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.    

The U.S. Supreme Court in Shute v. Carnival Cruise Lines, 499 U.S. 585 (1991) held the Shutes, who were injured on a Carnival Cruise ship in waters off Mexico, must file suit in Florida pursuant to the forum selection provision printed on the back of their ticket.   The Shutes filed suit in their home state of Washington.  The cruise ship departed from California.  Shute is still one of the most far reaching holdings enforcing adhesion-like forum selection provisions.  The Shutes also had a strong argument that they lacked notice of the forum selection/choice of law provisions.  

On January 16, 2012, attorneys filed a class action against Amazon.com relating to an online hacking attack that compromised the personal information of up to 24 million customers of its online shoe retailer, Zappos.com.  Data Breach Legal Watch reported that less than 24 hours after the breach occurred, the plaintiffs’ bar had already filed a Complaint claiming that the attack resulted in the exposure of the following:

A recent Seventh Circuit opinion indicates that plaintiffs' counsel in a class action suit that engages in misconduct will not likely be able to adequately represent the class.  In Creative Montessori Learning Centers v. Ashford Gear LLC, No. 11-8020 (7th Cir. Nov. 22, 2011), Judge Posner's opinion overturned the district court's class certification because the district court applied a standard that was too lenient for misconduct on the part of plaintiffs' counsel. 

The named plaintiff, Creative Montessori Learning Centers, sued Ashford Gear LLC for violating the Telephone Consumer Protection Act, 47 U.S.C. § 227.  The Act provides that the recipient of an unsolicited fax can be compensated up to $1,500 for each fax.  There are 14,573 other members of the class who collectively claim to have received 22,222 unsolicited faxes. 

Plaintiffs' attorneys, attorneys from Bock and Hatch, specialize in bringing suits under the Act, but used some unethical tactics to initiate the suit.  The attorneys contacted a fax broadcasting company that faxes advertisements on behalf of advertisers.  Then the attorneys asked the broadcasting company for information about faxes it had sent – and promised to keep the information confidential.  But instead of keeping the information confidential, the attorneys used the information to drum up lawsuits.  The attorneys found violators of the Act and potential plaintiffs.  Notably, the attorneys found Montessori, the named plaintiff, and misleadingly told them that a class action already existed.     

This behavior prompted defense attorneys to argue that the class should not be certified because plaintiffs' attorneys behaved unethically and would not be able to adequately represent the class.  However, the district court applied an egregious misconduct standard, and found that the conduct was not egregious and certified the class.  On appeal, the Seventh Circuit applied a different standard. 

The Seventh Circuit emphasized the importance of ensuring that plaintiffs' counsel can adequately represent a class.  The court noted that class plaintiffs lack the knowledge and monetary stake to allow them to monitor their lawyers.  Therefore, courts have to take great care in ensuring that plaintiffs' counsel will fulfill their fiduciary duties.  The court then held that the district court erred by applying an egregious misconduct standard; rather, any misconduct on behalf of plaintiffs' counsel should create a serious doubt that plaintiffs' counsel is fit to represent a class.  The court then remanded the case back to the district court so the district court could determine whether the class should be certified. 

With this decision, the Seventh Circuit is leaving less room for unethical conduct on the part of plaintiffs' counsel in class action litigation.  It is a decision that will likely be welcomed by defense counsel and class plaintiffs alike. 

William F. Auther is a partner with an active trial practice in business litigation and Kelly M. McInroy is an associate in the Phoenix office of Bowman and Brooke LLP.  

On June 20, the U.S. Supreme Court issued its much-anticipated Wal-Mart Stores, Inc. v. Dukes decision in which the Court held that the nationwide class certification approved by the lower courts was not consistent with Federal Rule of Civil Procedure 23(a) governing class actions. The class of plaintiffs consisted of some 1.5 million women who worked at Wal-Mart throughout the U.S. and allegedly suffered discriminatory pay and promotion practices at any point during or after December 1998.  Writing for the Court, Justice Antonin Scalia concluded that the millions of plaintiffs and their claims did not have enough in common: “Without some glue holding the alleged reasons for all those decisions together, it will be impossible to say that examination of all the class members’ claims for relief will produce a common answer to the crucial question why I was disfavored.”

As was reported this week, plaintiffs’ counsel have now move the fight to the states, amending their original complaint filed in federal district in California to limit the class to female Wal-Mart employees in California and filing a new action on behalf of Texas Sam’s Club and Wal-Mart female employees.  It is anticipated that these represent the first of many additional class-action lawsuits to be filed against Wal-Mart on the state or regional level.

At first blush, these state and regional actions appear to suffer from some of the same defects as the action rejected by the U.S. Supreme Court.  Among other things, it remains undisputed that Wal-Mart store supervisors retained discretion over promotion and pay policies, making challenges on anything above the store-level problematic.  In addition, the proposed classes appear to include female associates as well as the female supervisors who may have supervised them and made the very promotion and pay decisions they deem objectionable. 

