Class Action Countermeasures : Class Action Lawyers & Attorneys : McGuireWoods Law Firm : Complex Litigation, Mass Torts

 Professor Myriam Gilles holds the distinction of having called the arbitration issue earlier than almost any other academic.  So when she writes a follow-up, it's well worth paying attention. That follow up is here, in her latest working paper, Killing Them with Kindness: Examining "Consumer-Friendly" Arbitration Clauses after AT&T Mobility vs. Concepcion. And her findings indicate that corporate defendants are issuing "consumer-friendly" arbitration clauses. (Though, as she points out, few are as generous as the AT&T clause that "won" in Concepcion.)

Professor Gilles is primarily concerned with the popular plaintiff argument that arbitration clauses should not be enforced when they might prevent a "vindication" of consumers' rights. She argues that there are four basic judicial responses to arbitration clauses: "liberal pragmatism" (any arbitration agreement that prevents a vindication of rights should fail), "practical formalism" (Concepcion has promoted a "race to the top" on arbitration clauses, and that's a good thing), "FAA absolutism" (there is no vindication of rights exception), and "conservative instrumentalism" (the vindication of rights exception should not swallow Concepcion).

[T]he view that I perceive as becoming dominant in the post-Concepcion world is “practical formalism,” under which most claimants seeking to make the vindication of rights showing are likely to fail, as consumer-friendly arbitration clauses proliferate across the corporate landscape. Justice Scalia in Concepcion offered up the observation that the claimants in that case could have vindicated their rights under the bilateral arbitration clause at issue, principally because “the arbitration agreement provides that AT&T will pay claimants a minimum of $7,500 and twice their attorney’s fees if they obtain an arbitration award greater than AT&T’s last settlement offer.” Since that time, numerous lower courts have rejected challenges to arbitration clauses and class action waivers based upon the observation that the clause at issue would in fact allow the vindication of rights – at least, when measured against the yardstick of Concepcion

(Unitalicized emphasis added, internal footnote omitted.)

What makes this working paper especially useful is that Professor Gilles doesn't just provide a taxonomy of different court's approaches, she actually looks at a number of clauses offered for popular customer services like Chase Bank, Groupon, and Xbox Live.  Her findings:

A few conclusions are worth noting at the forefront. First, all the clauses I examined contained class action waivers. While this is not surprising, it represents a clear increase in the popularity of these provisions over the past decade. Second, nearly all the clauses had been amended in the aftermath of Concepcion. Indeed, I could find few arbitration clauses that hadn’t been amended in 2011-2012, and presumably, many of these changes reflect the addition of pro- consumer provisions. Third, fewer companies than I had expected have copied the more generous aspects of AT&T’s clause – i.e., provisions offering automatic cost-shifting, bounties, premiums and doubling of attorneys’ fees. Of the 37 arbitration clauses examined, only 6 companies offered anything close to AT&T’s set of incentives, and none were quite as generous."

(Emphasis added, internal footnote omitted.)  In general, Professor Gilles's findings indicate that what companies have done in the wake of Concepcion is to amend their arbitration clauses, make an educated guess as to what level of "pro-consumer" terms would survive any court challenge, and then further amend upwards after losing court battles. And that's certainly useful information for any in-house counsel looking to minimize their class-action risk.

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A busy travel and work schedule this week means that today, I'm just going to point you to three cases with lessons class-action lawyers should be aware of.  So, when defending your class actions, don't forget:

• When removing under CAFA, pay attention to continuing damages.  In Leslie v. Conesco Life Ins. Co., 2012 U.S. Dist. LEXIS 130508 (S.D. Fla. Sep. 13, 2012), the Southern District of Florida was willing to count continuing damages up through the projected trial date in determining whether the plaintiff met the $5 million amount-in-controversy requirement. 

• Plaintiffs must prove arbitration would be too expensive.  In Lowry v. JP Morgan Chase Bank, N.A., 2012 U.S. Dist. LEXIS 128907 (N.D. Ohio Sep. 11, 2012), the plaintiffs offered an estimate from an economist to argue that they could only vindicate their rights through a class action, but the court found the proffer "insufficient," and compelled arbitration.  

• Sometimes, you can sway a court to stay litigation by describing the costs involved in proceeding.  In Blixseth v. Cushman & Wakefield of Colorado, Inc., 2012 U.S. Dist. LEXIS 128977 (D. Colo. Sep. 11, 2012), the defendants faced the usual problem: they had moved to dismiss the case, but the plaintiff wanted to push ahead with expensive discovery.  When the defendants moved to stay discovery, the court noted that the plaintiff offered no good reason other than "public interest" to proceed, but also observed that "Plaintiff's 85-page complaint alleges nine causes of action and, based on the allegations, the case will likely involve discovery of thousands of documents."  So it granted the motion to stay.  

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Those who argue that AT&T v. Concepcion killed the class action must be having an interesting January. Two of the more significant cases so far this year--Compucredit Corp. v. Greenwood (2012) and D.R. Horton, Inc. v. Cuda (NLRB 2012), have involved similar questions about when a defendant can move to compel arbitration in a class action.

But wait, I hear you ask. Didn't Concepcion decide that issue last year? Well, like with most legal questions, the answer is yes and no. Concepcion held that general statements about state unconscionability law cannot trump the dictates of the Federal Arbitration Act. But it left open the question of whether a federal statute could supplant § 2 of the FAA. Both of these lawsuits test that opening: CompuCredit involves the Credit Repair Organizations Act (CROA), and D.R. Horton involves the Fair Labor Standards Act (FLSA).

