Class Action Waivers Explained

Class Action Waivers

With the rise of arbitration as a way to resolve many consumer and employment disputes in somewhat recent history, it has become more common for companies to begin including class action waivers in their consumer and employment contracts. For example, the Microsoft Advertising Agreement includes a section labeled “Arbitration Agreement and Class Action Waiver.” This agreement means that anyone who agrees to advertise on Microsoft is barred from bringing a class action lawsuit, or any lawsuit at all for that matter, as long as their principal place of business is in the United States. 

Companies like Microsoft see this as a way to avoid costly legal battles that often involve paying a large number of people the same confirmed amount while not interacting with each person individually. However, critics argue that such agreements often are imposed on parties without much bargaining power and require them to give up a right. Regardless, class action waivers are more common than ever. Therefore, it is essential to understand their implications on the individual and how they can be useful or harmful to businesses and people alike.             

Class Action Lawsuits Explained: 

Before discussing a class action waiver, one must understand what a class action lawsuit is to determine if it is a process they would like to avoid or embrace. A class action is a lawsuit brought by a group of individuals against the same person or business for a similar claim. Several critical elements of a class action vary depending on the jurisdiction. Still, the most common requirements are spelled out in Rule 23 of the Federal Rules of Civil Procedure.

In short, this requires the class to be big enough to justify hearing their claims together instead of separately. Their claims must be the same across all people in the class, and they are allowed to appoint a representative or representatives to speak and participate in the suit on behalf of the class. It is a way to resolve a large number of similar claims in a uniform and efficient way for both the class and the parties. There is only one trial and one result that is split among the members of the class. While a class action can be time-consuming and costly for both sides, it often makes more sense than hearing each claim individually.  

Class Action Waivers Explained: 

A class action waiver attempts to remove the ability of the individual parties to form a class and forces each of them into individual dispute resolution, typically in arbitration. This means that if all consumers of the same product signed a contract or agreed to a contract through the purchase of an item to waiver class action. That item causes the same issue for every consumer. Each consumer would need to arbitrate the claim with the company, separate from the others. These are often hidden in larger contracts that make them difficult to spot. In addition, they are often in contracts with parties with little to no negotiating power over the other party.

Commonly, class action waivers are found in credit card use contracts, bank use contracts, employment contracts, and other consumer contracts. While each jurisdiction will have different requirements for these waivers based on the type of contract and the jurisdictional requirements, it is typically required that the waiver specifically provide an alternative means to resolve the dispute. This is usually arbitration.  

Benefits and Drawbacks for Contract Creators: 

With class action waivers, there are often benefits and drawbacks for the contract creators who include the waiver that are significantly different from the benefits and drawbacks that the individual class member may encounter. For this reason, the advantages and disadvantages of the waivers will be discussed separately. For the contract creators, these waivers bring the following benefits:

  • Confidentiality: An enormous benefit to the people drawing up the class action waiver is the ability to keep the dispute between the contract creator and potential class member confidential. Class actions are lawsuits that are typically public records and involve advertisements and mailings to collect class members. This means that many people would find out about the dispute. Keeping the dispute in arbitration ensures that the dispute is not published and spoken about.  
  • Fewer Participants: Another benefit that contract creators see is fewer plaintiffs bringing a dispute. Because each person will have to bring an arbitration claim separately, many will choose not to bother if it is not a huge problem. If they were allowed to be a part of a class, they could join without much effort and still recover. The work required, combined with less public knowledge that it is a systemic issue, will often lower the total number of claimants.  
  • Various Results: In a class action, the class will receive the same result across the board based on variation based on repetitiveness or intensity in some cases. However, with a class action waiver, the same defendant would be able to receive different results with each claim based on the arbitrator. Confidentiality helps prevent claimants from coming in expecting the same result.  

While there are some significant benefits for contract creators, there are also some drawbacks. 

These include:

  • Individual Cases: As discussed previously, the point of creating a class is it is impracticable to hear each case individually. However, class action waivers force a single defendant to go to arbitration repeatedly for the same claim. This can result in hundreds or thousands of claims.  
  • Legality Challenges: Several challenges to the legality of these clauses have arisen in recent history, most notably in employment law. However, the Supreme Court ruled that companies are allowed to include class action waivers in employment contracts. This does not mean that the legality of these clauses will never be challenged, which is a risk many companies take when including them.  

Class action waivers can help businesses in a variety of ways. Still, there are risks, and careful thought should be put into considering such a waiver.  

Benefits and Drawbacks for Class Members: 

Many of the reasons listed above may be flipped for potential class members when deciding whether an agreement with a class action waiver is a benefit or issue. However, there are benefits to the potential class members avoiding a lengthy trial through a waiver, and these benefits include:

  • Different Results: As mentioned above, the confidentiality of arbitration means that potential class members may not know what another person in the same situation was able to receive from a company. This can also benefit the potential class member because they are not bound to the uniform result from a class action lawsuit. This means that they could walk away from arbitration with much more than they would at trial. But it could be a potential drawback for those who receive less than the average. 
  • Confidentiality: For some potential class members, confidentiality may also help them feel more confident in bringing their claims forward. Particularly in employment cases, there may be some sensitive information about the parties coming forward, and avoiding the public record on those cases can be helpful.

Even though there are benefits, there are also issues for potential class members that need to be considered. These include:

  • Difficulty: If allowed to be a member of a class, the individual may not have to contribute much to the case outside of their information. Without a class action, the individual plaintiffs have to each bring their case. This may hamper or dissuade some people from pursuing a claim.  
  • Cost: Membership in a class will likely cost little out of pocket. Arbitrations can be expensive, and if any responsibility for fees ends up with the potential class member, they could have to pay more than they hoped. Higher costs can also discourage recovery for the individual.  

There are reasons one may choose to agree to a class action waiver. However, an agreement should be made with care and understanding of the greater process. 

Giving up a right to a trial with many others in the same situation is a risk, not all are willing to take.

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