For many years, companies have required consumers and employees to sign contracts containing arbitration clauses that prohibit them from filing class action claims and require them to waive jury trials. The history of how this trend developed is interesting, in that it created unintended consequences that some companies are now trying to counter by no longer arbitrating consumer and employment claims.

The story begins in California, where the Supreme Court of California held in 2005 that consumers could bring class actions in arbitration in certain circumstances. (Discover Bank v. Superior Court, 30 Cal.Rptr.3d 76 (2005).) The court said: “We do not hold that all class action waivers are necessarily unconscionable. But when the waiver is found in a consumer contract of adhesion in a setting in which disputes between the contracting parties predictably involve small amounts of damages, and when it is alleged that the party with the superior bargaining power has carried out a scheme to deliberately cheat large numbers of consumers out of individually small sums of money, then, at least to the extent the obligation at issue is governed by California law, the waiver becomes in practice the exemption of the party ‘from responsibility for [its] own fraud, or willful injury to the person or property of another.’ (Civ. Code, § 1668.) Under these circumstances, such waivers are unconscionable under California law and should not be enforced.” (30 Cal.Rptr.3d at 87.) The court also held that the Federal Arbitration Act (FAA) does not prohibit a California court from refusing to enforce an unconscionable class action waiver.

However, six years later, the U.S. Supreme Court rejected the Discover Bank rule in AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011). Concepcion brought a class action suit in federal court in California. AT&T moved to compel arbitration under an agreement that required arbitration of disputes and precluded class actions. The Supreme Court said: “The overarching purpose of the FAA, evident in the text of §§ 2, 3, and 4, is to ensure the enforcement of arbitration agreements according to their terms so as to facilitate streamlined proceedings. Requiring the availability of class wide arbitration interferes with fundamental attributes of arbitration and thus creates a scheme inconsistent with the FAA.” (131 S. Ct. at 1748.) Because it “stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress” (Hines v. Davidowitz, 312 U.S. 52, 67, 61 S.Ct. 399, 85 L.Ed. 581), the 5–4 majority held that California's Discover Bank rule was preempted by the FAA. (131 S. Ct. at 1753.)

Justice Breyer dissented, saying: “California law sets forth certain circumstances in which ‘class action waivers’ in any contract are unenforceable. In my view, this rule of state law is consistent with the federal Act's language and primary objective. It does not ‘stan[d] as an obstacle’ to the Act's ‘accomplishment and execution.’ Hines v. Davidowitz, 312 U.S. 52, 67, 61 S.Ct. 399, 85 L.Ed. 581 (1941). And the Court is wrong to hold that the federal Act pre-empts the rule of state law.” (131 S.Ct.at 1756.)

After AT&T Mobility, the focus turned to whether the consumer or employee had become bound to arbitrate disputes by agreeing to the contractual terms proposed by the company. In Norcia v. Samsung Telecommunications America, LLC, 845 F.3d 1279 (9th Cir. 2017), Norcia filed a class action complaint against Samsung for misrepresentations regarding its Galaxy S4 smartphone. Samsung moved to compel the agreement to arbitrate in the Product Safety & Warranty Information brochure that was in the box containing the phone when it was purchased. The court held: “Because Norcia did not give any outward manifestation of consent … no contract has been formed.” (845 F.3d at 1286.)

In Kauders v. Uber Technologies, Inc., 486 Mass. 557 (2021), Kauders commenced suit in Massachusetts Superior Court, claiming that three Uber drivers had refused to provide him with rides because he was blind and was with his guide dog. Uber moved to compel arbitration pursuant to the terms and conditions contained in its app. Kauders was the first Massachusetts case to consider the standard for contract formation in online contracts. The court said that the FAA preserved general principles of state contract law on whether the parties have agreed to arbitrate their dispute. The court established a two-pronged test for determining contract formation: There must be both reasonable notice of the terms and a reasonable manifestation of assent to those terms. Regarding reasonable notice, the court considered how easy it is to access the terms, how many steps were required to read the terms and how clear and extensive the process was.

