Articles from October 2012

A strong body of law continues to develop denying defendants’ attempts to compel arbitration and, as a practical matter, elude meaningful enforcement of workplace- and consumer-protection laws. Most recently, the highly respected Judge Susan Illston, in California’s Northern District, rejected an attempt by American Honda Motor Co. (as a third-party non-signatory to a sale contract) to enforce an arbitration clause in a class action alleging defects in the Honda Accord. See Soto v. Amer. Honda Motor Co., Inc., No. 12-1377 (N.D. Cal. Oct. 3, 2012) (order denying motion to compel arbitration) (available here).

The at-issue arbitration clause was entered into between the plaintiff and the dealership where he bought his Accord, which in turn assigned the Installment Sale Contract comprising the arbitration clause to American Honda Finance Corp. (“AHFC”). See order at 2. American Honda Motor Co. was never a party to the contract. Accordingly, American Honda advanced three related theories in attempting to compel arbitration despite not being a party to the sale contract: (1) a theory that the contract incorporates third parties; (2) an equitable estoppel theory based on the plaintiff’s own reliance on the contract containing the arbitration clause; and (3) an agency theory, premised on the close business relationship between American Honda and AHFC. See id. at 4. Judge Illston serially rejected each of the three theories advanced by American Honda and, consequently, denied the motion to compel arbitration. See id. at 5-9.

The direct incorporation theory was easily rejected as a matter of literal contract interpretation. See id. at 5. The provision that American Honda had posited as the source of it being expressly incorporated as a beneficiary of the Installment Sale Contract was held, instead, to “refer to a secondary sale of the car, and not the relationship with the manufacturer AHM.” Id. So, too, was American Honda’s equitable estoppel theory rejected, as the plaintiffs’ product defect claims were found not to be closely intertwined with or dependent on the Installment Sales Contract. See id. at 5-7. For similar reasons, the court also rejected American Honda’s agency theory, finding that “AHFC’s agency relationship to AHM is limited to the financing of Honda vehicle sales and leases; it has no involvement with AHM’s design and manufacture of vehicles. Id. at 8.

The class action will thus remain in the Northern District, where the plaintiffs’ allegations of a “systemic design defect that results in burning motor oil at a faster rate than intended” will be adjudicated under statutes including California’s Consumer Legal Remedies Act, Unfair Competition Law, and the Magnuson-Moss Warranty Act. Id. at 1.

In a ruling that substantially intersects with bankruptcy jurisprudence, the Fifth Circuit has denied Countrywide’s motion to decertify a class of borrowers who claim they were charged illegal fees. See Rodriguez v. Countrywide Home Loans, Inc., No. 11-40056, 2012 U.S. App. LEXIS 19372 (5th Cir. Sept. 14, 2012) (available here). Formally, the Fifth Circuit affirmed both the bankruptcy court’s certification of a class seeking injunctive relief and its denial of Countrywide’s motion to reconsider the certification ruling. A bankruptcy court’s granting of class certification, a relatively unusual occurrence, is authorized by Federal Bankruptcy Rule 7023, which provides for the use of Federal Rule of Civil Procedure Rule 23 in bankruptcy proceedings.

This litigation arose when plaintiffs, after emerging from Chapter 13 bankruptcies, were assessed fees by Countrywide, their mortgage lender, which had accrued while their bankruptcy cases were pending. The plaintiffs had all cured their pre-petition mortgage arrearages, completed their Chapter 13 plans, and received discharges. Despite these factors, Countrywide still threatened to foreclose on the plaintiffs’ homes if they refused to pay the fees. See Rodriguez at *1-2. Accordingly, the plaintiffs alleged that Countrywide’s insistence that they pay the fees violated Federal Rule of Bankruptcy Procedure 2016(a). The plaintiffs also alleged that Countrywide misapplied mortgage payments to satisfy some of the unauthorized fees, rather than properly applying the payments towards the amount due each month. Id.

As assets of their bankruptcy estates, the plaintiffs’ litigation against Countrywide proceeded in the bankruptcy court, which certified a class seeking an injunction mandating that “Countrywide shall not collect or attempt to collect any fees that (1) were incurred during the pendency of a class member’s bankruptcy case, (2) are governed by Rule 2016(a), and (3) have not yet been authorized pursuant to Rule 2016(a).” Id. at *5.

Countrywide moved to overturn the bankruptcy court’s 2010 class certification ruling, arguing that its conduct in imposing the fees was not generally applicable to the class because the company had no policy regarding the assessment of fees during bankruptcy proceedings. Notwithstanding the lack of a formal, written compliance policy, the court found that Countrywide did have a generally applicable practice. Id. at *17-18. Despite the rarity of class certification proceedings in federal bankruptcy courts, the court’s analysis in this case was notably detailed and rigorous. See id. at 16-17.

With the plaintiffs’ Chapter 13 bankruptcies now discharged and the certification ruling secure, it appears likely that the action will be transferred to an Article III federal district court for post-certification proceedings. Countrywide, acquired by Bank of America in 2008, has already settled numerous class actions for billions of dollars in connection with its conduct concerning home mortgages.

