Massachusetts Invalidates Arbitration Agreement Because Plaintiffs Could Not Effectively Pursue Small Value Claims

by Stinson Leonard Street - Arbitration Nation
Contact we were waiting for SCOTUS’s decision in AmEx, we got a decision on vindicating statutory rights from a different high court: the Supreme Judicial Court of Massachusetts.  In an opinion that could be a blueprint for other plaintiff-friendly states, the supremes in Massachusetts held that courts may invalidate arbitration agreements that preclude class actions if a plaintiff proves he or she “effectively cannot pursue a claim against the defendant in individual arbitration.”  Feeney v. Dell Inc., __ N.E.2d ___, 2013 WL 2479603 (Mass. June 12, 2013).

The Massachusetts plaintiffs in Feeney allege that Dell charged and collected money for a state sales tax that Massachusetts did not actually impose.  The putative class brought the lawsuit in 2003 alleging violation of Massachusetts’s consumer protection act, which specifically provides for class actions.  Dell successfully moved to compel individual arbitration, based on the language of its contract (which mandated individual arbitration at the now defunct National Arbitration Forum).

This case has been up to the Massachusetts high court twice.  The first time, in 2009, it invalidated the arbitration clause after concluding that class action prohibitions in consumer arbitration agreements contravene Massachusetts public policy.  After the case was remanded for further proceedings, however, SCOTUS decided Concepcion, and the validity of the class arbitration waiver had to be considered anew.

Massachusetts stuck to its guns, however.  After conceding that the analysis in Concepcion means that the FAA preempts Massachusetts’s public policy in favor of consumer class actions, Massachusetts found an alternative basis for its decision.  In effect, it adopted a state-law version of Green Tree Financial v. Randolph, the Supreme Court decision declaring that arbitration agreements may be unenforceable if plaintiffs can prove that arbitration would be so expensive that they cannot realistically vindicate their federal statutory rights.  A Massachusetts plaintiff can now avoid the class action waiver in his or her arbitration clause if they can “prove as a matter of fact that the class waiver provision… effectively prohibits him or her from pursuing a claim.”

Applying that new rule, the court found support in the record to conclude that the plaintiffs’ claims “are nonremediable in individual arbitration pursuant to the terms of the agreement.”  The support largely came from the complex nature of the claims, which required advanced knowledge of the tax codes, the small individual damages ($14 and $216 for the named plaintiffs), and the lack of any mandatory fee-shifting provisions in the statute.  For that reason, the court refused to compel arbitration at all, and instead remanded for class litigation of the claims in state court.  (In a companion case, Machado v. System4 LLC, __ N.E.2d __, 2013 WL 2479604 (June 12, 2013), however, the court applied the same rule and found the plaintiffs had not proven they could not pursue their claims in individual arbitration.  The individual plaintiffs’ damages in Machado were between $9,000 and $22,000, and the statutes at issue required the defendant to pay attorneys’ fees and costs to a prevailing plaintiff.)

Not only is this case interesting because it may foreshadow a whole new line of state cases trying to invalidate arbitration agreements, but also because of the exasperated tone of the decision.  Writing an opinion invalidating waivers of class arbitrations after Concepcion is no easy feat. Here are some choice quotes from the opinion:

  • After noting that the savings clause in Section 2 of the FAA is not “a dead letter,” the court wrote ”[t]he question we seek to answer today, one that courts across the country have struggled with in the wake of Concepcion, is under what conditions a State court may still invalidate an arbitration agreement containing a class waiver as unconscionable or against public policy without running afoul of the FAA.”
  • “There is no principled reason to conclude that Congress in enacting the FAA had even the remote intention to prevent a State court from invalidating such an egregiously exculpatory agreement in an adhesive consumer contract merely because it took the form of an arbitration agreement”; and
  • “The FAA may be a powerful tool for consumer businesses, but it is not a trump card.”

Because this case is ostensibly based in state law (although I don’t see any Massachusetts cases cited in support of the new rule), it may not be impacted if SCOTUS disavows the Green Tree exception altogether later this month.  However, whether SCOTUS would agree with Massachusetts’ application of Concepcion is a whole other question.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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