The Enforceability of Class Action Waivers in Arbitration Agreements: The Third Circuit Court of Appeals Signs on to the Majority Trend
By: Irene C. Freidel, Robert W. Sparkes, III
In addressing the enforceability of class action waiver provisions included in mandatory arbitration agreements, the majority of state and federal courts have followed a two-pronged, fact-intensive test that will operate to invalidate a class action waiver where: 1) the party to be bound did not have a meaningful opportunity to negotiate or reject the arbitration agreement portion of a contract (i.e., the agreement is one of adhesion); and 2) if enforced, the waiver would effectively eliminate a party’s right to seek redress because the expected recovery is not large enough to justify the risks and costs of individual litigation. In practice, most courts employing this analysis have found class action waivers in consumer finance related agreements to be unconscionable, and thus unenforceable, under applicable state and federal law.
The Third Circuit Court of Appeals, however, appeared to reject the majority trend in its 2007 opinion in Gay v. CreditInform, 511 F.3d 369, 378 (3d Cir. 2007). In Gay, the Third Circuit panel upheld a mandatory arbitration clause in an agreement between a consumer and a credit repair organization, which clause required individual arbitration of all disputes arising out of the agreement. The Third Circuit panel held that the right to proceed on a class-wide basis was merely a procedural right and was therefore waivable. The court refused to consider whether the consumer would have a meaningful opportunity to recover if she were barred from pursuing the claim as a class action. Instead, the court ruled that the arbitration provision was not, on its face, so unreasonable that it could be considered unconscionable under state law. Any further inquiry into the effect of the provision, according to the Third Circuit panel (albeit in dicta), would violate the Federal Arbitration Act’s (“FAA”) prohibition on state laws which restrict or burden the enforcement of agreements to arbitrate. In so holding, the Third Circuit panel did not discuss the apparently contrary holdings in other federal circuits.
On February 24, 2009, a different three-judge panel of the Third Circuit, in Homa v. American Express Company, ---F.3d---, 2009 WL 440912 (3d Cir. Feb. 24, 2009), found that a class action waiver included in a mandatory arbitration provision in a consumer credit card agreement was unconscionable under New Jersey state law. The Third Circuit held that New Jersey had a fundamental public policy against enforcing class action waivers in the context of “a low-value consumer credit suit.” As such, the court held that “if the claims at issue are of such a low value as effectively to preclude relief if decided individually, then, under [New Jersey law] the class-arbitration waiver is unconscionable.”
The Third Circuit’s opinion in Homa suggests that the Third Circuit may be prepared to fall in line with the majority of state and federal courts in addressing class action waivers in arbitration agreements. This development will likely not bode well for consumer finance and consumer credit entities that seek to include such class action waivers in their various consumer agreements. On the other hand, the Homa court’s reliance on New Jersey state law – law not at issue in the Gay case – may not signify any change in the Third Circuit’s approach to class action waivers, but may merely stand as evidence of one court interpreting and applying two different states’ laws in similar situations. The fluidity and importance of this area of the law, however, suggest that we will not have to wait long for the next court ruling to more fully direct the analysis and the Third Circuit’s approach to class action waivers in arbitration agreements.
