Business Alert: California Approves Class Action Waivers in Arbitration Clauses

The Court of Appeals of California recently released a key decision in Phillips v. Sprint that will significantly impact the field of California class actions. A copy of the decision can be found at the California court system’s website (specifically http://www.courts.ca.gov/opinions/documents/A134371.DOC). This decision will be of particular interest to our business clients but may trickle over into insurance disputes and other arenas.
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Phillips Ruling Results in Change to California Law
In 2005, after a period of procedural matters, named plaintiff Timothy Phillips filed a putative class action lawsuit (“putative” means that the court has not yet agreed a class exists or that a class claim is viable) against Sprint. The case alleged that Sprint made misrepresentations to its customers about cellular telephone rates. In 2006, Sprint filed a motion asking the court to force the parties to go to arbitration, citing a provision in its customer agreement that requires individual arbitration of all disputes related to the agreement. The arbitration provision, which specifies that it is to be governed by the Federal Arbitration Act (“FAA”), is broad and applies to all claims while precluding the resolution of claims on a class level.

At the trial level, the court denied Sprint’s motion to compel arbitration. In doing so, the court found that the arbitration provision in the customer contract, combined with the customer’s waiver of the right to bring a class action, was unconscionable under California law. This ruling stemmed from prior state court decisions finding that, under certain circumstances, a class action waiver set forth in certain types of consumer contracts is unenforceable. However, years later, the United States Supreme Court disagreed with California’s reading of the FAA. In AT&T Mobility LLC v. Concepcion (2011), the high court held that class action waivers in consumer contracts are indeed valid. A state court is bound to comply with the U.S. Supreme Court’s reading of a federal law such as the FAA.

Following the Concepcion ruling, Sprint asked the court to revisit the 2006 order and compel arbitration of the claims in the Phillips case based on the intervening change in the law. After rejecting a procedural objection, the Phillips trial court held that Concepcion governed. As such, the trial court granted Sprint’s motion to compel bilateral arbitration of the single named plaintiff and asked Sprint to prepare papers to address the cases of other class members. The Court of Appeals agreed and held that class action waivers in arbitration clauses are permissible in California.

The Importance of Selecting a Well-Rounded Small Business Law Firm
Phillips involves a complex area of law. It will impact the way businesses draft contracts and the way both courts and arbitrators read them when disputes arise. It also raises an important point: Businesses need to keep potential litigation in mind when drafting agreements. This is why it is vital for a company to engage a law firm with litigation and alternative dispute resolution experience when drafting contracts. Attorney Greg Brod’s experience in commercial litigation and arbitration allows him to help small businesses and other entities with contract drafting and negotiation.

As a San Francisco small business law firm, The Brod Law Firm can help prevent as well as resolve business disputes. We have no minimum billing requirement for our business clients and work with each client to create a legal strategy that ultimately saves both time and money. Call to arrange a free consultation.

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(Photo by Robert Linder)