Feeney v. Dell Inc.

908 N.E.2d 753

454 Mass. 192

John A. FEENEY & another¹ v. DELL INC.² & others.³

SJC-10259

Supreme Judicial Court of Massachusetts, Middlesex.

Argued March 5, 2009.

Decided July 2, 2009.

Edward D. Rapacki, Boston (Joseph M. Makalusky with him) for the plaintiffs.

John A. Shope, Boston (Kirk G. Hanson with him) for the defendants.

The following submitted briefs for amici curiae:

Dwight Golann, pro se.

Ben Robbins, Martin J. Newhouse, & Jo Ann Shotwell Kaplan, Boston, for New England Legal Foundation & others.

Martha Coakley, Attorney General, & Matthew H. Schrumpf & Jennifer Grace Miller, Assistant Attorneys General, for the Commonwealth.

Present: MARSHALL, C.J., IRELAND, SPINA, CORDY, & BOTSFORD, JJ.

MARSHALL, C.J.

We decide in this case whether a statutory right to participate in class action lawsuits can permissibly be foreclosed by a provision in a consumer contract compelling individual arbitration. The plaintiffs, John A. Feeney and Dedham Health and Athletic Complex (Dedham Health), appeal from an order of a judge in the Superior Court compelling arbitration of their claims—brought as a putative class action—alleging that Dell improperly collected Massachusetts sales tax on the purchase of optional service contracts sold in connection with the purchase of Dell computers when (according to the plaintiffs) no such tax was due, and that the collection of such tax violated the Massachusetts consumer protection act, G.L. c. 93A. We conclude that the provision compelling individual arbitration in the plaintiffs' consumer contracts is not enforceable because it is contrary to the fundamental public policy of the Commonwealth favoring consumer class actions under G.L. c. 93A. We also conclude, however, for reasons we shall explain, that because the plaintiffs' complaint does not contain sufficient allegations to make out a claim under G.L. c. 93A, it should be dismissed without prejudice. We reverse the order compelling arbitration and remand for further proceedings.⁴

1. Factual background. We summarize the relevant facts from the judge's memorandum of decision and from undisputed facts in the record. Dell Catalog Sales Limited Partnership (Dell Catalog) and Dell Marketing Limited Partnership (Dell Marketing), wholly owned subsidiaries of Dell Inc. (formerly Dell Computer Corporation), sold computers and related products to consumers and businesses and, in connection with such sales, also sold optional computer hardware service contracts under which BancTec, Inc. (BancTec); QualxServ LLC; or Dell Marketing agreed to provide onsite computer repairs to the purchasers. Feeney and Dedham Health purchased Dell computer hardware from Dell Catalog and Dell Marketing, respectively, and optional service contracts provided by either Dell Marketing or BancTec.⁵ Dell Catalog and Dell Marketing collected sales tax on the plaintiffs' respective optional service contracts, totaling $13.65 from Feeney and $215.55 from Dedham Health.⁶

The "Dell Terms and Conditions of Sale"⁷ (terms)⁸ in effect at the time of the plaintiffs' purchases contain an arbitration clause compelling arbitration of any claim against Dell (but not binding Dell in connection with any claims it may have against a customer) and mandating that any such claims be arbitrated on an individual basis.⁹ Specifically, the terms provide that claims against Dell "arising from or relating to this Agreement" shall be resolved "exclusively and finally" by arbitration, and that the arbitration "will be limited solely to the dispute or controversy between Customer and Dell."¹⁰ The effect of these provisions is to prohibit a Dell customer from participating in a class action—whether by litigation or arbitration—against Dell.¹¹

The terms also include a choice-of-law provision that provides: "This agreement and any sales thereunder shall be governed by the laws of the State of Texas, without regard to conflicts of laws rules."¹²

2. Prior proceedings. a. Prearbitration. Feeney commenced a putative class action against Dell Computer Corporation (Dell Computer) in March, 2003,¹³ alleging that its "deliberate and systematic practice" of charging and collecting from plaintiffs and other Massachusetts residents monies falsely characterized as a lawful sales tax on the purchase of optional service contracts for computers constituted "unfair or deceptive acts or practices" in violation of G.L. c. 93A and regulations issued by the Attorney General of Massachusetts.¹⁴ See G.L. c. 93A, § 2.¹⁵ Asserting that they and other Massachusetts customers had suffered damages because Dell Computer caused them to pay monies for a "tax" that had not been imposed by any Massachusetts taxing authority, the plaintiffs sought relief under provisions of the consumer protection act providing for class actions, G.L. c. 93A, §§ 9(2)¹⁶ and 11.¹⁷ On July 3, 2003, Dell Computer moved to stay the proceedings and to compel arbitration pursuant to the Federal Arbitration Act (FAA), 9 U.S.C. § 4 (2000). The plaintiffs responded that the prohibition on class actions in the arbitration clause was unconscionable and undermined "the very purpose of the Massachusetts Consumer Protection Act." The motion to compel arbitration should be denied, they argued, because, inter alia, the terms unilaterally preclude class actions. A judge in the Superior Court allowed Dell Computer's motion to compel arbitration without decision, and the plaintiffs sought interlocutory review pursuant to G.L. c. 231, § 118, first par.¹⁸ A single justice of the Appeals Court denied the plaintiffs' petition.¹⁹, ²⁰

