Debt collector can’t use arbitration provision to thwart class action, court rules

A collection agency that was not party to a contract between a business and a consumer could not compel arbitration of the consumer’s claims against the collection agency over its practices, the Massachusetts Supreme Judicial Court has ruled.

Consumer advocates had been watching the case closely, fearing that the SJC might reach the opposite conclusion, which would have enabled the debt collection agency to scuttle a potential class action lawsuit related to its alleged violations of 940 C.M.R., §7.04(1)(f), in which the Massachusetts attorney general has defined unfair or deceptive acts or practices violating the state’s consumer protection statute, Chapter 93A, in the debt collection context.

While noting that the “heavy hand” of the Federal Arbitration Act favors arbitration, Justice Barbara A. Lenk wrote for the court that the question in Landry v. Transworld Systems Inc. “is not whether the subject matter of a particular claim falls within the scope of the arbitration provision, but, rather, whether there is an enforceable arbitration agreement” between Transworld and the consumer, Philip Landry.

After reviewing the six theories under which a nonsignatory may enforce a contract in Massachusetts, the SJC agreed with the lower court that none of those circumstances applied to Transworld.

Specifically, Transworld argued that it could enforce the arbitration provision in a rental car contract with Landry either under an “agency” theory or as a third-party beneficiary.

But the SJC concluded that neither theory was applicable.

A nonsignatory agent might be able to enforce an arbitration provision in a contract signed by its principal, but only in the limited circumstance in which the claim against the agent arose “under the contract in question,” which it did not in this case, as Landry’s sole claim is that Transworld engaged in unlawful debt collection practices, the court said.

As for the third-party beneficiary argument, the SJC noted that, under Massachusetts law, a nonsignatory seeking to enforce an arbitration agreement as a third-party beneficiary must point to “clear and definite” evidence of the parties’ intent that it benefit from the provision, but the court could not discern any such clarity here.

“The language in the arbitration provision is susceptible of multiple interpretations; the arbitration provision is, at a minimum, ambiguous as to whether Transworld can enforce it,” Lenk wrote.