On August 21st, the U.S. Court of Appeals for the Ninth Circuit in Richards v. Ernst and Young held that an employer’s arbitration agreement could be enforced, despite any limitation on joint or class actions.

The decision came after defendant; Ernst & Young LLP appealed the district court’s decision denying its motion to compel arbitration of state wage and hour claims brought by its former employee, Michelle Richards. The district court ruled that the defendant had waived its right to arbitration by failing to raise the agreement as a defense early in litigation. However, plaintiff Richards’ action was consolidated with other former employees’ claims at a later date.

In reversing the district court’s decision, the Court of Appeals noted that waiver of a contractual right to arbitration is not favored. Therefore, any party arguing waiver of the right has a heavy burden of proof which includes demonstrating: (1) knowledge of an existing right to compel arbitration; (2) acts inconsistent with that right; and (3) prejudice to the party opposing arbitration resulting from the inconsistent acts.

The plaintiff argued prejudice as a result of the defendant’s failure to compel arbitration at an earlier date, after she had already provided pretrial information and incurred expenses. However, the Court of Appeals ruled this was insufficient prejudice. Plaintiff further argued she was prejudiced as there were meritorious arguments and as a result of compelling arbitration, some of her claims were dismissed. However, the Court noted that one of her claims was dismissed without prejudice, which did not constitute a decision on the merits. Furthermore, another of her claims was resolved when it was determined that she lacked standing to bring the claim- a decision that precedes and does not involve any analysis of the merits.

Last of all, the plaintiff argued that the Court should follow a decision of the National Labor Relations Board (NLRB) in D.R. Horton, 357 N.L.R.B. No. 184, 2012 WL36274 (Jan. 3, 2012) in which it was held that an arbitration agreement that did not allow employees to file joint, class, of collective employment related claims was invalid. The Court of Appeals declined to entertain the argument, as it was not properly raised before the district court for argument. However, it more importantly noted that it, as well as a majority of courts, have declined to follow the NLRB’s decision because it conflict with explicit pronouncements of the U.S. Supreme Court and the Federal Arbitration Act (FAA) 9 U.S.C. §§ 1–16. It specifically noted that the U.S. Supreme Court recently reiterated the importance of courts enforcing arbitration agreements, including those whose subject matter involves claims of federal law violations.

This case is important for employers, who may be able to limit their exposure to class actions by utilizing mandatory arbitration agreements such as the one in this case. Employers should be careful to understand the benefits of litigation versus arbitration and seek advice from an experienced attorney regarding the use of such an agreement in its employment contracts.

This blog was originally posted on September 19 on the Jampol Zimet website. Click here to read the original entry. 

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Terry Baynes of Thomson Reuters has an interesting article on efforts by a few plaintiffs’ attorneys to “crowd source” consumer arbitration claims.  The effort arises out of the Supreme Court’s decision in AT&T Mobility v. Concepcion, 131 S.Ct. 1740 (2011), upholding class action waivers in mandatory arbitration clauses.  The article discusses how two plaintiffs’ attorneys have created a website to generate consumer interest in filing multiple arbitration claims against a company with the stated goal of overwhelming the company “with hundreds or thousands of claims.”   The article quotes one of the founding lawyers as saying, “If it happens enough, companies will want class actions again.” Andrew Pincus, who represented AT&T Mobility before the Supreme Court, is quoted as calling the site “marketing front for plaintiffs’ law firms.”  Mr. Pincus discussed Concepcion at DRI’s 2011 Class Action Seminar in Washington, DC.  DRI will hold the next edition of the Class Action Seminar on July 25 and 26, 2013.  That program is expected to include discussions of the Supreme Court’s current term’s class action and collective action cases.  More details on that will follow soon.

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Class Actions and The Supreme Court

Posted on September 4, 2012 02:09 by Michael Aylward

As the rest of us return from the last long weekend of summer, the U.S. Supreme Court send us scurrying back to our computers this morning with news that it has accepted Travelers' cert petition in Standard Fire Ins. Co. v. Knowles, 11-1450.  At issue is a ruling by an Arkansas District Court declaring that Travelers could not remove a homeowner's class action against to federal court because the underlying claimants had stipulated that they were seeking damages under $5 million, the jurisdictional limit for removal under CAFA.  