In CompuCredit, the plaintiffs alleged that the defendant had misrepresented its ability to rebuild card-users' credit, as well as the effective credit limits on its accounts. CompuCredit had moved to compel arbitration, but the district court had denied the motion, and the Ninth Circuit had affirmed.

The Ninth Circuit adopted the following line of reasoning, urged upon us by respondents here: The disclosure provision gives consumers the "right to sue," which "clearly involves the right to bring an action in a court of law." Because the nonwaiver provision prohibits the waiver of "any right of the consumer under this subchapter," the arbitration agreement— which waived the right to bring an action in a court of law— cannot be enforced. 

The flaw in this argument is its premise: that the disclosure provision provides consumers with a right to bring an action in a court of law. It does not.

(Internal citations omitted.) The plaintiffs also relied on the fact that the CROA contained a number of references to lawsuits, and specifically to class actions. They argued that these mentions demonstrated Congress intended to allow a right to a class action in this case. The Court disagreed:

These references cannot do the heavy lifting that respondents assign them. It is utterly commonplace for statutes that create civil causes of action to describe the details of those causes of action, including the relief available, in the context of a court suit. If the mere formulation of the cause of action in this standard fashion were sufficient to establish the "contrary congressional command" overriding the FAA, valid arbitration agreements covering federal causes of action would be rare indeed. But that is not the law.

(Emphasis added, internal citation omitted.)

By contrast, in D.R. Horton, the NLRB held that the right to bring a class or collective action cannot be waived by an arbitration clause. Is that consistent with CompuCredit?

Probably. D.R. Horton involved allegations that the defendant had misclassified building superintendents as exempt from the FLSA. The plaintiff, Michael Cuda, filed a classwide arbitration, and D.R. Horton moved to dismiss, because its arbitration clause did not allow for collective action. Accepting the defendant's logic, the judge dismissed the claim.

The NLRB reversed, explaining:

Section 7 of the NLRA vests employees with a substantive right to engage in specified forms of associational activity. It provides in relevant part that employees shall have the right "to engage in … concerted activities for the purpose of collective bargaining or other mutual aid or protection …"

And it went on to observe that

The Board has long held, with uniform judicial approval, that the NLRA protects employees' ability to join together to pursue workplace grievances, including through litigation.

Section 7 does not specifically mention class actions. But the NLRB decided that, because it did specifically allow for concerted action to protect employees, that class-action litigation fell within the scope of the statute as drafted.

These forms of collective efforts [including class actions] to redress workplace wrongs or improve workplace conditions are at the core of what Congress intended to protect by adopting the broad language of Section 7. Such conduct is not peripheral but central to the Act's purpose.

(Emphasis added.) In other words, the NLRA specifically stated that the parties had a right to use collective action (which had been interpreted to include class actions) to improve their working conditions. The substantive right to use a class action came from the statute itself.

So what can defense lawyers take from this? So long as the federal statute at issue does not specifically provide a right to bring a class actions, it will still be worth including arbitration clauses where appropriate, and moving to enforce those clauses.

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 This was a busy year for class-action jurisprudence. Clearly, most of the Supreme Court cases had some effect on class action practice. But the district and appellate courts also rendered a host of rulings this year that significantly affect class-action practice. Despite what a number of academics and plaintiffs' lawyers have claimed, the class action is not dead.  That said, it's probably true, to quote plaintiff's lawyer Daniel Girard, that while the "death of the class action" is overstated, the "Golden Age of the private attorney-general" is over. There were so many interesting opinions in the past year, with so many implications, that it was hard to identify just ten. Consequently, I've cheated a little. The final two entries actually comprise four cases which, taken as pairs, indicate a couple of new trends to watch out for.

