All posts by James D. Smith

A current trend in consumer class action litigation across the country focuses on food and beverage labeling. Plaintiffs will allege that products labeled as “all natural,” being a good source of a certain nutrient, or having “no artificial ingredients” are deceptive and violate various unfair competition laws. The United States District Court for the Northern District of California has become a particularly active forum for these claims, earning the nickname, “the food court.” That court often denies motions to dismiss and grants class certification, largely relying on California’s consumer-friendly False Advertising Law, Unfair Competition Law, and Consumers Legal Remedies Act. A recent decision on one of the earliest “all natural” class actions, however, emphasizes that defendants can succeed against these claims even after losing the motion to dismiss and motion for class certification. This decision reminds us that, as with any class action, it is important to prepare the case as if you will take it to trial (and be prepared to try it) and to put the plaintiffs to the test of meeting the essential elements of their claims.

Reis v. AriZona Beverages USA LLC, No. 10-01139 RS (N.D. Cal. Mar. 28, 2013), began in March 2010 and is one of the earlier “all natural” food labeling cases. Those two plaintiffs alleged that the defendants falsely labeled AriZona Iced Tea as “all natural,” “100 percent natural,” and “natural” even though the products contain high fructose corn syrup and citric acid. The plaintiffs contended that those ingredients are not natural and that the marketing, advertising, and labeling was deceptive. The Northern District of California denied a motion to dismiss, denied a motion for summary judgment, and certified a class under Federal Rule of Civil Procedure 23(b)(2) to pursue claims under California law.

Things changed, however, after discovery had closed. The plaintiffs never disclosed any expert opinion as to whether high fructose corn syrup and citric acid are not “natural,” and they did not provide any evidence as to how to measure restitution or disgorgement under California law. Thus, the defendants renewed their motion for summary judgment.

The court took a particularly harsh view of plaintiffs’ failure to conduct basic discovery or provide evidence supporting essential elements of the claims. Central to the claims, of course, is the assertion that high fructose corn syrup and citric acid are not “natural.” The defendants provided an expert report from a food scientist who described the processes of making those ingredients, and who opined that they are natural. The defendants also provided declarations from their suppliers reflecting that the high fructose corn syrup supplied to defendants satisfies FDA natural policy, and a certificate of the natural status of their citric acid.

The plaintiffs did not offer any evidence that high fructose corn syrup is artificial. Instead, they asked the court to take judicial notice of patents issuing for the process of producing that product. They argued that high fructose corn syrup is not natural as a matter of law because a patented process is necessary to create it. The court quickly dismissed that argument as it lacked any legal support and was nothing more than an extension of plaintiffs’ contention that a product is artificial if it cannot be grown in soil, plucked from a tree, or found in the ocean. As the court noted (Slip Op. at 7), “[i]n the face of a motion for summary judgment, rhetoric is no substitute for evidence.”

The plaintiffs truly seemed to discard their “not natural” argument. Instead, they contended that the labels were misleading under California law because ordinary consumers would not know that “all natural” includes such ingredients derived through complex processes. The court rejected that argument as well because California law requires that the statements be likely to mislead the public, not merely that they could mislead the public. To succeed on this type of claim, the plaintiffs should have demonstrated by extrinsic evidence (such as consumer survey evidence) that the challenged statements tend to mislead the public. Ambiguous deposition testimony from one of the defendant’s executives about the decision to include the “all natural” labeling on the products did not meet the plaintiffs’ burden.

Equally important, the plaintiffs failed to meet their burden of establishing some way to measure damages. Under California law, plaintiffs and the class would only be entitled to restitution or disgorgement. The proper measure of such damages is the difference between what plaintiffs paid for and what they received. Even under the plaintiffs’ theory, the drinks they purchased had some value—presumably the same value as “correctly” labeled beverages that did not tout being “all natural.” But the plaintiffs did not even address this essential element of their claims. “They offer not a scintilla of evidence from which the finder of fact could determine the amount of restitution or disgorgement to which plaintiffs might be entitled if this case were to proceed to trial.” [Slip Op. at 11] That failure alone was sufficient to grant summary judgment.

Last, the court also decertified the Rule 23(b) (2) class that it had certified. The court concluded that the plaintiffs and their counsel were not adequate representatives for the absent class. The failure to even attempt the necessary discovery and to fail to address at all in their summary judgment opposition the proper measure of damages indicated they could not protect the class’ interests.

Although Ries is a district court decision, it is significant for a few reasons. First, it is an important victory for class defendants facing such food labeling claims in the Northern District of California. That court has become a magnet for these types of claims. Second, the decision emphasizes that class action defendants cannot view class certification as the end of their case. Class action plaintiffs’ reliance on the vague meaning of “all natural” can work against them on the merits of the claim. At some point, plaintiffs must prove that the ingredients they challenge truly are not “natural” or not a good source of a nutrient. While plaintiffs in this district often defeat motions to dismiss through rhetoric (i.e., it is not natural if it can’t be grown or raised), meeting the burden of proof at summary judgment is a different matter altogether. Defendants should be able to compel plaintiffs to provide, at a minimum, expert testimony to meet this burden. Of course, expert testimony must satisfy Daubert at the summary judgment stage, so that provides another avenue of attacking the plaintiffs’ case. As with every case, prepare it from the outset as if you are going to trial.

Categories: Class Actions | Food Safety

Actions: E-mail | Comments

The Eleventh Circuit recently allowed a defendant to enforce the arbitration provision in its consumer agreement despite some missteps that could have led to the opposite result, particularly if this case had been in another circuit. In re Checking Account Overdraft Litigation, No. 11-14318 (11th Cir. July 6, 2012), involves allegations that a bank charged overdraft fees when accounts had sufficient funds, provided inaccurate information about balances, and failed to inform consumers of changes to policies (leading to more overdraft fees). That named plaintiff brought claims under the North Carolina Unfair Trade Practices Act, breach of contract, and breach of the covenant of good faith and fair dealing.

The bank moved to compel arbitration under it services agreement, which the district court denied. Following AT&T Mobility, LLC v. Concepcion, 131 S. Ct. 1740 (2011), the Eleventh Circuit remanded for reconsideration. The district court again refused to compel arbitration. It held that the bank waived the right to submit the question of arbitrability to the arbitrator after having litigated the matter for more than a year. It also found the arbitration clause to be unconscionable because the bank could recover its fees from the arbitration, even if it did not prevail, and by withdrawing those fees from the customer’s account without notice. [Slip op. at 4]

The Eleventh Circuit affirmed the conclusion that the bank waived its argument that the agreement gave the arbitrator the authority to decide enforceability and arbitrability. While Rent-A-Center West, Inc. v. Jackson, 130 S. Ct. 2772 (2010), confirms the validity of such delegation provisions, it did not address whether a party may waive them by inconsistent conduct. By litigating the case for a year without raising this threshold issue of arbitrability, the bank gave ample grounds to the district court to find waiver. [Id. at 6]

The fee shifting provision, indeed, allowed the bank to recover its fees and costs incurred from “any dispute involving [the customer’s] account.” [Id. at 7] Thus, the bank was entitled to those fees and costs even if a customer prevailed in a dispute. The bank argued that the provision did not apply to arbitration—it was not in the arbitration section of the agreement, and the arbitration clause specified that AAA rules applied (which have their own costs provisions). The appellate court also backed the district court’s conclusion that the provision applied to this arbitration and, therefore, could be considered in evaluating unconscionability. [Id. at 8-9]

If the fee/cost provision applied, it was not difficult to conclude that it is unconscionable under general principles of contract law. While the arbitration provision was conspicuous and on the agreement’s first page, the unusual fee shifting provision was not highlighted and was on page 14. Its plain language allowed the bank to recover fees even if it lost. [Id. at 18, 20-22]

The last issue was the remedy in light of this unconscionable language. The agreement contained a clause to sever any unenforceable portion of the arbitration provision. Likewise, applicable state law allows for severing unconscionable provisions from broader contracts. While the consumer argued that the bank waived its right to rely on the severance clause, the state law principle still applied. The Eleventh Circuit held hat severing the fee shifting provision was appropriate because the arbitration clause could function effectively without it. [Id. at 25-26] The parties most likely intended the fee shifting provision and arbitration clause to operate separately considering they appeared in separate potions of the agreement and did not reference one another, too. [Id. at 26] Accordingly, the appellate court reversed and instructed the district court to compel arbitration, though without the fee shifting provision.

