Class action waiver

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A class action waiver is a provision found in some contracts which prohibits a party from filing a class action legal proceeding against the other party, or both parties waiving the right to file class actions against each other. Though used internationally, class action waivers, just like class action lawsuits, are predominantly an American phenomenon and most frequently both found and upheld in the United States and agreements with American citizens. [1]

Contents

Class action waivers may be found on a standalone basis, though they are more commonly found as part of an arbitration clause, and when paired with such clauses, frequently include jury trial waivers. [2] All three clauses are the subject to controversy and wide legal debate, with supporters claiming the tools are strong risk management tools and the expense that class action litigation presents both in regard to time and money, though advocacy groups argue that these clauses reduce the rights of consumers and employees and prevent companies from being held accountable for grievances such as wage and hour violations. [3] [4]

Class action waivers legality across countries and administrative decisions range in legality between jurisdictions, with some countries like France and administrative divisions like Ontario in Canada banning such clauses, while others, most prominently the United States via its Supreme Court ruling in AT&T Mobility LLC v. Concepcion , have rules that such clauses are enforceable.

Contractual language

Most class action waiver clauses include this wording or a variation of it:

You and we agree that any dispute filed against each other must be on an individual basis and not as a class or collective action. [5]

Federal level

The Supreme Court of the United States has found on multiple occasions that class action waivers are legal, though in all ruled circumstances on the issue, the Supreme Court has only ruled on class action waivers attached to arbitration agreements. In AT&T Mobility LLC v. Concepcion , the high court ruled that class action waivers are legal under the Federal Arbitration Act as they significantly impact what the court saw as Congress's pro-arbitration stance. The court reiterated its stance in Epic Systems Corp. v. Lewis . In Epic, Justice Neil Gorsuch authored a majority opinion which outlined that the US Congress, upon legislating the National Labor Relations Act of 1935, likely did not wish "to confer a right to class or collective actions in [Section 7 of the NLRA], since those procedures were hardly known when the NLRA was adopted in 1935". Justice Clarence Thomas concurred in a separate opinion, writing that the illegality of the class action waiver is a public policy defense, referring to McMullen v. Hoffman. [6]

Class action waivers in any jurisdiction, however, are not enforceable in cases of sexual assault or sexual harassment; the 117th Congress passed and President Joe Biden signed the Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act in 2022 which additionally prohibited the enforcement of class action waivers. [7] As of 2023, the bipartisan law has been used by employees of companies, most notably Rivian, to sidestep class action waivers. [8] Prior to Epic and AT&T, New York and California have attempted to ban class action waivers, and in the case of California, use such laws to additionally invalidate arbitration agreements or allow judges to refuse to enforce class action waivers in certain circumstances. National lawmakers have also pushed to pass the proposed Forced Arbitration Injustice Repeal Act, which would ban the enforcement of both arbitration clauses and class action waivers in many cases today seen by some as unfair or anti-consumer. [9] [10] [11] [12]

Class action waivers and arbitration agreements have also been argued to be unenforceable by the US Department of Labor, which argued to the Sixth Circuit that the two run contrary to statutory rights with regard to fiduciary misconduct.

Naked class waivers

A "naked" class action waiver is a version of the waiver where the contract in which the waiver is found is not attached to an arbitration agreement. Class action waivers are only protected from state legislatures' actions through the Federal Arbitration Act, if they are bundled with an agreement to send disputes to arbitration. The Supreme Court has yet to rule on whether naked class waivers are permissible.

