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April 28, 2011 Articles

Florida Considers Unconscionability in Class-Action Waivers

The Florida Supreme Court heard oral argument in Pendergast v. Sprint Nextel Corp., which considered public-policy exceptions to class-action waivers in arbitration clauses.

By Benjamin Kelley and Jamy Dinkins

At the Eleventh Circuit’s request, the Florida Supreme Court heard oral argument in Pendergast v. Sprint Nextel Corp. on February 10, 2011. The Eleventh Circuit asked the Florida Supreme Court to consider Florida’s public-policy exceptions to class-action waivers in arbitration clauses and requested that the court determine what kind of framework courts should use for both procedural and substantive unconscionability, whether the wireless contract at issue was procedurally or substantively unconscionable, and whether the contract was void.

James Pendergast’s federal class-action complaint alleged that Sprint charged customers improper roaming fees for calls made within Sprint’s geographic coverage area. He filed suit under the Florida Deceptive and Unfair Trade Practices Act and provisions of Florida law, including breach of contract and negligent misrepresentation. Sprint responded with a motion to compel arbitration, claiming that a 2008 service agreement barred suit because it contained an arbitration clause and a class-action waiver clause. The Southern District of Florida granted the motion to compel arbitration and rejected Pendergast’s arguments that the class-action waiver and arbitration clauses were unconscionable and therefore unenforceable under Florida law. Pendergast appealed to the Eleventh Circuit.

On appeal, the main issue concerned what the appropriate analytical framework is under Florida law for deciding unconscionability. While recognizing that both procedural and substantive unconscionability must be shown for a contract to be found unconscionable, the court noted that there is tension among Florida intermediate appellate courts regarding the proper analytical framework.

On appeal, the main issue concerned what the appropriate analytical framework is under Florida law for deciding unconscionability. While recognizing that both procedural and substantive unconscionability must be shown for a contract to be found unconscionable, the court noted that there is tension among Florida intermediate appellate courts regarding the proper analytical framework.

Pendergast argued for a balancing or sliding-scale approach, where the more substantively oppressive a contract is, the less evidence of procedural unconscionability will be required to find the contract unconscionable and vice versa. The Third and Fourth Florida District Courts of Appeal have applied this approach. Sprint, on the other hand, contended that courts should evaluate substantive and procedural unconscionability independently. Florida’s Second and Third District Courts of Appeal apply this approach, often with no reference to a balancing or sliding-scale method. If either procedural or substantive unconscionability has not been independently established, the courts have simply concluded their analyses. Because of this tension among Florida’s intermediate appellate courts, the Eleventh Circuit certified this question to the Florida Supreme Court.

The Eleventh Circuit also asked the Florida Supreme Court to determine whether the class-action waiver was procedurally unconscionable under Florida law. The Southern District of Florida found that it was not. To determine procedural unconscionability, courts must consider the manner in which the parties entered into the contract, the parties’ relative bargaining power and whether the complaining party had a meaningful choice at the time of contracting, whether the terms were presented on a “take-it-or leave it” basis, and the complaining party’s ability to understand the disputed terms. Powertel, Inc. v. Bexley, 743 So. 2d 570, 574 (Fla. 1st Dist. Ct. App. 1999). The central inquiry, however, is whether the consumer has an absence of meaningful choice in accepting the contract’s terms. Belcher v. Kier, 558 So. 2d 1039, 1042 (Fla. 2d Dist. Ct. App. 1990).

Pendergast argued that the contract was procedurally unconscionable because Sprint added terms to his service agreement without calling attention to those terms. Pendergast also noted that even if he had been aware of the unilateral additions, he could not have opted out of the contract without losing the value of his already-purchased, Sprint-only mobile phone. Plus, he contended, he could not have switched to another cellular phone carrier without a class-action waiver clause because a suitable alternative provider did not exist.

Sprint responded that the class-action waiver clause was written in clear terms, in legible font, and that it had provided Pendergast with copies of the agreement on multiple occasions. It argued that Pendergast simply did not read the agreement; he could have opted out within 30 days of any change Sprint made to the service agreement. Additionally, Sprint noted that Pendergast provided no evidence of the cost or value of the Sprint-only mobile phone that would have allegedly gone to waste. Given the unsettled nature of Florida law in this area, the enormous number of cellular phone contracts, and the frequency of similar unconscionability claims, the Eleventh Circuit certified the question of procedural unconscionability to the Florida Supreme Court.

The Eleventh Circuit also asked the Florida Supreme Court to consider whether the contract was substantively unconscionable under Florida law, even though, because it held that the contract was not procedurally unconscionable, the Southern District of Florida had not reached the issue. Pendergast argued that the class-action waiver provision was substantively unconscionable because it effectively prevented him from seeking a legal remedy for the violation he alleges; his claim is too small to litigate individually, and necessitating a class action to make it economically viable. One Florida appellate court found that requiring contracting parties to forego legal remedies is an element of substantive unconscionability, especially where the waiver insulates the drafting party from consumer-protection laws. Powertel, 743 So. 2d at 576. Another appellate court found that a class-action waiver was unconscionable in part because it removed the plaintiff’s ability to litigate on behalf of a class certifiable due to numerosity, commonality, typicality, and adequacy of representation. Bellsouth Mobility LLC v. Christopher, 819 So. 2d 171, 173 (Fla. 4th Dist. Ct. App. 2002).

The Eleventh Circuit recognized that the facts for Pendergast are less favorable than in either Powertel or Bellsouth, because Pendergast had other remedies available (small-claims court and appropriate state and federal authorities) and state law authorizes attorney fees. Nevertheless, the Eleventh Circuit asked the Florida Supreme Court to resolve the question of whether these factors amount to substantive unconscionability.

Finally, the Eleventh Circuit asked the Florida Supreme Court to determine whether any other grounds for voiding the class-action waiver provision exist under Florida law. While this question’s language is broad, the Eleventh Circuit seems to be asking whether a class-action waiver is void as against public policy. It noted the Florida Deceptive and Unfair Trade Practices Act and flagged the problem encountered in Powertel—concern that contracts could insulate parties from the teeth of consumer-protection law.

Also of significance is the case of Gordon v. Branch Banking and Trust, 2011 WL 1111718 (11th Cir. 2011), decided by the Eleventh Circuit on March 28, 2011. Here, BB&T tried to invoke a class-action waiver clause to preclude a class action, alleging unjust enrichment based on allegations of overdrafting. The Eleventh Circuit held that the provision was unenforceable under Georgia law because the plaintiff would not be able to retain an attorney to prosecute her claims if the waiver was enforced. Each overdraft fee was worth only $35, an amount sure to be exceeded by attorney’s fees in any potential individual litigation or arbitration. The court said the class-action waiver clause was unconscionable because it would have precluded the plaintiffs from having an adequate legal remedy. Similar appeals by other banks are still pending before the Eleventh Circuit. Oral argument is scheduled for April 12, 2011, in Miami, Florida.

Benjamin Kelley and Jamy Dinkins – April 28, 2011


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