San Diego Class Action Lawsuits: Arbitration and Enforceable Contractual Waivers

This article provides some basic information on class action lawsuits, their purpose, and some recent trends with respect to contractual waivers. California courts are generally hostile to contractual waivers of class actions, but at the same time, the US Supreme Court has recently upheld waivers of class action lawsuits when wrapped in arbitration provisions. Since class action lawsuits can be very costly for San Diego businesses, it is worthwhile to make the attempt to limit class action lawsuits. Here is a brief discussion.

San Diego Corporate Law: What are Class Action Lawsuits?

In general, a class action lawsuit is one filed by a representative plaintiff — one or several — who attempts to convince a court that they should be the “representative” of a very large group of potential plaintiffs — hundreds to thousands to tens of thousands. In general, all of the plaintiffs would have very similar cases against one target defendant of the lawsuit. As an example, assume your business is the target defendant and all of your employees are claiming that you have failed to pay the minimum wage — you paid only $5 an hour. In that example, one employee could file suite and ask the judge to “certify a class” of plaintiffs that would include all of your employees whom you paid only $5 an hour.

Class action lawsuits are intended to address two main issues: efficiency and rectifying cost/benefit disincentives. In our minimum wage example, it would be efficient for the courts to handle all of the wage claims in one lawsuit, rather than having to handle 1,000 or 10,000 lawsuits. There is simple efficient use of labor, but also efficiency in that one judge can make one ruling that applies to all of the workers. With respect to cost/benefit disincentives, a better example might be where a business overcharges its customers for some service. As an example, take telegram delivery services. Maybe, by law, the delivery service can only charge $3.00 for sending the telegram. But, in our example, the firm charges $6.00 and the delivery service overcharged 100,000 customers. None of the customers have an incentive to file a lawsuit to recover $3.00; the potential benefit is far outweighed by the costs of finding a lawyer, drafting a complaint, paying hundreds of dollars in filing fees, etc. A class action lawsuit is intended to overcome that cost/benefit problem. Class action certification also allows for a successful plaintiff to recover attorneys’ fees. Many times, the fees exceed the amount collected in damages for the class of plaintiffs. This is among the reasons that class action lawsuits are so dangerous for San Diego and California businesses.

San Diego Corporate Law: California is Hostile to Class Action Waivers

As noted, the California Supreme Court has been very hostile to efforts by businesses to enforce contractual waivers of the right to file class action lawsuits. Most recently, in McGill v. Citibank, N.A., 2 Cal.5th 945 (Cal. Supreme Court 2017), the court ruled that Citibank could not require their customers to waive any remedy — like a class action lawsuit — that sought to protect and provide for “the public benefit.” Citibank required its credit card customers to agree to mandatory arbitration with respect to card services provided. The class action waiver was wrapped into the arbitration clause and prohibited an award against Citibank unless that award was “on an individual (non-class, non-representative) basis.” As noted, the California Supreme Court struck down the provision as a violation of California law. See Cal. Civil Code, § 3513.

However, a year later, the US Supreme Court came to a different result in the case of Epic Systems Corp. v. Lewis. See news report here. In that case, the court upheld a class action waiver that was part of a mandatory arbitration clause. The court held that the Federal Arbitration Act preempted any efforts by state legislatures and state supreme courts to weaken arbitration provisions. As such, decisions like McGill were disapproved.

This is one reason why San Diego business should consider adding mandatory arbitration provisions to their customer service agreements and to their Terms of Service agreements on their websites. Compelling mandatory arbitration is helpful generally — see our discussion here — and, under the holding of Epic Systems, businesses can now successfully limit consumer class action lawsuits.

Contact San Diego Corporate Law

If you would like more information, contact attorney Michael Leonard, Esq., of San Diego Corporate Law. Mr. Leonard provides legal services related to business law, private securities offerings/sales, the sale/purchase of a business, and for mergers and acquisitions. Mr. Leonard can be reached at (858) 483-9200 or via email.

You Might Also Like:

Include an Arbitration Clause in Your Contracts to Save You Money

Should I Require Key Employees to Sign an Arbitration Agreement?

San Diego Business: Using Attorneys’ Fees Clauses to Your Advantage

Contract Law: Can You Shift a Burden of Proof Via Contractual Provision?