Lessons Learned

Had this matter been in the Second or Ninth Circuits, it is quite possible the court would have invalidated the arbitration clause as unconscionable. Of course, we cannot always choose the forum, so we need to consider how to avoid the risks this case presented.

First, lawyers for businesses cannot focus only on the arbitration clauses when advising our clients. We must evaluate how the clause interacts with other provisions or even other documents if they are incorporated by reference, etc. It seems impossible to believe the bank truly intended to recover fees if it lost at arbitration; the provision more likely covered fees incurred if the bank had to litigate garnishment, child support, or spousal maintenance issues as a third party. But the uncertainty regarding the fee shifting provision’s scope nearly invalidated the unrelated arbitration clause, which would have opened up the bank to a class action in federal court. Read and understand every document your client will present to the customer as part of the transaction. Ensure they do not contain surprises like this fee shifting provision or inconsistent arbitration clauses. If your client is interested in including a fee shifting provision, include it in the arbitration clause and try to get the client to agree that it only applies if the consumer’s claim is frivolous. We do not want a court to think the arbitration provision disadvantages the consumer if terms of such risks of fee shifting when compared to litigation.

Second, do not forgo arguments to enforce portions of the arbitration clause unless you and the client are prepared to waive them forever. The bank may have had sound reasons to initially forgo arguing that the arbitrator had the power to determine arbitrability, but it tried to change tactics and to embrace that provision too late. Always look down the road to how your decisions will affect the case in 6 or 12 months.

Third, evaluate including clauses to sever an unconscionable portion of the overall agreement or the arbitration provision. Admittedly, this calls for careful consideration. I do not tolerate the risk of class arbitration well; the lack of appellate review is just too much for a “bet the company” matter if you can avoid it. I am inclined to include a provision invalidating the entire arbitration agreement if a class action waiver is found to be unenforceable or unconscionable to avoid that risk. Your client’s agreement, however, may have provisions that can fall by the wayside but still have the overall agreement provide fair and reasonable dispute resolution processes. Again, think carefully about how to address this issue.

The bank here may have dodged a bullet. Its close call gives defense practitioners another reason to suggest that our clients carefully review their consumer agreements so they avoid the risks seen here.

Categories: Arbitration

Actions: E-mail | Comments

In 2010, the Supreme Court issued Stolt-Nielsen, S.A. v. AnimalFeeds International Corp., 130 S. Ct. 1758 (2010). In that opinion, the Court held that parties could not be compelled to participate in class arbitration unless they had agreed to do so; courts and arbitrators could not infer such agreement by the mere fact that a party had agreed to arbitrate. Defense counsel thought (or hoped) that Stolt-Nielsen would preclude class arbitration whenever the arbitration clause did not expressly allow class or collective proceedings. As disputes worked their way to the various courts of appeals, however, we see those intermediate appellate courts finding unique ways to allow class arbitration and effectively limit Stolt-Nielsen to its facts.

The Second Circuit Pushes Back In Jock

Last year, the Second Circuit continued what seems to be a running battle with the Supreme Court regarding arbitration clauses in Jock v. Sterling Jewelers, Inc., 646 F.3d 113 (2d Cir. 2011), cert. denied, 132 S. Ct. 1742 (2012). I discussed that opinion at the time the Second Circuit released it. In essence, the Second Circuit concluded that an arbitrator could decide that an arbitration clause allowed class arbitration so long as neither the agreement nor the law categorically prohibited the arbitrator from concluding otherwise. Instead of requiring a specific intent to permit class arbitration, that decision allowed an arbitrator to use that procedure so long as the governing law did not prohibit it.

The Third Circuit Also Confines Stolt-Nielsen

Since Jock, two other courts of appeals have weighed in and likewise limited the reach of Stolt-Nielsen. In Sutter v. Oxford Health Plans LLC, No. 11-1773 (3d Cir. Apr. 3, 2012), a physician accused a managed care network of improperly denying, underpaying, and delaying reimbursements for medical services. The doctor originally brought the putative class action in New Jersey state court, and the managed care plan moved to compel arbitration. The doctor contended that individual arbitration would violate New Jersey public policy and asked the state court to refuse to enforce the arbitration clause or to certify the class before sending the matter to arbitration. The state court referred the matter to arbitration and ordered that the arbitrator decide all procedural issues, including whether class certification was warranted. The arbitrator concluded that the provision allowed class proceedings and issued a clause construction award to that effect. The managed care network then unsuccessfully moved to vacate the clause construction award in district court. The matter proceeded to class wide arbitration, and the managed care network again sought to vacate the resulting award. The district court denied the motion to vacate the award and granted the doctor’s cross-motion to confirm it.

The Third Circuit affirmed using class arbitration in this setting. As has become common in the lower courts, the Third Circuit seized on the parties’ stipulation in Stolt-Nielsen that their agreement was “silent” with respect to class arbitration (i.e., they had not reached any agreement on that issue). In this case, the doctor and the managed care network disputed whether they intended to authorize class arbitration. This was true even though the doctor had opposed enforcing the arbitration agreement in New Jersey state court on the ground that it would send the dispute to individual arbitration; the managed care plan contended this showed the doctor’s effective admission that the arbitration clause did not permit class wide proceedings. The Third Circuit concluded that the arbitration clause was very broad and encompassed class proceedings in the absence of an express carve-out making such proceedings unavailable. In relevant part, the clause stated: “no civil action concerning any dispute arising under this Agreement shall be instituted before any court, and all such disputes shall be submitted to final and binding arbitration in New Jersey . . . .” According to the Third Circuit, the lack of express class arbitration exclusion merely corroborated the arbitrator’s holding; it was not the basis of the holding. “Thus, the arbitrator did not impermissibly infer the parties’ intent to authorize class arbitration from their failure to preclude it.”

The First Circuit Is the Latest Appellate Court to Limit Stolt-Nielsen

More recently, the First Circuit likewise limited the scope of Stolt-Nielsen in Fantastic Sams Franchise Corp. v. FSRO Association, Ltd., No. 11-2300 (1st Cir. June 27, 2012). In that dispute, the regional owners association of Fantastic Sams hair salons sued the franchisor, alleging that the franchisor had breached the licensing agreements. The regional owners association and the franchisor entered into 35 agreements covering different areas of the country. All of the agreements called for arbitration, though 25 of them executed after 1988 expressly prohibited class arbitration. The remaining 10 agreements executed before 1988 did not expressly prohibit or permit class or collective arbitration. The district court ruled that the arbitrator had jurisdiction to determine if those 10 agreements allowed the regional owners association to pursue a collective action on behalf of hundreds of individual salons.

The First Circuit affirmed the district court’s decision. As other courts have done, the First Circuit found it important that the parties in Stolt-Nielsen stipulated that they had not reached agreement on the issue of class arbitration: “a finding that an agreement does not preclude class arbitration is not enough to conclude that the agreement authorizes it when the parties have said that they reached no agreement on the subject” (emphasis added). Thus, the First Circuit rejected the notion that a provision must contain express language evincing intent to permit class or collective arbitration. Rather, the parties can reach an implicit agreement to authorize class arbitration. The First Circuit also rejected the notion that arbitration clause was “silent” on class arbitration in the same manner as in Stolt-Nielsen (i.e., the parties did not stipulate to such silence). It was significant to the First Circuit that the agreement’s language changed in 1988 to exclude class arbitration. “[A]dditional evidence could reveal that the later change in language reflects a conscious choice by the parties to exclude some forms of arbitration, available prior to 1988, after that date. . . . In addition, there may be other evidence of intent presented to the arbitrators, such as industry practice.” The First Circuit also did not believe that the associational action brought by the owners’ group was the same as class action. The owners association did not seek to represent absent parties or parties that are not signatories to the agreement. Likewise, the arbitration panel would not need to certify a class or provide public notice of the arbitration; the owners association represented all of the individual salons.

