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.    

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.

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:

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.

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.      

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.  

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.  

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.

On April 27, 2010, the Supreme Court issued an opinion on the meaning of silence.  In a landmark decision in Stolt-Nielsen, S.A., v. AnimalFeeds International Corp., No. 08-1198, the Court held that an arbitration agreement that was silent with respect to class arbitration could not be construed to allow arbitration by a class of plaintiffs.

Stolt-Nielsen and AnimalFeeds are both large international shipping companies that conducted business under the terms of a standard contract known in the maritime industry as a “charter party,” which required that all disputes be resolved through arbitration pursuant to the terms of the Federal Arbitration Act (“FAA”).  When AnimalFeeds demanded class arbitration of antitrust claims on behalf of a class of direct purchasers of tanker transportation services, it became apparent that the charter party was silent as to whether class arbitration was permitted.  After an arbitration panel concluded that the charter party permitted class arbitration, Stolt-Nielsen petitioned the United States District Court for the Southern District of New York to vacate the arbitration ruling, claiming that the arbitrators acted in “manifest disregard” of the law in allowing class arbitration.  The district court agreed, vacating the arbitrators’ decision.  The United States Court of Appeals for the Second Circuit then reversed, interpreting the Supreme Court’s plurality opinion in Green Tree Financial Corp. v. Bazzle, 539 U.S. 444 (2003), as allowing class arbitration where the arbitration agreement is silent on the issue. On June 15, 2009, the United States Supreme Court granted certiorari.

DRI filed an amicus brief on the merits in support of Stolt-Nielsen.  Based on its members’ extensive practical experience, DRI was uniquely well suited to explain to the Court why class arbitration is a fundamentally different, more complex, and expensive process than individual arbitration and why the Second Circuit’s opinion, which effectively equated contractual silence with consent to class arbitration, would have subjected numerous defendants to the very financial risks and burdens they sought to contain by contracting for arbitration.
The Supreme Court reversed the Second Circuit in a 5-3 decision.  In a majority opinion for the Court, Justice Alito explained that the charter party’s silence must be construed as forbidding, rather than permitting, class arbitration.  As the Court held, “Even though the parties are sophisticated business entities, even though there is no tradition of class arbitration under maritime law, and even though AnimalFeeds does not dispute that it is customary for the shipper to choose the charter party that is used for a particular shipment, the panel regarded the agreement’s silence on the question of class arbitration as dispositive.  The panel’s conclusion is fundamentally at war with the foundational FAA principle that arbitration is a matter of consent.”  (Emphasis added). 

The successful DRI amicus was filed by Jerrold J. Ganzfried, a partner in the Washington, D.C., office of Howrey LLP, and Jennifer Bagosy, a senior associate in the firm’s Irvine, California, office.

Regardless of how we feel about lawyer advertising (I'm old enough to remember when it was mostly not allowed and then when it was pretty limited), many of us in areas affected by the mortgage foreclosure crisis have seen lots of advertisements from lawyers advertising their ability and willingness to help homeowners threatened by foreclosure. That has always seemed surprising to me since I've never been sure what most lawyers can do for most of those cases. The answer seems to be that they can take their money and then do little to actually help their clients.

Unsurprisingly some State Bars have been responding to this. Last month the California State Bar identified 16 lawyers who were under investigation for so-called loan modification scams. That was surprising for several reasons including the fact that lawyers were identified who were under investigation but no formal charges had been filed. There may be as many as 200 lawyers under investigation.
Several lawyers have given up their law licenses--and others are under investigation by the Federal Trade Commission as well as the California State Bar.

I'm not sure how I feel about this--glad to see policing of lawyers--but "outing" them before formal charges are filed seems to have potential for abuse. I do know that it is incredibly refreshing to see some pushback on preposterous advertisements by lawyers.