A recent decision in California should put a smile on the faces of those who routinely include mandatory arbitration clauses in their commercial contracts with customers, and should put an idea into the minds of those who don’t. Just last week, a federal judge upheld Citibank’s effort to enforce a mandatory arbitration clause contained in a student loan agreement when Craig Smith, the borrower, sued the bank for alleged violations of the Telephone Consumer Protection Act (“TCPA”). Smith v. Citibank, N.A., Case No. SACV 13-00748-CJC (C.D. Calif., June 18, 2013). The case was stayed, pending results of the arbitration.
Earlier, Smith had borrowed money for his education from the bank but, in 2012, had fallen behind in his repayments. Citibank began collection efforts by placing autodialed calls to, and leaving prerecorded messages on, Smith’s cell phone. Smith did not answer the first call he received, but he did answer the next one and, at that time, revoked his consent to receive future calls on his cell phone. He also asked whether calls were being placed by an autodialer and were recorded. He was told “yes,” in response to both questions. Citibank then purportedly called Smith at least 20 more times.
Subsequently, Smith filed a class action in California state court, alleging violations of the TCPA and the state law regulating debt collection practices, claiming that he had suffered emotional distress from the calls. The matter was removed to federal court, where Citibank filed its motion to compel arbitration.
When Smith originally obtained his student loan, he had e-signed an application that directed him to read the entire document, which included a broad agreement to submit to arbitration disputes related to “all aspects of [Smith’s] Account including without limitation the origination, establishment, terms, treatment, operation, handling, billing, servicing, limitations on or termination or acceleration of [Smith’s] Account.” The agreement also forbade any arbitration of class claims and stated it was to be governed by Nevada and federal law.
The court, after explaining the Federal Arbitration Act (“FAA”) and the validity of agreements that contain promises to arbitrate disputes under the FAA, set forth the test for determining whether a dispute must be arbitrated. “In order to determine whether the parties are required to arbitrate their dispute, the court must decide (1) whether a valid agreement to arbitrate exists and, if it does, (2) whether the agreement encompasses the dispute at issue.” Next, the court examined Nevada law, which contains a strong policy favoring arbitration, and concluded that Smith had failed to demonstrate why the arbitration agreement was invalid or unenforceable.
After also noting a strong federal policy in favor of arbitration, the judge then turned to the facts alleged in the complaint and determined that they fell within the scope of the agreement to arbitrate. The court stated as follows:
Mr. Smith’s claims arise out of his failure to make required payments on his loan and Citibank’s efforts to collect the amount owed under the terms of the Note. These claims relate to the terms, treatment, operation, handling, billing, servicing, termination, and acceleration of his account. Given the broad language of the Arbitration Agreement, Mr. Smith’s claims clearly fall within its scope.
This is an important case as it goes against a recent trend that has greatly expanded the range and scope of TCPA litigation. It seems reasonable that Congress initially expected victims of unwanted residential telemarketing or expensive incoming calls to their cell phones to take their claims to small claims court and recover statutory damages not exceeding $1,500 per violation. But, as technology and markets changed, so too did TCPA litigation. Federal courts began to hear TCPA claims that often turned into multimillion-dollar class action suits. And, despite somewhat favorable construction of its TCPA rules by the FCC to accommodate modern dialing and communications technology with business transactions and consumer cell phones, including debt collection efforts, businesses often fail to obtain the necessary consent before autodialing cell phones or sending them text or prerecorded voice messages. As a result, debt collectors often find themselves spending substantial sums of money to defend or settle class action lawsuits.
Any damages that Citibank might have to pay are likely to be small, relatively speaking, even assuming that Smith can prove that 20 calls were made to his cell, using an autodialer/ prerecorded message, after he revoked permission. In that instance, the arbitrator would likely impose, at most, $30,000 in statutory damages ($1,500 for each willful violation times 20 calls made after Smith made the request not to be called anymore). This is obviously far from what could have been awarded in a class action verdict or contained in the settlement of a class action suit. Indeed, enforceable arbitration clauses depriving plaintiffs’ lawyers of the opportunity to bring claims as class actions could undoubtedly change the economic incentives for those lawyers to continue their current love affair with the TCPA. This might be the very “thing” that nervous companies have been looking for.
And, in fact, that “thing” just got a lot bigger, not only because of the Citibank case, but also because of a decision rendered by no less an authority than the U.S. Supreme Court, just two days after Smith v. Citibank was decided. In American Express Co. v. Italian Colors Restaurant, No. 12–133 (June 20, 2013), the Supreme Court upheld the enforceability of mandatory class action and class arbitration waivers in contracts, even in cases involving alleged federal statutory violations where the cost of proceeding in individual arbitration would be prohibitive. Significantly, the American Express case all but forecloses any argument that a class action waiver is unenforceable on the grounds that the high cost of proving a statutory claim on an individual basis effectively deprives plaintiffs of the ability to vindicate their rights under federal statutes, including, presumably, the TCPA.
According to the majority ruling in American Express, courts must “rigorously enforce” arbitration agreements consistent with their terms, even for claims alleging a violation of a federal statute, unless the pro-arbitration mandate of the Federal Arbitration Act has been “overridden by a contrary congressional command.” It is likely that, as with the antitrust statute at issue in American Express, the Court would conclude that the TCPA does “not guarantee an affordable procedural path to the vindication of every claim,” or “evince an intention to preclude a waiver” of class-action procedure. Accordingly, companies wishing to limit TCPA exposure should not only consider including broad mandatory arbitration provisions in their contracts, but should also review those arbitration provisions to make sure that they contain explicit language waiving class action litigation in arbitration proceedings, without going so far as to constitute a prospective waiver of a party’s right to pursue statutory remedies.