b. Arbitration. Unable to appeal from the decision of the single justice, see Ashford v. Massachusetts Bay Transp. Auth., 421 Mass. 563, 566-567, 659 N.E.2d 273 (1995), Feeney and Dedham Health each filed a claim of arbitration "under protest" in November, 2004.²¹ Their requests for class certification were denied by an arbitrator of the National Arbitration Forum (NAF). Relying on the provisions of the Dell terms and on "[c]lear rules of contract interpretation and construction," the arbitrator concluded that "class action relief has been waived, by the parties" and was not available in the arbitration despite the plaintiffs' "compelling arguments in favor of this relief." The arbitrator conducted a consolidated hearing on the merits of the plaintiffs' individual claims, ruled in favor of the defendants on the merits,²² and dismissed the plaintiffs' respective claims with prejudice.

c. Postarbitration. In February, 2008, the plaintiffs moved in the Superior Court to vacate the arbitration award and to reconsider the orders allowing the defendants' motion to compel arbitration. The defendants responded by moving to confirm the arbitration award and to dismiss the case. A different judge denied the plaintiffs' motions, allowed the defendants' motion,²³ and dismissed the case with prejudice. The plaintiffs appealed, and we granted their application for direct appellate review.

3. Jurisdiction and standard of review. The defendants argue that because the arbitrator declined the plaintiffs' request to certify a class, that decision may not now be reviewed. We reject the argument. Although the plaintiffs disagree with the arbitrator's decision declining to certify a class, their challenge here is to the order compelling arbitration in the first instance, and the plaintiffs thus present a "gateway dispute about whether the parties are bound by a given arbitration clause," an issue for judicial resolution. In re Am. Express Merchants' Litig., 554 F.3d 300, 311 (2d Cir.2009), quoting Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79, 84, 123 S.Ct. 588, 154 L.Ed.2d 491 (2002). Where, as here, the plaintiffs challenge the enforceability of a class action prohibition embedded in a binding arbitration clause, they are "plainly" challenging "the validity of the parties' agreement to arbitrate," and a court is the appropriate forum for such a challenge. In re Am. Express Merchants' Litig., supra. See Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440, 445, 126 S.Ct. 1204, 163 L.Ed.2d 1038 (2006), quoting Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 403-404, 87 S.Ct. 1801, 18 L.Ed.2d 1270 (1967) (courts may adjudicate challenge "of the arbitration clause itself").

We review the decision on the motion to compel arbitration de novo. Commonwealth v. Philip Morris, Inc., 448 Mass. 836, 844, 864 N.E.2d 505 (2007), citing Miller v. Cotter, 448 Mass. 671, 676, 863 N.E.2d 537 (2007). See Kristian v. Comcast Corp., 446 F.3d 25, 31 (1st Cir. 2006) (evaluating District Court's denial of motion to compel arbitration de novo).²⁴

4. Public policy. The plaintiffs argue that the class action prohibition in Dell's terms "contravenes Massachusetts public policy."²⁵,²⁶ We agree. It is "universally accepted" that public policy sometimes outweighs the interest in freedom of contract and in such cases the contract will not be enforced. Beacon Hill Civic Ass'n v. Ristorante Toscano, Inc., 422 Mass. 318, 321, 662 N.E.2d 1015 (1996), citing Spence v. Reeder, 382 Mass. 398, 413, 416 N.E.2d 914 (1981); Broussard v. Melong, 322 Mass. 560, 561, 78 N.E.2d 623 (1948); Restatement (Second) of Contracts § 179 (1981); 6A A. Corbin, Contracts § 1375 (1962); and 6 S. Williston, Contracts § 12:4 (R. Lord 4th ed. 1995). See A.Z. v. B.Z., 431 Mass. 150, 160, 725 N.E.2d 1051 (2000) ("It is well established that courts will not enforce contracts that violate public policy"). See also id. at 160 n. 24, 725 N.E.2d 1051 (noting numerous cases in which this court has "in a variety of contexts" refused to enforce contracts because of conflict with public policy). "`Public policy' in this context refers to a court's conviction, grounded in legislation and precedent, that denying enforcement of a contractual term is necessary to protect some aspect of the public welfare." Beacon Hill Civic Ass'n v. Ristorante Toscano, Inc., supra, citing Somerset Sav....