In its cert petition, Travelers observed that last year, the Supreme Court ruled in Smith v. Bayer Corp,  131 S. Ct. 2368, 2382 (2011) that in a putative class action "the mere proposal of a class ... could not bind persons who were not parties."  In this case, it asks:  

When a named plaintiff attempts to defeat a defendant's right of removal under the Class Action Fairness Act of 2005 by filing with a class action complaint a "stipulation" that attempts to limit the damages he "seeks" for the absent putative class members to less than the $5 million threshold for federal jurisdiction, and the defendant establishes that the actual amount in controversy, absent the "stipulation," exceeds $5 million, is the "stipulation" binding on absent class members so as to destroy federal jurisdiction?   

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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.                              

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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.  

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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.    

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Former NBA legend Bill Russell has recently brought a suit against the National Collegiate Athletic Association (“NCAA”) (Russell v. NAT’L Coll. Athletic Ass’n., 11-04938, U.S. District Court, Northern District of California).  Russell’s suit is one of several the NCAA is currently facing revolving around alleged violations of federal antitrust laws.  Russell alleges the NCAA used his likeness from his days as a collegiate athlete at the University of San Francisco, where he led the men’s basketball team to national championships in 1955 and 1956.  He also claims that the NCAA has violated federal antitrust laws by preventing former student athletes (football and basketball) from being compensated for the commercial use of their images and likenesses.  Russell alleges that the NCAA sells videos of the championship games he led his team in for $150, without compensating the featured athletes.

Electronic Arts, Inc., (“EA”) is also named as a defendant in the suit.  As the second largest video game maker in the United States, Russell claims EA used his image in a “Tournament of Legends” featured on one of its NCAA basketball video games.    Russell seeks an injunction blocking any further sales of the videos and video games in question.  Additionally, he wants disgorgement of profits from both the games and videos along with other damages.  

Russell’s claim will likely be consolidated with a pending lawsuit brought by Ed O’Bannon, a former UCLA basketball standout (O’Bannon v. NAT’L Coll. Athletic Ass’n., 09-cv-01967, N.D. Cal.; appeal pending, 10-15387, 9th. Cir.).  O’Bannon’s suit alleges that the NCAA and EA have conspired to violate former student-athletes’ rights to profit from and control the use of their image. EA has denied any wrongdoing, relying on the constitutional right of freedom of speech under the First Amendment.  EA claims that freedom of speech under the First Amendment means it does not need permission to use any player’s likeness because the videos have sufficient creative elements that collectively express that they are more than depiction of any one athlete.  The NCAA has also denied any wrongdoing.  

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On October 11, 2011 the Supreme Court heard argument in CompuCredit Corp. v. Greenwood, No. 10-948, confronting the intricacies of application of pre-dispute arbitration agreements, supported by strong federal policy favoring arbitration, and federal statutes containing non-waiver of “rights” provisions in the consumer arena.  Specifically, the Question Presented was:

Whether claims arising under the Credit Repair Organizations Act, 15 U.S.C. § 1679 et seq. (“CROA”), are subject to arbitration pursuant to a valid arbitration agreement.

The Court’s recent cases applying the Federal Arbitration Act, 9 U.S.C. § 2 (“FAA”) represent an unbroken string of enforcement of arbitration agreements in a variety of contexts.  None of the federal statutes previously considered were specific enough to overcome presumptive arbitrability under the FAA.

The CompuCredit Case and the CROA
Respondents, who acquired credit cards through CompuCredit, successfully persuaded the District Court and the Ninth Circuit Court of Appeals that the CROA provides consumers with a non-waivable right to litigate their disputes in court.  Greenwood v. CompuCredit Corp., 617 F. Supp.2d 980, 988 (N.D. Cal. 2009)(denying motion to compel arbitration despite strong federal policy favoring arbitration)  aff’d 615 F.3d 1204, 1205 (9th Cir. 2010).  The Ninth Circuit’s holding created a conflict with the Third and Eleventh Circuits, both favoring compulsory arbitration of CROA claims.    

CompuCredit marketed a sub-prime credit card to consumers with impaired credit, advertising that the card could improve a consumer’s credit rating, although the credit limit on the cards typically was a mere $300.  However, the issuing bank would charge fees totaling $180 against the $300 credit limit.  The pre-approved acceptance certificate enclosed “terms of the offer” and a “summary of credit terms” with a pre-dispute arbitration provision.  CompuCredit principally relied on the argument that the  CROA nowhere mandates judicial resolution of any “rights” or “causes of action” asserted by consumers.  A “right to sue” does not mean a “right to sue in court”.  CompuCredit’s position was supported by amicus briefs by DRI and the Consumer Data Industry Association.  