1. Wal-Mart Stores Inc. v. Dukes (S. Ct.) - Whether you think it killed the class action or not, Wal-Mart Stores, Inc. v. Dukes (called "Wal-Mart" by some, "Dukes" by others) was the runaway most important case of the year for class-action practitioners. It clarified an ongoing debate about whether Rule 23(b)(2) could be used for money damages (it can't), it finally provided a standard for Rule 23(a)(2) (a common question must have a common answer), and it finally put to bed a common misreading of Eisen that had justified ignoring inconvenient facts when certifying class actions. Those all make it the most significant decision of the year, even before you get to the press hype.
2. AT&T Mobility v. Concepcion (S. Ct.) - Concepcion is the other case that has been accused of killing the class action (sometimes on its own, sometimes in conjunction with Dukes.) It hasn't managed that feat, but it has sent what one plaintiffs' attorney called "a seismic change" through class-action practice. While we're still feeling the aftershocks it's clear that it is now more difficult to bring "creative" consumer claims that are governed by clear purchase contracts; and certain individualized employment disputes are also finding their way into arbitration rather than class actions. And that's before we get into the Supreme Court's discussion of exactly what due process requires from aggregated litigation.
3. Pilgrim v. Universal Health Card, LLC (6th Cir.) - This case, the first appellate opinion to address the motion to strike class allegations at the pleading stage, has made the tactic truly viable. For years, class-action defendants have faced down multi-state classes that they knew from prior experience could not get certified. And yet, because courts were reluctant to rule on the viability of these class actions before discovery, defendants faced long and expensive discovery just to get to a legal issue that required no additional facts. Pilgrim marks the first time that an appellate court has recognized that determining whether variations in state law predominate over other issues does not require discovery, it just requires an analysis of the laws in question.
4. Klier v. Elf Atochem Inc. (5th Cir.) - Thought that cy pres relief was a no-brainer in your class action settlement? Think again. Joined later in the year by the Ninth Circuit's opinion in Nachsin v. AOL, LLC, Klier finally bridles the runaway use of cy pres relief to dress up less valuable class actions. The fact that it also provided a stark critique of the always-problematic medical-monitoring class action was just a bonus.
5. Smith v. Bayer Corp (S. Ct.) - Significant" does not have to mean "pro-defendant." In Smith, the Supreme Court held (abrogating the Seventh Circuit's Thorogood opinion last year) that a defeat at class certification does not preclude another class member from bringing the same class action somewhere else. It based this decision on the eminently logical reason that, until a case has been certified as a class action, it is just an individual plaintiff's case. (That same logic underlies the Seventh Circuit's recent re-affirmation that one can moot a class action before certification.)
6. Erica John Fund v. Halliburton (S. Ct.) - Similarly, securities defendants were perfectly happy with the Fifth Circuit's requirement that a plaintiff demonstrate loss causation when certifying a securities class under a "fraud on the market" theory, even if that requirement could not be found in the text of Rule 23. The Supreme Court, in a short, well-reasoned, and unanimous opinion, definitively closed off that particular line of argument.
7. In re Bluetooth Headsets Products Liability Litigation (9th Cir.) - The Ninth Circuit's rejection of a problematic class-action settlement (the class got nothing, the attorneys got $850,000) imposed a common-sense "proportionality" requirement on class counsel fees, recognized that segregation of the fee request from the rest of the settlement does not eliminate perverse incentives for class counsel, and required a cross-check for lodestar-based fees.
8. Judge Alsup's Class Settlement Checklist - Judge Alsup has handled a number of class actions in his few years on the bench. And this was the year that he developed a standing order that lays out what he expects from any classwide settlement, before negotiations may even have begun. It's an outstanding idea, and it provides excellent guidance to plaintiffs and defendants about what they can and can't accomplish in a settlement in his court. While I may not agree with all of his analysis, I can't fault his attempt to create certainty in the negotiation process.
9. In re Aqua Dots Products Liability Litigation (7th Cir.) & Pipefitters Local 636 Insurance Fund v. Blue Cross Blue Shield of Michigan (6th Cir.) - The Sixth and Seventh Circuits both faced the question of how to handle class actions that, while they might benefit the plaintiff and the plaintiffs' lawyers, would do no one else any good. Judge Easterbrook of the Seventh Circuit pointed out that while it is logical to say that a class action duplicating a voluntary recall is not a good idea, it doesn't exactly fall under the text of superiority. So instead, he held that a plaintiff who brings a redundant class action is inadequate. The Sixth Circuit, faced with a class action that might benefit the class but would in the process hurt other citizens of Michigan, simply held it not superior to other methods of resolving the controversy (including individual lawsuits).
10. CE Design v. King Architectural Metals (7th Cir.) & Creative Montessori Learning Centers v. Ashford Gear LLC (7th Cir.) - In a pair of opinions this year, Judge Posner seemed single-handedly determined to restore integrity to the class action. In CE Design, he held that a named plaintiff who has credibility problems cannot serve as an adequate class representative. In Creative Montessori, he held that class counsel who have engaged in deceptive methods to prosecute their class action are not adequate class counsel. The message behind these two cases seems clear: everyone in a class action is expected to be on the up-and-up, not just the defendants.

In making this list, I had to leave off a number of significant developments in class action practice. Taco Bell tried a risky but successful PR strategy this year. The Second Circuit held that subclasses might require their own counsel. The federal appellate courts have split--even after Dukes--on how to treat expert testimony. 2011 was an interesting time for class actions. Perhaps uniquely so. It will be interesting to see how each of these developments shakes out in 2012.

[Note - edited after publication to fix a formatting error and an unfinished sentence.]

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BNA's Class Action Litigation Report has published an article by yours truly that adapts this post about arbitration post-Concepcion and tries to add a little more scholarly rigor.  

They've also graciously allowed me to make it available here, where you can find it suitable for downloading, printing, and stuffing in the stocking of your favorite class-action defense lawyer.  (It makes great kindling to go with the coal.)

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The Supreme Court decided AT&T Mobility LLC v. Concepcion back in April, a decision that many scholars (and lawyers) have bemoaned as killing the class action. The hyperbole about the death of class actions (or their rebirth as shambling undead corpses) isn't new, and it's likely not merited. At the very least, I don't seem to be any less busy.

So, what does the state of the arbitration in class actions look like, six months on? With roughly 120 published opinions reviewing motions to compel arbitration, it's possible to venture a few opinions.

Most of the immediate procedural mop-ups are now finished. (By "mop-ups," I mean motions to compel arbitration in cases that predated Concepcion. Much as after CAFA was passed, one finds a number of of cases discussing amendment and relation-back doctrines, now there are a number of cases discussing waiver and behavior inconsistent with arbitration, as defendants seek to invoke Concepcion in cases that have reached later stages of litigation.) But leaving aside these cases, the remaining issues should give a good indication of how class actions will proceed in a world where invoking arbitration is possible.

So what are the issues that remain?

