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.    

In a recent Corporate Counsel article, the authors describe a Federal Trade Commission ruling about the disclosure of connections between corporate advertisers and those who shill, directly or indirectly, the advertisers’ wares. 

Recently the Federal Communications Commission (FCC) took measures that may possibly eliminate all sports television blackouts — a move that would delight many fans but is up against the strong defense of leagues like the National Football League (NFL). 

The NFL is the most notable league to experience a significant number of blackouts per year, with 2011 seeing 16 of them. The NFL’s blackout policy states that in order for a team’s home game to be televised in that team’s market, the game must be sold out 72 hours prior to kickoff. 

The FCC is seeking public inquiry on eliminating its own blackout rules, which support league blackout policies. Specifically, the FCC’s blackout rule, which has been in place since 1970, is being targeted. In November, the Sports Fans Coalition, supported by other interest groups, filed a petition to end the FCC’s blackout rule, its executive director Brian Fredrick stating, “We’re asking the government to get out of the business of propping up sports blackouts.” The NFL, however, strongly supports the FCC’s blackout rule, as it is said to ensure a team’s “ability to sell all of its game tickets” and to “make televised games more attractive to viewers through the presence of sellout crowds.” 

Fredrick believes that the NFL, along with other leagues, will argue that blackouts are financially necessary and should not be dispelled. In the petition filed in November, interest groups argued that the FCC’s blackout rule “supports anti-fan, anti-consumer behavior by professional sports leagues.” In addition, they believe that the leagues are the main reason this issue exists because, they argue, the leagues overcharge fans for tickets — the whole reason there are so many empty seats come game day in the first place. 

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:

On January 23, 2012, the Supreme Court issued a unanimous opinion in the case of National Meat Association v. Harris, No. 10-224.  

Listen up, all you internet users (which is basically everybody but my mother, who still views the Internet as the work of the devil, and will quote from the book of Revelation in support of her theory).  Three bills you need to be aware of, because they may change the way you view (or more correctly, the way you are allowed to view) the Internet.  and from what I’m reading, there are some pretty darned big sites and companies that are ready to either “go dark” in protest (Wikipedia, for example, which is where I do most of my legal research) or lend a big supporting hand to the protests of the current bills being considered (Google is one – who can live a day without Googling something?  I mean for cryin’ out loud the Company has made itself into a verb!!).  Those bills are:

On Monday, January 9, 2012, the Supreme Court heard argument in a case challenging the Environmental Protection Agency’s issuance of administrative compliance orders under the Clean Water Act, 33 U.S.C. §§ 1251 et seq. (the “CWA”).  Sackett v. United States Environmental Protection Agency, No. 10-1062. 

Chantell and Mike Sackett bought a vacant lot near Priest Lake, Idaho, intending to build their home there.  The lot is zoned residential and is located in a platted subdivision, with sewer and water hookups.  Surrounding lots already have homes built on them.  The Sacketts applied for and obtained the necessary building permits from the local authorities.  Once they began laying gravel, however, they were hit with a compliance order from the EPA.  The order declared the Sacketts’ property to be “wetlands,” and charged the Sacketts with discharging pollutants into the waters of the United States, absent a permit, in violation of 33 U.S.C. § 1311(a).  In the order, the EPA required the Sacketts to return the property to its prior condition and to seek a wetlands permit – costs that, according to the Sacketts, would add up to tens of thousands of dollars, many times the $23,000 they paid for the property.  Failure to comply with the order could result in fines of up to $37,500 per day. 

The Sacketts tried to challenge the wetlands finding – both before the EPA and in federal court under the Administrative Procedure Act, but their challenges were rejected.  The district court in Idaho concluded that the CWA precludes judicial review of compliance orders before the EPA has started an enforcement action in federal court, and granted the EPA’s motion to dismiss.  Sackett v. EPA, No. 08-CV-185-N-EJL, 2008 WL 3286801 (D. Idaho Aug. 7, 2008).  The Ninth Circuit affirmed.  Sackett v. EPA, 622 F.3d 1139 (9th Cir. 2010).  In other words, the only way in which the Sacketts could obtain judicial review of the order would be to violate the order and then raise their arguments in any enforcement action brought by the EPA. 

Arguing on behalf of the Sacketts, Damien Schiff of the Pacific Legal Foundation stated that his clients’ inability to seek relief from the courts when the EPA issues a compliance order under the CWA amounts to a denial of due process.  The majority of the justices seemed sympathetic with his argument.  Justice Stephen Breyer, for example, later commented that not allowing judicial review of administrative actions would represent a “huge upheaval” of federal practice, because “for 75 years the courts have interpreted statutes with an eye towards permitting judicial review, not the opposite.”  Justice Elena Kagan, however, suggested that the Sacketts had not exhausted all of their administrative remedies and could have obtained a wetlands permit from the Army Corps of Engineers.  Mr. Schiff disagreed, stating that having to go through the wetlands permit process before a second agency was not an adequate remedy. 

Deputy Solicitor General Malcolm Stewart argued for the EPA, and stuck to the EPA’s position that the Sacketts’ property is a wetland and that the CWA precludes any judicial review of compliance orders.  The Court did not appear to be persuaded.  In particular, Justice Anthony Scalia and Justice Samuel Alito sharply criticized the EPA’s argument.  Justice Alito remarked at one point that “most ordinary homeowners would say this kind of thing can’t happen in the United States,” adding later that the EPA’s conduct is even more “outrageous” because it can change its mind at any time after issuing the compliance order.

The case is being closely watched by industry and public interest groups alike.  Fifteen different amicus briefs have been filed, fourteen of them in favor of the Sacketts – including briefs filed by the Chamber of Commerce, the State of Alaska and various trade and industry groups.  The media is describing the case as a fight between the “little guy” and big government.  We’ll find out if David or Goliath wins this fight when a decision is issued this spring.  The Court’s decision could impact not only CWA enforcement authority, but possibly also review of compliance orders issued under other federal environmental statutes. 

Carmen R. Toledo is a partner at King & Spalding in Atlanta, Georgia.  

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.  

In the wild, wild west of the internet, it looks like the Federal Trade Commission is saddling up to play the role of sheriff. On November 29, 2011, the FTC announced its proposed settlement of claims against the social networking goliath, Facebook. (By the way, you can read about it on the Commission’s Facebook page. http://www.facebook.com/federaltradecommission?v=wall.) The settlement resolves an eight-count administrative complaint charging Facebook with misleading their users by telling them they would protect the privacy of personal information, but repeatedly allowing that information to be shared with third parties or made public without the users’ knowledge or consent.  (In the matter of Facebook, Inc., File no. 092 3188.) Coming on the heels of the FTC’s March 2011 settlement of charges that Google, Inc. violated its own privacy promises to consumers when it rolled out its social network site, Google Buzz (In the Matter of Google, Inc., File no. 102 3136), the Facebook case demonstrates the agency is willing to use consumer protection laws to “make sure companies live up to the privacy promises they make to American consumers.” http://ftc.gov/opa/2011/11/privacysettlement.shtm.)