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Class action lawsuits banned in more consumer contracts

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Class action lawsuits banned in more consumer contracts

Already utilized by many companies, clauses in end-user licensing agreements or other consumer contracts that ban consumers from turning to class actions to resolve product or service disputes are becoming more commonplace following a 2011 U.S. Supreme Court decision, experts say.

While the Supreme Court's 5-4 decision in AT&T Mobility L.L.C. vs. Vincent and Lisa Concepcion dealt with arbitration, legal experts say it provides companies a way to avoid class actions by requiring that disputes be addressed through arbitrations and that claims be brought individually rather than as a group.

Concepcion came out of the fact that people were increasingly using (class action waivers) to come up with a rational way to deal with user disputes,” said Kevin M. McGinty, a member of law firm Mintz Levin Cohn Ferris Glovsky & Popeo P.C. in Boston.

In a blog post in May announcing Microsoft Corp.'s plans to adopt class action waivers in its end-user licensing agreements, Tim Fielden, the Redmond, Wash.-based company's assistant general counsel, noted the 2011 ruling.

The ruling, Mr. Fielden wrote, permits the company's inclusion of language providing that customers whose claims can't be resolved informally with Microsoft can bring claims in small claims court or arbitration, but not as part of a class action.

“Certainly, I think there's been a movement for the past decade to put clauses in contracts to prohibit class treatment,” said Edward F. Sherman, a professor at the Tulane University Law School in New Orleans. “The Concepcion case has really given more muscle to that.”

“I think we'll see that being done in many, many contracts, certainly consumer contracts like cellphone contracts, services of various kinds,” Mr. Sherman said. “Whether we'll see it in commercial contracts, contracts between two companies, is a little more doubtful.”

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“I think it was fairly common before and it's becoming more common now,” said Brian T. Fitzpatrick, associate professor of law at the Vanderbilt Law School in Nashville, Tenn. “I don't know why any company wouldn't put class action waivers into arbitration agreements, because I don't know why any company would want to face a class action lawsuit.”

In the wake of the Supreme Court's ruling in Concepcion, “For state law claims, these things are more or less bulletproof,” Mr. Fitzpatrick said. While some questions remain about the ruling's impact on federal law claims, the vast majority of breach of contract, consumer fraud, breach of warranty and other product liability claims are going to be state law claims, he said.

Philip G. Kircher, a member of Cozen O'Connor in Philadelphia, said he expects to see class action waivers becoming more commonplace, “particularly in situations like Microsoft where they have millions of customers.”

“There are obviously distinct advantages to a company like Microsoft” or other companies mass producing products priced in the hundreds of dollars, Mr. Kircher said. “In a situation where you mass produce a product that costs that much, it's probably a good idea to stick into the end-user licensing agreement a waiver of class actions,” he said.

“A consumer is much less likely to sue over $600,” Mr. Kircher said. “It's unlikely you're going to have many people bringing their own actions, because it's just too expensive.”

“The problem is for consumers, and the good thing for companies is that when you get rid of class actions, companies are able to take advantage of consumers in small increments without ever having to pay it back,” Mr. Fitzpatrick said. “That's the concern, that Concepcion has really let companies off the hook.”

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He noted that some believe many consumer fraud claims are frivolous and filed to force companies to settle. “My own personal view is there are better ways to deal with frivolous lawsuits than to just get rid of class action lawsuits,” Mr. Fitzpatrick said.

But Mr. McGinty suggested that with class action waivers, “The incentive to bring claims when there's often no complaint—it's just a lawyer-driven claim—is gone.”

Mr. Sherman said that because many companies were concerned that barring class actions would be perceived as denying consumers access to the courts, many emphasize that consumers can go to small claims court or arbitration, with the company often offering to pay the arbitration costs.

“Sometimes they provide even that they'll pay legal fees for the individual to bring a small claims action,” he said.

Indeed, in his blog post, Mr. Fielden wrote that when disputes go to arbitration, Microsoft will “promptly reimburse filing fees, and, if we offer less to resolve a dispute informally than an arbitrator ultimately awards, we will pay the greater of the award or $1,000 for most products and services—plus double the customer's reasonable attorney's fees.”

Mr. Kircher suggested there are cases in which companies might want to avoid class action waivers, such as manufacturers of items where problems might cause widespread and more costly damages. In those cases, “If people are going to sue, you want them to sue as a class action.”

“In the end, it brings the manufacturer total peace” rather than “thousands of actions across the country in 50 different states,” he said. “Companies have to think about that.”

“If you have a big problem, the ability to resolve that problem through some kind of class settlement obviously has some benefit for companies,” Mr. McGinty said. “Those real big problems are rare.”

And companies facing such cases have other ways of addressing consumer issues such as product recalls or refunds, Mr. McGinty said. “There are other ways of dealing with real problems that don't require the intervention of the courts or buying off of plaintiffs attorneys,” he said.