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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 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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 For those who are not yet suffering Concepcion fatigue from the many many many blog posts on the topic, I have a brief post up at the OUPblog on its effect on consumers.  

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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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