Consumer Contract Arbitration Clause, Class Action Ban Held Unenforceable

This posting was written by William Zale, Editor of CCH Advertising Law Guide.

Computer seller Dell, Inc. could not enforce an arbitration clause and contractual bar against class action claims in a suit brought by computer purchasers asserting that Dell imposed charges falsely characterized as sales tax in violation of the Massachusetts consumer protection statute, the Massachusetts Supreme Judicial Court has ruled.

Dell’s consumer contract provision compelling individual arbitration was unenforceable because it was contrary to the fundamental Massachusetts public policy favoring consumer class actions under the statute, the court held. Because the purchasers failed to allege facts sufficient to state a violation of the statute, however, their claims were dismissed with leave to amend.

Aggregation of Small Claims

The right to a class action in a consumer protection case was of particular importance when, as here, aggregation of small claims was likely the only realistic option for pursuing a claim, the court observed. The two named plaintiffs claimed damages of only $13.65 and $215.55, respectively.

Allowing companies that do business in Massachusetts to insulate themselves from small value consumer claims would create the potential for countless customers to be without an effective method to vindicate their statutory rights—a result clearly at odds with public policy, the court said.

Choice of Law

Massachusetts law was applicable despite Dell’s contractual choice of Texas law, the court determined. The court relied on cases including Brazil v. Dell, Inc. (ND Cal. 2007) CCH Advertising Law Guide ¶62,652, in which California's interest in protecting its citizens from “take it or leave it” agreements that incorporate one-sided protections was held to outweigh Texas's interest in “protecting its resident business's expectations of consistent legal standards.”

Enforcement of the contractual choice-of-law provision was declined because Texas law likely would result in the enforcement of the class action prohibition, leaving Massachusetts consumers and businesses without an effective remedy for small claims—a result contrary to the fundamental policy of the Commonwealth, the court explained.

Federal Preemption

The Federal Arbitration Act did not preempt the ruling that the arbitration agreement was unenforceable under Massachusetts law, the court added. Under the U.S. Supreme Court's decision in Doctor’s Associates, Inc. v. Casarotto, CCH Business Franchise Guide ¶10,915, 517 U.S. 681, 687 (1996) and Massachusetts precedent, generally applicable contract defenses may be applied to determine the validity of an arbitration agreement.

Severability

The contracts at issue did not contain a severability or savings clause. The court agreed with the Supreme Court of New Mexico, which had held, in Fiser v. Dell Computer Corp. (2008) CCH Advertising Law Guide ¶63,085, that a similar class action waiver was not severable because the class action bar was “part of the arbitration provision” and “central to the mechanism for resolving the dispute between the parties.”

Consumer Protection Law Claim

The purchasers did not state a violation of the consumer protection statute by claiming that Dell imposed charges falsely characterized as sales tax for optional service contract when no tax was due, the court ruled. The purchasers failed to allege that Dell did not remit the tax it collected to the Commonwealth, and the consumer protection statute had been held inapplicable to actions motivated by legislative mandate.

The court granted the purchasers leave to amend their complaint to allege facts to support their implied theory that Dell collected tax on sales of services contracts as part of an attempt to transfer the tax burden on repair parts from the repairer—whether Dell or a third party—to the customer.

The July 2 opinion in Feeney v. Dell Inc. will be reported in CCH Advertising Law Guide.