Yet another California Court of Appeal panel has found that California’s unconscionability doctrine remains applicable to the analysis of petitions to compel arbitration. See Goodridge v. KDF Automotive Grp., Inc., ____Cal. App. 4th ____ (Aug. 24, 2012). In a unanimous opinion issued in August and ordered published on September 13th, the three-judge panel of California’s Fourth Appellate District (which includes Orange, San Diego, Riverside and San Bernardino Counties) held the arbitration clause in a purchase contract for a tire to be unconscionable. See slip op at 1.

In so ruling, the Goodridge panel affirmed the trial court’s rejection of the defendant’s argument that “‘[t]he United States Supreme Court in [AT&T Mobility LLC v. Concepcion (2011) ___ U.S. ___ [131 S.Ct. 1740, 179 L.Ed.2d 742] (AT&T)] makes it clear that unconscionability is no longer a valid objection to an arbitration agreement.’” Slip op. at 7. Looking to recent Ninth Circuit authority, Goodridge holds that Concepcion “‘did not overthrow the common law contract defense of unconscionability whenever an arbitration clause is involved. Rather, [AT&T] reaffirmed that the savings clause preserves generally applicable contract defenses such as unconscionability, so long as those doctrines are not ‘applied in a fashion that disfavors arbitration.’ ’” Slip op. at 11, citing Kilgore v. KeyBank, N.A., 673 F.3d 947, 963 (9th Cir. 2012).

With the enduring validity of California’s unconscionability jurisprudence established, the Goodridge decision goes on to find the at-issue arbitration clause both procedurally and substantively unconscionable, giving considerable weight to the plaintiff’s declaration testimony to the effect that the purchase agreement that contained the clause was presented to him on a “take it or leave it” basis and embodied onerous terms. See slip op. at 15-18. The decision notes that “[t]he arbitration clause was hidden within the lengthy prolix of the printed form presented by KDF to Goodridge” and that four particular terms “fall outside the reasonable expectations of Goodridge as the nondrafting party and are unduly oppressive.” Id. at 17, 19. For instance, while the arbitration clause’s appeals provision is ostensibly bilateral, by limiting appeals to awards in excess of $100,000, as a practical matter only the defendant would be able to avail itself of this right. See id. at 19-20. Similarly, the arbitration clause provides that either party can appeal an arbitrator’s imposition of injunctive relief. Id. at 21. Again, only the defendant would realistically benefit from this provision. Further, the clause requires the appealing party to advance the costs and fees of both parties, a term plainly disadvantageous to the plaintiff. See id. at 22-23.

The California Supreme Court is expected to conclusively determine the applicable scope of Concepcion in its upcoming review of three cases: the Second Appellate District’s rulings in Iskanian v. CLS Transp. Los Angeles, LLC and Sanchez v. Valencia, and the Fourth Appellate District’s ruling in Mayers v. Volt. 

In a case that continues to deal surprise rulings, the U.S. Supreme Court has denied a certiorari petition filed by Merrill Lynch in a case challenging the certification of a class of brokers alleging race discrimination. See Merrill Lynch v. McReynolds, No. 12-113, (U.S. Oct. 1, 2012). The Supreme Court’s declination to review McReynolds (despite its decision in Wal-Mart v. Dukes tightening class certification standards) follows the Seventh Circuit’s affirmative reversal of the trial court’s denial of class certification, thereby exhausting Merrill Lynch’s avenues for judicial review. Judge Richard Posner, generally regarded as holding to a conservative orientation, defied ideology-based expectations by authoring the Seventh Circuit’s opinion. See McReynolds v. Merrill Lynch, 672 F.3d 482 (7th Cir. 2012).

The Supreme Court’s denial of review, together with the Seventh Circuit’s ruling, are expected to be heralded as indications that Dukes is not the “death knell” for class actions, as many had predicted. Judge Posner’s opinion pointedly distinguished Dukes, noting that, while “there was no company-wide policy to challenge in Wal-Mart,” this was not the case with Merrill Lynch, whose policies were alleged to be company-wide and therefore better suited to class action treatment. McReynolds v. Merrill Lynch 672 F.3d at 488. While Dukes arguably imposes greater rigor on the analysis attendant to grants of class certification, McReynolds exemplifies that a similar rigor is required of judicial orders denying class certification. Thus, Dukes appears to have established standards that are fully accessible to plaintiffs presenting strong evidence of employer practices applicable across a tightly-defined class.

The denial of Merrill Lynch’s petition for review preserves the practical note that Judge Posner struck when he acknowledged the familiar argument by defendants that numerous “mini trials” could be necessary to resolve particular individual issues. Id. at 490-91. However, in a passage likely to appear in many reply briefs in support of class certification, Posner reasoned that “at least it wouldn’t be necessary in each of those trials to determine whether the challenged practices were unlawful.” Id. at 491.

Judge Posner also addressed the possibility of “issue classes,” stating: “Rule 23(c)(4) provides that ‘when appropriate, an action may be brought or maintained as a class action with respect to particular issues.’ The practices challenged in this case present a pair of issues that can most efficiently be determined on a class-wide basis, consistent with the rule just quoted.” Id.

Whether the parties will in fact propose the use of 23(c)(4) procedures on remand, and whether the rebuked trial court will adopt such procedures, remains to be seen. However, to the extent that the McReynolds case continues to demonstrate workable class action devices, it is expected to be copiously cited to by plaintiffs seeking to emulate its successful formula.