The need for discovery on arbitration. Plaintiffs have argued that they need discovery to determine whether discovery is appropriate in this case. For the most part, courts have not accepted this argument.  See, e.g., Giles v. GE Money Bank, 2011 U.S. Dist. LEXIS 111018 (D. Nev. 2011) ("Whether the arbitration agreement is enforceable against Giles, is a straightforward matter of contract law.").  (A few have, however. See Hamby v. Power Toyota Irvine, 2011 U.S. Dist. LEXIS 77582 (S.D. Cal. Jul. 18, 2011).) Defendants seem to do best with this argument when they challenge plaintiffs to show exactly what discovery they need from the defendant. See Khan v. Orkin Exterminating Co., Inc., 2011 U.S. Dist. LEXIS 118486 (N.D. Cal. 2011) ("Aside from vague assertions regarding the need to conduct discovery, Plaintiff fails to articulate with any specificity what discovery he seeks to obtain."); Reeners v. Verizon Communications, Inc., 2011 U.S. Dist. LEXIS 76367 (M.D. Tenn. Jul. 14, 2011) ("Plaintiff has failed to carry his burden to show that he needs discovery to respond to Defendants' Motion."). Usually, the information the plaintiff wants is in his possession to begin with. The relative costs of arbitration and litigation, for example, are available from most arbitrators. (Although at least one court has held that Concepcion says the relative cost doesn't matter.  See Khan v. Orkin Exterminating Co., Inc., 2011 U.S. Dist. LEXIS 118486 (N.D. Cal. 2011)) Challenging plaintiffs often reveals that plaintiffs have made this argument as either (1) a delaying tactic, or (2) a method of imposing costs as early as possible in the litigation.

The "It's different here" argument. Sure, the Supreme Court overruled Discover Bank. But that was a California case. Connecticut law is different. (No, it's not. Ramirez v. Freescore, LLC, 2011 U.S. Dist. LEXIS 97374 (C.D. Cal. Aug. 30, 2011).) OK, well Florida law is different. (Not, it's not. Cruz v. Cingular Wireless, LLC, 2011 U.S. App. LEXIS 16811 (11th Cir. Aug. 11, 2011).) Delaware is. (No. Chavez v. Bank of Am., 2011 U.S. Dist. LEXIS 116630 (N.D. Cal. 2011).) How about Maryland? (No. Murphy v. DirecTV, Inc., 2011 U.S. Dist. LEXIS 87625 (C.D. Cal. 2011).) South Dakota or Illinois? (No. Tory v. First Premier Bank, 2011 U.S. Dist. LEXIS 110126 (N.D. Ill. Sep. 26, 2011). ) Utah? (No. Giles v. GE Money Bank, 2011 U.S. Dist. LEXIS 111018 (D. Nev. 2011).) There are 42 more states, not counting the District of Columbia, Puerto Rico, the American Virgin Islands, or Guam. But it's safe to say that this trend is moving in a single direction.

The exculpation argument. Here, plaintiffs argue that compelling arbitration would effectively exculpate the defendant, because it would not have to face liability for its alleged misconduct. So far, courts have not been persuaded by this argument; it veers too close to the underlying policies the Supreme Court found unpersuasive in Concepcion. Cruz v. Cingular Wireless, LLC, 2011 U.S. App. LEXIS 16811 (11th Cir. Aug. 11, 2011); Arellano v. T-Mobile USA, Inc., 2011 U.S. Dist. LEXIS 52142 (N.D. Cal. 2011).

The "vindication of rights" argument. This debate actually seems to give plaintiffs some play. It's similar to, but not quite the same as, the exculpation argument, since it's framed to focus on the plaintiff rather than the defendant. As a result, it has convinced a court in the Southern District of New York. Chen-Oster v. Goldman Sachs Group, Inc., 2011 U.S. Dist. LEXIS 73200 (S.D.N.Y. Jul. 7, 2011). Others, though, are not persuaded by the change in rhetoric. See D'Antuono v. Serv. Road Corp., 2011 U.S. Dist. LEXIS 57367 (D. Conn. 2011); Kaltwasser v. AT&T Mobility LLC, 2011 U.S. Dist. LEXIS 106783 (N.D. Cal. Sep. 20, 2011); Opalinski v. Robert Half Int'l, Inc., 2011 U.S. Dist. LEXIS 115534 (D.N.J. Oct. 6, 2011).

Piggybacking on another's arbitration agreement. Some defendants--such as bill collectors facing FDCPA class actions--have tried to invoke their client's arbitration agreements to shunt class actions to arbitration. The courts that have faced these cases have held that a third party may not invoke an arbitration agreement. Sakalowski v. Metron Servs., Inc., 2011 U.S. Dist. LEXIS 101652 (E.D. Mo. Sep. 8, 2011).  (The argument may turn out differently if the defendant is a named third-party beneficiary in the contract. See Chavez v. Bank of Am., 2011 U.S. Dist. LEXIS 116630 (N.D. Cal. 2011).)

Can arbitration clauses create predominance issues? The Northern District of California thinks so. It has held that, at least in one case,

Although it is not clear how many putative class members signed arbitration agreements, the evidence currently before the Court supports an inference that a significant number did, and that a significant portion of this litigation would be devoted to discovering which class members signed such agreements and enforcing those agreements, rather than to the resolution of plaintiffs' legal claims - which themselves are complex.

Pablo v. Servicemaster Global Holdings, Inc., 2011 U.S. Dist. LEXIS 87918, *6 (N.D. Cal. Aug. 9, 2011).

The "you asked for arbitration" ploy. In a much-publicized case, a set of plaintiffs sought arbitration against AT&T, which it opposed. Hypocritical, right? Well, probably not. The arbitration sought an injunction preventing AT&T's proposed merger with T-Mobile. AT&T argued that the injunction was outside the scope of its Customer Agreement (an argument supported by various state governments). The Southern District of New York held that injunctions against mergers are not covered by AT&T's Terms of Service with its wireless customers. AT&T Mobility LLC v. Gonnello, 2011 U.S. Dist. LEXIS 116420 (S.D.N.Y. Oct. 7, 2011).

