The Massachusetts Supreme Judicial Court (“SJC”) on June 12 renewed its endorsement of the “vindication of statutory rights” ground for invalidating predispute arbitration agreements that contain class action waivers. In a state consumer protection act case and in a companion Wage Act case, the SJC declared that Massachusetts courts should “invalidate a class waiver provision where the plaintiff can demonstrate that he or she lacks the ability to pursue a claim against the defendant in individual arbitration according to the terms of the agreement.” In the consumer protection act case, the SJC held that the plaintiffs had met that standard as a factual matter; in the Wage Act case, the court held that the plaintiffs had not. Those holdings leave considerable uncertainty as to the parameters of the required proof. These decisions seem contrary to the U.S. Supreme Court’s decision in Concepcion and other recent Federal Arbitration Act (“FAA”) decisions, so they might have short lifespans. Nevertheless, businesses whose arbitration agreements contain class action waivers that might be challenged in Massachusetts courts will need to be prepared to marshal evidence and arguments to present in an individualized factual inquiry to show that those provisions do not effectively prohibit plaintiffs from bringing claims. Firms should consider including in their arbitration agreements pro-consumer incentives such as those present in the arbitration agreement at issue in Concepcion. Also, the Wage Act case reaffirms that terms in arbitration agreements that purport to limit legal or equitable remedies are unlikely to be enforced in Massachusetts courts.
Procedural context. The plaintiffs in Feeney v. Dell Inc., 465 Mass. 470, 2013 WL 2479603 (June 12, 2013)(“Feeney II”), sought to represent a class of Massachusetts residents who paid charges identified as sales tax on the purchase of Dell computer service contracts. Plaintiffs alleged collection of those charges constituted “unfair or deceptive acts or practices” under the Massachusetts Consumer Protection Act, Mass. Gen. Laws ch. 93A (“Chapter 93A”), because no such tax had been imposed by any Massachusetts taxing authority. Dell countered that plaintiffs’ claims must be individually arbitrated pursuant to arbitration agreements that contain class action waivers. The SJC previously invalidated those class action waivers on the ground that they were “contrary to the fundamental public policy of [Massachusetts] favoring consumer class actions under [Chapter 93A].” Feeney v. Dell Inc., 454 Mass. 192, 193 (2009) (“Feeney I”). The case came back to the SJC on Dell’s contention that Feeney I was abrogated by the Supreme Court’s decision in AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011).
The plaintiffs in the companion Massachusetts Wage Act case, Machado v. System4 LLC, 465 Mass. 508, 2013 WL 2479604 (June 12, 2013), entered into “local franchise agreements” with the defendants for the provision of commercial janitorial services to third-party customers. The plaintiffs sought to represent a class of persons they alleged were misclassified by System4 as independent contractors and who were also the victims of other Wage Act violations. A Superior Court judge denied the defendants’ motion to stay the action pending arbitration, on the basis of Feeney I, and subsequently denied the defendants’ motion for reconsideration in light of Concepcion.
Both cases interpret and apply the FAA.
The SJC’s rationale. In Feeney II, the SJC “conclude[d] that Concepcion precludes the invalidation of class waiver provisions in arbitration clauses in consumer contracts, such as the one at issue here, where the reason for invalidation is that such waivers are contrary to the fundamental public policy of the Commonwealth.” 2013 WL 2479603, at *1. Similarly, in Machado, the SJC observed that, “where the right to a class proceeding has been waived as part of an agreement to arbitrate, Concepcion interprets the FAA to require enforcement of that class waiver regardless of any State law or policy to the contrary.” 2013 WL 2429604, at *3. This is consistent with the SJC’s previous recognition that, “where the FAA applies, it would preempt a conflicting State law — one that might, for example, bar arbitration or authorize a party to proceed in a judicial forum regardless of the party’s having entered into an agreement to arbitrate.” Warfield v. Beth Israel Deaconess Medical Center, Inc., 454 Mass. 390, 400 n.14 (2009).
Nevertheless, the SJC held that Massachusetts courts should void arbitration contracts that create “de facto immunity from private civil liability for violations of State law.” Feeney II, at *19. The SJC reasoned that its decision is not inconsistent with Concepcion and the FAA: “We do not interpret the FAA so broadly as to deny a consumer any remedy, nor do we discern any such congressional intent. A State court’s invalidation [of an arbitration agreement] on these grounds survives not because it can be harmonized with the FAA, but because the FAA does not conflict with such a ruling and therefore does not preempt it.”1 Id. at *15.
The SJC held that a class action waiver may be declared invalid under FAA Section 2’s savings clause because it violates Massachusetts public policy “against agreements that immunize business defendants from private civil liability from consumer injuries.” Feeney II, at *20 (contrasting this with the public policy basis for invalidating such waivers in Feeney I, which was the favoring of Chapter 93A class actions); see also Machado, at *3 (“public policy opposing exculpatory contracts”). The SJC thus drew a fine line distinction between public policy that is based on the forum or type of proceeding (which raises the spectre of preemption as arbitration cannot be disfavored) as opposed to public policy that merely seeks to ensure that plaintiffs have a remedy in some forum (which the SJC would apparently treat as a forum-neutral policy that evades the preemption issue).