Some jurisdictions have laws or legal precedent which are friendly to naked class action waivers. In March 2006, the state of Utah passed a law which expressly permitted class action waivers in contracts, seen by opponents of Utah's law as retaliation against California's courts, which prior to the SCOTUS ruling on class action waivers, had prohibited class action waivers. [13] The Fifth Circuit also ruled that within its circuit, class action waivers not attached to an arbitration agreement are legal in a 2017 case between the NLRB and D. R. Horton, Inc. [14]

Naked class action waivers, though, are subject to state laws, and as demonstrated in 2023 by rulings made by courts in New Jersey and Rhode Island, they may be overturned and declared unconscionable by state courts. [15] [16] [17] New Jersey's trial and appellate courts, though, were overruled by their state's Supreme Court, which ruled that naked class action waivers were enforceable and not contrary to public policy. [18]

Many countries have not tested a class action waiver in courts, though the international law firm CMS predicts that these clauses are unconscionable or unenforceable in Germany, Italy, Russia, and in England and Wales. [19] [20] [21] [22]

Australia

Class action waivers remained untested in Australia until December 2021, where the Federal Court of Australia found it was an unfair contract term. In Karpik, the court found that Australian Consumer Law in section 23 (which already bans standard form contracts) prohibits class action waivers. [1] [23] On appeal, the Full Court of the Federal Court of Australia reversed, only to be later unanimously overturned by the High Court of Australia, in the process also striking down Carnival's forum selection clause which would have otherwise required Karpik to file legal action in the United States. [24] [25] [26]

Canada

National level

Class action waivers lack a uniform policy across Canada, as the Supreme Court of Canada has found that provincial legislation governs disputes. Nationally, though, in Seidel v. TELUS Communications, the court found that because a class action waiver was attached to an invalid arbitration agreement, the class action waiver was void.

Provincial level

On the provincial level, Ontario, per the Consumer Protection Act of 2002, has banned class action waivers; similar laws have been passed in the provinces of Quebec and Saskatchewan. [27] Courts in British Columbia also previously found that class action waivers were unenforceable and unconscionable in Pearce v. 4 Pillars Consulting Group due to the contract in question being a standard form contract written by 4 Pillars and giving little bargaining power to Pearce. [28] British Columbian courts, however, have overridden this ruling in 2023 litigation against Pokémon Go and Harry Potter: Wizards Unite developer Niantic, where a trial court and a court of appeals ruled in 2023 that such clauses were legal and enforceable, pointing specifically to other provinces which had banned them and how British Columbia had no such ban; the court further ruled that legislatures as opposed to courts are to create exemptions or prohibitions on class action waivers. [27]

France

Under Article L. 623-32 of the French Consumer Code, as well as Article L. 1143-21 of the French Public Health Code, France considers class action waivers "abusive" and illegal within the country. [29] [30]

India

Class action waivers have not been tested in Indian courts, though Order 1 Rule 8 of the Code of Civil Procedure allows for consumers, with court permission, to initiate class action lawsuits, which the Indian law firm Shardul Amarchand Mangaldas & Co notes can be problematic for the enforceability of class action waivers. [31]

See also

Related Research Articles

Arbitration, in the context of the law of the United States, is a form of alternative dispute resolution. Specifically, arbitration is an alternative to litigation through which the parties to a dispute agree to submit their respective evidence and legal arguments to a third party for resolution. In practice, arbitration is generally used as a substitute for litigation. In some contexts, an arbitrator has been described as an umpire.

Terms of service are the legal agreements between a service provider and a person who wants to use that service. The person must agree to abide by the terms of service in order to use the offered service. Terms of service can also be merely a disclaimer, especially regarding the use of websites. Vague language and lengthy sentences used in these terms of service have caused concerns about customer privacy and raised public awareness in many ways.

<span class="mw-page-title-main">Standard form contract</span> Type of contract between two parties

A standard form contract is a contract between two parties, where the terms and conditions of the contract are set by one of the parties, and the other party has little or no ability to negotiate more favorable terms and is thus placed in a "take it or leave it" position.

<span class="mw-page-title-main">Forum selection clause</span> Contract clause which requires disputes to be resolved in a given manner or court

In contract law, a forum selection clause in a contract with a conflict of laws element allows the parties to agree that any disputes relating to that contract will be resolved in a specific forum. They usually operate in conjunction with a choice of law clause which determines the proper law of the relevant contract.

<span class="mw-page-title-main">Unconscionability</span> Doctrine in contract law

Unconscionability is a doctrine in contract law that describes terms that are so extremely unjust, or overwhelmingly one-sided in favor of the party who has the superior bargaining power, that they are contrary to good conscience. Typically, an unconscionable contract is held to be unenforceable because no reasonable or informed person would otherwise agree to it. The perpetrator of the conduct is not allowed to benefit, because the consideration offered is lacking, or is so obviously inadequate, that to enforce the contract would be unfair to the party seeking to escape the contract.

