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Posts Tagged ‘class action waiver’

In what would have been bigger class action news yesterday had the Supreme Court not issued its decision in Amgen, the Court also heard oral argument in class arbitration case, American Express Co. v. Italian Colors Restaurant, No. 12-133 (click case title for a link to the transcript).  The primary issue presented is whether the “federal substantive law of arbitrability” may be invoked to invalidate an arbitration agreement in a case involving federal law claims.  The case will test the limits of the Supreme Court’s holding in AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011) (holding that the Federal Arbitration Act preempts state laws prohibiting class arbitration waivers). 

It is clear from the questions posed by the Justices that there are certain members of the Court (namely Justice Scalia, author of Concepcion) who remain steadfast in their belief that arbitration agreements that prohibit class claims are enforceable, period, and that there is another faction of the court that has serious doubts about the use of an arbitration agreement to effectively foreclose a litigant from obtaining any meaningful procedure for vindicating his or her rights.  Whether this case follows Concepcion in solidifying the enforceability of class arbitration waivers or carves out an exception will likely depend on a few swing votes in the middle.

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In a recent post entitled Concepcion a Year Later, Are Consumer Class Actions Dead Yet?, I invited readers to offer their perspectives on trends in the enforceability of class arbitration waivers now that a year after the Concepcion decision.  In response, Jessie Kokrda Kamens at the Bloomberg BNA Class Action Litigation Report send me a copy of her recent article, Post-Concepcion, Plaintiffs Chalk Up Few Victories, Look to Government for Relief.  Kamens offers the perspectives of several leading class action practitioners on how the law on class arbitration waivers has developed in the lower courts since Concepcion, as well as their predictions on how the law will develop into the future.  Among the observations made in the article:

  • Although class arbitration waivers were upheld in 76 cases, plaintiffs were successful in invalidating arbitration clauses in several key cases, mostly on various federal law grounds.
  • Use of “consumer-friendly” provisions, such as the one at issue in Concepcion that provided for monetary incentives for individuals to pursue arbitration, makes it much more likely that an arbitration clause will be upheld.
  • Observers are eagerly awaiting several federal and state regulatory and legislative developments that may impact the enforceability of class arbitration waivers, including the results of a study being conducted by the federal Bureau of Consumer Financial Protection (CFPB) pursuant to Dodd-Frank about the impact of arbitration clauses on consumer financial products, several bills being considered by Congress, and a bill being considered in the California legislature that would render void contracts that contain class action waivers.

Thanks to Bloomberg BNA (www.bna.com) for granting permission to post a copy of the article on this site.  For those of you who are not subscribers, I highly recommend the Bloomberg BNA Class Action Litigation Report.  It is one of the most comprehensive and reliable sources of class action cases and trends available.

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It has only been a few months since the Supreme Court issued its decision in AT&T Mobility v. Concepcion, holding that state laws holding class arbitration waivers unenforceable as against public policy are preempted by the Federal Arbitration Act (FAA), and the Court is already considering a new case involving the enforceability of arbitration agreements in consumer contracts.  

Today, the Supreme Court heard oral argument in Compucredit Corp. v. Greenwood, No. 10-948, in which the issue is whether a federal law’s grant to consumers of a right to sue can be waived through an arbitration agreement.  A copy of the oral argument transcript is now available at the Court’s website.  Most of the questions were directed at issues of statutory construction under the Credit Repair Organizations Act, 15 U.S.C. § 1679 et seq., and in particular whether Congress intended that the right to sue in court be non-waivable.  The Ninth Circuit’s decision below, the limited scope of the question presented for review, and the questions posed at oral argument would all suggest that the Court is unlikely in its ultimate opinion to address some of deeper questions remaining after Conception, such as whether and under what circumstances a consumer arbitration agreement can be held unconscionable under federal law.  Then again, as aptly illustrated in Justice Scalia’s opinion in Concepcion decision, the possibility that the decision will go beyond the limited statutory questions presented and address deeper public policy issues can never be ruled out.

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Today’s edition of the Baker Hostetler Employment Class Actions Newsletter has two great articles worth noting.

My colleague here in Denver, Holli Hartman, authored an article summarizing developments in challenges to class arbitration waivers following the Court’s decision in AT&T Mobility LLC v. Concepcion.

Cleveland Partner Greg Mersol and Summer Associate George Skupski contributed an entry examining the application of Daubert standards to expert testimony at the class certification stage in light of the Supreme Court’s decision in Wal-Mart Stores, Inc. v. Dukes.

Although I’m admittedly somewhat biased, I highly recommend both articles, as well as other employment class action-related news and commentary on the firm’s Employment Class Action Blog.