The SJC went on to state that “a plaintiff must prove that a class waiver provision effectively prohibits him from bringing a claim against the defendant,” id. at *20, but the court then seemed to ignore that burden when it concluded that, because the dollar amounts involved were small and the case of a “complex nature,” plaintiffs’ burden was satisfied. Id. at *22.
The anticipated lifespan of these decisions. As the SJC acknowledges, state public policy cannot trump the requirements of the FAA so as to disfavor arbitration. The viability of these two decisions is thus subject to considerable doubt were they to be reviewed by the Supreme Court. (It is beyond the scope of this alert to detail the reasons why this is so.) In the last couple of years the Supreme Court has on at least three occasions summarily vacated state appellate court decisions that gave state law precedence over the FAA. Nitro-Lift Technologies, LLC v. Howard, 133 S. Ct. 500 (Nov. 26, 2012) (per curiam); Marmet Health Care Center v. Brown, 132 S. Ct. 1201 (Feb. 21, 2012) (per curiam); KPMG LLP v. Cocchi, 132 S. Ct. 23 (Nov. 7, 2011) (per curiam).
In addition, the Supreme Court presently has before it for decision American Express Co. v. Italian Colors Restaurant, No. 12-133. That case presents the issue whether a class action waiver in a contractual arbitration agreement may be defeated by a prospective class representative’s contention that he/she would be prevented from vindicating his/her rights under a federal statute in an individual arbitration. The SJC in Feeney II relied on the Second Circuit’s decision in that case, In re American Express Merchants’ Litig., 667 F.3d 204 (2012) (“Amex III”).
What a plaintiff needs to prove to establish inability to pursue a claim in an individual arbitration. While we wait to see if either of the SJC decisions receive and survive Supreme Court review, class action waiver disputes in Massachusetts courts will need to be analyzed within the framework the SJC has erected, as skeletal as it may be. The SJC has not clearly articulated what a plaintiff must prove in the “individualized factual inquiry” to show that she/he would be unable to vindicate his or her statutory rights in an individual arbitration. The SJC stated that the plaintiff must “prove as a matter of fact that the class waiver provision (in conjunction with the other terms of the agreement) effectively prohibits him or her from pursuing a claim.” Feeney II, at *21. The court stated that this “may be the case where the claims are complex, the damages are demonstrably small and the arbitration agreement does not feature the safeguards found the Concepcion agreement.” Id. at *20.2
The court found the requisite proof of such inability lacking in Machado. In that case, according to the court, “[t]he plaintiffs rel[ied] primarily on an affidavit, prepared in a different case, of an attorney with expertise in franchise arbitration who averred that the cost of individual arbitration in these types of disputes essentially always exceeds a plaintiff’s potential recovery.” 2013 WL 2479604, at *4 n.14. The least amount of damages sought by a Machado plaintiff was $9,541.83. While cautioning that “the magnitude of potential damages is not the sole criterion to be considered in determining whether a claim is remediable in individual arbitration according to the terms of the arbitration agreement,” the court stated that “it may be the most important factor.” Id. at *4. See Feeney II (“it is decidedly not sufficient that plaintiff’s claims are of a class of disputes that predictably involve small amounts of damages”). (Emphasis in original; internal quotations omitted.) The court concluded in Machado that, “[p]articularly given Concepcion’s rejection of the notion that damages of $4,000 were sufficiently small to require class proceedings for the vindication of claims . . . , it would be difficult for us to conclude that potential damages of approximately $10,000 or greater are so small as to preclude the bringing of claims in individual arbitration.” Id. at *4. The court also noted that award of attorneys’ fees and costs to a prevailing employee, and trebling of unpaid wages, are mandatory under the Massachusetts Wage Act. Id. at *5. (The Machado arbitration provision also authorized arbitrators to award attorneys’ fees and costs, including the costs of arbitration.)
The SJC came to a different conclusion in Feeney II, based largely on the fact that the Dell arbitration provision did not include any “pro-consumer incentives” such as those in the AT&T Mobility arbitration agreement, and on the SJC’s perception of “the complex nature of the claims involved.” Feeney II, at *21-22. There is no mention in the court’s opinion — as there is in the Machado opinion — of the applicable statute’s mandate that attorneys’ fees and costs be awarded to a prevailing claimant,3 or of the availability (at the court’s discretion) of an award of multiple damages. Nor is there any mention in the Feeney II opinion of any factual support offered by the plaintiffs (by affidavit or otherwise), or of any “individualized factual inquiry” conducted by the trial court. Indeed, contrary to the SJC’s suggestion, its conclusion seems to be based on “unsupported hypothesis” or public policy rather than fact-based determinations.