<span class="mw-page-title-main">Federal Arbitration Act</span> United States legal statute

The United States Arbitration Act, more commonly referred to as the Federal Arbitration Act or FAA, is an act of Congress that provides for non-judicial facilitation of private dispute resolution through arbitration. It applies in both state courts and federal courts, as was held in Southland Corp. v. Keating. It applies in all contracts, excluding contracts of seamen, railroad employees, or any other class of workers involved in foreign or interstate commerce, and it is predicated on an exercise of the Commerce Clause powers granted to Congress in the U.S. Constitution.

<span class="mw-page-title-main">Arbitration clause</span> Contract clause requiring parties to resolve disputes via arbitration

In contract law, an arbitration clause is a clause in a contract that requires the parties to resolve their disputes through an arbitration process. Although such a clause may or may not specify that arbitration occur within a specific jurisdiction, it always binds the parties to a type of resolution outside the courts, and is therefore considered a kind of forum selection clause.

<span class="mw-page-title-main">Arbitration</span> Method of dispute resolution

Arbitration is a formal method of dispute resolution involving a neutral third party who makes a binding decision. The third party neutral renders the decision in the form of an 'arbitration award'. An arbitration decision or award is legally binding on both sides and enforceable in the courts, unless all parties stipulate that the arbitration process and decision are non-binding.

Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440 (2006), is a United States Supreme Court case concerning contract law and arbitration. The case arose from a class action filed in Florida against a payday lender alleging the loan agreements the plaintiffs had signed were unenforceable because they essentially charged a higher interest rate than that permitted under Florida law.

<span class="mw-page-title-main">Contract</span> Legally binding document establishing rights and duties between parties

A contract is an agreement that specifies certain legally enforceable rights and obligations pertaining to two or more parties. A contract typically involves the transfer of goods, services, money, or a promise to transfer any of those at a future date. The activities and intentions of the parties entering into a contract may be referred to as contracting. In the event of a breach of contract, the injured party may seek judicial remedies such as damages or equitable remedies such as specific performance or rescission. A binding agreement between actors in international law is known as a treaty.

Southland Corp. v. Keating, 465 U.S. 1 (1984), is a United States Supreme Court decision concerning arbitration. It was originally brought by 7-Eleven franchisees in California state courts, alleging breach of contract by the chain's then parent corporation. Southland pointed to the arbitration clauses in their franchise agreements and said it required disputes to be resolved that way; the franchisees cited state franchising law voiding any clause in an agreement that required franchisees to waive their rights under that law. A 7-2 majority held that the Federal Arbitration Act (FAA) applied to contracts executed under state law.

AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011), is a legal dispute that was decided by the United States Supreme Court. On April 27, 2011, the Court ruled, by a 5–4 margin, that the Federal Arbitration Act of 1925 preempts state laws that prohibit contracts from disallowing class-wide arbitration, such as the law previously upheld by the California Supreme Court in the case of Discover Bank v. Superior Court. As a result, businesses that include arbitration agreements with class action waivers can require consumers to bring claims only in individual arbitrations, rather than in court as part of a class action.

Discover Bank v. Superior Court is a 2005 case where the California Supreme Court ruled that an arbitration clause was unenforceable because a class-action waiver contained within it would exculpate Discover Bank from liability for wrongdoing involving small sums of damages.

14 Penn Plaza LLC v. Pyett, 556 U.S. 247 (2009), is a United States labor law case decided by the United States Supreme Court on the rights of unionized workers to sue their employer for age discrimination. In this 2009 decision, the Court decided that whenever a union contract "clearly and unmistakably" requires that all age discrimination claims under the Age Discrimination in Employment Act of 1967 (ADEA) be decided through arbitration, then employees subject to that contract cannot have those claims heard in court.

Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614 (1985), is a United States Supreme Court decision concerning arbitration of antitrust claims. The Court heard the case on appeal from the United States Court of Appeals for the First Circuit, which had ruled that the arbitration clause in a Puerto Rican car dealer's franchise agreement was broad enough to reach its antitrust claim. By a 5–3 margin it upheld the lower court, requiring that the dealer arbitrate its claim before a panel in Tokyo, as stipulated in the contract.

Disputes between consumers and businesses that are arbitrated are resolved by an independent neutral arbitrator rather than in court. Although parties can agree to arbitrate a particular dispute after it arises or may agree that the award is non-binding, most consumer arbitrations occur pursuant to a pre-dispute arbitration clause where the arbitrator's award is binding.

<i>In re Zappos.com, Inc., Customer Data Security Breach Litigation</i>

In re Zappos.com, Inc., Customer Data Security Breach Litigation, 893 F. Supp. 2d 1058, was a United States District Court for the District of Nevada case in which the Court held that Zappos.com's customers were not held to the browsewrap terms of use because of their obscure nature. The courts also held that the agreement was unenforceable because Zappos had reserved the right to change it at any time without informing the customers. This court decision set a precedent for businesses that use browsewrap agreements and/or include a clause in their agreements that allow them to change the agreements at any time. The decision encouraged conversation on how a business should most fairly display its terms of use and how to avoid unfairness and ambiguity when writing them.

DIRECTV, Inc. v. Imburgia, 577 U.S. ___ (2015), was a case in which the Supreme Court of the United States clarified when arbitration provisions in contracts are governed by the Federal Arbitration Act. In a 6–3 opinion written by Justice Stephen Breyer, the Court reversed a decision by the California Court of Appeal that refused to enforce an arbitration agreement between DIRECTV and its customers. The California Court had ruled that the arbitration agreement was unenforceable because, under applicable California law, a class action arbitration waiver between DIRECTV and its customers was unenforceable. However, the Supreme Court of the United States held that the California Court of Appeal's interpretation was preempted by the Federal Arbitration Act, and the California Court of Appeal was therefore required to enforce the arbitration agreement.

Epic Systems Corp. v. Lewis, 584 U.S. ___ (2018), was a case decided by the Supreme Court of the United States on how two federal laws, the National Labor Relations Act (NLRA) and the Federal Arbitration Act (FAA), relate to whether employment contracts can legally bar employees from collective arbitration. The Supreme Court had consolidated three cases, Epic Systems Corp. v Lewis, Ernst & Young LLP v. Morris (16-300), and National Labor Relations Board v. Murphy Oil USA, Inc. (16-307). In a 5–4 decision issued in May 2018, the Court ruled that arbitration agreements requiring individual arbitration and prohibiting class action lawsuits are enforceable under the FAA, regardless of allowances set out within the NLRA.

Am. Express Co. v. Italian Colors Rest., 570 U.S. 228 (2013), is a United States Supreme Court case decided in 2013.

