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Many companies are now drafting and inserting “Class Action Waiver” provisions into agreements with customers and employees. A Class Action Waiver, coupled with an arbitration provision, requires employees and/or customers to forego any class litigation or class arbitration in lieu of individual arbitration of claims against a company. A carefully drafted Class Action Waiver may meaningfully reduce the risk of a single, large judgment against your company, not to mention expensive, lengthy litigation with uncertain outcomes. Despite this appeal, Class Action Waivers require a careful, particularized analysis before implementation.

In Kentucky, the fray started in late 2010, after the Kentucky Supreme Court decided Schnuerle v. Insight Comm. Co. L.P. In Schnuerle, local cable television/Internet provider Insight Communications sought to avoid class litigation from its subscribers by inserting a Class Action Waiver in its customer service agreement. Insight’s customers subsequently filed a class action lawsuit in Jefferson County, Kentucky, alleging breach of contract and violations of the Kentucky Consumer Protection Act – because of Internet service failures in April 2006. Insight argued that its Class Action Waiver, coupled with an arbitration clause in its customer agreement, required each customer to individually arbitrate claims against the company. The Kentucky Supreme Court, however, held that – in the consumer context and under state contract law – Insight could not restrict its customers from joining as a class to pursue their small claims. Nevertheless, the Schnuerle Court required the customers to pursue their class action against Insight in arbitration, rather than state court. The Schnuerle case created an uncertain landscape for Kentucky companies wishing to escape class action claims from customers and employees – until a recent decision from the United States Supreme Court.

On April 27, 2011, the U.S. Supreme Court decided AT&T Mobility LLC v. Concepcion, a case in which AT&T Mobility LLC (AT&T) sought to enforce a Class Action Waiver in wireless service agreements with its customers. AT&T’s Class Action Waiver was similar to the provision Insight had with its customers, as it also required customers to file any and all claims against the company individually and in arbitration. Like the Kentucky Supreme Court, the federal courts in California which first heard the Concepcion case ruled that a Class Action Waiver was unenforceable under state law – and AT&T’s customers could pursue their claims as a class.

In a 5-4 decision, the U.S. Supreme Court reversed the lower federal courts and held that the Federal Arbitration Act (FAA) preempts any state law or court decision which precludes enforcement of a Class Action Waiver in conjunction with an arbitration provision. The Concepcion Court also held that courts could not force class arbitration upon companies claiming rights under a Class Action Waiver because “[a]rbitration is poorly suited to the higher stakes of class litigation.” This decision required AT&T’s customers to assert their claims, if at all, individually in arbitration. The individual claims in the Concepcion case were only worth about $30 on average, making it highly unlikely any individuals would voluntarily pursue arbitration. Thus, AT&T is relatively immune from class action litigation from its customers.

The Concepcion decision has predictably upset some lawmakers and consumer protection advocates. If and until the FAA is amended, however, companies may benefit – like AT&T – by inserting a Class Action Waiver into arbitration provisions with customers and employees. However, because the Concepcion decision has not been interpreted and applied by any lower courts, companies should carefully analyze whether they are comfortably situated to: (i) litigate certain covered claims individually in arbitration; and (ii) potentially litigate over new legal questions which arise in the wake of Concepcion. Indeed, the National Labor Relations Board recently issued complaints against several companies which maintain Class Action Waivers in employment agreements, on the grounds that such Waivers may unlawfully interfere with employees’ statutory right to engage in concerted activity. Likewise, questions remain over whether Class Action Waivers may prevent companies from compelling class action litigation to efficiently defend against complicated antitrust or wage & hour claims. Companies should also consider the prospect of serial arbitration claims from creative plaintiffs’ attorneys. For most companies, decisions concerning Class Action Waivers will predictably depend upon an individualized assessment of potential class claims, as well as each company’s particularized risk tolerance.

To discuss the pros and cons of inserting a Class Action Waiver in your company’s employee and customer agreements, contact any member of Greenebaum’s Labor and Employment Practice Group.

To learn more about Benjamin J. Lewis and his practice, visit his profile.

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