Last week I posted about a class action lawsuit against Overstock.com that was dismissed because of a binding mandatory arbitration clause that prohibited class action lawsuits. I mentioned that there is a split of authority regarding whether or not such clauses are unconscionable. Yesterday, the Ninth Circuit weighed in again, issuing an opinion finding such a clause unenforceable under Washington state law. See Lowden v. T-Mobile USA, Inc., No. 06-35395 __ F.3d __ , 2008 WL 170279 (9th Cir. Jan . 22, 2008), as reported by Reuters. T-Mobile's arbitration clause prohibited class action lawsuits and barred punitive damages, but required T-Mobile to pay most or all of the administrative costs for small claims.
Washington Precedent on Unconscionability - The Ninth Circuit relied heavily on a recent Washington Supreme Court decision, Scott v. Cingular Wireless, 161 P.3d 1000 (Wash. 2007). The Scott court had found that a similar class action waiver in a Cingular arbitration agreement was unconscionable, in part because the state "'relied on . . . private class action to correct deceptive or unfair industry practices.'" Moreover, even if Cingular paid the costs of arbitration, this would not make it worth the "'time, energy, and stress to pursue such individually small claims.'" Thus, "'without class actions, consumers would have far less ability to vindicate the C[onsumer] P[rotection] A[ct].'"
Preemption Under the FAA – The T-Mobile court also examined whether the Federal Arbitration Act preempted the determination that the class action waiver was unconscionable. In another recent case, Shroyer v. New Cingular Wireless Servs., Inc., 498 F.3d 976 (2007), the Ninth Circuit held that a mandatory arbitration clause with a class action waiver was unconscionable under California law, and also that the FAA did not preempt California law on the issue. Relying on the Shroyer decision, the T-Mobile court found that the FAA similarly did not preempt Washington law.
Prevalence of Mandatory Arbitration Clauses in Credit Card Agreements –Justinian Lane posted yesterday on the Tort Deform blog on the topic of "Why are mandatory arbitration clauses so prevalent in consumer credit card agreements?" He examines the argument of tort reformers that companies favor arbitration because it is cheaper than court proceedings. After comparing the filing fees of courts and the National Arbitration Foundation, he finds that arbitration costs are higher. He concludes that, rather than the stated reason of reducing court costs, the real reason that creditors favor mandatory arbitration is to avoid class actions and thereby cut back on class action lawsuits filed against them under consumer protection statutes.
While I agree that creditors prefer arbitration clauses in order to avoid class actions, I don't agree with his analysis of the relative overall costs. He suggests that, even factoring in attorneys' fees, it would be cheaper to get a default judgment in court. For example, he assumes that a lawyer can draft a complaint in less than half an hour and get a default judgment in court in 15 to 60 minutes. I don't know any lawyer who can attend a court hearing, wait for his case to be called, get a default judgment, and complete any relevant paperwork in that amount of time, especially factoring in travel time. By contrast, if a defendant defaults in an arbitration proceeding, an appearance before the arbitration panel will probably be unnecessary, along with the accompanying travel time and in-court waiting time. It may be that default judgments are cheaper in arbitration because of filing fees and hearing fees, but the calculation is not as simple as Lane suggests. A 2007 report from Public Citizen provides a more detailed look at some of the relevant costs.
Split Authority – For anyone interested in specifically which jurisdictions permit class action waivers, the Scott court provided a partial list. Courts finding class action waivers in arbitration clauses enforceable include: Jenkins v. First Am. Cash Advance of Ga., 400 F.3d 868 (11th Cir. 2005); Iberia Credit Bureau, Inc. v. Cingular Wireless L.L.C., 379 F.3d 159, 174 (5th Cir. 2004); Snowden v. Checkpoint Check Cashing, 290 F.3d 631, 638-39 (4th Cir. 2002); Dale v. Comcast Corp., 453 F. Supp. 2d 1367, 1377 (D. Ga. 2006) (applying Georgia law); Tillman v. Commercial Credit Loans, Inc., 177 N.C. App. 568, 629 S.E.2d 865, 875 (2006); AutoNation USA Corp. v. Leroy, 105 S.W.3d 190, 199-200 (Tex. App. 2003).
Courts finding class action waivers in arbitration clauses substantively unconscionable include, for example: Ting v. AT & T, 319 F.3d 1126, 1150 (9th Cir.2003); Skirchak v. Dynamics Research Corp., 432 F. Supp. 2d 175, 181 (D. Mass. 2006); Edwards v. Blockbuster Inc., 400 F. Supp. 2d 1305, 1309 (E.D. Okla. 2005); Luna v. Household Fin. Corp. III, 236 F. Supp. 2d 1166, 1178 (W.D. Wash. 2002); Lozada v. Dale Baker Oldsmobile, Inc., 91 F.Supp.2d 1087, 1105 (W.D. Mich. 2000); Leonard v. Terminix Int'l Co., L.P., 854 So.2d 529, 538 (Ala. 2002); Discover Bank v. Superior Court of Los Angeles, 113 P.3d 1100 (Cal. 2005); Powertel, Inc. v. Bexley, 743 So.2d 570, 576 (Fla. Dist. Ct. App. 1999); Kinkel v. Cingular Wireless, L.L.C., 857 N.E.2d 250 (Ill. 2006); Whitney v. Alltel Commc'ns, Inc., 173 S.W.3d 300, 314 (Mo. Ct. App. 2005); Muhammad v. County Bank of Rehoboth Beach, 912 A.2d 88 (2006); Schwartz v. Alltel Corp., 2006-Ohio-3353 ¶ 36, 2006 WL 2243649 (Ohio Ct. App.); Vasquez-Lopez v. Beneficial Or., Inc., 152 P.3d 940 (2007); Thibodeau v. Comcast Corp., 912 A.2d 874, 886 (Pa. Super. 2006).
Defendants would clearly be better off in the former jurisdictions, and plaintiffs the latter.