Given that the “most important factor” under this analysis may be the amount of the potential recovery, what is the critical ceiling at which a purportedly nonremediable “small value” claim becomes an arbitrable claim? And what other facts are necessary or sufficient to move an otherwise nonremediable small value claim into the arbitrable category? Certainly more must be at issue than the $229 in Feeney II, at least in the absence of “pro-consumer incentives” in the arbitration agreement. In a case involving a claim under a statute providing for the award of attorneys’ fees and costs to a prevailing claimant, the ceiling may be $4,000, the amount the SJC notes was at issue in Concepcion.
The SJC did not address but does not seem to have ruled out taking into account whether a plaintiff's claims are appropriate for class treatment, that is, whether the plaintiff will be able to satisfy the requirements of Rule 23. What if a motion to compel arbitration is denied, and then the court denies class certification? What if class certification is granted as to some claims and denied as to others? What if a certified class is defined in such a way that it excludes a plaintiff who has successfully resisted arbitration by challenging a class action waiver? Presumably the claims of any class member who opts out of a class could be compelled to arbitration (assuming the arbitration agreement is otherwise enforceable).
Also, the SJC did not address and does not seem to have ruled out taking into account the fact that generally, as in court, multiple claimants may pursue their claims in a single arbitration proceeding without invoking class procedures. That allows such claimants to economize on the costs of prosecuting their claims.4
Waiver of multiple damages claims. The SJC held that the waiver of multiple damages claims in the Machado arbitration agreements was “void as contrary to public policy” because “the award of treble damages is mandatory under [the Massachusetts Wage Act], and cannot be waived.” The court does not identify the public policy. The court does not explicitly state that any contractual attempt to circumvent the requirements of a Massachusetts statute will be void as a matter of public policy, but, in the absence of any other explanation, that would seem to flow by implication from its holding. Such an interpretation of course could have far-reaching and troubling implications beyond the realm of arbitration agreements. Perhaps what the court meant to say (or should have said) is that the waiver is void on the basis of illegality, a standard, generally applicable breach of contract defense. In any event, the SJC held that the multiple damages waiver provision was severable from the rest of the arbitration agreement, and that “the availability of statutorily mandated multiple damages does not impinge on any fundamental characteristic of arbitration, nor does it frustrate the purpose of the arbitral forum.” Thus, it declined to invalidate the System4 arbitration provision.
Feeney II and Machado are inconsistent with the FAA and with Supreme Court precedent. They seem destined to be vacated by the Supreme Court, if it is presented with an opportunity to do so. In the meantime, parties seeking to compel compliance with class action waivers in arbitration agreements in the Massachusetts courts will have to wrestle with the nature and quantum of proof necessary to establish that such provisions prevent the plaintiff from vindicating his/her statutory rights by creating de facto immunity for the defendant from private civil liability for violations of Massachusetts law. Moving parties will doubtless need to resist the notion that the size of the typical claim is all but determinative. Focus on the speculative and self-serving nature of assertions of “immunity” may be productive.5 The Machado decision reaffirms that attempts in arbitration provisions to limit legal or equitable remedies otherwise available may not succeed if challenged in court. Businesses are well-advised to redraft arbitration agreements to include more consumer-friendly incentives of the types present in Concepcion.
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1 The Feeney II decision does not mention the SJC’s still extant (but highly questionable) precedent holding that Chapter 93A consumer claims — individual or class — need not be arbitrated. See Hannon v. Original Gunite Aquatech Pools, Inc., 385 Mass. 813, 816 (1982). The continued viability of that decision is in considerable doubt in light of Concepcion and other recent Supreme Court decisions, as the appellant has forcefully argued in the pending SJC appeal in McInnes v. LPL Financial LLC, No. SJC-11356 (decision pending). Hannon would in any event dispose of only one of the Feeney II plaintiffs because the other is arguably a commercial entity, not a consumer, and the SJC has held that Chapter 93A claims brought by commercial entities that do not qualify as consumers may be compelled to arbitration.
2 The AT&T Mobility arbitration agreement at issue in Concepcion included the following features: AT&T was obligated to pay all costs for nonfrivolous claims, a bounty provision in the event the customer received an award greater than AT&T’s last written settlement offer, a small claims court option, and the customer’s option to elect to proceed in person, by telephone or based on written submissions.
3 With a limited exception under Chapter 93A when a claimant has rejected defendant’s reasonable settlement offer.
4 The Machado arbitration provision requires that arbitration proceed on an individual basis, prohibits consolidation with any other arbitration proceeding, and provides that collateral estoppel shall not apply (e.g., to preclude re-litigation of issues, claims or defenses), so this consideration would not be a factor in the analysis in that case.
5 See, e.g., LaVoice v. UBS Financial Services, Inc., 2012 WL 124590 (S.D.N.Y. Jan. 13, 2012) (finding “no legal basis for giving weight to” plaintiff ’s “and his counsel’s professed disinclination to pursue LaVoice’s claims individually…[because] the Court cannot help but find LaVoice and counsel’s statements to be self-serving and irrelevant”).
This article was originally published by Bingham McCutchen LLP.