Articles from August 2012

JPMorgan Chase & Co. has agreed to pay $100 million to settle a class action initiated by credit card holders who accused the banking giant of improperly increasing minimum payments as a means of generating higher fees. See In Re: Chase Bank USA, N.A. “Check Loan” Contract Litigation, No. 09-2032 (N.D. Cal. Aug. 9, 2012) (Order Granting Preliminary Approval of Class Settlement) (available here).

The plaintiffs allege that Chase breached the implied covenant of good faith and fair dealing by issuing each plaintiff a credit card and including in the Cardmember Agreement a provision that cardholders make minimum payments of two percent of the outstanding balance of any cash advances. The at-issue Agreement also provided that Chase reserved the right to change the terms of the Cardmember Agreement. The lawsuit’s core allegation is that Chase raised the minimum monthly payment from two to five percent with the primary objective of triggering a “penalty APR” of 29.99% plus late fees. The MDL-referred action acquired the shorthand title “Check Loan Litigation” because the initial offer to plaintiffs was accompanied by the balance-transfer checks familiar to most credit card holders.

The $100 million settlement preliminarily approved by Judge Maxine M. Chesney is said to represent 45 percent of the approximately $220 million in late fees and excess interest costs incurred as a result of Chase’s alleged practices. Attorneys’ fees may not exceed 27 percent of the full settlement fund. Class notice is scheduled to be mailed to the class members on August 24, 2012.

The Check Loan Litigation is perhaps the least of JPMorgan’s current concerns, having been among the financial entities that, along with Visa and Master Card, agreed to pay $6 billion to settle claims brought by retailers related to the merchant fees charged by credit card issuers in order to allow customers to pay with credit cards. Additionally, government regulators have included JPMorgan in their investigation of the LIBOR scandal, which implicates the London Interbank Offered Rate to which the interest payments on school, auto, and other loans are commonly tied.

The Check Loan settlement is expected to be well received by class members and to proceed to the final approval stage.

A federal judge has denied Microsoft’s motion to dismiss a putative class action alleging that Microsoft sent spam text messages to consumers.  See Smith v. Microsoft Corp., No. 11-1958 (S.D. Cal. Jul. 20, 2012) (order denying motion to dismiss) (available here).  Microsoft had argued that the plaintiff could not establish “actual harm” and therefore did not satisfy federal Article III standing requirements.  Smith and other recent rulings, most prominently the U.S. Supreme Court’s ruling in Edwards v. First Am. Corp. (available here), have caused legal observers to revise expectations of a tighter Article III standing jurisprudence leading to more early dismissals in federal court.

The Smith action alleges that Microsoft sent unsolicited text messages to consumers promoting its popular Xbox gaming platform, in violation of the Telephone Consumer Protection Act (TCPA).  Microsoft sought an early dismissal of the action on the ground that the named plaintiff lacked Article III standing because he could not show that he suffered actual economic injury.  In particular, Microsoft emphasized that the named plaintiff had not incurred any additional cell phone charges due to the texts.  However, Judge Janis Sammartino rejected Microsoft’s argument, ruling that the TCPA confers standing irrespective of whether a plaintiff incurs charges or other direct pecuniary detriment, thus allowing the putative class action to proceed without proof of additional charges being incurred attendant to the spam messages. 

The ruling’s underlying reasoning has a potentially wide reach.  In addition to grounding her ruling in the TCPA’s overt language and legislative history, Judge Sammartino analogized it to other statutes designed to promote similar privacy protections, referencing the Wiretap Act (addressed in In re iPhone Application Litigation, 2012 WL 2126351 (N.D. Cal. 2012)), the Video Privacy Protection Act (addressed in In re Hulu Privacy Litigation, 2012 WL 2119193 (N.D. Cal. 2012)), and the Stored Communications Act (addressed in Gaos v. Google, Inc., 2012 WL 1094646 (N.D. Cal. 2012)).  Order at 9. 

The Smith action seeks statutory damages pursuant to the TCPA (which provides for a minimum of $500 per violation) as well as injunctive relief that would proscribe “all wireless spam activities” by Microsoft.

Defendants who believed that the U.S. Supreme Court’s AT&T Mobility v. Concepcion decision marked the beginning of a golden era for arbitration are finding it more difficult to enforce arbitration clauses than anticipated, particularly where state law unconscionability doctrines are implicated.  Most recently, California’s Court of Appeal (Second Appellate District) has affirmed a trial court ruling denying the defendant’s petition to compel the arbitration of wrongful termination claims based on an arbitration clause set forth in the defendant’s employee handbook.  See Sparks v. Vista Del Mar Child and Family Servs., __ Cal. App. 4th __ (Cal. Ct. App. 2012) (available here).