The First Circuit could have relied only on this latter point—the nature of an “associational action” contrasted to a true class action—to reach this result. Instead, however, it discussed in considerable detail the limiting stipulation in Stolt-Nielsen and the ways of finding an implied agreement to class wide arbitration.

The Outlook for Defense Practitioners

In each of these three cases, the courts seemed to take great pains to limit Stolt-Nielsen based on those parties’ stipulation that the arbitration clause was “silent” on the issue of class/representative arbitration. Indeed, the First Circuit’s Fantastic Sams decision seemed to reach that point unnecessarily. That court likely could have pointed to the associational nature of the claims—a suit by the regional owners association rather than a class action—to conclude that the district court properly referred the issue to the arbitrator. The lower courts’ focus on the Stolt-Nielsen stipulation also oddly minimizes the importance of the Supreme Court opinion. In essence, that approach limits the applicability of Stolt-Nielsen to settings in which the parties stipulate that their arbitration clause is silent on the topic of class wide proceedings. Of course, no party hoping to pursue class treatment will stipulate as much anymore, effectively meaning Stolt-Nielsen is limited to its facts. It is difficult to conceive of the Supreme Court granting certiorari and issuing that opinion merely to announce a matter of statutory interpretation that will not apply to any other dispute. That contradicts the notion that a “petition for writ of certiorari will be granted only for compelling reasons.” Sup. Ct. R. 10.

The approach also stands on its head that notion that parties cannot be compelled to arbitrate on a class wide basis unless they agreed to do so. The lower courts’ decisions permit the inference of such intent when the arbitration clause refers to “any controversy or claim arising out of or relating to this contract” or similarly-broad language. Such language is common in arbitration clauses; interpreting it to evince assent to class arbitration renders much of Stolt-Nielsen moot absent a stipulation. Under that interpretation, the burden improperly shifts to the party opposing class arbitration to prove that the parties did not intend to permit such proceedings, which only seems possible with a “no class arbitration” clause. In effect, this approach does what Stolt-Nielsen prohibits by allowing a court or arbitrator to infer intent to agree to class arbitration solely because the parties agreed to arbitrate at all.

With lower courts taking these approaches, we should continue advising clients to include prohibitions on class, representative, or collective proceedings in their arbitration clauses. We cannot rely on Stolt-Nielsen to prohibit such proceedings—at least not until further guidance from the Supreme Court. If your client is a likely target of class actions and is able to do so, modifying existing arbitration agreements is advisable. This may be in the form of modifying terms of use, subscription agreements, etc. Of course, those steps alone cannot guarantee that no class arbitration will occur, particularly as the Consumer Financial Protection Bureau begins the rulemaking process to prohibit such provisions in covered agreements and the National Labor Relations Board has ruled that class prohibitions violate § 8(a)(1) of the National Labor Relations Act. Adding lower courts’ efforts to limit Stolt-Nielsen to those types of uncertainties that we try to help clients avoid and understand is the best course for now.

Categories: Arbitration | Civil Justice System | Court of Appeals

Actions: E-mail | Comments

In recent years, the Court has provided important opinions for class action lawyers, including Dukes, Concepcion, Bayer Corp., Erica P. John Fund, and Janus Capital Group. The October Term 2012 reflects the Court’s continuing interest in this area and should provide two more important opinions.

Amgen—Class Certification In Securities Fraud Actions.

In Amgen Inc. v. Connecticut Retirement Plans & Trust Funds, No. 11-1085, the Court will resolve a circuit split regarding securities fraud class actions. In such class actions under Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5, the plaintiffs may avoid having to establish individual class members’ reliance on allegedly-misleading statements or omissions (an impossible task). They do so through the fraud on the market presumption of reliance approved in Basic, Inc. v. Levinson, 485 U.S. 224 (1988). To benefit from the rebuttable presumption, a plaintiff must show that: (1) the defendant made public misrepresentations, (2) the misrepresentations were material, (3) the security traded in an efficient market, and (4) the plaintiff bought or sold shares after the misrepresentation but before the truth was known. The Court will address whether, as part of class certification proceedings, (1) a plaintiff must show the materiality of the misrepresentation and (2) the defendant must have the opportunity to rebut the application of the fraud on the market theory.

In the underlying dispute, the plaintiff alleges that Amgen misrepresented what the FDA would consider at an upcoming meeting. The plaintiff contends that the FDA intended to explore safety concerns about two Amgen drugs but Amgen misled the public about the meeting agenda. In response, Amgen denied that the alleged misrepresentations could have been material because many public sources disclosed to the market what the FDA was evaluating at the meeting; Amgen argued that the district court had to evaluate materiality as part of class certification so it could determine if the fraud on the market theory applied. The district court and Ninth Circuit, however, concluded that it would be an improper examination of the merits to require the plaintiff to establish materiality as part of class certification. The Seventh Circuit shares that view, but the Second and Fifth Circuits agree with Amgen’s arguments.

Combined with the Comcast case discussed below, this case could result in significant changes to class action jurisprudence across the spectrum. Even by itself, however, the matter could provide substantial tools for securities fraud class action defendants. Presently, defense lawyers in those cases do not have anywhere near the same number of tools to oppose certification as we do in, e.g., consumer fraud matters. If we are able to attack the application of the fraud on the market theory, then the class certification battle acquires greater significance and possible utility. Defeating matter at certification effectively ends the litigation while also avoiding the tremendous expense of post-certification litigation (particularly trial) and the almost unbearable risks of an adverse verdict.

Comcast—Examining The Merits And Expert Testimony At Class Certification.

In Comcast Corp. v. Behrend, No. 11-864, consumers brought antitrust claims against a cable television company. As typically happens in antitrust matters, the parties robustly disputed how to define the relevant market and whether the plaintiff could establish antitrust injury. They presented competing experts with strong qualifications, though each questioned the other’s methodology. In granting certiorari, the Court framed the issue a bit differently than Comcast did in its petition. Comcast focused on whether the Third Circuit improperly retreated from Wal-Mart v. Dukes in terms of permissible merits inquiries at class certification. The question the Court structured, however, is:

Whether a district court may certify a class action without resolving whether the plaintiff class has introduced admissible evidence, including expert testimony, to show that the case is susceptible to awarding damages on a class-wide basis.

In that respect, the Court seems poised to answer directly what it implied in Dukes (131 S. Ct. at 2553-54): does Daubert v. Merrell Dow Pharmaceuticals apply to expert evidence offered at class certification? Notably, that question presented does not require the Court to answer whether one or the other expert correctly analyzed competing data to define the relevant market. Instead, it only explores whether the plaintiff’s economist offered a methodology that truly can evaluate injury and allocating the resulting damages to the class members.

Taken Together

Amgen and Comcast will allow the Court to evaluate what type of proof class action plaintiffs must offer at the class certification stage. While no doubt exists any more that courts may delve into the merits to the extent they overlap with class certification, applying that standard turns out to be an inexact art that varies among trial courts. If a majority of the Court is so inclined, those justices could use these cases to broadly describe evidentiary showings a plaintiff must make well beyond securities fraud and antitrust disputes. The Court certainly seems poised to use the cases to limit plaintiffs’ ability to argue that certain substantive questions about their claims must wait until trial to be answered; instead, it is appropriate to consider whether plaintiffs can muster an adequate evidentiary record before consolidating hundreds or thousands of claims in a class.

Categories: Business Litigation | Business Torts | Class Actions | Corporate America | Supreme Court

Actions: E-mail | Comments

Two decisions within the past few days emphasize the limits on class action arbitration waivers, despite recent United States Supreme Court opinions that breathed new life into such provisions. With these recent decisions, we see courts relying on both federal and state law concepts to invalidate arbitration provisions when the courts conclude that an individual plaintiff could not feasibly pursue arbitration.

Vindication of Federal Rights.

The Second Circuit visited the issue for the third time in In re American Express Merchants’ Litigation, No. 06-1871-cv (2d Cir. Feb. 1, 2012). Merchants there are pursuing Sherman Act antitrust claims against American Express, alleging that American Express improperly ties its non-premium credit cards to its premium charge card services. Because charge card customers are much more desirable from the merchants’ perspective, American Express is able to charge higher processing fees for those transactions. These plaintiffs allege that American Express forces merchants to also accept its credit cards and to pay higher processing fees for them even though the credit card customers tend to make smaller purchases.