Respondents filed a class action alleging violations of substantive provisions of the CROA for deceitful marketing. In 1996, Congress enacted the CROA to ensure sufficient disclosures to permit consumers to make informed decisions when dealing with credit repair companies and prohibit predatory practices.  Respondents alleged that CompuCredit omitted the necessary disclosures altogether or failed to present them with the required detail.  Respondents relied on a reading of  the obligation of credit firms to disclose consumers’ “right to sue” and a cross reference to a separate section providing that “[a]ny waiver by any consumer of any protection ***or any right” is void.  15 U.S.C. § 1679f(a).    They also argued, in reliance on language in AT&T Mobility v. Concepcion, 563 U.S. ___ (2011), that class arbitration is inadequate to protect consumers’ interests.  Respondents, also, were supported by amicus briefs, including one by the AARP and the NSCLC. 

Issues for the Supreme Court
Broadly considered, the decision may resolve whether consumer contracts’ pre-dispute arbitration agreements are enforceable and afford sufficient protections for consumers outside of court processes, whether in class actions or not.  More narrowly considered, the result may be limited solely to the specific “right to sue” language of the CROA.  Alternatively, the decision may have limited life if the Consumer Financial Protection Bureau, authorized by §1028 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, exercises its authority to abolish pre-dispute arbitration agreements in consumer contracts.  Ironically, however, Congress’ provision of the specific authority to do so demonstrates Congress can plainly state its’ intent to bar arbitration and cuts against Respondents’ “plain language” arguments in CompuCredit.

Clues from Oral Argument?
If one hoped for a partisan duel between liberal and conservative Justices, the oral argument will be a disappointment.  While Justices Sotomayor, Kagan, and Ginsburg at times seemed very concerned with how the ordinary person would construe the phrase “right to sue”, the significance of the disclosure requirement in the CROA, and the one-sided nature of non-bargained for consumer contracts, their questions disclosed concerns with Respondents’ position as well in light of the court’s precedent and the necessity to distinguish post dispute arbitration agreements and pre-dispute arbitration waivers.   Chief Justice Roberts remarked that the term “lawsuit” does not typically refer to arbitration.  Justice Kennedy queried whether the act of requesting the waiver caused a breach of the CROA.  Presumably, this would fit an argument to construe the statute to avoid absurd results. Yet, the argument covered a litany of other federal statutes containing non-waiver provisions that courts frequently refer to arbitration, including antitrust, RICO, ADEA, and Truth in Lending Act claims.  None of them use the same language as the CROA.  Justice Scalia took interest in the argument that the “right to sue” language was not included in the substantive, versus procedural, rights in the CROA.    

Likely Outcome
CompuCredit will resolve the circuit conflict and will continue the trend of enforcement of arbitration provisions by the Supreme Court.  The interesting point will be to see how broadly or narrowly the Court will address the issues, which will turn on how a divided Court will align on the majority analysis used to address the case.  A future update will follow when the decision is entered.      

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These days, many depositions are videotaped.  If a deposition is being videotaped, is there still a need for a court reporter?  Is a stenographic (“hard copy”) transcript necessary?  This issue is currently the subject of debate in Texas and across the country, with interest groups taking positions on both sides.

On one hand, hard copy transcripts have practical advantages over video depositions.  First, hard copies allow attorneys to take part in their favorite pastime – copious amounts of highlighting and tabbing.  Additionally, most cases require careful attention to the facts, and hard copy transcripts make it easier to cite to the record.  In short, whether it is due to personal preference or the manner in which people learn, some people will probably always prefer working with hard copies.

At the same time, video depositions have unique advantages over hard copy transcripts.  In the era of C.S.I., jurors expect attorneys to use technology.  And video evidence is often more compelling and entertaining than a transcript.  Video depositions capture mannerisms, body language, and attitudes that would otherwise go unnoticed.  Because of this, adverse witnesses and opposing counsel are more likely to mind their manners when being videotaped.  Of course, there are exceptions to every rule, and video footage of a witness losing control can be pure gold.  For example, when the witness in the infamous Texas Style Deposition told the examining attorney that he had “a case of incipient verbal diarrhea,” a paper transcript would never have done it justice. 

As other commentators have noted, both video depositions and traditional hard copy transcripts have their place.  When used correctly, each form of “transcript” compliments the other.  Because of the limitations of videotape-only depositions, however, traditional hard copies (and court reporters) are here to stay . . .  for now.


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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.  

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