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An Amicable Separation for Arbitration and the Class Action Waiver

posted by Mark Weidemaier

Shutterstock_124671304To follow up on Adam's post about the Dropbox arbitration clause and its class action waiver, I want to highlight two aspects of the clause that may not be apparent on first glance. First, Dropbox's procedures for individual arbitration are actually quite fair. That's worth emphasizing, but so is the likely explanation: that Dropbox views a fair individual process as the cost of getting insulation from class actions. Second, Dropbox's clause suggests that the long-standing link between arbitration and class action avoidance may be breaking down. (This isn't necessarily good news if you value the deterrent effect of class actions.)

Let's begin with Dropbox's procedures for individual arbitration claimants. These are pretty customer-friendly, especially when compared to the comparable procedures Dropbox specifies for lawsuits filed in court. For instance, claimants can expect an arbitration hearing (assuming their claim is large enough to merit one under American Arbitration Association rules) in the county where they live and work, whereas San Francisco is the venue for all non-small-claims judicial proceedings. Dropbox will also pay a $1000 bonus to anyone who rejects a settlement offer and recovers more in arbitration. It may have borrowed this idea from AT&T v. Concepcion, which upheld a class action waiver in an arbitration agreement in part because the majority viewed AT&T's similar (if more generous) bonus as sufficient to enable arbitration for individual claimants.

As I mentioned in an earlier post, one result of the Supreme Court's arbitration case law is that arbitration risks becoming a vehicle for "laundering" contract terms that courts have historically been reluctant to enforce. The most notable term these days is the class action waiver, but there are others (punitive damages waivers, etc.). Whether you object to terms like these or not, there's no inherent reason they should be more enforceable simply because paired with an arbitration clause. Unfortunately, that's pretty much where things stand. Of course, arbitration only works this way if the clause is insulated from challenge on unconscionability and other grounds. Hence Dropbox's easy opt out and fair individual arbitration procedures. After all, these aren't costly to grant if you don't expect many customers to file claims

Something else is notable about the Dropbox agreement: it explicitly forbids class actions in court. (By contrast, many of the arbitration clauses I've seen accomplish this only implicitly, by requiring arbitration of all disputes and forbidding class actions in arbitration.) I would expect to see more of these clauses over time, even when the contract does not include an arbitration clause. That's because the Supreme Court's recent AmEx decision implies a growing willingness to enforce class action waivers outside the arbitration context. (Most of the relevant discussion in AmEx is on pp. 4-6 - e.g., "The antitrust laws do not evince an intention to preclude a waiver of class action procedure.") We'll see whether businesses take up this invitation; so far not all have rushed to change their contracts.

Image courtesy of Shutterstock.

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