In general, it's still too early to tell the overall effect of Concepcion on class action filings, since we don't yet have the data yet for the second half of 2011.  But it does appear that it's helping to corral class actions in credit card, cell phone, and labor cases where there were pre-existing contracts. What does that mean? Looking over the published cases, it appears that most of the class actions where arbitration was compelled addressed the kind of highly technical issues that are likely ginned up and tried out by plaintiffs' lawyers, regardless of their ultimate merit. Are we poorer off with those odd contract theories being decided by arbitrators rather than classwide settlements? I think the answer to that question is pretty clear.

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Today, the Supreme Court began to roll out its class-action opinions. And first up, it has decided AT&T Mobility LLC v. Concepcion. In a 5-4 opinion authored by Justice Scalia (Thomas concurring), the Court held that § 2 of the Federal Arbitration Act preempted California's Discover Bank rule, which "classif[ied] most collective-arbitration waivers in consumer contracts as unconscionable."

A number of sources are painting this as the end of the class-action as we know it. So, time to shut down the blog? Hardly. There are many, many class actions, even consumer class actions, that will survive this ruling. (Taco Bell, for example, does not rely on arbitration clauses when it sells its Enchirito. It's not clear whether one must sign a health waiver.)

So what exactly did the Court rule?

The overarching purpose of the FAA, evident in the text of §§ 2, 3, and 4, is to ensure the enforcement of arbitration agreements according to their terms so as to facilitate streamlined proceedings. Requiring the availability of classwide arbitration interferes with fundamental attributes of arbitration and thus creates a scheme inconsistent with the FAA.

To support this ruling, Justice Scalia's opinion explores exactly what procedures are required to bind absent class members to a classwide verdict. In particular,

First, the switch from bilateral to class arbitration sacrifices the principal advantage of arbitration—its informality—and makes the process slower, more costly, and more likely to generate procedural morass than final judgment.

...

Second, class arbitration requires procedural formality. The AAA’s rules governing class arbitrations mimic the Federal Rules of Civil Procedure for class litigation. And while parties can alter those procedures by contract, an alternative is not obvious. If procedures are too informal, absent class members would not be bound by the arbitration. For a class-action money judgment to bind absentees in litigation, class representatives must at all times adequately represent absent class members, and absent members must be afforded notice, an opportunity to be heard, and a right to opt out of the class. At least this amount of process would presumably be required for absent parties to be bound by the results of arbitration.

(Internal citations omitted.) In other words, the Supreme Court ruled that a classwide arbitration is likely to be ineffectual. For it to have the benefits of a class action, it must sacrifice the informality that makes arbitration appealing. For it to have the benefits of arbitration, it must sacrifice the protections we afford absent class members.

What does this mean for class-action lawyers going forward? There are a couple of consequences. First--and hardly surprising--we're likely to see more defendants that use form contracts build in arbitration provisions.

Second, we're likely to see plaintiffs' lawyers try some innovative challenges to arbitration provisions. The Supreme Court held that a blanket rule against arbitration provisions is preempted by the FAA, but left open the possibility that a court might find a specific arbitration provision unconscionable if it does not comply with other steps designed to ensure that contracts of adhesion respect consumers' rights. (See footnote 6 for the specific language.)

Third, the Court's discussion of the difference between arbitration and class actions--in particular its emphasis on the need for adequate representation to bind absent class members--gives defense lawyers further ammunition in challenging inadequate plaintiffs. (It may also provide a hint on how the Court may rule on the Rule 23(b)(2) issue in the other closely-watched class action on its docket.)

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Yesterday, the Supreme Court heard oral argument on Concepcion v. AT&T, which posed the question of whether the Ninth Circuit had properly disregarded AT&T's consumer arbitration clause as unconscionable because it did not allow classwide arbitrations. As I mentioned yesterday, much of the advance reporting and commentary (with a few exceptions) painted the argument as the harbinger of an apocalyptic battle over the future of the consumer class action.

The reality was more sedate. Most reports on the argument (which Slate's Dahlia Lithwick described as "some kind of hideous jargon spill in the Gulf of Mexico") have stressed that the Court treated this primarily as an issue of federalism, specifically when to interfere with state law. Justice Scalia, usually considered the one of the most conservative (and therefore both pro-business and pro-state) Justices, focused his questioning heavily on issues of federalism. Specifically, he asked:

Are we going to tell the State of California what it has to consider unconscionable?

Justice Kagan--appointed by former University of Chicago Law School (go Maroons!) colleague President Obama and therefore expected to be pro-consumer--appeared to agree with Scalia's analysis:

It may be a good unconscionability doctrine or it may be a bad unconscionability doctrine, but it’s the state’s unconscionability doctrine.

Justice Alito (aided by some questions from Chief Justice Roberts) focused more on whether unconscionability can properly include unfairness to parties not currently before the court:

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.

What does this mean for the future of arbitration clauses? Several studies have shown that the more questions the Justices ask of a side, the likelier it is to lose.  In this case, at least according to published news reports, counsel for AT&T had to answer more and tougher questions than Deepak Gupta of Public Citizen, counsel for the respondent. While some of the questions Justices Alito and Roberts asked indicate a possible line of argument for upholding AT&T's arbitration clause, the early money would favor an opinion affirming the Ninth Circuit. Given that Circuit's reputation, that would make this opinion truly noteworthy. Of course, the Court will have the last word sometime in Spring 2011.

