Articles from July 2012

In a turn of events that illuminates what critics contend is the fundamental unfairness of arbitration proceedings, FINRA — the Financial Industry Regulatory Authority — has fired three arbitrators who found in favor of investors in a proceeding against Bank of America subsidiary Merrill Lynch in 2011.  Bloomberg News first reported the story here.  FINRA is the securities industry’s largest private dispute-resolution company, and it is specified in many arbitration clauses that private investors are bound by.

In the underlying matter, husband and wife investors alleged that Merrill Lynch was negligent in monitoring their investments, and sought over $640,000 in damages.  The case progressed through the individual arbitration process, pursuant to a mandatory arbitration clause.  Though rulings in favor of plaintiffs in arbitration are rare, and substantial awards even more so, the panel awarded $520,000 in damages to the investors.  Merrill executives complained to FINRA about the ruling, and the firings began shortly thereafter, staggered over a roughly 11-month period.  Two of the three ousted arbitrators had considerable experience.  One of the affected arbitrators, Irma Gormly, has initiated a “whistle blower” complaint with the SEC; thus far, however, the SEC has not responded.

Despite seemingly taking issue with the substance of the decision favoring investors, Merrill Lynch has made no attempt to attack the ruling itself.  No appeal has been filed, nor are there any grounds for such, according to another sacked arbitrator, Fred Pinckney.  Pinckney sums up the situation (quoted by Bloomberg News) thusly: “It’s unbelievable that they would take such an experienced panel and get rid of it.  To me, this undermines the credibility of the entire FINRA process — I didn’t say kangaroo court — but when you have three well-credentialed people, doing their job, and there were no meritorious grounds for an appeal, and we get handed the ‘black spot’ — and not all at once — it makes for a pretty cheap novel.”

Relief for consumers may be on the horizon.  The Consumer Financial Protection Bureau (CFPB), created in 2011 by the Dodd-Frank Act, is currently conducting a study into mandatory arbitration clauses and their adverse impact on consumers’ ability to seek remedies for consumer protection violations.  The study is intended to help the CFPB determine whether to issue regulations regarding the mandatory arbitration process.  The deadline to submit comments to the bureau has passed; however, the comments submitted by the public are available here.

A federal district court has denied a motion to compel arbitration, holding that arbitration would strip the plaintiffs of substantive statutory rights and that multiple individual actions would be inefficient and costly, with expert fees alone amounting to hundreds of thousands to millions of dollars.  See In re Elec. Books Antitrust Litig., No. 11-02293 (S.D.N.Y. June 27, 2012) (Opinion & Order) (available here).  The plaintiffs allege that they paid higher prices for electronic books because a group of major publishing companies conspired to artificially inflate e-book prices, in violation of the federal Sherman Antitrust Act.  See Order at 3.

One of the publisher defendants, Penguin, moved to stay the proceedings and to compel those plaintiffs who bought e-books through Amazon.com or Barnes & Noble to individually arbitrate their claims.  See id. at 3-4.  The standard agreements between these vendors and their customers provide that customers must arbitrate all disputes.  Id. at 4-5.  Additionally, the at-issue arbitration clauses require that any litigation be pursued through an individual action, rather than as a class.  Id.  After reciting the broad federal preference for arbitration embodied in the Federal Arbitration Act (FAA), the court noted that a plaintiff “may successfully invalidate an arbitration agreement that contains a class action waiver on the grounds that the agreement would prevent them from ‘effectively vindicating’ their federal statutory rights.”  Id. at 5, citing In re American Exp. Merchants’ Litig., 667 F.3d 204, 216 (2d Cir. 2012).

Southern District Judge Denise Cote concluded that enforcing the arbitration agreements would, as a practical matter, prevent the plaintiffs from vindicating their substantive rights, since the cost of litigation would be prohibitively high in relation to plaintiffs’ expected recovery.  Order at 8-9.  At this point, plaintiffs have already spent about $45,000 on experts, and stand to recoup “at most a median recovery of $540 in treble damages,” thus rendering individual arbitration completely illogical.  Id.  Judge Cote noted that the defendants “presented no serious argument to the contrary.”  Id. at 9.  As to defendants’ suggestion that plaintiffs in individual actions simply “pool resources and share the cost of expert fees,” Judge Cote responded, “[t]his argument blinkers reality.”  Id.