In two earlier opinions, 554 F.3d 300 (2d Cir. 2009) and 634 F.3d 187 (2d Cir. 2011), the Second Circuit held that the arbitration provision in the merchants’ agreements with American Express was unenforceable. Following the Supreme Court’s opinion in AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011), the Second Circuit asked for supplemental briefing on the topic. Although Concepcion held that the Federal Arbitration Act preempts state law that imposes particular restrictions on arbitration provisions, the Second Circuit held for a third time that American Express’ arbitration clause is unenforceable because it prevents an aggrieved party from vindicating a federal statutory right.

In this third opinion, the Second Circuit concluded that Supreme Court authority “leaves open the question presented on this appeal: whether a mandatory class action waiver clause is enforceable even if the plaintiffs are able to demonstrate that the practical effect of enforcement would be to preclude their ability to bring federal antitrust claims.” [Slip Op. at 15] These plaintiffs satisfied the Second Circuit that they would be precluded from doing so in individual arbitrations because individual damages (a mean of $5,300 and a maximum of $39,000) could not compare to the several hundred thousands of dollars needed for an expert economic analysis of liability and damages. [Id. at 22] Thus, “the only economically feasible means for plaintiffs enforcing their statutory rights is via a class action.” [Id.] It is not enough that the Clayton Act, 15 U.S.C. § 15, allows for treble damages, attorneys’ fees, and expenses. A plaintiff must advance the expert costs and then must assume the risk of losing—a significant deterrent to pursuing civil antitrust claims in the court’s mind. [Id. at 23]

Those plaintiffs relied on an economist’s declaration to establish the likely cost of the necessary analysis. The court concluded that American Express did not seriously challenge that evidence, which amounted to a concession that an individual plaintiff could not reasonably pursue the claims, whether in court or arbitration. [Id.] Just as notable, the court’s “decision in no way relies upon the status of plaintiffs as ‘small’ merchants. We rely instead on the need for plaintiffs to have the opportunity to vindicate their statutory rights.” [Id. at 24]

Other courts, particular lower courts in the Second Circuit, have applied this vindication of federal right approach to other statutory claims, such as Title VII employment discrimination suits. E.g., Chen-Oster v. Goldman, Sachs & Co., 2011 WL 2671813 (S.D.N.Y. July 7, 2011). With the Second Circuit’s most recent opinion, expect such attacks on arbitration provisions to increase. It will become more important to challenge the validity of an expert’s assertion of the costs of proceeding with individual arbitration—perhaps to the point of seeking Daubert hearings as part of this process. While Concepcion and other Supreme Court opinions strengthen defendants’ positions regarding enforcing arbitration provisions, the law is by no means settled.

Traditional Unconscionability.

On the other side of the country one day earlier, the Northern District of California relied on traditional unconscionability principles to invalidate an arbitration provision in Lau v. Mercedes-Benz USA, LLC, No. CV 11-1940-MEJ (N.D. Cal. Jan. 31, 2012). That plaintiff bought a luxury car but had numerous mechanical problems with it. Mercedes sought to compel arbitration when the plaintiff filed suit. The court found the provision procedurally and substantively unconscionable.

The contract contained paragraph in capital letters noting the plaintiff’s ability to take the contract to review it and that it contained an arbitration provision on the back. The arbitration provision had a bold font heading and also was in capital letter. [Slip Op. at 2] The court found that procedural unconscionability existed because the dealership presented the contract on a take-it-or-leave-it basis. It did not matter that the plaintiff signed next to a paragraph mentioning the arbitration provision on the back of the contract. While the plaintiff negotiated the price (apparently exceeding $100,000), he “was never offered the opportunity to negotiate the inclusion or exclusion of specific pre-printed terms.” [Id. at 12]

The court found substantive unconscionability because the plaintiff faced substantial expenses in arbitration that do not exist in litigation. Those expenses include the arbitrator’s hourly fee and the administrative body’s fees. [Id. at 13] The provision also was unbalanced because it allowed for a de novo appeal to a three-member panel only if the award was $0 or in excess of $100,000. The practical effect was to deny plaintiff an appeal right if he recovered less than his full reimbursement right of more than $100,000 but allowed Mercedes to appeal if plaintiff received that full recovery. Of course, plaintiff also faced advancing more costs if he appealed any award. [Id. at 14]

Courts frequently undertake this traditional unconscionability analysis to invalidate arbitration provisions. Plaintiffs’ counsel are being more aggressive in attacking provisions on those grounds, including seeking discovery about a corporation’s experience in arbitration in hopes of showing that the deck is stacked against the consumer. Thus, it is crucial to take care in drafting an arbitration provision, presenting it to the consumer/employee, and documenting those efforts well before the threat of suit arises. Consider having the business advance the costs of the arbitration, forgoing seeking its fees (unless the claim against it is frivolous), and ensure that the clause treats the parties equally.

Actions: E-mail | Comments

Recently, a federal magistrate allowed a putative class action plaintiff to serve discovery regarding a defendant’s consumer arbitrations as part of an effort to invalidate a class waiver in an arbitration clause. In Newton v. Clearwire Corp., No. 2011-CV-00783-WBS-DAD (E.D. Cal. Sept. 23, 2011), the plaintiff is pursuing California consumer fraud, contract, unjust enrichment, and injunctive relief claims based on the internet service provider illegally throttling customers’ internet connection speeds. The defendant moved to compel arbitration, but the court allowed the plaintiff “limited” discovery regarding the defendant’s arbitration and litigation experience with customers. At issue were interrogatories seeking information regarding the number of instances of Clearwire or customers initiating arbitration or non-arbitration proceedings and the outcomes of those proceedings. Slip Op. at 2-3. Note that the magistrate refused to compel production of all documents relating to Clearwire’s policies and procedures for arbitration disputes.

The magistrate granted the plaintiff’s motion to compel, accepting arguments that such information relates to the plaintiff’s substantive unconscionability argument. The plaintiff urged that such information may show the provision is unconscionable because it produces “overly harsh or one-sided results.” Id. at 5. It is not clear from the decision how plaintiff intends to use the information she receives. It seems very likely that she may contend that arbitration is “one-sided” if consumers frequently or overwhelmingly lose in those proceedings. Alternatively, she may argue that the results are unduly harsh if arbitrators award Clearwire fees and costs at some level that plaintiff believes is excessive. If this interpretation is accurate, this decision presents a departure from unconscionability jurisprudence in a manner that allows plaintiffs to inflate discovery expenses while trying to circumvent the straightforward application of AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011).

The traditional notion of one-sided provisions truly considers whether one party receives benefits the other does not. For example, does the provision require a consumer to pursue arbitration but excuses the business from it? Does the provision require arbitration of claims an employee would bring (e.g., discrimination, unpaid overtime) but allow court proceedings for an employer’s typical claims (e.g., trade secret misappropriation)? May the business seek repayment of fees if the consumer’s claim is frivolous but the provision is silent as to the consumer’s ability to recover fees? If your client’s arbitration provision contains these types of one-sided provisions, you should modify their agreement.

Even if 100% of arbitrated claims result in awards in favor of the business, however, that does not mean the results are “overly harsh or one-sided.” It may be that the business operates fairly and only non-meritorous claims are arbitrated. Likewise, the business may quickly pay reasonable claims—saving all involved the time and expense of arbitration—but chooses to fight frivolous claims. In sum, the number of claims tried or arbitrated and a summary of the outcomes are not meaningful data alone. That is akin to concluding that the American judicial system is unfair to plaintiffs because less than 5% of civil cases reach trial; by itself, that statistic is meaningless if you’re evaluating the system’s fairness. Moreover, as we can imagine, a court embarking on this type of after-the-fact evaluation of arbitrated or tried claims puts itself in the untenable position of reviewing the entirety of those earlier proceedings, including the evidence presented and the arguments made.