NOTE - This entry has been corrected.  It originally misidentified Public Citizen as "Public Justice." 

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Today, the United States Supreme Court hears oral argument in Concepcion v. AT&T, a case on appeal from the Ninth Circuit concerning whether the Federal Arbitration Act preempts states like California from requiring arbitration clauses to allow for classwide arbitration. (The venerable SCOTUSBlog has an excellent roundup of the issues and briefing.)

I'm not interested in pre-gaming the argument. (Although if I were a betting man, I'd lay odds on the Roberts Court finding in favor of AT&T.) I'm more interested in the rash of stories and op-eds (like this one from Vanderbilt Professor Brian Fitzpatrick) that make claims like

If the case is decided the way many observers predict, it could end class-action litigation in America as we know it.

You could say I'm biased. Class actions form the foundation of my practice. I write a blog about class-action strategy (and welcome to it). I just published a book on how to litigate class actions.  But it's simply not true that class actions will disappear if the Supreme Court rules in favor of AT&T on this issue.

Here are the assumptions that inform my conclusion. Class actions are big business for many attorneys. And class action lawyers are endlessly resourceful. The Private Securities Litigation Reform Act did not kill securities class actions. Nor, despite similar warnings, did the Class Action Fairness Act end consumer class-action litigation.

Does this mean that I think that Concepcion will have no effect on class actions? Hardly. If the Supreme Court rules in favor of AT&T, defendants will have a powerful tool for making sure that plaintiffs' attorneys can't gin up minor complaints into bet-the-company litigation. It will be more difficult to bring certain kinds of consumer class actions; most notably the kind where the claims do not describe harms consumer care about. (How do we know when consumers don't care? They don't bother to claim their money. For many consumer class-action claims, the response rate is very low--between 2 and 20 percent. This is one of the reasons why cy pres relief is so popular among plaintiffs' lawyers, and so controversial otherwise.)

But reducing the number of low-merit consumer class actions does not mean there will be no consumer class actions; there are many consumer class actions where there is no contract (and hence no arbitration clause) at issue. Nor does it mean that there will be no way for wronged consumers to get redress. Among other methods:

• Many companies provide voluntary customer-satisfaction programs.
• Many companies will be providing attractive bilateral arbitration provisions. (AT&T's covered most costs, and provided a $7,500 bonus to consumers who got more than AT&T had first offered.)
• State consumer-protection laws that offer attorneys' fees still exist. (So do lemon laws.)
• State and federal consumer-protection agencies exist.

Moreover, there are a number of different kinds of class actions that an arbitration clause likely would not apply to. Among those are:

• Consumer class actions that do not involve form contracts.
• Various antitrust class actions.
• Securities class actions.
• Environmental class actions.
• Civil rights class actions.
• Labor and employment class actions.

I don't believe I live in a world where corporations can do no wrong. Some can and do; and deterring wrongdoing is a noble policy goal. But I also don't live in a world where all class-action plaintiffs' lawyers selflessly bring only meritorious claims. Many don't; and those claims do nothing to deter actual wrongdoing. Finding the proper balance between under- and over-deterrence of corporate misconduct is not easy. It's a game of constant adjustment, and no matter which way the Supreme Court rules in Concepcion, either plaintiffs or defendants will have some adjusting to do. But if the Supreme Court rules in favor of AT&T, class actions will not disappear. It will just be harder to bring the kinds of class actions that will provide little actual relief for the class. And, if I were a betting man, I'd lay money on the side that says that even then, there will still be consumer class actions for me to defend.

UPDATE (12 November 2010) - Welcome Overlawyered readers!  If you haven't already, please also check out Ted Frank's post at Point of Law, which very lucidly covers similar points.  Also, look here for a brief postgame analysis of the argument.

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As I've written before, it's rare for something to qualify as breaking news in the world of class action practice. This, however, qualifies. This afternoon, the three-judge panel that had ruled that the Class Action Fairness Act requires at least one class member to have suffered $75,000 in damages--thus turning itself into an outlying circuit on the question of class-action jurisdiction--reversed itself in a per curiam opinion:

On July 19, 2010, we issued an opinion in this case. Cappuccitti v. DirecTV, Inc., No. 09-14107, slip op. (11th Cir. July 19, 2010). We based our decision on our interpretation of the jurisdictional requirements of the Class Action Fairness Act of 2005 (“CAFA”), Pub. L. No. 109-2, 119 Stat. 4 (codified in scattered sections of 28 U.S.C.), which we have elsewhere called a “statutory labyrinth.” Lowery v. Ala. Power Co., 483 F.3d 1184, 1199 (11th Cir. 2007). Subsequent reflection has led us to conclude that our interpretation was incorrect. Specifically, CAFA’s text does not require at least one plaintiff in a class action to meet the amount in controversy requirement of 28 U.S.C. § 1332(a). Accordingly, we construe both parties’ petitions for rehearing en banc to include petitions for panel rehearing,1 vacate our earlier opinion, and replace it with this one.

(Emphasis added.)  The court then proceeded to address the arbitration provision that had actually been before it in the original case, finding that DirecTV's arbitration provision was not unconscionable.

The court erred. As Cappuccitti readily conceded in opposing DirecTV’s motion to compel arbitration, attorney’s fees and litigation expenses would be available to him if he prevailed on the theory that the early cancellation fee is invalid as “[u]nfair or deceptive” under O.C.G.A. § 10-1-393(a). The JAMS Rules provide for the award of attorney’s fees and litigation expenses if allowed by state law, and O.C.G.A. § 10-1-399(d) authorizes them.

