UBER TECHNOLOGIES, INC. Contractual terms that prevent a party from participating in a class action may be unenforceable for unconscionability and public policy when they preclude access to justice, the
Background
The defendants in Pearce were advisors to individuals who were nearing a state of insolvency and were seeking to restructure their debt. Several former customers alleged the defendants were operating illegally and sought a return of fees paid and damages.
The former customers sought to have their claims certified as a class action proceeding. Some of these customers had entered into a standard form contract with the defendants that contained a class action waiver clause. The clause purported to prevent the customers from bringing class action proceedings. The defendants opposed class certification, and sought a stay of proceedings against some customers based on the class action waiver clause, among other grounds.
The motion judge, in Pearce v 4
A unanimous
The Court explained that unconscionability focuses on the vulnerability of and unfairness to the party seeking to void the contract while public policy focuses on the harm to society that would flow from upholding a particular contract.
Unconscionability
A contractual clause will be unenforceable for unconscionability when: (1) an inequality of bargaining power exists between the parties; and (2) that inequality led to an improvident bargain, or an unfair contract, judged when the contract was made. Applying these principles, the Court held that the class action waiver clause here was unconscionable and so invalid.
Inequality of bargaining power is established "where one party is unable to protect their interests in the contracting process." That depends on the context, but financial, informational, cognitive and experiential asymmetries are all relevant. The inequality does not have to be so great that it nullifies the party's capacity to enter a contract or amount to duress or undue influence. A lesser standard is sufficient. Here, the Court noted the consumers were not sophisticated commercial parties, and that the contracts were standard forms not subject to negotiation. The consumers were on the verge of insolvency when they entered the agreements. The clause did not effectively communicate that by agreeing not to participate in a class action, they would be barred from what was likely to be the sole mechanism through which they could practically bring an economically viable claim against the defendants. Although the defendants reviewed the contract with their customers, the Court made it clear this practice is only effective to the extent that it operates to equalize the relevant imbalances in the bargaining power of the parties. Here, it did not.
An improvident bargain occurs when, at the time the contract is made, the inequality of bargaining power and the surrounding circumstances lead to an undue disadvantage to the weaker party, or an undue advantage to the stronger party. Here, the Court reasoned that because of the low monetary value of the individual claims and the complex nature of the legal issues, non-class action proceedings were not an economically viable option. Thus, the practical effect of the clause was to prevent the consumers from suing the defendants under the agreement, thereby imposing an undue disadvantage.
Public Policy
The doctrine of public policy renders a contractual term unenforceable where an overriding public policy interest outweighs the public policy interest in upholding the principle of freedom of contract. The overriding public policy interest here was that the contractual term effectively precluded the ability of a party to seek the resolution of a dispute in accordance with law. Such a clause "undermines the administration of justice, the rule of law, democracy and commercial certainty."
The Court concluded that the class action waiver was unenforceable as being contrary to public policy. The primary thrust of the Court's reasoning was that class action proceedings were the only feasible way of bringing claims because of their low monetary amount and the complexity of the legal issues involved. While the class action waiver clause did not expressly prevent the customers from each bringing their own non-class action claims, that would not be feasible. Further, requiring many individual claims rather than a single class action would lead to a waste of judicial resources and problems of duplication of fact‑finding and the potential for inconsistent results. Finally, without class actions, "wrongdoers could cause widespread but individually minimal harm to a large class of individuals without fearing litigation, because the cost for one plaintiff to bring the suit would exceed the likely recovery."
Conclusion
Pearce suggests courts will be more willing to find class action waiver clauses unconscionable or against public policy, and parties intending to rely on them should take proactive steps to ensure they will be enforceable. Such steps may include drafting the clause in a way that its practical implications are clear, and specifically explaining those implications to the other party before entering the contract. Even so, waiver clauses may still be unenforceable where a class action proceeding is the only practical way a plaintiff can bring an economically viable claim to enforce their rights.
The use of public policy grounds to invalidate a class action waiver may have broader implications for commercial parties generally, as it does not necessarily depend on finding an inequality of bargaining power. It is often difficult to establish an inequality of bargaining power when the contract is between two sophisticated corporations. If a plaintiff can challenge a class action waiver on public policy grounds, that could open the door to class action waivers being struck down in more situations.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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