Perhaps the most ominous prediction that accompanied the Supreme Court’s Wal-Mart v. Dukes decision was that a wave of decertifications would nullify many, if not most, already-certified actions.  Yet more than a year after Dukes, that prediction has not come to pass, a fact underscored by a recent decision from California’s Central District.  See Kingsbury v. U.S. Greenfiber, LLC, No. 08-CV-00151 (C.D. Cal. Jul. 2, 2012) (order denying motion to reconsider order granting class certification) (available here).  In Kingsbury, the plaintiff successfully moved for certification in May of 2011, a ruling that was upheld with the court’s denial of the defendant’s motion to reconsider.  Id.

The action was filed in 2008 by a group of homeowners whose homes contained allegedly defective insulation that was prone to water retention and mold contamination.  See Order at 1-2.  The plaintiffs claim that the defendant failed to inform them of the mold risk.  Id.  In attempting to reverse the 2011 class certification ruling, the defendant argued that decertification was required under both Dukes and the Supreme Court’s other much-discussed 2011 class action decision, AT&T v. Concepcion, and that Concepcion also supported the defendant’s contention that all disputes with the plaintiffs should be resolved in arbitration.  See Order at 2-3.  Judge A. Howard Matz rejected both arguments.  Id. at 10.

As to the Concepcion-based arbitration argument, Judge Matz found that the defendant had waived any entitlement to arbitration, “because even before [Concepcion] was decided, [the defendant] was well aware of its right to arbitrate.  By engaging in extensive litigation for almost four years, [the defendant] waived its arbitration rights.”  Order at 3.

Addressing the defendant’s argument that common questions of law or fact did not predominate in light of the new standard presented in Dukes, the court held that “Dukes does not alter the Court’s decision to certify a class,” because “there are numerous common contentions that are central to the resolution . . . of each class member’s claim.”  Order at 10.  Judge Matz went on to enumerate the predominant common questions, and in doing so provided useful guidance for plaintiffs and counsel who confront perhaps the most recurring of class action defenses where commonality is dispositive to certification.  The common questions included: whether the defendant’s purchase agreement is deceptive under California’s Unfair Competition Law; whether the at-issue insulation is prone to water retention and mold; whether a reasonable consumer would expect disclosure of these risks; whether the presence of the at-issue insulation affects home values; and whether the defendant concealed material information about the insulation.  Id. at 10.

Kingsbury is far from an outlier among cases where defendants have invoked Dukes in an attempt to decertify misrepresentation and non-disclosure claims.  See, e.g., Johnson v. General Mills, Inc., 276 F.R.D. 519 (C.D. Cal. 2011) (Carney, J.) (finding predominance of common questions, notwithstanding Dukes); Jermyn v. Best Buy Stores, Inc., 276 F.R.D. 167 (S.D.N.Y. 2011) (McMahon, J.) (same).  More notable are the instances where decertification motions were denied in Dukes-like employment discrimination cases or other circumstances with a similarly subjective, individualized element.  See, e.g., United States of America v. City of New York, 276 F.R.D. 22 (E.D.N.Y. 2011) (Garaufis, J.) (denying decertification motion in employment discrimination case, notwithstanding Dukes); DL v. District of Columbia, 277 F.R.D. 38 (D.D.C. 2011) (Lamberth, J.) (denying decertification motion in Individuals with Disabilities and Education Act action and distinguishing Dukes).  The latter cases further undermine the myth that few certifications would survive post-Dukes.

Some federal courts have insisted that, to certify a class, the plaintiff moving for certification must establish that the defendant’s at-issue unlawful conduct injured every single putative class member — a virtually insuperable standard.  In addition to being effectively impossible to satisfy, a leading class action scholar argues that the “classwide injury” criterion perpetuates fallacies that result in claims ideally suited for classwide adjudication being denied certification and, more often than not, the plaintiffs and prospective class members never obtaining relief.  See Sergio J. Campos, Proof of Classwide Injury, 37 BROOK. J. INT’L L., 750 (forthcoming 2012) (draft available here).

Professor Campos begins his paper with a compelling example: Suppose an individual protected by a statute akin to Title VII is seeking employment and finds a good fit in a help-wanted ad, but the ad clearly states that those of her ethnic background “need not apply.”  See Campos at 751-52.  Should this individual be precluded from bringing her suit as a class action unless she is able to establish, at the class certification stage, that “‘each person for whom [she] will ultimately seek relief was a victim of the employer’s discriminatory policy’”?  Campos at 752, quoting Int’l Bd. Of Teamsters v. United States, 431 U.S. 324, 336 (1977).

