Articles from March 2013

A Los Angeles jury has found Johnson & Johnson, the well-known household product company and world’s largest maker of medical products, liable to a plaintiff who received an artificial hip made by the company’s DePuy orthopedics division. The jury awarded $8.3 damages to the recipient of the recalled artificial hip. The verdict is the first in the more than 10,750 civil cases alleging that the artificial hip known as the Articular Surface Replacement (ASR) was defectively designed.

While the bulk of the ASR cases are consolidated in an Ohio federal district court, the Kransky case is not among them. Kransky has attracted considerable attention in the mass press as well as legal trade journals, with the The New York Times reporting that the case was accelerated to trial owing to the plaintiff’s terminal cancer and other ailments, which was also featured in Jonhnson & Johnson’s unsuccessful defense before the 12-person Los Angeles jury. 

Though the ASR’s all-metal design was believed to be an innovative advancement when introduced in 2003, the artificial hip was recalled by Johnson & Johnson in 2010 when it became clear that the metal-on-metal wear of the ASR’s two major components resulted in metallic shavings that caused tissue and bone inflammation. At the Los Angeles trial, the key piece of evidence was an internal Johnson & Johnson memo that accentuated that the “recall” of an implanted medical device is distinctly invasive, with the memo estimating that as many as 40 percent of ASR recipients would require surgical replacement.

Despite the Kransky verdict signaling that the remaining ASR litigation will be resolved in favor of the plaintiffs, attorneys on both sides have stated that the verdict is not indicative of the fate of the remaining 10,000+ claims still pending. Even so, it is difficult to envision Johnson & Johnson eluding liability as to a recalled product, implanted in vulnerable patients, and allegedly depositing metallic shavings in and around those patients’ lower abdomens.

Just over a year ago, the Second Circuit issued perhaps the strongest limitation on the U.S. Supreme Court’s ruling in Concepcion v. AT&T, invalidating a class action waiver contained in the arbitration agreement between American Express and the merchant plaintiffs. See In re American Express Merchants’ Litigation, 667 F.3d 204 (2nd Cir. 2012). The Second Circuit held the waiver of class treatment to be unenforceable because a prohibition against collective actions would impair the plaintiffs’ ability to enforce their statutory rights under federal antitrust law.

American Express’ cert petition was granted, however, throwing the Second Circuit holding into considerable doubt. After months of briefing, the Supreme Court oral argument was held on February 27th. Justice Ginsberg took the lead by questioning Michael Kellogg, an American Express lawyer, as to whether the class action waiver would operate just as the Second Circuit supposed, by making it impossible for individual plaintiffs to afford the experts necessary to establish a defendant’s monopoly power. See Transcript of Oral Argument at 3-5, American Express Co. v. Italian Colors Restaurant, No. 12-133 (February 27, 2013). Kellogg’s response focused on the Second Circuit’s ruling requiring a threshold class certification analysis: “The alternative, as the court below held, is that the district court has to decide in the first instance, I’m not going to send it to arbitration because I think they need a class action. To make that determination, he first has to do a Rule 23 analysis.” Transcript at 5. Unsatisfied, Ginsburg persisted, and Kellogg conceded that “there is no guarantee in the law that every claim has a procedural path to its effective vindication” (Transcript at 6), illuminating the fundamental difference in outlook between American Express and the Second Circuit on the key issue of effective access to legal remedies and whether an arbitration clause is enforceable under federal law if it inhibits the vindication of statutory rights.

Justice Kagan picked up the thread, asking Kellogg whether his client’s arbitration clause could candidly prohibit merchants from “bring[ing] any Sherman Act claim against American Express,” which Kellogg conceded it could not. See Transcript at 6-7. Kagan thus made vivid that American Express is purporting that it is permissible to accomplish indirectly — denial of an effective vindication of rights — what it cannot do directly. Justice Kagan then expounded on this argument, asking Kellogg whether a contract provision whereby American Express merchants were not permitted to adduce expert evidence of monopoly power in an antitrust suit would be permissible under existing Supreme Court precedents. See Transcript at 8-9. After initially contending that such a question would be better addressed under state unconscionability law, Kellogg responded “Correct” when Justice Kagan re-stated the same hypothetical. Transcript at 9. As Kellogg pontificated on the reasoning behind the Second Circuit decision, Justice Ginsberg interjected to note that the Second Circuit had based its ruling in part on the fact that a suitable antitrust expert would cost an individual plaintiff roughly $300,000, whereas even with an award of treble damages, the same individual plaintiff would be compensated with only $5,000, making such a case per se irrational without the cost spreading attendant to a class action. Transcript at 11.