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My recent SCOTUSblog post  on the October 2010 Supreme Court Term class action decisions does not address an important decision from the Third Circuit Court of Appeals, which was issued last week.  In Litman v. Cellco Partnership, the Third Circuit held that New Jersey decision holding class arbitration waivers unconscionable was preempted by the Federal Arbitration Act.  To that extent, the court’s analysis is a relatively straightforward application of the federal preemption analysis in Concepcion.  But what is important about the Litman decision is that the court’s analysis makes no mention of whether the arbitration clause at issue contained the sorts of consumer-friendly procedural protections contained in the AT&T Mobility arbitration clause at issue in Concepcion.  Based on the quoted portions of the agreement discussed in Litman, it appears that it did not.  As a result even in cases outside the Third Circuit, Litman provides a defendant with strong authority for arguing that class arbitration waivers cannot be held unconscionable under state law principles regardless of the presence of any special consumer protections ensuring that arbitration provides a meaningful mechanism for redress.

However, potential defendants should still be cautious about going too far with arbitration provisions that mandate a waiver of all avenues for class relief if they don’t also contain some provision for incentivizing the pursuit of individual arbitration of a meritorious claim.  There are a variety of other arguments, including arguments based on the federal common law of arbitrability, that may still be persuasive to many courts when the particular arbitration agreement at issue appears to foreclose any possibility of litigation at all.  Moreover, the decision of only one of the federal circuits will not likely be enough to prevent attempts by plaintiffs’ lawyers to attack broadly-worded arbitration agreements in consumer contracts in the short-term.  So, although Litman is a good decision for defendants, prudent corporations will not treat it as an invitation to adopt draconian class arbitration waivers that have the effect of precluding nearly all consumer litigation.

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Class arbitration waivers are contract provisions that require disputes be submitted to arbitration but also expressly preclude the arbitration from being conducted on a representative or class basis.  Class arbitration waivers have been a hot topic in class action litigation over the past few years, as some courts have found that in certain contexts that the are unenforceable in violation of public policy.

Yesterday, the Second Circuit Court of Appeals issued its decision on remand from the U.S. Supreme Court in In re American Express Merchants’ Litigation, No. 06-1871-cv.  This is the second decision by the Second Circuit in the case finding that the class arbitration waiver provision at issue was unenforceable.  The first decision, In re American Express Merchants’ Litigation, 554 F.3d 300 (2009), was issued by a panel that included future Supreme Court Justice Sonia Sotomayor.  (See this February 2009 CAB entry discussing the decision).  Last May, the Supreme Court granted certiorari, vacated the decision, and remanded for reconsideration in light of its recent decision in Stolt-Nielsen, S.A. v. AnimalFeeds Int’l Corp., 130 S. Ct. 1758 (2010).

A 2-judge panel, sans now-Justice Sotomayor, issued the decision on reconsideration yesterday.  The court found that Stolt-Nielsen did not change its conclusion.  The rationale is best summarized in the following excerpt:

Stolt-Nielsen states that parties cannot be forced to engage in a class arbitration absent a contractual agreement to do so. It does not follow, as Amex urges, that a contractual clause barring class arbitration is per se enforceable. Indeed, our prior holding focused not on whether the plaintiffs’ contract provides for class arbitration, but on whether the class action waiver is enforceable when it would effectively strip plaintiffs of their ability to prosecute alleged antitrust violations.

Slip op. at 11.

The Court went on to hold that the arbitration provision at issue was not enforceable because, it found, the facts in the record established that having to pursue the antitrust claims at issue in the case would be prohibitively expensive without using the class action device.  Therefore, the court reasoned, the contract provision was void for public policy reasons, as a matter of law.  In rejecting the argument that Stolt-Nielsen prohibits the invalidation of arbitration provisions for public policy reasons, the court stated:

While Stolt-Nielsen plainly rejects using public policy as a means for divining the parties’ intent, nothing in Stolt-Nielsen bars a court from using public policy to find contractual language void. We agree with plaintiffs that “[t]o infer from Stolt-Nielsen’s narrow ruling on contractual construction that the Supreme Court meant to imply that an arbitration is valid and enforceable where, as a demonstrated factual matter, it prevents the effective vindication of federal rights would be to presume that the Stolt-Nielsen court meant to overrule or drastically limit its prior precedent.” (Plaintiffs’ Supp. Brief, p. 7) Following the Stolt-Nielsen decision, our court reached a similar conclusion in considering a different iteration of the issue: whether class action waivers are unconscionable as a matter of state law.

Id. at 21.

The long-term impact of the Second Circuit’s decision is unclear, especially since the Supreme Court’s decision in AT&T Mobility v. Concepcion is expected soon.  (See this November 17, 2010 CAB Entry recapping the oral arguments in AT&T Mobility).  However, AT&T Mobility involves issues of federal preemption and the power of the state courts to find class arbitration waivers unenforceable.  Therefore, even a decision favorable to the defendant in AT&T Mobility may not prevent future federal courts from applying the Second Circuit’s reasoning in invalidating class arbitration waivers.

