Consumer Protection, Federal Arbitration Act, Federal Arbitration Act Section 2, Federal Arbitration Act Section 3, Federal Arbitration Act Section 4, Federal Preemption, Feeney v. Dell Inc., Feeny v. Dell Inc., Massachusetts Supreme Judicial Court, Perry v. Thomas, Public Policy, Southland, state law
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