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Recent Court Decisions Leave MA Courts to determine when Arbitrations Clauses can be Invalidated

On March 10, 2003, John A. Feeney and Dedham Health and Athletic Complex (Feeney) brought a class action against Dell Inc. for alleged “unfair and deceptive acts or practices” in violation the Massachusetts Consumer Protection Act (93A). They claimed Dell collected fees on service contracts fraudulently characterized as a sales tax. Based on clauses in Dell’s “Terms and Conditions of Sales” requiring arbitration and prohibiting class actions, the Superior Court stayed the proceedings and compelled arbitration in accordance with Section 4 of the Federal Arbitration Act (FAA). The FAA is a federal statute requiring enforcement of arbitration agreements. The agreement provided “claims against Dell ‘arising from or relating to this Agreement’ shall be resolved ‘exclusively and finally’ by arbitration, and that arbitration ‘will be limited solely to the dispute or controversy between Customer and Dell.'” Feeney lost the arbitration.

In 2009, the Massachusetts Supreme Judicial Court (SJC) granted Feeney’s application for direct appeal after the Superior Court refused to vacate the arbitration. The SJC found in favor of Feeney. It reasoned the waiver provision violated a Massachusetts’ public policy, evidenced by 93A, favoring consumer class actions. Despite the ruling, the Court dismissed the claim without prejudice for failure to state a claim.

By the time Feeney amended the complaint, the U.S. Supreme Court had decided AT&T Mobility LLC v. Concepcion holding that class action waivers in arbitration agreements couldn’t be invalidated on grounds of state public policy. Concepcion held that the FAA pre-empted state laws with broad prohibitions on the arbitration of certain types of claims and applications of State law doctrine that “disfavor arbitration” in a manner inconsistent with the FAA. The FAA is representative of a preference for enforcing contracts and a recognition that arbitration can efficiently resolve claims. Over the years, the U.S. Supreme Court has expanded the statute’s coverage by upholding many arbitration agreements despite the existence of more robust remedies under federal and state law.

On June 12, 2013, due to the Supreme Court’s clarification on the FAA’s pre-emptive effect, the SJC re-examined its reasoning in Feeney. The SJC held that class action waivers in arbitration agreements are unenforceable when they operate to deny consumers mechanisms for exercising rights under State law. The Court decided pre-emption under the FAA does not prohibit holding a class action waiver unenforceable “where a court determines, following an individualized factual inquiry, that class proceedings are the only viable way for a consumer plaintiff to bring a claim against a defendant, as may be the case where the claims are complex, the damages are demonstrably small and the arbitration agreement does not feature the safeguards found in the Concepcion agreement.” To come to this conclusion, the SJC focused on two prior Supreme Court cases: Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc. and Green Tree Fin. Corp. Ala. v. Randolph. Although these cases ultimately upheld arbitration clauses preventing statutory access to class actions and triple damages, in each case, the Supreme Court made a point of discussing whether or not the arbitration clause prevented the effective exercise of statutory rights. More importantly, in Randolph, the Court acknowledged that in some cases arbitration costs could rise to a level that effectively bar a plaintiff from vindicating federal statutory rights. The SJC took these discussions to indicate circumstances exist where arbitration clauses become so disruptive to statutory rights that they become unenforceable. Where amounts in controversy are small, the complexity of claims require expertise, and no incentives are present compensating consumer’s for expended costs (i.e. fee shifting or bounty provisions), the SJC decided class action waivers create insurmountable obstacles to pursuing claims under 93A and create de facto immunity.

Although well intentioned, days after Feeney was decided, the Supreme Court again raised doubts as to the validity of the SJC’s reasoning. In American Express Co. v. Italian Colors Restaurant, the Supreme Court held arbitration clauses cannot be invalidated because the cost of pursuing claims exceeds recovery. This leaves lower courts in Massachusetts with the difficult task of determining under what circumstances arbitration clauses can be invalidated for abrogating state borne rights.