Class Action Waivers Enforceable? California Court Says, ‘Not So Fast!’

Class actions against dietary supplement sellers. Text marketers. Biz-op providers. You name it, and a class action has disturbed the peace of many a direct response marketer in recent times. Nary a weight-loss supplement client of this attorney seems to have been spared. Financially unable or unwilling to go the distance, even where meritorious defenses exist, many targets of these suits have no choice but to pay the “ransom,” most of which goes to class attorney’s fees. As is so often the case in Federal Trade Commission (FTC) suits, the suing party has all the leverage.

Perhaps in response to this consumer class action onslaught, the U.S. Supreme Court lately has been giving new heft to mandatory arbitration clauses, which also contain “class” waivers. In 2011, in AT&T Mobility LLC v. Concepcion, which addressed whether an arbitration clause could bar classwide arbitration, the court overruled a California Supreme Court decision that had said such a bar was “unconscionable” and thus unenforceable. The court held that the California rule was preempted by the Federal Arbitration Act because non-consensual class arbitration violates the Act’s “liberal policy favoring arbitration,” in that it “sacrifices arbitration’s informality,” is “more likely to generate procedural morass than final judgment,” and “greatly increases risks to defendants.”

Last year, in CompuCredit Corp. v. Greenwood, the Supreme Court also barred a class action under the Credit Repair Organization Act (CROA), saying CROA did not prohibit arbitration as the sole method of dispute resolution. The court went out of its way to reach this conclusion. Even though the statute explicitly granted the “right to sue” a credit repair organization under CROA, the court said “right to sue” doesn’t mean the right to sue in court, but only the right to enforce “liability” for “failure to comply” with CROA, which right also could be enforced in binding arbitration. Since CompuCredit had contractually provided for binding arbitration that was subject to judicial enforcement, the plaintiff’s right to “impose liability” was protected.

Against this tide, last month a California appellate court, perhaps still smarting from the slap to its state supreme court in Concepcion, struck down an arbitration and class waiver clause on “unconscionability” grounds. In Natali v. Import Motors Inc., the court said the arbitration provision at issue was unconscionable because it was “adhesive” (one-sided in defendant’s favor), was buried in the contract, and the plaintiff was given no chance to review it.

The court got around Concepcion by saying it only limited an “unconscionabilty” defense that “disfavors arbitration,” and a conclusion that a one-sided arbitration provision in favor of the drafter is unconscionable “does not rely on any judicial policy judgment” disfavoring arbitration. In short, Natali reads Concepcion to place no limit whatsoever on “unconscionability” as a defense to enforcement of an arbitration/class waiver clause so long as, in the words of Concepcion, it doesn’t interfere with the “fundamental attributes of arbitration” (like classwide arbitration would).

The lesson of Natali, and its reading of Concepcion, for direct response marketers is that if they wish to limit their litigation exposure in an effective manner through the use of mandatory arbitration and class waiver provisions, then it is imperative those provisions be fair, balanced and conspicuously disclosed to consumers.

Talking about Direct Response, FTC

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