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March 04, 2009

Third Circuit Invalidates Arbitral Class Action Waiver

Last summer I published a commentary in the Mealey’s Class Action Report entitled Unconscionable Consumer Class Action Waivers and the Federal Arbitration Act. (located on my website, www.lexmarc.us/Documents/Consumer_Class_Action_Waivers.pdf) The article reported on the trend of federal cases to find the clauses requiring all claims to be resolved in individual, non-class arbitration are unconscionable under state law, and that non-enforcement of arbitration agreements to the extent of refusing to give effect to the class action waiver does not violate the Federal Arbitration Act.
That commentary was critical
of a decision of the United States Court of Appeals for the Third Circuit, Gay v. Creditinform, 511 F.3d 369 (3d Cir. 2007).
The Court in Gay had stated, in dicta intended to have controlling impact, that the FAA pre-empts, and thus prevents enforcement of, state law principles of unconscionability in regard to arbitration clause class action waivers. The Gay panel reasoned that state law principles that had evolved to strike down such waivers were particular to arbitration agreements, and thus violated the command of Section 2 of the FAA that arbitration agreements may be denied enforcement only on grounds for denying enforcement to contracts generally. I wrote that the Gay panel had misconstrued Supreme Court precedents concerning Section 2, which essentially hold that Section 2 prevents a state from refusing to enforce arbitration clauses based on state law principles hostile to arbitration – because the FAA was enacted precisely to pre-empting such state laws. The class action waiver may operate to immunize corporations from liability for unlawful conduct, whether in arbitration or in court, because individual claims cannot economically be prosecuted. That state law principles involved were, in my view, that coercive covenants not to sue violate public policy, and whereas these principles are not specifically concerned with arbitration agreements, the FAA does not pre-empt them.
Last month, a different Third Circuit panel in Homa v. American Express Co., 2009 U.S. App. LEXIS 3688 (3d Cir. Feb. 24, 2009), agreed. The Homa Court held that the class action waiver in the arbitration clause of a consumer credit card agreement was unconscionable under New Jersey law, and that the FAA does not prevent the application of such law. The Court reasoned that New Jersey law views the arbitral class action waiver as unconscionable not because the agreement requires an arbitral forum, but rather because the agreement deprives the consumer of the class-action mechanism in any forum. Without saying directly that Gay was decided incorrectly, the Homa panel is critical of Gay and in effect rejects Gay’s FAA pre-emption analysis. The Homa Court cites as the correct approach – as did my Summer 2008 article – the Ninth Circuit’s decision in Lowden v. T-Mobile USA, 512 F.3d 1213, 1221 (9th Cir. 2008) (holding that the application to an arbitration provision of a general ban on class-action waivers was not preempted by the FAA because that ban “appl[ies] equally to a contract that permits only individual, not aggregate, litigation in court.”).