Unfortunately, we should expect more plaintiffs to serve and move to compel such discovery as they try to avoid the impact of Concepcion. Typically, however, courts (even those applying California law) take a more reasonable approach when evaluating substantive unconscionability. Rather than trying to dissect the results of past arbitrations, courts usually examine the arbitration provision and evaluate how it will apply to this dispute. For example, the court in Saincome v. Truly Nolen of America, Inc., No. 3:11-CV-00825-JM-BGS (S.D. Cal. Aug. 3, 2011), rejected a variety of unconscionability arguments in an employment dispute. It considered the provision’s language and the disputes it covered, eventually rejecting the plaintiff’s substantive unconscionability arguments (though it refused to rule that the plaintiff could not bring a collective FLSA arbitration). Even more to the point, the court in Meyer v. T-Mobile USA Inc., No. C 10-05858 CRB (N.D. Cal. Sept. 23, 2011)—decided the same day as Newton—refused to allow discovery regarding prior arbitrations. That plaintiff sought discovery relating to all of T-Mobile’s customer disputes for a seven-year period, even if the subject arbitration clause did not apply to them. Unlike the magistrate in Newton, that district judge in Meyer agreed that evaluating the fairness of an arbitration provision involves a narrow inquiry: “[T]he only arbitration agreement at issue is the 2008 agreement, and the documents relevant to determining the validity of that arbitration agreement—the 2008 Service Agreement, T&C [terms and conditions] and arbitration agreement—are already accessible by the parties and the Court.”

Defense lawyers know that we’ll encounter this type of discovery, so be prepared to explain to your judge, magistrate, or discovery master why it is irrelevant to determining if the provision is substantively unconscionable. Focus the court on the arbitration provision’s language and how this plaintiff’s arbitration will proceed. Before you reach that stage, this also is a good reminder to touch base with your clients about ensuring their arbitration clauses are not one-sided so that you’re not focusing the court’s attention on unhelpful language.

Actions: E-mail | Comments

Following the Court’s recent opinion in AT&T Mobility LLC v. Concepion, 131 S. Ct. 1740 (2011), some commentators proclaimed the end of consumer class action whenever an arbitration clause existed. While Concepion is a watershed opinion holding that the Federal Arbitration Act preempts many state law doctrines that would invalidate arbitration clause class action waivers, it is not the final word on the topic. In prior articles, I noted the existence of the Arbitration Fairness Act of 2011 (H.R. 1873), which would exempt consumer, civil rights, and employment disputes from the FAA as well as reverse Rent-A-Center West, Inc. v. Jackson, 120 S. Ct. 2772 (2010). Likewise, the Dodd-Frank Wall Street Reform and Consumer Protection Act (Pub. Law 111-203) calls on the bureau of Consumer Financial Protection and the SEC to consider administrative rules that could invalidate certain arbitration clauses in specified transactions. Developments since the Court published Conception demonstrate that lower courts are splitting on how to interpret that authority, including in novel ways to continue invalidating class action waivers.

Straightforward Applications of Concepcion to Enforce Class Action Waivers.

Not surprisingly, many lower courts apply Conception to enforce arbitration provisions with class action waivers. In Nelson v. AT&T Mobility LLC, 2011 U.S. Dist. LEXIS 92290 (N.D. Cal. Aug. 18, 2011), the court rejected arguments that a plaintiff seeking only “public” injunctive relief under California’s Unfair Competition Law (“UCL”) and Consumer Legal Remedies Act (“CLRA”) was not bound by an arbitration clause with a class action waiver. That plaintiff argued that public injunctive relief addressed a public right, so allowing that plaintiff to proceed on a class basis would not conflict with the FAA. That court also rejected the plaintiff’s arguments, based on California state court decisions following Concepcion, that claims under California’s Private Attorney General Act (“PAGA”) were not subject to Concepcion. That plaintiff unsuccessfully analogized his UCL and CLRA claims to PAGA claims.

A few days after Nelson, the Third Circuit ruled that New Jersey common law imposing class arbitration despite an agreement’s prohibition of class/collective actions is inconsistent with, and preempted by, the FAA. Litman v. Cellco P’Ship, 2011 U.S. App. LEXIS 17649 (3d Cir. Aug. 24, 2011). The Third Circuit also noted that a New Jersey choice of law provision only applied to the agreement to the extent it was consistent with the FAA. This dispels arguments that, by choosing a particular state’s substantive law, the parties necessarily choose that law to govern all aspects of interpreting the arbitration clause’s enforceability, too. As a practice pointer, however, it probably is best to specify that the FAA governs interpretation of an arbitration provision in your agreement.

Most recently, the court in Kaltwasser v. AT&T Mobility LLC, No. C07-00411 (N.D. Cal. Sept. 20, 2011), rejected arguments that an arbitration clause with a class waiver prevented the plaintiff from vindicating statutory rights.

That plaintiff pursued claims based on California’s UCL, CLRA, and False Advertising Law (“FAL”) based on AT&T’s claim to have the fewest dropped calls. The plaintiff argued that the costs of expert witnesses in an individual arbitration would prevent him from vindicating rights under those California statues. The vindication of rights argument often is based on Green Tree Financial Corporation-Alabama v. Randolph, 531 U.S. 79 (2000). There, the Court indicated that “large arbitration costs could preclude a litigant . . . from effectively vindicating her federal statutory rights in the arbitral forum.” Id. at 90. The Kaltwasser court, however, indicated that it is not clear that Green Tree applies to the vindication of state, rather than federal, statutory rights. Slip Op. at 8. Even if Green Tree applies to state law claims, the “notion that arbitration must never prevent a plaintiff from vindicating a claim is inconsistent with Concepion.” Id. If the Concepion majority intended that plaintiffs could avoid class waivers by offering evidence of their individual costs of arbitration versus their potential recovery, one would have expected the majority to address that proposition as the dissent raised it. Id. at 8-9. It would be impractical to make a fact-specific comparison of a plaintiff’s potential award to potential costs in order to evaluate the enforceability of a class action waiver. Id. at 9. Last, the Kaltwasser court rejected the plaintiff’s argument that Concepion left intact California case law that claims for injunctive relief under the UCL, CLRA, and FAL cannot be arbitrated because the purpose of such relief is to remedy a public wrong that arbitration would frustrate. Such a principle conflicts with the FAA because that amounts to a state law outright prohibiting arbitrating particular claims. Id. at 11.

Novel Methods to Limit Concepcion’s Reach.

While those opinions enforcing class action waivers in arbitration provisions are useful to defendants, other courts find ways around Concepcion. One of those opinions actually precedes Concepion but states a principle that other courts embrace. In re American Express Merchant’s Litigation, 634 F.3d 187 (2d Cir. 2011), concluded that the costs of an economic analysis in a Sherman Act tying arrangement claim made the class waiver unenforceable. Enforcing the arbitration clause would prevent individual plaintiffs from vindicating their federal statutory rights because no plaintiff would obtain an economic analysis that typically would be at least 10 times the size of its claimed damages. Notably, the Second Circuit sua sponte stayed that matter for reconsideration in light of Concepion on August 1, 2011.

Lower courts in the Second Circuit also have relied on the vindication of federal statutory rights doctrine. For example, Chen-Oster v. Goldman, Sachs & Co., 2011 WL 2671813 (S.D.N.Y. July 7, 2011), the court ruled that a class waiver would prevent the plaintiff from effectively vindicating statutory rights under Title VII. Circuit law made clear that such a plaintiff could only bring a “pattern or practice” discrimination claim in a collective action, so an arbitration class action waiver would make it impossible to pursue such federally-created, statutory claims.

Moving beyond federal court, we also see state courts making considerable efforts to avoid Concepion. In NAACP of Camden County East v. Thomas, 2011 N.J. Super. LEXIS 151 (N.J. Super. Ct. App. Div. Aug. 2, 2011), the court severed arbitration provisions as unenforceable under a traditional contract law analysis. That litigation involved used automobile sales, and the plaintiff wanted to avoid an arbitration clause. The court concluded that multiple documents provided to individual customers contained different, confusing, and vague language regarding arbitration. Applying traditional legal doctrines regarding contract formation and interpretation, the court concluded that no mutual assent to the arbitration provisions existed because of those deficiencies. Id. at *33-34.