References

  1. 1 2 Dreyer, Frances; Briggs, Nicholas; Locket, Scott (September 2021). "Contracting out of class actions? Federal Court says no in an Australian first". Johnson Winter Slattery. Retrieved 2023-12-25.
  2. ↑ "The use and enforceability of class action waivers in arbitration agreements in the United States". Practical Law. Retrieved 2022-08-24.
  3. ↑ "Are Arbitration Agreements Necessary for Class-Action Waivers To Be Enforceable?". The Florida Bar. Retrieved 2022-08-24.
  4. ↑ "Preparing for the COVID-19 class action: Is there an unexpected consequence lurking in your arbitration agreement's poison pill provision? | Insights". DLA Piper. Retrieved 2022-08-24.
  5. ↑ "Class Action Waiver Sample Clauses: 924 Samples". Law Insider. Retrieved 2022-08-25.
  6. ↑ "Epic Systems Corp. v. Lewis, 584 U.S. ___ (2018)". Justia Law. Retrieved 2022-08-24.
  7. ↑ Bustos, Cheri (2022-03-03). "Text - H.R.4445 - 117th Congress (2021-2022): Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act of 2021". United States Congress. Retrieved 2022-08-25.
  8. ↑ "Rivian Employee Avoids Arbitration, Class Waiver Under 2022 Law". news.bloomberglaw.com. Retrieved 2023-09-20.
  9. ↑ Goldstein, Mark S.; Schmitt Minniti, Cindy (2017-07-31). "New York Court Rules that Class-Action Waivers Are Unenforceable". SHRM. Retrieved 2022-08-27.
  10. ↑ Skok, Gavin W. (2020-07-14). "California Strikes Again: Do Arbitration and Class Action Waiver Clauses Protect Your Clients Against a Class Action CCPA Claim?". CPO Magazine. Retrieved 2022-08-27.
  11. ↑ "Class Action Waivers Might Not be Enforceable When the Federal Arbitration Act Does Not Apply". Primerus. Retrieved 2022-08-27.
  12. ↑ "The FAIR Act: A New Bill Banning Mandatory Arbitration Agreements". JD Supra. Retrieved 2022-12-13.
  13. ↑ "Utah Law Permits Class Action Waivers". Law.com. Retrieved 2024-04-04.
  14. ↑ Huffstetler, Erin Kilgore, Scott (2017-08-09). "Class Action Waivers Are Enforceable Even Without an Arbitration Agreement, Says the Fifth Circuit". Louisiana Law Blog. Retrieved 2024-04-04.{{cite web}}: CS1 maint: multiple names: authors list (link)
  15. ↑ "District of Rhode Island invalidates "naked" class action waiver on public policy grounds". ktslaw.com. 2016-07-29. Retrieved 2023-12-15.
  16. ↑ Levin, Mark J. (2023-10-26). "Rhode Island federal court nixes stand-alone class action waiver". Consumer Finance Monitor. Retrieved 2023-12-12.
  17. ↑ "NJ Appellate Division: Class Action Waiver Unenforceable Absent Mandatory Arbitration Agreement". New Jersey Law Journal. Retrieved 2023-07-19.
  18. ↑ "NJ High Court Reverses Lower Court's Rule for Class Action Waivers". New Jersey Law Journal. Retrieved 2024-07-25.
  19. ↑ "Class actions in Germany – law and rules". CMS Expert Guide. Retrieved 2022-08-25.
  20. ↑ "Class actions in Italy – law and rules". CMS Expert Guide. Retrieved 2022-08-27.
  21. ↑ "Class actions in Russia – law and rules". CMS Expert Guide. Retrieved 2022-08-25.
  22. ↑ "Class actions in England and Wales – law and rules". CMS Expert Guide. Retrieved 2022-08-25.
  23. ↑ "Australian Competition Law | ACL | s 23". Australian Competition Law. Retrieved 2022-08-27.
  24. ↑ "High Court of Australia finds Ruby Princess class action waiver clauses unfair". Corrs Chambers Westgarth. Retrieved 2024-03-22.
  25. ↑ "Carnival plc v Karpik (The Ruby Princess) [2022] FCAFC 149". Federal Court of Australia. Retrieved 2023-12-27.
  26. ↑ "Carnival plc v Karpik (The Ruby Princess) [2023] HCA 39". High Court of Australia. Retrieved 2023-12-27.
  27. 1 2 "Publishers, check those T&C's: BC Court of Appeal upholds arbitration and class action waivers in video game contracts". DLA Piper. Retrieved 2023-12-12.
  28. ↑ Armstrong, Stephen; Bjorkquist, Sonia (September 7, 2021). "Riding the wave: recent developments with class action waivers". Osler. Retrieved June 24, 2022.
  29. ↑ "Class/collective actions in France: overview". Practical Law. Retrieved 2022-06-24.
  30. ↑ Pouzilhac, Aramis Law Firm-Cédric de; Carrega, Marion (2022-02-25). "In brief: arbitration agreements in France". Lexology. Retrieved 2022-06-24.
  31. ↑ "Enforceability Of Provisions In Contracts Restricting The Right To File Class Action Suits In India* - Contracts and Commercial Law - India". www.mondaq.com. Retrieved 2022-08-27.
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