Understanding the Rules on the Use of Arbitration Clauses to Prevent Class Actions

Our experienced San Diego business litigation attorneys provide representation to plaintiffs who wish to use the court system to pursue a legal remedy, as well as to defendants who are being sued. The court system offers the opportunity for plaintiffs to pursue their claims and obtain justice against those who have harmed them physically or financially, and provides the chance for defendants to have their day in court to force plaintiffs to prove accusations and to fight to avoid liability. San Diego business litigation attorney

In recent years, however, there has been an ongoing battle over access to the courts. The debate centers on whether or not companies may utilize arbitration clauses to limit access to courts by forcing parties to agree to arbitrate any and all disagreements, and, whether these companies may also force employees, suppliers, and others to waive their right to file a class action.

While class action waiver provisions can protect companies from burdensome litigation and abusive legal practices, they can also limit access to the justice system for plaintiffs with legitimate, but relatively small damage claims. Without the ability of these plaintiffs to join in class actions, many legal wrongs will go unaddressed because it will not make economic sense for the plaintiff to pursue a lawsuit for a small amount of damages.

California courts have generally been more protective of the rights of parties to gain their constitutionally protected access to the courts than other states, issuing rulings in cases like McGill v. Citibank, in which the court held that mandatory arbitration clauses are against public policy when a class sues for public injunctive relief. The U.S. Supreme Court and the U.S. Congress however, have shown a trend towards restricting the rights of these plaintiffs by enforcing arbitration clauses, even when those clauses cut off access to the courts and effectively make pursuing a legal remedy impossible.

State and Federal Rules and Regulations on Arbitration Clauses

The McGill case in California is part of a pattern of cases in which the California courts have ruled that class action waivers in contracts are unenforceable because of public policy. California courts also ruled in a case called Iskanian v. CLS Transportation that public policy made an arbitration clause unenforceable when the clause prevented a class action rising under the Private Attorneys General Act (“PAGA”).

The Consumer Financial Protection Bureau, a federal agency, has also moved to restrict the use of arbitration clauses, preventing certain financial institutions from including class action waivers as part of a broad arbitration provision in consumer contracts.

However, the U.S. House of Representatives passed a resolution to overturn the CFPB rule and to allow these arbitration clauses in contracts for financial services. And, the Supreme Court has repeatedly ruled that arbitration clauses can and should be enforced even if they include a waiver of class action rights.

One important ruling came in a famous case called AT&T Mobility v. Concepcion, which involved plaintiffs being denied a right to pursue a class action remedy against AT&T when they were charged sales tax on phones that AT&T had marketed as free.

AT&T sought to enforce an arbitration provision in the contract for sale that the consumers had signed, and despite claims that the clause in the contract waiving class actions should not be enforceable, the U.S. Supreme Court determined that federal laws encouraging arbitration pre-empted California’s state rules. The AT&T plaintiffs were essentially denied the right to pursue their claims by the ruling, since they each were out just $30.22 each, and pursuing litigation over such a small amount is not worth the cost, time and effort on an individual basis.

As far as California’s claim that public policy prevents arbitration clauses from being enforced in certain contracts: This ruling may not stand up to any appeals to higher courts following the Supreme Court ruling in American Express Co. v. Italian Colors Restaurant which held that state public policy could not create an exception to the Federal Arbitration Act, which makes arbitration clauses largely enforceable.

This means that while California courts may want to stop companies from restricting contracting parties’ rights to use the court system to resolve disputes, the efforts on the part of federal courts and federal lawmakers are likely to make California’s efforts difficult or impossible. Federal court rulings and federal laws preempt state law, and businesses will benefit from the protections the federal government provides to reduce litigation risks while plaintiffs will simply have to cope with having their remedies curtailed.

Getting Help from A San Diego Business Litigation Attorney

The trusted business lawyers at Gehres Law Group, P.C. provide representation to plaintiffs and defendants in drafting and enforcing contracts, including those falling under the purview of the Federal Arbitration Act. Give us a call at 858-964-2314 or contact us online today to find out more about how our San Diego Business litigation attorneys can help.

By | 2018-01-24T12:12:23-08:00 September 11th, 2017|Business Litigation|Comments Off on Understanding the Rules on the Use of Arbitration Clauses to Prevent Class Actions