Similarly, the California Court of Appeal ruled that a PAGA claim for civil penalties relating to overtime pay deficiencies is a law enforcement action protecting the pubic. Because such an action is not one benefiting private parties, refusing to enforce the arbitration clause and its class action waiver does not frustrate the FAA. Brown v. Ralphs Grocery Co., 197 Cal. App. 4th. 49 (2011). It will not be surprising to see state courts be more creative in crafting principles limiting Concepcion.

Finally, an administrative action before the National Labor Relations Board reveals that the Department of Labor and Equal Employment Opportunity Commission believe that class/collective action waivers violate the National Labor Relations Act. Section 7 of that act guarantees employees the right “to engage in other concerted activities for the purpose of collective bargaining or other mutual aid or protection . . . .” Section 8(a)(1) prohibits employers from interfering with that or any other right guaranteed in § 7 of the act. In D.R. Horton Inc. v. Cuda, NLRB No. 12-CA-25764 the Department of Labor and EEOC (as well as the NLRB’s acting general counsel and various amici) assert that such waivers interfere with that ability to pursue concerted actions for mutual benefit. The NLRB has not yet issued its decision, but this issue undoubtedly will work its way through the courts following the conclusion of administrative proceedings.

Actions: E-mail | Comments

The Eleventh Circuit recently allowed class action defendants to invoke arbitration provisions despite having actively litigated the matter in court for nine months. This opinion is important because such decisions are relatively rare, particularly in class action settings. In Krinsk v. SunTrust Banks, Inc., No. 10-11912 (11th Cir. Sept. 7, 2011), the plaintiff filed her original complaint May 15, 2009. Of course, that is well before the Supreme Court's recent opinion in AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011), which held that the Federal Arbitration Act preempts state law finding class action waivers in arbitration clauses to be unconscionable and unenforceable.

Krinsk, who is 92 years old, alleges that SunTrust (and related entities and executives) implemented a plan to deny elderly homeowners access to their home equity lines of credit (HELOC). Almost two years after Krinsk obtained her HELOC, SunTrust requested additional financial information from Krinsk and then suspended her access to the HELOC funds based on that information (i.e., changes in her financial circumstances). Krinsk contends the SunTrust's true motive was to restore its capital reserves and eliminate risk from HELOC loans, particularly targeting elderly customers. Her original complaint stated claims for financial elder abuse, breach of contract, deceit, negligent misrepresentation, breach of fiduciary duty, breach of the covenant of good faith and fair dealing, and violating Regulation Z under the TILA. She also sought to represent a class of SunTrust Florida HELOC customers (1) older than 65, (2) who received a letter requesting additional financial information during a 3.5 month period in 2008, and (3) whose HELOC SunTrust reduced or suspended because the customer allegedly failed to provide the information. This putative class may have included hundreds of members.

SunTrust did not invoke its arbitration clause, which contained a class action waiver. Instead, it moved to dismiss, filed a joint case management report, agreed on a discovery plan, and opposed class certification over the next nine months. The district court eventually granted in part and denied in part the long-pending motion to dismiss, and also gave Krinsk leave to file an amended complaint. While that amended complaint stated fewer claims, it sought to certify a much broader class of any age and whose HELOCs SunTrust suspended for any reason in a three-year period. This putative class included at least 56,000 members. SunTrust promptly sought to compel arbitration, which the district court refused to do, finding that SunTrust waived its right to arbitrate.

The Eleventh Circuit reversed, concluding that the amended complaint's much broader class definition revived the right to compel arbitration. While it is a rare amended complaint that nullifies an earlier waiver, this is one of those situations. Such nullification is not automatic, of course. "Rather, courts will permit the defendant to rescind his earlier waiver, and revive his right to compel arbitration, only if it is shown that the amended complaint unexpectedly changes the scope or theory of the plaintiff's claims." Slip Op. at 16. Dramatically increasing the putative class' scope and size amounted to such changes. Id. at 18-19. "The vast augmentation of the putative class so altered the shape of the litigation that, despite its prior invocations of the judicial process, SunTrust should have been allowed to rescind its waiver of its right to arbitration." Id. at 19. On remand, the district court must evaluate Krinsk's arguments that the arbitration and class waiver provisions are unconscionable. Id. at 20 n.23.

The opinion is significant because federal courts often conclude that a party waives its right to arbitration by actively participating in litigation. That is why a defendant usually must decide early whether to invoke an arbitration clause. In SunTrust's case, the defendants had to decide that point before the Supreme Court's three recent-- and significant-- arbitration opinions: Stolt-Nielsen S.A. v. AnimalFeeds International Corp., 130 S. Ct. 1758 (2010); Rent-A-Center West, Inc. v. Jackson, 130 S. Ct. 2772 (2010); and AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011). Prior to those opinions, a defendant may understandably have concluded that the risk of a court or arbitrator ordering class arbitration was too much. While class/collective actions always present substantial risks to defendants, many defendants would rather have the procedural certainty of the Federal Rules of Civil Procedure (including the chance at interlocutory review of a certification decision under Rule 23(f)) and the opportunity for appellate review generally. The Supreme Court's recent opinions, however, provide strong arguments that the class waiver arbitration clause must be enforced (Concepcion) and, if it is stricken, SunTrust cannot be compelled to arbitrate on a classwide basis as the agreement will now be silent on the issue (Stolt-Nielsen).

On remand, we can anticipate Krinsk attacking the arbitration clause as preventing her from vindicating her statutory rights, particularly federal rights under Regulation Z (12 C.F.R. § 226.5b). Before and after Concepcion, some courts have stricken class waivers, concluding that those provisions make it impossible for a plaintiff to pursue rights guaranteed under federal law. E.g., In re Am. Express Merchants' Litig., 634 F.3d 187 (2d Cir. 2011) (cost of economic analysis in Sherman Act claim made it infeasible for individual action, so class waiver was unenforceable); Chen-Oster v. Goldman, Sachs & Co., 2011 WL 2671813 (S.D.N.Y. July 7, 2011) (class waiver unenforceable because it would prevent plaintiff from pursuing "pattern or practice" claim under Title VII). Nonetheless, SunTrust at least has the opportunity to invoke its arbitration clause in light of the amended complaint.

Categories: Arbitration | Class Actions

Actions: E-mail | Comments

In July 2011, the Second Circuit issued an opinion supporting an arbitrator's interim Clause Construction Award finding that an arbitration agreement permitted class arbitration of employment disputes. The opinion is surprising because of its efforts to distinguish, and apparently clash with, Stolt-Nielsen, S.A., v. AnimalFeeds International Corp., 130 S. Ct. 1758 (2010). Practitioners who believe that Stolt-Nielsen precludes class arbitration when the arbitration agreement is silent on the topic may be dismayed with the Second Circuit’s rationale. Before turning to the Second Circuit’s opinion in Jock v. Sterling Jewelers, Inc., 2011 U.S. App. LEXIS 13633 (2d Cir. July 1, 2011), we should review Stolt-Nielsen.

Stolt-Nielsen: Class Arbitration Requires That The Parties Agree To Class Treatment.

In April 2010, the Supreme Court addressed whether an arbitration panel could conclude that antitrust claims were subject to class treatment when the arbitration agreement was silent on that topic. Stolt-Nielsen, the parties agreed that, when a contract is silent on an issue, the parties have not reached agreement on that issue. 130 S. Ct. at 1766. Because that claimant sought to bring its claims as a class action, the arbitrators had to determine whether the Federal Arbitration Act, federal maritime law, or New York law established an intent to permit class treatment even though the arbitration agreement was silent on the issue. Id. at 1768. Rather than pointing to a specific legal principle of those bodies of law that would imply such intent, however, the arbitration panel reached its own public policy determination to create a rule permitting class treatment in such situations. Id. at 1769.

The Supreme Court rejected the arbitration panel’s approach because "a party may not be compelled under the FAA to submit to class arbitration unless there is a contractual basis for concluding that the party agreed to do so." Id. at 1775. The arbitration panel erred by evaluating whether the parties intended to preclude class arbitration; rather, the proper inquiry is whether the parties intended to permit class arbitration. "An implicit agreement to authorize class-action arbitration, however, is not a term that an arbitrator may infer solely from the fact of the parties' agreement to arbitrate." Id. at 1775. The Court discussed several of the significant differences between bilateral arbitration and class action arbitration to emphasize that agreeing to arbitrate claims with one opponent is not a basis to infer an agreement to arbitrate claims of perhaps dozens or hundreds of opponents advancing similar theories. Id. at 1776. “[W]e see the question as being whether the parties agreed to authorize class arbitration. Here, where the parties stipulated that there was 'no agreement' on this question, it follows that the parties cannot be compelled to submit their dispute to class arbitration." Id.

