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Eighth Circuit Upholds Class-Action Waiver

By Anthony R. McClure, Litigation News Associate Editor – December 23, 2009

In a recent decision adding to the debate over class-action waivers in consumer agreements, a federal circuit court reversed a district court’s holding that such a waiver was unenforceable. In Cicle v. Chase Bank USA [PDF], the Eighth Circuit held that a class-action waiver contained in a Chase Bank card member agreement was neither substantively nor procedurally unconscionable.


Background of Cicle
The plaintiff filed a putative class action in Missouri state court against Chase, alleging that Chase improperly increased the interest rate charged on credit card balances. Specifically, the plaintiff claimed that Chase imposed illegal penalties and violated the Missouri Merchandising Practices Act (MMPA).


Chase removed the case to the U.S. District Court for the Western District of Missouri under the Class Action Fairness Act of 2005 [PDF] on the basis of diversity jurisdiction and the National Bank Act on the basis of federal-question jurisdiction.


Chase then filed a motion to stay the litigation and compel arbitration pursuant to an arbitration clause in the card member agreement, which provided that “any dispute may be resolved by binding arbitration” and that the cardmember “will not be able to bring a class action or other representative action in court such as that in the form of a private attorney general action, nor will you be able to bring any claim in arbitration as a class action or other representative action.”


The agreement contained an exception for small claims court matters and also provided that Chase would pay for the filing fee (up to $500) and the first two days of any fees for the arbitrator.


The agreement also provided that each side would generally be responsible for their own attorney fees and costs, unless the arbitrator orders otherwise based on applicable law.


District Court Decision
The district court denied Chase’s motion to stay the class action and to compel arbitration. The district court first concluded that the class-action waiver and the provisions for cost sharing were unconscionable under Missouri law. The court then relied on the terms of the card member agreement to sever the class-action waiver as a non-essential term.


When Chase would not agree to pay all costs and fees associated with arbitration, the district court denied enforcement of the arbitration clause as unconscionable under Missouri law.


Reversal
The Eighth Circuit reversed, finding that the contract was neither procedurally nor substantively unconscionable.


At the outset, the court assumed that Missouri law applied, despite Chase’s argument that the agreement’s Delaware choice-of-law provision should apply.


As the Eighth Circuit explained, “[w]e find it unnecessary to resolve the choice-of-law question, however, because we would reverse the District Court whether we apply the law of Missouri or Delaware.”


With respect to procedural unconscionability, the court noted that the arbitration clause was in fine print, but also observed that “the arbitration agreement and class-action waiver were introduced by a boldfaced heading and a paragraph in all-uppercase font explaining the litigation rights that were being waived by acceptance and use of the card.”


The court also noted that when the agreement was amended, the plaintiff had 30 days to reject the changes in writing, but she continued to use the card and “affirmatively accepted the amendment.”


The Eighth Circuit also rejected the argument that Chase’s superior bargaining position should render the agreement unenforceable.


“These sorts of take-it-or-leave-it agreements between businesses and consumers are used all the time in today’s business world. If they were all deemed to be unconscionable and unenforceable contracts of adhesion, or if individual negotiation were required to make them enforceable, much of commerce would screech to a halt,” the court opined.


With respect to substantive unconscionability, the Eighth Circuit first noted that the agreement provided an exception for small claims court matters.


The court also observed that the plaintiff was free to pursue her claims individually under the MMPA and seek to recover damages including “punitive damages, attorney’s fees, and equitable relief.”


The court also held that the cost-sharing clause did not render the agreement unconscionable because “the agreement leaves open, at the arbitrator’s discretion and in keeping with the applicable law, the possibility of shifting all costs, regardless of which party prevails.”


Analysis
“I am not surprised by this result,” says Gregory C. Cook, Birmingham, AL, cochair of the ABA Section of Litigation Class Actions and Derivative Suits Committee.


Cook says that in most jurisdictions, courts apply a multifactor test. In these jurisdictions, the decision whether to enforce a class-action waiver will depend on factors such as “how much money is at stake, whether attorney’s fees are allowed under the arbitration clause or the applicable law, whether the clause allows for the arbitrator to award costs, or whether it allows for a shifting of costs or a fronting of costs by the defendant,” Cook says.


“I expect the courts to apply a multifactored test and most of those factors in this case seem to fall on the defendant’s side,” he says.


Alan S. Kaplinsky, Philadelphia, member of the Section’s Class Actions and Derivative Suits and Alternative Dispute Resolution committees and former cochair of the ABA Business Law Section’s Consumer Financial Services Committee, agrees.


“I thought the court absolutely got it right and has joined several other federal circuit courts of appeal that during the past several years have upheld the validity of class-action waivers,” Kaplinsky says. Generally, “the courts are divided on this issue,” he notes.


Others strongly disagree with the decision and criticize the Eighth Circuit’s analysis. “I think this decision is a step backward in what has been an otherwise commendable movement toward restoring victims’ rights,” says Daniel R. Karon, Cleveland, cochair of the Section’s National Institute on Class Action Committee and the Antitrust subcommittee of the Class Actions and Derivative Suits Committee.


“This decision retreats from a noticeable return to allowing victims their day in court, and I don’t expect it will take root,” opines Karon, who is also an editorial board member and contributing author to the Section’s special publication, Class Actions Today.


As an example of this return, Karon cites state and federal decisions in California as well as In re: American Express Merchants’ Litigation, in which the Second Circuit recently ruled that a defendant’s class-action waiver violated the Federal Arbitration Act because it “effectively preclude[d] any action seeking to vindicate the statutory rights asserted by the plaintiffs.”


Looking Forward
As courts continue to issue decisions on class-action waivers, the debate over their viability will no doubt continue.


One question is how companies and consumers will react to these decisions. Cook’s advice to companies who draft similar standard agreements is to “make it as consumer friendly as possible.” That way, “it is more likely to be enforced by the courts.”


In the Cicle case, for instance, Chase’s arbitration clause provided “for a fronting of the filing fees in the arbitration” and “did not bar the award of attorney’s fees under applicable law.”


Kaplinsky agrees. “My advice would be to draft as fair an arbitration provision as you can,” he says.


“Bend over backwards to include within it consumer-friendly features such as a carve out for small claims court, a provision requiring the company to pay the lion’s share of the arbitration fees, and a provision creating a contractual fee-shifting arrangement,” among other things, Kaplinsky advises.


On the other hand, Karon’s hope is to have these disputes resolved in court rather than arbitration. “Don’t victimize your customers and you won’t get sued,” Karon says. “And if you do victimize them, own up to it and face them in court.”


He expects other courts to advance the trend of “allowing consumers their day in court. All that I’ve ever requested—and all that victims deserve—is a fair and balanced playing field.”


Keywords: Litigation, class actions, waivers, Eighth Circuit


 
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