Class action prohibition in arbitration agreements: Be careful what you ask for

By Michael (Sam) Sandmire
January 31, 2007

For years now, courts have enforced mandatory arbitration provisions in consumer and employment agreements.  The usual mandatory arbitration provision in a consumer or employment contract provides that all disputes of any kind shall be decided not in court, but by an arbitrator.  Early on, it was assumed that mandatory arbitration could only resolve individual suits.  More recently, however, plaintiffs have pursued class actions in arbitration, and many arbitration services today provide for class action arbitrations.  As a result, some companies and employers have responded by including within the arbitration clause a prohibition on class actions. 

According to plaintiffs' lawyers, combining the mandatory arbitral forum for dispute resolution with a prohibition on class actions, effectively eliminates the class action mechanism for mass resolution of, often, small-value claims that individual claimants would not otherwise pursue.  Some courts are beginning to agree, finding that a prohibition on class actions is "unconscionable" and, therefore, not enforceable.  See Riensche v. Cingular Wireless in which a Washington federal district court determined that the prohibition against class actions was "unconscionable" and denied the defendant's motion to compel arbitration.  An Oregon Court of Appeals case decided today similarly held that a prohibition on class actions, in part, rendered the otherwise mandatory arbitration agreement unenforceable.  See Vasquez-Lopez v. Beneficial Oregon, Inc. 

In both of these cases, the courts threw out the entire arbitration agreement, and the plaintiffs were allowed to litigate in court, an outcome the defendant had sought to avoid with the arbitration agreement in the first instance.  In other cases, the courts have struck the specific prohibition on  class actions, but otherwise upheld the arbitration agreement.  This leaves the defendant in the untenable position of facing a class action with a single arbitrator without the many procedural protections afforded to defendants in civil court. 

While it may be tempting to push the limits of mandatory arbitration as a way to rein in costly and protracted litigation, one should proceed with caution and seek competent counsel in defining the parameters of such agreements.

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