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MASSACHUSETTS COURT HOLDS CLASS ACTION WAIVER IN ARBITRATION PROVISION VIOLATES PUBLIC POLICY

The Supreme Judicial Court of Massachusetts held in Feeny v. Dell Inc., 454 Mass. 192 (2009), that a consumer contract provision compelling individual arbitration is contrary to fundamental state public policy favoring consumer class actions under the state’s Consumer Protection Act (Act). However, the court dismissed the complaint without prejudice for failure to state a claim under the Act.

In this case, purchasers of computers and optional service contracts from Dell Inc. sought to bring a class action under the Act against Dell for allegedly improperly collecting Massachusetts sales tax on the optional service contracts. The “Dell Terms and Conditions of Sale” in effect at the time of the plaintiffs’ purchases contained a mandatory arbitration clause that precluded class actions. The terms also selected Texas as the governing law.

The plaintiffs filed suit in a Massachusetts court, but Dell successfully moved to compel arbitration and the cases were arbitrated by the National Arbitration Forum. The arbitrator denied the plaintiffs’ request for class certification, conducted a consolidated hearing on the plaintiffs' individual claims, ruled in favor of Dell and dismissed the plaintiffs' claims with prejudice. The plaintiffs returned to the courts seeking, among other things, to overturn the motion to compel arbitration. Eventually, the Supreme Judicial Court accepted plaintiffs’ application for review and held that a statutory right to participate in a class action lawsuit cannot be foreclosed by a provision in a consumer contract compelling individual arbitration.

The court determined that in cases with small value claims under the Act, a clause effectively prohibiting class proceedings in any forum violates the public policy of the state. This public policy determination was based largely on the Act, which specifically authorizes class actions, and its legislative history. The court noted that the right to a class action in a consumer protection case is of particular importance where aggregation of small claims may be the only realistic option for pursuing a claim. In addition, the court opined that class action bans undermine the public interest in deterring wrongdoing and negatively affect the rights of unnamed class members on whose behalf the class action would proceed.

The court also refused to honor the Texas choice-of-law provision, finding that Massachusetts law applied because Texas law likely would have permitted the class action prohibition and enforcing the choice-of-law provision would lead to a result contrary to Massachusetts’ fundamental policy. In addition, the court rejected Dell’s argument that the Federal Arbitration Act preempts any defense based on state public policy.

After relying heavily on the Act for its public policy rationale, the court then surprisingly agreed with defendants that the Act did not apply to plaintiffs’ claims by its own terms. The Act applies only to “unfair or deceptive practices in the conduct of any trade or commerce” and not to actions motivated by “legislative mandate.” On the facts alleged in the complaint, the court concluded that Dell remitted the sales taxes to the state and thus was within the “legislative mandate” exception. The court left open the possibility that the plaintiffs could file an amended complaint alleging a profit motive that would trigger the applicability of the Act.

  • Judy Scheiderer and