In light of this, it is apparent that the district court’s order denying arbitration must be vacated and the case remanded for further proceedings consistent with this opinion.

With this ruling, the Eleventh Circuit has brought itself back into line with other federal courts on the question of which class actions qualify for federal jurisdiction under CAFA. 

We now return you to your (hopefully) class-action-free weekend.

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 On Monday, I reported on the passing of Vanderbilt Professor Richard Nagareda. Given the widespread recognition of his contributions to studying aggregated litigation, it seemed appropriate to revisit one of his better articles: Aggregation and Its Discontents: Class Settlement Pressure, Class-Wide Arbitration, and CAFA, which originally appeared in the Columbia Law Review in 2006. 

In this article, Professor Nagareda took three debates over class-action practice -- (1) do class actions create undue settlement pressure? (2) can arbitration clauses override the use of the class-action device?; and (3) did the passage of CAFA threaten to abrogate the Supreme Court's holding in Klaxon v. Stentor Electric Manufacturing Co. (1941) that federal courts must apply state choice-of-law principles -- and used them to ask a broader question posed by class-action practice:

When should the law become concerned, as a normative matter, that the affording or withholding of aggregation is not a matter of mere procedural format but amounts instead to an unauthorized, back-door method of reform for substantive rights?

After a careful examination of the (then-) state of the law for each of these issues, Professor Nagareda came to the following conclusion:

The debates over class settlement pressure, waivers of class-wide arbitration, and CAFA each pose questions about the relationship between aggregate procedure and substantive law. In these high-stakes disputes, one side or the other seeks to characterize the availability of aggregation as merely a cosmetic matter, whereas the opposing side seeks to probe its practical effects. Interestingly enough, plaintiffs and defendants make different arguments along these lines in different settings.

The law should cut through the advocacy on both sides by situating all three debates along a common metric of institutional authority. Each is ultimately a debate over when the affording or the withholding of aggregation is not merely a matter of procedural format, but also a way to alter substantive law.

Each of Professor Nagareda's questions has gradually been answered by the evolution of class-acton doctrine and civil procedure doctrine. While undue settlement pressure is always a concern, defendants have been handed better tools (like the much-used Iqbal ruling) with which to minimize the in terrorem effect of large but meritless cases. The Supreme Court has granted certiorari to hear the Concepcion case, which should provide an answer to whether arbitration clauses can preclude classwide consumer litigation in certain circumstances. And, while the Shady Grove decision did not directly address the clash between CAFA and Klaxon, it does provide guidance for how federal class-action rules should interact with state substantive law.

That said, there's still a great deal that class-action lawyers can take from this article. First, Professor Nagareda did an outstanding job of picking apart the tactics that underlay each side's approach to these three issues. There is a reason that this article is generally considered seminal.

Second, Professor Nagareda identifies an important rhetorical technique, which is the sliding scale each side employs in characterizing the effect of class-action rulings. In essence, the bigger the change a side wants, the more likely they are to gloss it as "cosmetic." Class-action defense lawyers have long known that one of the best ways to show a court the problems with a class proposal is to focus on how the case would actually be tried.  Professor Nagareda brought both scholarly rigor and intellectual honesty to bear on how that argument plays out under various circumstances.  

And finally, Professor Nagareda's article provides an excellent reminder that there is much to be said for standing back from the nitty-gritty of the rules at times and asking the larger question of what each of your arguments actually means. As he illustrates here, sometimes the answer really will be surprising.

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Followers of this blog have probably noted (and probably with some chagrin) that I rarely discuss just-released cases, because I'm more interested in what we can learn about the strategies in a case than breaking the latest legal news. This case, though, is different, because last week the Eleventh Circuit released an opinion on jurisdiction under the Class Acton Fairness Act (CAFA) that is baffling in large part because it ignores the ways in which parties actually litigate a class action.

In the recently-decided Cappuccitti v. DirecTV (11th Cir. Jul. 19, 2010), the Eleventh Circuit dismissed a class action for lack of subject-matter jurisdiction under CAFA.

As part of its reasoning, it held that at least one plaintiff must allege more than $75,000 in damages:

While § 1332(d) may have altered § 1332(a) to require only minimal diversity in CAFA actions, there is no evidence of congressional intent in § 1332(d) to obviate § 1332(a)’s $75,000 requirement as to at least one plaintiff.

(Citation omitted.) 

How did the court reach that conclusion?  Plaintiffs Renato Cappuccitti and David Ward sued DirecTV, Inc., claiming that DirecTV wrongfully charged its subscribers fees for cancelling their subscriptions prior to the subscriptions’ expiration. They brought suit in federal court under CAFA (both plaintiffs were Georgia residents, DirecTV is a California corporation, and the amount in controversy exceeds $5 million). DirecTV moved to dimiss and to compel arbitration. The district court refused to compel arbitration, and partially dismissed the plaintiffs' claims. DirecTV appealed the denial of arbitration.

The Eleventh Circuit never reached the arbitration question. Instead, it held that it lacked subject-matter jurisdiction over the case because neither of the plaintiffs had alleged a claim worth more than $75,000. As the opinion puts it:

in a CAFA action originally filed in federal court, at least one of the plaintiffs must allege an amount in controversy that satisfies the current congressional requirement for diversity jurisdiction provided in 28 U.S.C. § 1332(a). Such a conclusion is compelled by the language of § 1332 as well as the general principle that federal courts are tribunals of limited jurisdiction whose power to hear cases must be authorized by the Constitution and by Congress.

