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The Supreme Court Hands the Defense a Victory in the Ongoing Battle Over Arbitration Agreements and Class Action Waivers

In recent years, to avoid the potential for catastrophic losses associated with class action litigation, many companies have elected to include in their contracts arbitration provisions and waivers of the parties’ right to participate in a class action. The use of these provisions has been particularly prevalent in consumer contracts and employment agreements. Not surprisingly, the plaintiff’s bar has mounted vigorous attacks against these kinds of contract provisions with some success.

Typically, plaintiffs have challenged these types of agreements as being unconscionable under various state laws. Applying this argument, some sympathetic state court judges have thrown out the class waiver provision, leaving the arbitration agreement intact. This has often forced defendants into the unenviable position of facing class arbitration with its lack of appellate options and procedural protections, which result the parties’ agreement did not contemplate. Many defendants faced with this difficult choice have elected not to enforce an otherwise valid arbitration agreement after invalidation of the class action waiver provision.

On April 27, 2010, in Stolt-Nielsen v. Animal Feeds International Corp., the United States Supreme Court handed the defense bar a significant victory in this ongoing battle. The Supreme Court held that a defendant cannot be compelled to submit a dispute to class arbitration if the parties did not expressly agree to do so. This holding removes the threat of class arbitration if the defendant did not agree to submit to class arbitration.

The Court’s decision did not expressly address the situation where a class action waiver is struck down by a court as being unconscionable. Presumably, however, the fact that the parties initially agreed to waive class treatment of disputes in any forum should be conclusive evidence that the parties did not agree to submit their disputes to class arbitration, even if the class action waiver is struck down.

The practical effect of this decision is to empower defendants who routinely use agreements containing arbitration provisions and class action waivers to seek enforcement of those provisions without risking that their dispute might be thrown into class arbitration if the class waiver provision is struck down by a court.

While there remain other legal obstacles to enforcement of class waiver provisions and arbitration agreements, this holding at least slows the trend in which the use of such contract provisions have been eroded by courts.