Regarding reasonable manifestation of assent, the court stated that “clickwrap” agreements (where the consumer or employee needed to click on “I agree”) are preferred; otherwise, the court will need to find some other manifestation of assent. The Uber app stated: “By creating an Uber account, you agree to the Terms & Conditions and Privacy Policy.” The court said that this was not reasonable notice since the app did not require the user to click the link to the terms and conditions in order to register and the link to the terms and conditions was not prominently displayed. “Uber has designed an interface that allows the registration to be completed without reviewing or even acknowledging the terms and conditions.” (486 Mass. at 579.) The Uber app did not have a clickwrap function to accept the terms and conditions. The user just clicked “DONE” to complete registration. The court found that “there was nothing stating that ‘DONE’ itself signified either creation of an account or acceptance of the terms.” (486 Mass. at 580.) Therefore, the court held that the dispute was not arbitrable.

In Emmanuel v. Handy Technologies, Inc., No. 20-1378 (1st Cir. 2021), which was decided shortly after Kauders, Emmanuel, a house cleaner, claimed that her employer had misclassified her as an independent contractor, and brought suit in federal court. The U.S. Court of Appeals for the First Circuit ruled that she could not sue her employer in court because she was bound by a clickwrap mandatory arbitration agreement and that the clickwrap agreement was sufficient to create a binding contract. Emmanuel had submitted an application through a website and had clicked a checkbox agreeing to its terms of use. She subsequently used the company’s mobile app to accept an independent contractor agreement, which was required for her to be connected with customers. The 15-section agreement included a mandatory arbitration clause toward the end of the agreement. That portion was not visible unless the user scrolled down through the entire agreement.

Emmanuel stopped working for Handy because of payment issues after performing 10 to 20 cleaning jobs. She then brought a class action alleging that she and others had been misclassified as independent contractors in violation of the state Wage Act and the federal Fair Labor Standards Act. The court found that both prongs of the Kauders test had been satisfied here because Emmanuel had reasonable notice of the arbitration clause and made a reasonable manifestation of assent to the contract terms.

The above cases illustrate how companies have attempted to compel consumers to arbitrate their disputes individually. However, recently, plaintiff’s lawyers have taken advantage of the restrictions on filing class actions by filing massive numbers of individual arbitration proceedings instead. Companies have attempted to prevent these filings, or, ironically, to compel the numerous plaintiffs to join together in one court class action to avoid the enormous costs of arbitrating a large number of cases. Part of the reason is that the major arbitration providers, such as JAMS and the American Arbitration Association (AAA), have instituted consumer and employee arbitration minimum standards that require respondents in arbitrations brought by consumers or employees to pay all the costs of the arbitration except for the claimant’s initial filing fee.

In Abernathy v. DoorDash, Inc., 438 F.Supp.3rd 1062 (N.D. Cal. 2020), 5,879 couriers for DoorDash brought individual arbitration claims asserting that they had been incorrectly classified as independent contractors instead of employees. Their contracts required individual arbitrations administered by the AAA, which charged each claimant a $300 filing fee and the respondent a $1,900 filing fee in each case. DoorDash refused to pay its filing fees, and the AAA closed the cases. The couriers then filed suit to compel arbitration. Under the FAA, the court determines whether a valid arbitration agreement exists covering the dispute at issue. The court found that 5,010 couriers had signed clickwrap agreements with DoorDash, and granted the motion to compel arbitration of those 5,010 claims. In conclusion, the court stated: “For decades, the employer-side bar and their employer clients have forced arbitration clauses upon workers, thus taking away their right to go to court, and forced class-action waivers upon them too … The irony, in this case, is that the workers wish to enforce the very provisions forced on them … DoorDash, faced with having to actually honor its side of the bargain, now blanches at the cost of the filing fees it agreed to pay in the arbitration clause. No doubt, DoorDash never expected that so many would actually seek arbitration. Instead, in irony upon irony, DoorDash now wishes to resort to a classwide lawsuit, the very device it denied to the workers, to avoid its duty to arbitrate. This hypocrisy will not be blessed, at least by this order.” (438 F.Supp.3rd at 1068.)

As a result of rulings like the one in Abernathy, some companies have now deleted arbitration clauses from their consumer and employment agreements. Thus, as the court in Abernathy observed, some companies have decided that it actually is better to face one class action with a jury claim than a large number of individual arbitrations.