The Eleventh Circuit based its holding on a reading of several cases interpreting the "mass action" provisions of CAFA.  But it also worked from the assumption that its job is to reduce the number of class actions filed in federal court:

If we held that § 1332(a)’s $75,000 requirement for an individual defendant did not apply to § 1332(d)(2) cases, we would be expanding federal court jurisdiction beyond Congress’s authorization. We would essentially transform federal courts hearing originally-filed CAFA cases into small claims courts, where plaintiffs could bring five-dollar claims by alleging gargantuan class sizes to meet the $5,000,000 aggregate amount requirement. While Congress intended to expand federal jurisdiction over class actions when it enacted CAFA, surely this could not have been the result it intended.

This reasoning is puzzling, because the vast majority of federal class actions aggregate smaller claims. In fact, much of the federal court's Rule 23 jurisprudence is based on the benefits that derive from allowing plaintiffs to aggregate small-dollar claims. (It also ignores footnote 12 of the Supreme Court's Allapattah opinion, and its own opinion in Evans v. Walter Industries, Inc., each of which accept that the $5 million aggregate requirement replaced the $75,000 individual requirement.)

With the issuance of the Cappuccitti opinion, the Eleventh Circuit has made itself an outlier on CAFA jurisdiction.  (Placing it in opposition to the Second, Third, Fifth, Sixth, Seventh, Eighth, and Tenth, Circuits)  Given the odd result of the Cappuccitti opinion, it is likely that plaintiffs who wish to keep cases out of federal court will file them in Georgia, Florida, and Alabama.  Defendants should prepare themselves accordingly.  

UPDATE, 15 OCTOBER 2010 - The three-judge panel that decided this case subsequently reversed itself in a per curiam opinion.  

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 ... to provide a brief update on the Supreme Court's decision yesterday in Stolt-Nielsen S.A. v. AnimalFeeds Int'l Corp., which held that, unless there is a specific contractual basis to do so, one party cannot force another to submit to classwide arbitration.  

Since the decision involves a firm client (which had retained a team headed by firm colleague Amy Manning), I'm going to refrain from the usual tactical analysis.  Instead, I'll simply reprint the firm's press release, and wish Amy and the rest of the McGuireWoods team congratulations on a job well done.  

Supreme Court Rules in Favor of McGuireWoods Client
in Landmark Class Action Arbitration Case

CHICAGO – McGuireWoods LLP announced that it has secured a victory before the U.S. Supreme Court on behalf of firm clients Jo Tankers B.V. and Jo Tankers Inc. In a 5-3 decision in Stolt-Nielsen S.A. et al v. AnimalFeeds International Corp., No. 08-1198, 559 U.S. ___ (2010), the court addressed the key question of whether parties can be compelled to submit to class arbitration where the arbitration clause is silent on the issue of class treatment. In the decision, the court held that “a party may not be compelled under the [Federal Arbitration Act] to submit to class arbitration unless there is a contractual basis for concluding that the party agreed to do so."

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For practitioners, clauses in consumer contracts that require consumers to arbitrate smaller claims rather than bring large-scale class actions have been a hot issue for several years. Defendants (and their counsel) like these clauses because, when they work, they can reduce a bet-your-company class action back to a manageable individual claim. Class-action plaintiffs (and their counsel) tend to dislike the clauses for the same reason.

In general, the debate surrounding class-action arbitration clauses centers on whether a given clause – which is usually part of a take-it-or-leave-it consumer contract – is unconscionable because the consumer had no chance to negotiate it. And while defendants can win this debate, they can lose it just as easily.

However, one federal district court case from 2007 shows how a defendant can craft an arbitration clause that may allow it to take advantage of this low-cost alternative to class actions, even in a generally pro-plaintiff jurisdiction like the Ninth Circuit, applying consumer-friendly law like Washington state’s. In Carideo v. Dell, Inc., the plaintiffs sued Dell alleging that it sold them defective laptops. Dell invoked its arbitration clause, which the trial court upheld.

The plaintiffs moved for reconsideration. In denying that motion, the trial court found that plaintiffs could still vindicate their claims in arbitration because:

• the individual amount in controversy was $1,300 to $1,700, large enough to justify a day in front of an arbitrator;
• the arbitration forum (the NAF) did not provide for confidential awards, which meant that later plaintiffs would benefit from these first arbitrations;
• there was enough freely-available evidence (including internet complaints) for the plaintiffs to make a persuasive factual case without expending lots of costs; and, most importantly
• Dell agreed to pay all of plaintiffs’ arbitration costs in excess of the initial $25 filing fee.

Since the end result was that arbitration would be less expensive (and less time-consuming) than bringing a suit in court, the court refused to find the arbitration clause substantively unconscionable. Nor, since the arbitration clause provided a genuine means of redress, did the court find the clause procedurally unconscionable, even though it noted the take-it-or-leave-it nature of the contract.

So what does this mean for defendants? For those that might consider arbitration clauses to reduce the risk from class actions, it may make sense to reduce the barriers to arbitrating the claims. There is at least some evidence that people prefer informal dispute resolution to litigation.  Assuming in general the products are sound, the potential liability from a handful of arbitrations – even including costs – is far less than the cost of litigating a class-action suit brought by an entrepreneurial plaintiff’s lawyer, or an extremely disgruntled consumer, even if the suit is dismissed early in. And, even if the case were to proceed as a class action, the presence of a realistic arbitration program available at the outset would be a strong argument that class litigation was not superior to individual litigation.
 

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