Thus, Stolt-Nielsen made clear that parties cannot be compelled to arbitrate disputes classwide unless they intended to do so, and an arbitrator or court cannot infer such intent merely because an arbitration agreement exists.

Jock: The Second Circuit Grants Unprecedented Latitude For An Arbitrator To Infer An “Intent” To Agree To Classwide Arbitration.

In Jock, a divided panel of the Second Circuit ruled that an arbitrator correctly concluded that the parties' silence on the issue of class arbitration amounted to an agreement to permit such proceeding. Jock is a Title VII discrimination suit brought by 12 employees of Sterling Jewelers. Each of the employees signed an employment agreement with an arbitration clause. Each acknowledged waiving her rights to commence any court action, though the agreement specified that the arbitrator "shall have the power to award any types of legal or equitable relief that would be available in a court of competent jurisdiction..." 2011 U.S. App. LEXIS 13633, *7.

The arbitration agreements did not expressly prohibit class claims and, indeed, did not mention class claims at all. Id. at *7-8. The arbitrator concluded that the agreements "cannot be construed to prohibit class arbitration," so she moved to determining whether class treatment was appropriate. Id. at *7 (internal quotations omitted). Applying a Ohio law, "the arbitrator determined she would not read into the agreement an intent to prohibit class claims because [t]he law will not insert by construction for the benefit of one of the parties an exception or condition which the parties either by design or neglect have omitted from their own contract." Id. at *8 (internal quotations omitted). Because the employer drafted the arbitration agreement, the employer had the burden of clearly expressing all material terms, particularly those adverse to the employee. Interpreting the agreement to prohibit class claims would impermissibly infer a term benefiting the employer even though the employer omitted it. Id. at *9.

The majority of this panel of the Second Circuit went to great pains to distinguish Stolt-Nielsen and to conclude that the district court could not properly vacate the arbitrator’s clause construction award. Rather, the district court’s review was circumscribed to two issues: "first, whether the parties had submitted to the arbitrator the question of whether the arbitration agreement permitted class arbitration and, second, whether the agreement or the law categorically prohibited the arbitrator from reaching that issue." Id. at *27. The lack of an explicit agreement to permit class arbitration was not the same as stipulating (as done in Stolt-Nielsen) that parties had not reached agreement on the issue. Instead, "the arbitrator was acting within her authority when she concluded that the arbitration agreement between Sterling and the plaintiffs manifested an intent to allow for class arbitration because the issue was properly before her having been placed there by the parties. In addition, she had a colorable justification under Ohio law to reach the decision she did, to wit, Ohio law does not bar class arbitration." Id. at *30-31. Denying plaintiffs the ability to seek classwide relief "would deny them access to at least one type of legal or equitable relief available to them in court—namely, certification to pursue classwide relief." Id. at *37. Because the arbitration agreement guaranteed all remedies and rights that would be available in court, the arbitrator could conclude the parties intended to permit class arbitration. Id. at *38-39.

Is Jock Ignoring Stolt-Nielsen?

The majority’s opinion seems to contradict Stolt-Nielsen in important respects. While the Supreme Court’s opinion emphasized the need to determine whether the parties intended to permit class arbitrations, the Second Circuit stands that rationale on its head. Under Jock, if the arbitration agreement does not prohibit class treatment, an arbitrator may infer an intent to permit class treatment. After all, the party that prepared the arbitration agreement could have precluded class treatment if it had intended to do so. Of course, this ignores the significant differences between class treatment and bilateral arbitrations that Supreme Court noted in Stolt-Nielsen.

Moreover, the notion that Ohio law implies that right to class arbitration reaches too far. Neither the arbitrator nor the majority of the Second Circuit pointed to any particular provision of Ohio law endorsing, authorizing, or requiring class treatment in arbitration agreements or employment disputes. Again, to interpret general principles of Ohio contract law to amount to an intent to permit class arbitrations effectively means that silence on the topic evidences that intent. If any state’s law is interpreted to permit an aggrieved party to seek class treatment no matter what the claims, then an arbitrator may conclude that the parties intended to permit class arbitrations if the agreement does not prohibit such proceedings.

A particularly notable flaw of the majority’s opinion is the idea that class treatment is a type of legal or equitable relief. This arbitration agreement guaranteed that the arbitrator could issue any type of legal or equitable relief that would be available in court; thus, the majority reasoned that the arbitrator correctly interpreted an intent to permit class treatment. That is, class treatment is a type of legal or equitable relief that would be available in court, so it also must be available in arbitration. Of course, this ignores that class treatment is a procedural tool and not a substantive right or remedy. "Relief" is synonymous with "remedy", with the former generally referring to court of equity and the latter to courts of law. E.g., Bryan A. Garner, A DICTIONARY OF MODERN LEGAL USAGE 752 (2d ed. 1995). Relief or a remedy is the device to make a party whole or to prevent further injury. This could be damages, an injunction, declaratory judgment, etc. Class treatment, however, provides no "relief" by itself. It is merely a procedural tool that allows the aggregation of a large number of separate plaintiffs' claims to be adjudicated in a more convenient and efficient manner. Like all rules, Rule 23 cannot "abridge, enlarge, or modify any substantive right" (28 U.S.C. § 2072(b)), but Jock treats it as a remedy that is a substantive right. Equating class treatment to "relief" or a "remedy" is error. It is akin to concluding that arbitration must allow motions for relief from awards because Rule 60 allows parties to move for relief from judgments.

Practice In Light Of Jock.

The Second Circuit often has seemed to be at odds with the Supreme Court when it comes to arbitration issues. The Ninth Circuit also has a similar reputation. Practitioners cannot rely on Stolt-Nielsen to ensure that claims will not proceed on a class basis in arbitration when the arbitration agreement is silent on the topic. It seems that some courts and arbitrators disagree with the Supreme Court’s recent opinions regarding arbitration and class actions, so plaintiffs' counsel may find sympathetic audiences when arguing that recent Supreme Court jurisprudence does not limit their cases. Anyone drafting an arbitration provision should continue specifying that claims cannot be brought on a class or representative basis. This is particularly true considering that Stolt-Nielsen addressed two commercial entities rather than individuals opposing a commercial entity. Indeed, that alignment of the parties in Stolt-Nielsen may prove to be another distinguishing factor that some courts rely on when concluding that class arbitration of consumer or employment claims is appropriate.

In addition, practitioners must be cautious when including choice of law provisions in their agreements. It may not be practical to choose law other than the jurisdiction in which the employee works, the customer receives services, or the client sells products. Indeed, choosing the law of a forum unrelated to the parties' transaction or in a manner that appears to be overreaching by the party drafting the agreement is not advisable. Nonetheless, evaluate the applicable forum's law regarding implied terms and assess whether that law affects class treatment. You may need to carve out an exception in the choice of law provision to clarify that, while the law of State X governs, that does not include any implied right to class, representative, or aggregate claims.

Categories: Arbitration | Court of Appeals

Actions: E-mail | Comments

In a case the Court indicates “does not even strike us as close,” the United States Supreme Court placed considerable limits on district courts’ powers to enjoin copycat class actions from proceeding in state courts. Smith v. Bayer Corp., No 09-1205, Slip Op. at 18. Class action defendants that defeat class certification in federal court will have a difficult time obtaining injunctions to prevent another plaintiff from seeking to certify a similar class action in state court.

The Two Suits Against Bayer

This case involves Bayer cholesterol-lowering drug, Baycol^®, which it sold from 1997 through August 2001. Bayer withdrew the drug after it was linked to 31 deaths in the United States. George McCollins sued Bayer in West Virginia state court in August 2001, alleging various economic injury claims. One month later, the plaintiffs in this case (Smith/Sperlazza) sued Bayer in a different West Virginia county, but neither McCollins nor Smith/Sperlazza knew of the other suit.