The Supreme Court’s reasoning in the Teamsters case excerpted by Professor Campos exemplifies the broad and troubling tendency whereby federal courts demand proof of classwide injury, effectively nullifying numerous archetype class actions, such as that set out in Professor Campos’ hypothetical.  He equates the hypothetical’s insistence on classwide injury with the U.S. Supreme Court’s predominance analysis in Dukes v. Wal-Mart, requiring that plaintiffs, to establish the predominance of common questions of law or fact, identify common questions capable of “generat[ing] common answers.”  See Campos at 755-56, quoting Dukes v. Wal-Mart, 131 S. Ct. 2541, 2551 (2011), quoting Nagareda, Richard A., Class Certification in the Age of Aggregate Proof, 84 N.Y.U. L. Rev. 97, 98-109 (2009).

As such, Professor Campos argues, the Supreme Court’s most recent and expansive articulation of class action jurisprudence, Dukes, is grounded in multiple fallacies, as are the numerous lower-court decisions that have required classwide injury.  The first fallacy that Campos identifies is the “All at Once Fallacy,” whereby courts believe that, in order to ensure that common questions predominate, a class action must be capable of resolving all issues “in one fell swoop.”  Campos at 756, 766.  Yet by, for instance, bifurcating liability and damages determinations, the initial liability determination is capable of giving way to a damages phase in which determinations are made as to each class member who has suffered injury.  Id. at 770.  The commonly adopted bifurcation procedure thus exemplifies that class actions need not necessarily entail adjudication in “one fell swoop.”

The second fallacy embodied in the classwide injury approach is that it treats the class action as an “extraordinary remedy,” similar to a preliminary injunction, which effectively forces plaintiffs to prove that they will succeed on the merits.  This runs contrary to the weight of extensive precedent strictly distinguishing the procedural, class certification phase from the post-certification merits determination.  Id. at 781.  Campos persuasively argues that imposing such an analysis at the class certification stage demonstrates a fundamental misunderstanding of the purpose of class actions, in particular the leveling effect whereby plaintiffs are able to “invest” in equal proportion to defendants; while defendants have the same incentive to invest in their defense whether facing an individual or class action, plaintiffs do not have parallel incentives.  See id. at 783-84.  Accordingly, “a merits determination prior to class certification defeats the purpose of the class action.  The class action is designed to permit the plaintiffs to invest in the merits on equal terms with the defendant.  Thus, a class action only works if it is available before a court decides the merits, not after.”  Id. at 785.

The third and final fallacy identified in the article, “The Individualist Fallacy,” is the idea that, absent proof of classwide injury, a class action will necessarily spawn a plethora of individual trials.  Id. at 785-86.  At the heart of this fallacy is the erroneous assumption that such individual trials are inherently more accurate that aggregate determinations.  Id. at 786.  A related fallacy manifests in the skepticism, expressed in Dukes, for sampling and statistical methods, and the underlying assumption that individualized analysis, by its very nature, yields more accurate outcomes.  Yet, as Campos suggests, all forms of reasoning entail aggregation and inference and, as such, the difference between an individual trial and a classwide adjudication is merely one of degree.  See id. at 787-88.  Moreover, rigorous sampling, survey, and data analysis methods will frequently produce analyses and conclusions that are more objectively accurate and reliable than the predominantly anecdotal alternative.

Professor Campos concludes that proof of classwide injury should not be a prerequisite to class certification, and that common questions, rather than common answers, should govern in determining whether certification is appropriate.  Id. at 800-801.  He goes on to reference the landmark Supreme Court case, Marbury v. Madison, stating, “it is . . . a principle of general application in U.S. law that ‘every right, when withheld, must have a remedy, and every injury its proper redress.’”  Campos at 805, citing Marbury v. Madison, 5 U.S. 137, 163 (1803).  Professor Campos’ implication is clear: should classwide injury be required of plaintiffs at the certification stage, many injuries will have no redress, since plaintiffs will not have an available, practical remedy.  In reaching into the foundational motivations and original intent behind class actions, Professor Campos has crafted a broadly attractive proposal, one that transcends apparent ideological divisions.