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Recent court case finds federal law trumps state prohibition on class actions

By Maurice L. Shevin and Samuel Friedman • Friday, October 23, 2015

The consumer finance industry is justifiably fearful of class action lawsuits. The fall-out from just one would devastate most consumer finance companies. That is why many in the industry include in their consumer notes and sales contract forms a contractual arbitration provision with a class action waiver.

Of course, consumer arbitration and class action waivers have been in the spotlight lately.  As we discussed a few weeks ago, the CFPB is considering a proposal to ban arbitration clauses that prohibit class actions.

In today's post, we review a recent Eleventh Circuit Court of Appeals decision ultimately holding that federal law trumps an Alabama law prohibition on class actions. 

In Lisk v. Lumber One Wood Preserving, LLC, 792 F.3d 1331 (11th Cir. 2015), the Court considered whether the plaintiff could bring a class action under the Alabama Deceptive Trade Practices Act (“ADTPA”), which expressly prohibits private class action lawsuits.  However, Federal Rules of Civil Procedure (“FRCP”) Rule 23 allows class actions.

In resolving the conflict in favor of federal law, the Court explained, “Under the plain terms of the statute, a federal rule applies in any federal lawsuit, and thus displaces any conflicting state provision, so long as the federal rule does not ‘abridge, enlarge or modify any substantive right.'”  In other words, FRCP Rule 23 trumps the state law prohibition—at least for lawsuits brought in the federal courts.

So, what does this case mean for consumer finance companies?

First, it removes a barrier to class action lawsuits.  In some circumstances, specifically including the ADTPA, a consumer can bring a class action in federal court, notwithstanding a state law prohibition to the contrary. Consumer advocates will certainly see this as a positive development.

More importantly, at least to consumer finance companies in Alabama, the ADTPA has a broad provision that makes it a violation to commit “any…unconscionable, false, misleading, or deceptive act or practice in the conduct of trade or commerce.”  Does that sound familiar?  Is this opening the door for UDAAP-type class actions? 

Now, the good news. The Court did not address the contractual prohibition on class-wide arbitration itself.  The permissibility of such a contractual provision has been upheld by the U.S. Supreme Court – at least for now.  

Still, this decision is another blow to the industry in the world of consumer class action and arbitration.

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