California Class Action Belatedly Dismissed in Favor of Arbitration

By now, any company that provides consumers with terms and conditions covering the terms of sale should be aware of the Supreme Court's recent decision in AT&T Mobility LLC v. Concepcion. That decision, issued earlier this year, enforced an arbitration clause and a class action waiver provisions to prevent dissatisfied consumers from filing class actions or even suing at all. Previously, it was unclear whether a consumer could be required to arbitrate instead of going to court, but the Concepcion ruling gave these clauses a general stamp of approval. Now, a California federal court has gone a little farther: if a lawsuit was started before the Concepcion decision was issued, a company can ask a court to retroactively apply the arbitration clause by dismissing the lawsuit and belatedly applying the arbitration clause. This is exactly what happened in a Southern District of California decision, Bailey v. Household Finance Corp., issued on October 28th. Debra Ann Bailey filed a lawsuit, saying Household Finance was harassing her with illegal telephone calls to collect a loan she hadn't paid back. The terms of her loan included an arbitration clause and class action waiver, but when the lawsuit was filed in 2010, Household Finance did not invoke those provisions because it didn't think the court would enforce them. When Household Finance learned of the Concepcion ruling in 2011, it filed a motion to dismiss the lawsuit and compel arbitration. Ms. Bailey argued it was too late, that Household Finance had waived its right to seek arbitration because it had been participating in the lawsuit for ten months. Judge William Q. Hayes sided with Household Finance, and required the plaintiff to go to arbitration, where she could not proceed with the class action. Judge Hayes wrote that Household Finance "could have reasonably believed that, prior to [Concepcion], California courts would have found the arbitration agreement to be unenforceable. A few months after [Concepcion] was decided, Defendants filed the Motion to Compel Arbitration. Accordingly, Plaintiff has failed to show that Defendants acted inconsistently with a known right to arbitrate." The case was dismissed and the parties ordered to proceed to arbitration, a huge victory for Household Finance.

The lesson to be learned here is that any company facing a class action lawsuit despite having an arbitration clause in their terms and conditions, should carefully examine their options in light of this week's decision. Moreover, companies who wish to attempt to secure such protections should consider obtaining customer consent to an alternative dispute resolution provision containing a class action waiver.

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