The opinion, certified for partial publication, noted that “the United States Supreme Court in Concepcion did not eliminate state law unconscionability as a defense to the enforcement of arbitration agreements subject to the Federal Arbitration Act” (slip op. at 7), with a bulky string citation to multiple precedents also holding that Concepcion did not nullify California’s unconscionability doctrine as applied to contracts purporting to require arbitration.  In addition to the authorities cited in Sparks, the decision echoes the unconscionability analysis of a recent federal district court ruling, Trompeter v. Ally Financial Inc.  No. 12-00392 (N.D. Cal. June 1, 2012) (order denying motion to compel arbitration) (Wilken, J.) (“Multiple elements render the agreement procedurally and substantively unconscionable, such that the arbitration agreement is void under California law.”) (available here).

Applying California’s unconscionability doctrine, the Sparks panel found the at-issue arbitration clause to be both procedurally and substantively unconscionable.  Procedural problems identified by the court include the following: (1) the arbitration clause was included within a lengthy employee handbook and not specifically called to the attention of plaintiff; (2) the plaintiff did not acknowledge or agree to arbitration; (3) the handbook stated that it was not intended to create a contract; and (4) since the handbook could be amended unilaterally by defendant, any agreement therein would be illusory.  Slip op. at 12-14.  As to substantive issues, the court found that the arbitration clause required employees to relinquish administrative and judicial rights under federal and state statutes, and it made no provision for discovery.  Id. at 14.  In addition, the rules referred to in the arbitration clause that would govern the arbitration process were not provided to plaintiff.  Id. at 2.

Sparks is notable for deciding an issue of considerable practical importance: whether an employer’s placement of an arbitration clause in an employee handbook suffices to bind employees to arbitrate.  The court’s answer is unequivocal, and speaks to the broader issue of fairness in the imposition of mandatory arbitration agreements: “The increasing phenomenon of depriving employees of the right to a judicial forum should not be enlarged by imposing upon employees an obligation to arbitrate based on one obscure clause in a large employee handbook distributed to new employees for informational purposes.”  Id. at 12-13.

The Ninth Circuit Court of Appeals has affirmed an order granting class certification in an unusual class action in which pilots and airline crew members sought recovery of “hazard pay” earned in delivering supplies to military posts in Iraq and Afghanistan.  See Hester v. Vision Airlines, Inc., __ F.3d __ (9th Cir. 2012) (available here).

The plaintiffs allege that Vision Airlines, a U.S. military subcontractor, retained funds that were specifically designated for hazard pay, and simply fired any employee who was aware that they were entitled to these funds, keeping the money for its own benefit.  See slip op. at 2-4.  The district court certified the class based on theories of liability that included unjust enrichment, money had and received, and conversion.  Id. at 4.  Specifically, the operative complaint alleged that Vision received and retained more than $21 million in hazard pay on behalf of its employees during the class period.  Id.

Particularly notable in Hester is the relatively rare imposition of a draconian discovery sanction, as the defendant’s answer was stricken after it repeatedly refused to produce documents related to hazard pay in response to an interrogatory served by the plaintiffs, and misled the court as to the existence of responsive documents.  See id. at 5-7.  Indeed, the district court’s imposition of such severe sanctions, affirmed by the Ninth Circuit, substantially shaped the case’s disposition.  The Ninth Circuit rejected the defendant’s contention that striking its answer was unjustified given that the district court had failed to consider less onerous sanctions, noting that Vision was warned several times on the record that this was a possibility.  The court also noted that, given defendant’s “willful disobedience,” it was reasonable to conclude that lesser sanctions would have been pointless.  Id. at 11.

Because the answer was stricken and a default judgment issued, the defendant in Hester was left to contest the adequacy of the plaintiffs’ allegations in the operative complaint, an argument that both the district court and Ninth Circuit rejected.  Id. at 7.  Likewise, the defendant was unsuccessful in seeking reversal of class certification, with the half-hearted argument that because the named plaintiff, Hester, had an employment contract with Vision and the other class members did not, the class representative was not typical and common issues did not predominate.  The Ninth Circuit dismissed this summarily, noting that “Vision did not produce any evidence that Hester had an employment contract with Vision.”  Id. at 13-14.

Hester stands as an ominous warning to defendants that engaging in discovery gamesmanship could have serious consequences.