In Kinkel v. Cingular Wireless, ____ N.E.2d ____ (Ill. 10/5/06), the Illinois Supreme Court held that an arbitration clause that prohibited class-wide arbitration was unconscionable.
The case began as an Illinois state-court class action in which plaintiff alleged that Cingular's $150 early-termination fee was an illegal penalty in violation of the Illinois Consumer Fraud Act. Plaintiff's agreement with Cingular included an arbitration clause with a class-action waiver, that is, a provision that “no arbitrator has the authority” to resolve class claims. Based on this clause, Cingular moved to compel arbitration solely on plaintiff's individual claims. The arbitration fee was $125. Cingular did not desire arbitration on a class-wide basis.
The trial court denied the motion to compel arbitration, holding that the class-action waiver was unconscionable and that the entire arbitration agreement unenforceable. After an intermediate appeal, the Illinois Supreme Court reviewed the case. The Supreme Court agreed that the prohibition of class arbitration was unconscionable. However, it also ruled that the class-action waiver was severable and that the arbitration clause could be enforced without it. The practical effect is that although Cingular can arbitrate the plaintiff's individual claims, it cannot preclude arbitration of the class claims, a result it was hoping to avoid.
The Supreme Court summarized its reasoning on unconscionability as follows:
In sum, we hold that under the circumstances of this case, the waiver on class actions is unconscionable. It is not unconscionable merely because it is contained in an arbitration clause. It is unconscionable because it is contained in a contract of adhesion that fails to inform the customer of the cost to her of arbitration, and that does not provide a cost-effective mechanism for individual customers to obtain a remedy for the specific injury alleged in either a judicial or an arbitral forum. We further hold that the offending clause is severable from the arbitration clause.
We do not hold that class action waivers are per se unconscionable. It is not unconscionable or even unethical for a business to attempt to limit its exposure to class arbitration or litigation, but to prefer to resolve the claims of customers or clients individually. Indeed, it has been suggested that, as a matter of economic theory, consumers may benefit from reduced costs if companies are allowed to engage in this strategy. See, e.g., J. Sternlight & E. Jensen, Using Arbitration to Eliminate Consumer Class Actions: Efficient Business Practice or Unconscionable Abuse?, 67 Law & Contemp. Probs. 75, 92-99 (2004). The unconscionability of class action waivers must be determined on a case-by-case basis, considering the totality of the circumstances.
At Workplace Prog Blog, Richard Bales has more, including thoughts about the article that was cited in the quoted portion of the Supreme Court opinion.
1. "Those Pesky Arbitration Clauses" (7/9/04)
3. "Another Class Action/Arbitration Clause Decision" (3/4/05)