When a large group of individuals are injured by the actions of a person or company, the class action lawsuit allows them to pursue their legal claims even where the damages personal to each individual may be small. Because attorneys’ fees are recoverable in class action suits, litigation attorneys are generally willing to take such cases on a contingency basis. Often, large corporations with potential exposure to class action claims incorporate arbitration clauses and class action waivers requiring any claimant to seek relief via arbitration and foreclosing the class action option. Arbitration clauses are attractive to defendants, and sometimes plaintiffs, because it is faster, cheaper and more flexible than litigation.
Where individual damages are small, the class action waiver most often acts as a bar to relief. From the corporate perspective, the class action waiver protects companies from frivolous suits brought by unscrupulous lawyers. Currently, the enforceability of a class action waiver under California law is unclear. One side is concerned with the protection of consumers who have little choice in most cases but to enter into whatever agreement they are presented (i.e. signing a contract with a cell phone provider). The other side is concerned with protecting the strong policy goal of encourage arbitration and reducing the pressure on overwhelmed courts.
Historically, California courts have been loathe to enforce arbitration agreements that limit or waive a plaintiff’s ability to pursue a class action. Following the U.S. Supreme Court’s recent decision in AT&T Mobility LLC v. Concepcion, 131 S.Ct. 1740 (2011), however, the California Supreme Court has had to reconsider its previous attitude towards such waivers, at least to some extent. In Concepcion, the U.S. Supreme Court held that the Federal Arbitration Act (“FAA”) preempted state laws restricting the right of parties to agree to arbitration. The Concepcion Court noted the efficiency and cost advantages of arbitration over class litigation and arbitration. Significantly, the Court emphasized that contract law governs and that “the FAA requires courts to honor parties’ expectations”. Thus, the enforceability of arbitration clauses and class action waivers falls squarely within the boundaries of contract law.
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