Class Arbitration Waivers in California Law Adjudicated by the Ninth Circuit

Theo Slater

International Commercial Arbitration

Prof. Schurz

5-15-08

Class Arbitration Waivers in California Law Adjudicated by the Ninth Circuit

Mass contracts between consumers or employees and large corporations increasingly include clauses that require binding arbitration for all disputes and a bar on class action litigation. These provisions are included in contracts for cell phones, credit cards, and employment among others. The affects of the bar on class actions in these contracts shield the corporations from liability for damages for small dollar amounts. This shield results from the fact that suits for low damage amounts are individually more expensive to initiate than the plaintiff can potentially recover, particularly in the context of arbitration because arbitration can be very expensive to initiate. Almost all jurisdictions require at least an $80-100 filing fee to instigate a law suit and arbitration complaints generally cost several hundred dollars to file in addition to the cost of paying the arbitrator, which can range from $600 to $1,600 a day. Corporations with class action waivers are therefore able to inflict small damages on employees or customers with no legal risk as long as the damages are lower then the cost of arbitration.

Most courts in the United States have upheld the validity of class action waivers. The waivers are frequently judged enforceable under theory of freedom to contract. The freedom to contract theory postulates that customers are free to use or not use any particular service. If they do not want to relinquish their right to class action litigation they do not have to use the services of any corporation that would require them to do so. Most consumers are unaware of the legal subtleties of the contracts they sign, frequently without reading, and as a result they do not know about the rights they sacrifice when starting a cell phone plan or getting a credit card. In modern life credit cards and cell phones, not to mention employment, are necessities. It is nearly impossible to rent a car or buy an airline ticket except at the airport without a credit card, and many activities become more difficult without a credit card. If the entire credit card industry were to use mandatory arbitration clauses and class action waivers in their contracts with customers, which is perhaps already the case, their customers would effectively have no choice but to sign the contracts or forgo the utility of credit cards. Employees frequently have to take employment where they can find it and cannot freely choose to reject employment due to a bar in their contract against class action litigation. When an unemployed person is searching for work they rarely have the luxury of perusing their prospective employer’s legal framework for dealing with employee disputes and choosing whether to except a job based on that policy. Frequently working people must take whatever job they can find to pay their bills making the supposed choice to refuse work due to an employer’s demand of sacrificing class action rights an illusory choice. As more and more corporations adopt mandatory arbitration clauses with attendant class action waivers the ability of customers and employees to avoid such contracts is in rapid decline. Corporations seek out these clauses because they recognize that the clauses will shield them from liability for many bad practices they may intentionally or inadvertently engage in.

The United States Court of Appeals for the Ninth Circuit has defied majority jurisprudence on the issue of class arbitration waivers when interpreting California law in order to protect employees and consumers. On several occasions the Ninth Circuit has ruled class arbitration waivers in contracts of adhesion unconscionable under California law. Three recent examples are in Lozano v. AT&T Wireless Services Inc. , Ingles v. Circuit City Stores, Inc., and Ting v. AT&T. In order to analyze the concept of uncontionability in California law, Discover Bank v. Superior Court, is also examined below.

Uncontionability in California Law

The concept of the uncontionability of class action waivers in contracts of adhesion involves the legal unenforceability of contracts or provisions of contracts due to a disparity of bargaining power between the parties and a contract provision that is one sided. Generally unconscionable provisions in the class action waiver context only exist where one party has superior bargaining power over the other and uses this leverage to create a contract provision that severely impacts an interest of the weaker party without a similar sacrifice of a legal right on the part of the stronger party. Such contracts are deemed unenforceable when they are found to be contracts of adhesion, meaning the weaker party is obligated either to accept or reject the contract provisions with no ability to modify them. In this case the one-sided contract provision is that customers cannot sue a corporation that injures them as a class. Theoretically the corporation also sacrifices its ability to sue consumers or an employee as a class, but a corporation would never do that anyway because corporations never file class actions against employees or customers. The context in which the Ninth Circuit will strike a contract provision for uncontionability involves contracts that are both procedurally and substantively unconscionable.

Procedural Uncontionability

The California Supreme Court has held a contract provision procedurally unconscionable where there is a “contract of adhesion, which, imposed and drafted by the party of superior bargaining strength, relegates to the subscribing party only the opportunity to adhere to the contract or reject it.” Such contracts are essentially take it or leave it contracts where a customer or employee can sign the contract or lose the opportunity for the service or job in question. These contracts frequently involve many pages of fine print and are presented to a customer before the commencement of cell phone service, in an envelope with a new credit card or a long employee manual similarly filled with fine print and difficult to understand provisions drafted by corporate lawyers. The contracts are rarely read and as a result most consumers and employees are unaware of the provisions in them. The provisions frequently include class action waivers that dramatically curtail the customer or employee’s ability to sue the company from which they have contracted to receive service or to sue their employer for violating