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The Supreme Court heard argument last week in the case that many commentators were calling a possible death knell for consumer class actions.  (See previous CAB posts on  Nov. 4, 2010 and Nov. 9, 2010)

So does the future of consumer class actions still seem dire after oral argument?

The basic issue is whether the Federal Arbitration Act pre-empts state contract law when state courts find class arbitration waivers unconscionable.  In other words, if an arbitration clause forecloses the possibility of a consumer class action, can state courts declare the waiver unconscionable, and therefore invalid?

Moreover, if states are permitted to find arbitration clauses that bar class actions unconscionable, will it end arbitration as a viable tool of conflict resolution?  Companies may avoid arbitration provisions in the future because none will want to deal with class arbitrations, which offer all the procedure of court litigation plus plenty of liability exposure, without the benefit of judicial review.

 Several Justices made comments suggesting a lack of comfort in telling states they can’t decide for themselves what constitutes an unconscionable contract.  If that sentiment plays out in the opinion, concerns about federalism and states rights may play a larger role in the outcome than any pro-business or pro-consumer bias or any leaning for or against class actions among the Court’s members.

 JUSTICE SCALIA: “What if — what if a State finds it unconscionable to have an arbitration clause in an adhesion contract which requires the arbitration to be held at a great distance from — from where the other party is and requires that party to pay the cost of the arbitration? Can a State not find that to be unconscionable?”

Justice Kagan followed up on the theme, questioning AT&T Mobility’s apparent position that state courts should generally have discretion to find contract provisions unconscionable, except class arbitration waivers.

JUSTICE KAGAN:  “… how about a provision prohibiting certain kinds of attorney’s fees? How about a provision prohibiting certain kinds of — a law prohibiting certain kinds of discovery provisions? And you said that would be fine, for the State courts to hold those things unconscionable, but it’s not fine for the State court to hold a class arbitration prohibition unconscionable. So what separates the two? How do we know when something is on one side of the line and something is on the other?”

In the face of arguments that California’s unconscionability law is disproportionately hostile to arbitration waivers, Justice Ginsberg, among others, observed that California applies its unconscionability doctrine equally to both arbitration contracts as well as non-arbitration contracts.

JUSTICE GINSBURG: “There is nothing that indicates that California’s laws are applying a different concept of unconscionability. You haven’t come up and said, oh, look what they did here. And in another case they said it has to shock the conscience.  Maybe across the board, California is saying: We think that unconscionability should have a broader meaning. Is it unfair to the weaker party to the bargain? Is there really no genuine agreement here? And if that is so, that will fit our definition of unconscionability.  How do we draw the line between a law that says discovery has to happen in arbitration, and one that says a — in a contract of adhesion, if the superior party retains the right to do discovery but tells the inferior party, you can’t? And a State says, that’s unconscionable.”

In response, Andrew Pincus, the attorney representing AT&T Mobility, with the help of Justice Alito, made the point that the California courts did in fact apply the state’s unconscionability doctrine differently to the class arbitration waiver in the Concepcion’s contract.  That is, the lower courts did not focus on the fairness of the contract’s terms to the Concepcions, the  actual plaintiffs before the court.  This runs contrary to the way most contract terms are assessed for fairness.  Instead, the courts focused on the contract’s fairness to a future class of possible plaintiffs.  If the lower courts had viewed the generous arbitration clause in the Concepcion’s phone contract for its fairness to the Concepcions, the contract may not have been deemed unconscionable.  Instead, the lower courts appear to have found the arbitration clause unconscionable merely because it barred the class action device.

 MR. PINCUS: “First of all, let me explain why the hypotheticals that you posit and that Justice Scalia posited and that Justice Sotomayor posited have been addressed under the traditional unconscionability doctrine that we described. In all of those cases, what courts have said is this provision — we are measuring whether it is unconscionable at the time of contracting; we are looking at the effect on the party before the court; can this person get to arbitration, is the fee too high, is it too far away. What about — we are looking at the effect on this particular person and we are deciding whether it shocks the conscience or whatever their across-the-board State standard is.  And in all of those cases, that’s what those courts do, and that’s why those provisions have been  invalidated, because they are invalidated under an evenhanded application of the unconscionability provisions that courts apply when they assess –”

 JUSTICE ALITO: “I thought that — I don’t want to interrupt your complete answer.”

 MR. PINCUS: “Sure.”

 JUSTICE ALITO: “But I thought that was the gist of your argument, the heart of your argument, that traditional unconscionability in California and elsewhere focuses on unfairness to the party who is before the tribunal. So here it would be unfairness to the Concepcions, rather than unfairness to other members of the class who are not before the court.”

 MR. PINCUS: “That’s exactly right, Justice Alito.”

 Read the entire transcript or listen to an audio recording at Scotus Blog

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