Bayer removed McCollins’ suit to federal court, and the Judicial Panel on Multidistrict Litigation consolidated that suit with thousands of other Baycol suits in the District of Minnesota. In 2003, the Minnesota court denied certification of a nationwide class seeking refunds of money paid for the drug. Bayer later asked the Minnesota court to deny certification of a West Virginia economic injury class, and the Minnesota court did so in 2008, reasoning that individual showings of harm would predominate over common issues.

Unlike McCollins’ suit, Bayer could not remove Smith/Sperlazza’s suit to federal court—diversity was lacking, and the Class Action Fairness Act did not yet exist—so that matter proceeded in West Virginia state court. After the 2008 class certification ruling in the federal action, Bayer asked the Minnesota federal court to enjoin the West Virginia state court from hearing Smith/Sperlazza’s class certification motion. Bayer argued that the injunction “was appropriate to protect the District Court’s judgment in McCollins’ suit denying class certification.” Slip Op. at 4. The District Court issued the injunction, and the Eighth Circuit affirmed.

The Supreme Court Reverses: The Injunction Was Improper Under The Anti-Injunction Act

The Anti-Injunction Act prohibits federal courts from enjoining proceedings in state courts “except where authorized by Act of Congress, or where necessary in aid of its jurisdiction, or to protect or effectuate its judgments.” 28 U.S.C. § 2283 (emphasis added). Bayer argued that the last clause, known as the “relitigation exception,” applied and permitted the injunction here. In a unanimous and unambiguous opinion, the Court rejected Bayer’s position. A federal court enjoining a state court proceeding under that statute is “heavy artillery,” and “every benefit of the doubt goes to the state court.” Slip Op. at 6. A party like Bayer seeking such an injunction must satisfy two requirements: (1) “the issue the federal court decided must be the same as the one presented in the state tribunal” and (2) the person or entity to be enjoined (Smith/Sperlazza) “must have been a party to the federal suit, or else must fall within one of a few discrete exceptions to the general rule against binding nonparties.” Id. at 7. Bayer failed on both counts, and it was not a close call for the Court on either.

No Injunction When The Issues Are Not The Same

Both McCollins’ and Smith/Sperlazza’s complaints contained similar consumer fraud and warranty allegations about Baycol; from that perspective, the issues were the same. The legal standards for class certification, however, differed. The federal court denied class certification under Federal Rule of Civil Procedure 23. The West Virginia court, of course, would apply that state’s rule 23.

It is not enough that the West Virginia rule tracks the federal rule’s language because the West Virginia Supreme Court interprets its rule differently, so the state court “is using a different standard and thus deciding a different issue.” Slip Op. at 9. While the Court rejected Smith/Sperlazza’s argument that a federal court may never enjoin a state court class action to be decided under a state rule, ample substantive differences existed between the federal and West Virginia rules. If state courts make it “crystal clear that they follow the same approach as the federal court applied . . . the issues in the two cases would indeed be the same.” Id. at 9-10. Any uncertainty on the point, however, must be left for the state court to decide. Id. at 10. There must be “clear evidence” that the state court will follow the federal analysis under Federal Rule of Civil Procedure 23 before this type of injunction may issue. Id.

In this instance, the West Virginia Supreme Court made clear that it is not bound by interpretations of the federal rule when interpreting the state rule. The state court has emphasized that it is important to avoid “Pavlovian” responses to interpretations of the federal rule. Id. Indeed, in a 2003 class certification opinion involving a drug’s efficacy, the West Virginia Supreme Court used a predominance analysis different than what the district court used when denying certification of McCollins’ Baycol claims. Id. at 11. Thus, a state court “would decide a different question than the one the federal court had earlier resolved.” Id. at 11-12. “Minor variations in the application of what is in essence the same legal standard do not defeat preclusion,” but the West Virginia Supreme Court’s approach was significantly different. Id. at 12 n.9. While this was enough to preclude an injunction here, the Court also analyzed whether Smith/Sperlazza were “parties” to the earlier federal action.

No Injunction When The Parties Are Different

Equally problematic for Bayer was that Smith/Sperlazza were not parties to the earlier federal action. A lower court’s judgment only binds parties, subject to a few, narrow exceptions. And Bayer could not stretch the notion of “party” to encompass Smith/Sperlazza when the earlier federal court proceedings never certified a class including them. The definition of “party” cannot encompass an absent class member (like Smith/Sperlazza) “whom the plaintiff in a lawsuit was denied leave to represent.” Id. at 13. “So in the absence of a certification under that Rule, the precondition for binding Smith[/Sperlazza] was not met. Neither a proposed class action nor a rejected class action may bind nonparties.” Id. at 15.

The Court was less dismissive of Bayer’s argument that public policy suggests that injunctions should be available in these situations in order to avoid abuse of the class action process. Bayer suggested that, following a denial of class certification, the same counsel may keep seeking to certify the same class by changing the named plaintiff and filing an otherwise identical complaint. While true, that was not enough to persuade the Court because other tools exist to prevent such abuse. “[O]ur legal system generally relies on principles of stare decisis and comity among courts to mitigate the sometimes substantial costs of similar litigation brought by different plaintiffs.” Id. at 17. If class actions present “special problems of relitigation, Congress has provided a remedy that does not involve departing from the usual rule of preclusion”—the Class Action Fairness Act of 2005. Id. “[W]e would expect federal courts to apply principles of comity to each other’s class certification decisions when addressing a common dispute.” Id. With Congress addressing the relitigation concerns of class actions through CAFA removal, federal courts should continue to follow longstanding principles of issue preclusion when deciding whether to enjoin a state proceeding.

Leaving no doubt about the effect of its ruling, the Court closed by noting that the Anti-Injunction Act’s “relitigation exception” permits injunctions “only when a former federal adjudication clearly precludes a state-court decision.” Id. at 18. In close cases, the “federal court should not issue an injunction, and the state court should decide the preclusion question. But this case does not even strike us as close.” Id.

Conclusion

Because of the Court's interpretation of who is a "party," this opinion calls into question some earlier class action injunction cases, such as In re Bridgestone/Firestone, Inc. Tire Products Litigation, 333 F.3d 763 (7th Cir. 2003) (holding that absent class members are in privity to the parties in the prior action). Defense lawyers relying on decisions like Bridgestone should expect to face such arguments and try to rebut them with exceptions to the rule that a judgment only binds "parties" to an action. As if another reason to remove to federal court when possible is necessary, this opinion provides one so as to avoid the need to analyze whether a state court class certification rule differs substantively from Federal Rule of Civil Procedure 23. If you find yourself in state court and unable to enjoin a second class action, your remedy is to appeal through the state appellate courts and, ultimately, the Supreme Court. Slip Op. at 6 n.5.

Two issues remain unresolved. First, the Supreme Court had no reason to decide whether federal preclusion law should incorporate state preclusion law in such situations because the parties did not identify any relevant difference between the two. Id. at 7 n.6. Second, the Court did not address whether a class certification denial is a "judgment" to which the relitigation exception applies; that issue arose in briefing and oral argument. Thus, even if a defendant shows that the same legal standard applies and that the second plaintiff is a "party" to the prior litigation, the issue of what is a "judgment" for purposes of the Anti-Injunction Act may arise.

Categories: Class Actions | Supreme Court

Actions: E-mail | Comments

An Important Class Action Defense Victory in the "Food Court"

A Near Miss in the Eleventh Circuit Provides Additional Guidance for Class Action Waivers in Arbitration Clauses

Uncertainties Regarding Class Wide Arbitration: Are Lower Courts Nullifying Stolt-Nielsen?

Looking Ahead To The Supreme Court’s 2013 Class Action Opinions

Important Limits On Class Action Arbitration Waivers

Plaintiffs’ Efforts To Use Discovery To Circumvent Concepcion And Class Waivers In Arbitration

Enforcement and Rejection of Class Action Waivers in Arbitration Provisions Since Concepcion

Reviving Arbitrations In Class Actions

The Second Circuit Complicates The Issue Of Classwide Arbitration After Stolt-Nielsen

Supreme Court Substantially Limits Federal District Courts’ Ability To Enjoin Similar Class Actions In State Courts

Submit Blog

Search Blog

Recent Posts

Categories

Authors

Blogroll