Class Action Waivers in Business Contracts

What a class action waiver is

A class action waiver is a contract term in which each party agrees to bring any claim against the other only in its individual capacity, and not as a plaintiff or class member in any purported class, collective or representative proceeding. In business contracts it almost always sits inside an arbitration clause, so the combined effect is that disputes go to arbitration, one party at a time. Franchise agreements, dealer and distributor agreements, software and platform terms of service, payment processing agreements, equipment leases and the terms small businesses accept from large vendors carry them routinely.

For the drafting party, the purpose is to prevent a single dispute over a fee or a term from becoming a case on behalf of every customer. For the signing party, the effect is that a claim too small to arbitrate alone may not be worth pursuing at all. Both consequences follow from the same three Supreme Court decisions.

The three decisions that settled the question

AT&T Mobility LLC v. Concepcion (2011). California courts had treated class waivers in consumer arbitration agreements as unconscionable under a state-law rule. The Supreme Court held that rule preempted by the Federal Arbitration Act. Section 2 of the FAA makes arbitration agreements enforceable save on grounds that apply to any contract, and a state rule that conditions enforcement on the availability of class procedures stands as an obstacle to the FAA's purpose of enforcing arbitration agreements according to their terms. Class arbitration, the Court said, sacrifices the informality that is arbitration's main advantage and raises the stakes for defendants without the safeguards of court.

Epic Systems Corp. v. Lewis (2018). Employees argued that agreements requiring individual arbitration violated the National Labor Relations Act's protection of concerted activity. The Court held that the FAA requires courts to enforce arbitration agreements as written, including terms requiring individualized proceedings, and that the NLRA contains no clear command displacing that requirement. The FAA's saving clause reaches only generally applicable contract defenses, not a defense that targets the individualized nature of arbitration. The case arose in employment, but its reasoning governs any class waiver in an arbitration agreement: absent a clear contrary congressional command, the waiver is enforced.

Lamps Plus, Inc. v. Varela (2019). A lower court had read an arbitration agreement that was ambiguous on the point as allowing class arbitration, using the state rule that ambiguities are construed against the drafter. The Supreme Court reversed. Because class arbitration is so different from the individual arbitration the FAA envisions, consent to it cannot be inferred from ambiguity any more than from silence. A party seeking class arbitration must point to an affirmative contractual basis for it. In practice, if the clause does not clearly authorize class proceedings, there are none, whether or not it contains an express waiver.

What Texas adds

Texas courts apply the FAA to any written arbitration agreement in a contract involving interstate commerce, which describes nearly every business contract with a party, a supplier or a payment outside the state. Where the FAA applies, the three decisions above bind Texas state courts as fully as federal ones. The Texas Arbitration Act governs the rest, and nothing in it treats class waivers differently from other arbitration terms. The general rules on when an arbitration clause holds, including the Texas act's exclusions for certain individual transactions, are in whether the arbitration clause in your contract is enforceable in Texas.

When a waiver does not hold

• The arbitration agreement itself fails. The waiver draws its force from the arbitration agreement. If no agreement was formed, if the clause was procured by fraud directed at the clause itself, or if the clause as a whole is unconscionable for reasons that have nothing to do with class procedures, such as fees that make the forum unusable or a forum a thousand miles away for a small claim, the waiver falls with it. Those defenses are discussed in whether you can avoid arbitration and go to court.
• A federal statute overrides the FAA. Epic Systems requires a clear congressional command. Congress has enacted such commands for a few categories of claims, none of which ordinarily reach a dispute between two businesses over a commercial contract.
• The waiver stands alone. A class waiver outside any arbitration agreement is not protected by the FAA and is judged under ordinary state contract law, where the case law is thinner. Most drafters pair the waiver with arbitration for that reason.
• The clause is ambiguous about class proceedings and you want them. Lamps Plus cuts the other way here: ambiguity defeats class arbitration, so a party hoping to proceed on behalf of others needs clear language authorizing it.

What it means if your business signed one

The practical effect is that your claim is worth what it is worth alone. A franchisee overcharged a few thousand dollars in marketing fees cannot join forty other franchisees in one proceeding. The response is to evaluate the individual claim honestly: the amount, the fee-shifting terms, who pays the arbitration costs under the provider's rules, and whether the contract allows small claims court as an alternative, which many clauses do. Coordinated individual filings by many claimants represented by the same counsel have become a feature of this area and have led providers to adopt procedures and fee schedules for mass filings; whether that path makes sense is a question for counsel with the clause in hand. Business claims against a counterparty also often carry individual damages large enough that the waiver changes nothing.

What it means if your business uses one

If your company sells to many customers on standard terms, a class waiver paired with arbitration is enforceable and common. Drafting still decides how well it works. The waiver should state plainly that claims may be brought only in an individual capacity and that the arbitrator has no authority to consolidate claims or preside over any class or representative proceeding, so that Lamps Plus leaves no opening. A delegation clause should send questions of arbitrability to the arbitrator. A severability clause should say what happens if the waiver is held unenforceable for a particular claim; many drafters prefer that such a claim go to court rather than to class arbitration. Cost terms should not be so one-sided that the whole clause is attacked as unconscionable. The parallel questions for employees are covered in arbitration agreements with employees in Texas.

Example

Suppose a Dallas restaurant group signs a payment processing agreement with a national provider. The agreement sends all disputes to AAA arbitration, waives class and representative proceedings, and lets either party use small claims court for qualifying claims. Two years in, the group discovers an undisclosed monthly fee of about $90 per location across its six locations and learns through an industry group that hundreds of merchants have the same complaint. A class action in Dallas County is not available: the arbitration agreement is in writing, the processor is out of state so the FAA applies, and under Concepcion and Epic Systems the waiver is enforced. Under Lamps Plus the AAA arbitrator cannot certify a class because the agreement does not clearly authorize one. The group's options are an individual arbitration for its own overcharges, with attention to the fee-shifting clause, or small claims court if the amount qualifies. The industry group's members can file individually in coordinated fashion, but each case is its own.

Before you sign the next one

Read the dispute clause before the pricing schedule. Ask whether individual arbitration of the likely disputes is economically possible, who pays the filing and arbitrator fees, whether there is a small claims carve-out, and whether fee-shifting is mutual. Large counterparties rarely strike the waiver, but they sometimes agree to cost terms that make individual arbitration viable, and that is the term worth negotiating. On your own forms, have the clause reviewed against the current rules of the provider you name, because provider fee schedules and mass-filing procedures change.

Tina Wysk advises businesses on arbitration clauses and represents them in the arbitrations and motions to compel that follow, in Dallas state and federal courts. Her arbitration and mediation practice page describes that work.