LAW
LAW
Appeals Court Sets New Standard for Writing Consumer Agreements
By David Cinotti , Pashman Stein Walder Hayden , PC
In Verizon Wireless case , the New Jersey Appellate Division makes clear that companies should not overreach in their consumer-arbitration agreements .
In Achey v . Cellco Partnership d / b / a Verizon Wireless , a decision released on May 1 , 2023 , the New Jersey Appellate Division ruled that an arbitration clause in Verizon Wireless ’ s customer agreement was so unfair to customers that it was unenforceable . As a result , the court permitted customers to proceed with class-action litigation against the company alleging that Verizon illegally failed to disclose administrative charges on their bills . The case , along with other recent decisions on consumer arbitration , is a good reminder to companies that they can use arbitration clauses in customer agreements to prevent consumer class actions , but they must be careful to avoid clauses that appear so one-sided as to effectively deprive consumers or employees of a fair opportunity to arbitrate their claims .
Background on the Case
Verizon Wireless , like many companies , sought to prevent class-action litigation against it by including an arbitration clause in its customer agreements . The clause broadly required all customer disputes to be arbitrated and precluded customers from filing class actions . The arbitration clause also said that customers were not permitted to file any arbitration on behalf of a class , but could only pursue claims individually .
None of that was itself a problem . Under the Federal Arbitration Act ( FAA ), state law cannot discriminate against consumer arbitration agreements by , for example , applying different standards for when they are enforceable or imposing prerequisites for arbitration agreements to be valid that do not exist for contracts generally . The U . S . Supreme Court has also ruled that arbitration agreements waiving the right to file class litigation are enforceable under the FAA , and that companies cannot be compelled to arbitrate against a class of persons unless they clearly consent to class arbitration .
But Verizon Wireless ’ s arbitration clause went further than prohibiting class litigation and arbitration . As more companies include class litigation and arbitration waivers in their contracts , plaintiffs ’ lawyers have turned to filing many – sometimes thousands – of individual consumer or employment arbitrations . That strategy imposes substantial costs on companies because most arbitration rules require the companies to pay the cost of consumer and employment arbitration , including all or most of the filing fees and the arbitrator fees . Companies often make it clear in arbitration agreements that they will pay those fees to avoid a court refusing to compel arbitration because the process is too expensive for customers or employees to use .
In 2022 , a New York court rejected Uber ’ s claim against the American Arbitration Association ( AAA ) that it should not have to pay the costs of arbitrating more than 30,000 individual arbitrations filed by the same law firm on behalf of claimants who were challenging the company ’ s delivery fees . Those costs amounted to more than $ 90 million . The decision ’ s message was that Uber could not demand the benefits of consumer arbitration , including avoiding class litigation and arbitration , without accepting the costs and inefficiencies of individual arbitrations .
Likely seeking to avoid paying for thousands of arbitrations , Verizon included a “ bellwether ” provision in its arbitration clause . That provision said that if 25 or more customers raised similar claims in arbitration and were represented by the same counsel or “ coordinated ” counsel , the customers ’ lawyers and Verizon ’ s lawyers would each select 5 of the cases to act as bellwether cases . Until those first 10 arbitrations were resolved , no other cases could be “ filed ” or proceed . If , after the first 10 arbitrations , Verizon and the customers ’ lawyers could not agree to a settlement of the other cases , the process would continue – 10 arbitrations at a time – until all cases were settled or decided in arbitration . That bellwether process potentially avoided massive arbitration fees imposed on Verizon , but it also meant that customers whose arbitrations were not part of the bellwether cases might have to wait years for their claims to be heard . At the time the plaintiffs filed their claims in court , more than 2,500 Verizon customers had filed similar claims in arbitration . Because the average AAA consumer arbitration takes 6.9 months to resolve , the court calculated that it could take 145 years before the plaintiffs ’ claims were resolved in arbitration .
There were other problematic aspects of the arbitration clause as well . It required customers to give Verizon notice of a claim within 6 months or waive their claims ; it forbade punitive damages and injunctions that applied to more than just the individual claimant ; and it prevented customers from relying on statements of customer-service representatives .
The New Jersey Appellate Division agreed with a California federal court ’ s decision in an earlier
David Cinotti , Pashman Stein Walder Hayden , PC
case that Verizon ’ s arbitration clause should not be enforced . Although the FAA does not allow state law to treat arbitration agreements less favorably than other contracts , it does permit state courts to refuse to enforce arbitration agreements on the same grounds that make other contracts unenforceable . “ Unconscionability ” and “ public policy ” are among those legal grounds applicable to all contracts , and the Appellate Division explained in its opinion why various aspects of the arbitration clause were unconscionable or against public policy .
Lessons for Consumer- Arbitration Agreements
From the company ’ s standpoint , Verizon ’ s bellwether process might have been a reasonable solution to the costs of thousands of individual consumer arbitrations . But the arbitration clause was so unreasonable to consumers – who have no ability to negotiate terms with their cellphone provider – that it was inviting a court to strike it down , particularly in states like California and New Jersey where there is already resistance to consumer arbitration . Companies should work with counsel to decide whether the benefits of preventing class proceedings outweigh the potential costs of arbitrating many individual arbitrations . Including a right to seek consolidation of arbitrations raising the same facts or legal issues might be a better way to avoid massive arbitration fees than the bellwether process that Verizon attempted . Although the FAA protects companies ’ contractual rights to arbitrate and avoid class actions , it is not a blank check for companies to impose whatever arbitration procedures they would like on consumers and employees .
August 2023 COMMERCE 31