What’s the likely outcome of the state/regional Wal-Mart class actions?  If you were representing Wal-Mart, what would you argue?  What are the chances one of these “Daughter of Dukes” cases ends up back before the nation’s high court?

An unnamed company has taken the first step in challenging the Consumer Product Safety Commission's (CPSC) online complaint database.  No information is currently listed in Pacer, the federal court filing system, but the Washington Post reported that a complaint was filed Monday in Maryland District Court.  The company that filed the suit is listed as "Company Doe" to protect its name – the exact reason that it filed the complaint in the first place. 

On August 14, 2008, the Consumer Product Safety Improvement Act became law and mandated that the CPSC create an online portal for customers to post complaints about products that can either injure children or pose fire, electrical, chemical, or mechanical hazards.  The Act sought to provide consumers with timely information about potentially unsafe products, so consumers would not have to wait for a recall to get the information.  However, the database has been criticized because of accuracy issues and the burden it places on manufacturers. 

Anyone can file a report in the database, found at www.SaferProducts.gov. , but a report is not eligible for publication unless it contains: (1) a description of the product; (2) the name of the manufacturer; (3) a description of the injury or risk of injury caused by the product; (4) the date that the incident occurred or risk of injury was discovered; (5) the type of reporter (consumer, agency, child service provider, etc.); (6) the reporter's name and address (this is not published); (7) the reporter's acknowledgement that the report is true and accurate; and (8) whether or not the reporter wants the information published. 

Once a report is filed online, the CPSC has five days to review it before sending it to the manufacturer.  However, the CPSC's "review" only entails ensuring that the minimum publication requirements have been met; the CPSC does not conduct any type of fact-finding investigation.  Instead, the burden is placed on the manufacturer to prove that the report is untrue, and it has just ten days to prove it.   If a report ends up being published, manufacturers can have their comments published with the report, but the CPSC does not always process comments in time to publish them the same day the report is published, and posting a comment is little consolation if a report is untrue. 

Since its inception, the database has been criticized for not requiring more information to reduce inaccuracies, such as a product serial number.  And the fact that manufacturers have to conduct all of the fact-finding and essentially prove themselves innocent seems a bit backwards considering anyone with access to a computer can file a report. 

Given these circumstances, it was only a matter of time before a company stepped up and challenged the system.  Consistent with argument that the database needlessly harms the reputation of manufacturers, the company has filed the lawsuit anonymously.  Whether or not the court will allow the company to remain "Company Doe" presents another question altogether.  But either way, this case could have major consequences for the CPSC database, and is definitely one to watch. 

William F. Auther is a partner with an active trial practice in product liability and business litigation and Kelly M. McInroy is a law clerk in the Phoenix office of Bowman and Brooke LLP.  

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:

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.      

Proposed class action settlements often bring out two types of objectors representing individual class members who would be affected by the settlement.  The first argues the settlement terms are themselves  unreasonable and seek modification of those terms.  Where those objections result in a higher overall recovery for the class, they seek attorneys’ fees from the increased value of the settlement fund.  See e.g., Duhaine v. John Hancock Mut. Life Ins. Co., 2 F.Supp.2d 175 (D.Mass. 1998) (allocating a portion of the fee award to counsel for successful objectors who improved the settlement fund).  The second type of objectors do not necessarily challenge the overall settlement amount per se, but rather object to the size of the award of counsel fees.  In that instance, they argue the amount of requested fees are excessive relative to the value of the settlement to the class members and seek a reduction of the award or an increase in the size of the fund.  Last year, in Fleming v. Barnwell Nursing Home and Health Facilities, Inc., 15 N.Y.3d 375 (2010), a majority of New York’s Court of Appeals held that counsel for a successful objector to the size of a fee request by class counsel was not entitled to recover attorneys fees from the increased value of the settlement fund.  The majority reached this decision based on a New York rule which it read to limit fee awards to “representatives of the class” and that such did not include counsel for individual class members even if their objections increased the award to the class.

Driven in part of the Fleming decision and the disincentive it created for class members to retain counsel to object to fee requests (since the cost of a successful objection would still be borne solely by the objector or her counsel even though the entire class benefited from the objection), the New York legislature passed a new version of the rule which would permit a court  to award fees to “representatives of the class and/or to any other person that the court finds has acted to benefit the class.”  N.Y. Senate Bill 4577.  On September 12, that bill was sent to Governor Cuomo for consideration and on September 23, Governor Cuomo signed the bill.  http://www.law.com/jsp/lawtechnologynews/PubArticleLTN.jsp?id=1202517053062&slreturn=1 .  

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.