Initially, at least, the justices likely to support upholding the Second Circuit decision were getting the better of the arguments. Perhaps sensing this, Justice Scalia intervened to note “I guess you could have said the same thing under the Sherman Act before Rule 23 existed, right?”, seemingly assuming that procedures equivalent to class actions were impossible before Rule 23’s modern incarnation in 1966. See Transcript at 12. In fact, class action-type procedures have existed in Anglo-American jurisprudence at least since the year 1200, with U.S. court decisions and equity rules antedating Rule 23 having approved of similar procedures that bind absent parties, according to one of the foremost experts in the area. See generally Stephen C. Yeazell, From Medieval Group Litigation to the Modern Class Action (Yale Univ. Press, 1987). Despite Scalia’s tenuous grasp of legal history, he pointed Kellogg toward perhaps his most compelling argument of the session: that on four different occasions Congress had considered adopting, and each time declined to adopt, class action procedures attendant to the Sherman Antitrust Act. See Transcript at 12.

Justice Kennedy, a frequent swing vote, briefly expressed skepticism about American Express’ argument. See Transcript at 14-15. However, Justice Stephen Breyer, who taught an introductory antitrust law course at Harvard Law School while he sat on the First Circuit, questioned the premise that an antitrust expert would necessarily be costly. See Transcript at 15-16. Breyer posited that an antitrust expert, like himself, could serve as the arbitrator, and in that capacity could streamline what would be extensive expert discovery in civil court, thereby capturing the efficiency and cost containment often cited as a motivating force behind the Federal Arbitration Act. See Transcript at 16. Similarly, Chief Justice Roberts elicited from Kellogg that there would be no bar to a law firm, trade association, or hedge fund financing the costs of an expert or other expense too prohibitive for an individual antitrust plaintiff. See Transcript at 20-21. Justice Kennedy appeared amenable to Breyer’s suggestion about the arbitrator also serving as a joint expert (see Transcript at 54-55), and only Justices Kagan and Ginsberg evinced a strong aversion to American Express’ arguments, suggesting that those hoping to preserve the Second Circuit’s decision have their work cut out for them.

For his part, Paul Clement, the lawyer for the plaintiffs below, focused his oral argument on the “vindication of rights doctrine,” arguing that the much-invoked strong federal policy favoring arbitration must yield where arbitration would effectively nullify a statutory right. See Transcript at 24-26. Additionally, Clement corrected Scalia’s earlier (and repeated) contention that there were no class actions before Rule 23. See Transcript at 25. However, much of Clement’s time was expended on relatively arcane exchanges with Justice Breyer, reminiscent of the discussions that arose when Breyer was a professor.

A decision from the Court is expected this summer.

Nestlé USA, Inc., facing allegations that its “Juicy Juice Brain Development” beverage deceived consumers into believing the product provided special cerebral health benefits, appeared to have dodged a class action when Judge George H. Wu granted its motion to dismiss in May of 2011, employing heightened and controversial pleading standards. See Chavez v. Nestlé USA, Inc., No. 09-9192, 2011 WL 2150128 (C.D. Cal. May 19, 2011). However, a three-judge Ninth Circuit panel recently reversed Wu’s ruling, holding that the plaintiffs’ “allegations regarding Juicy Juice Brain Development will support viable FAL and UCL fraudulent business practices claims,” concluding that the plaintiffs sufficiently alleged that Nestlé had not substantiated the benefit by scientific proof, and that a child would have to drink more than a quart a day of Juicy Juice to get the recommended daily allowance of DHA. Memorandum at 2, Chavez v. Nestlé, No 11-56066 (9th Cir. Mar. 8, 2013).

Though designated as unpublished, the ruling is notable not only in reviving what might prove to be a substantial consumer class action, but also in confirming that the Ninth Circuit remains reluctant to supplant the long-standing and familiar notice pleading standard articulated in the landmark Conley v. Gibson, 355 U.S. 41 (1957), with the heightened standards applied in Bell Atlantic v. Twombly, 550 U.S. 544 (2007), and Ashcroft v. Iqbal, 129 S. Ct. 1937 (2009) (an antitrust case and a domestic terrorism case, respectively).

Only the dissent directly broaches the Twombly/Iqbal controversy. See Memo. at 4 (“They plead that the advertisements suggesting that the additives in Juicy Juice are good for children are ‘likely to deceive’ the public. Under Twombly and Iqbal, . . . more than that conclusory claim is necessary. The complaint does not suggest that anything in Juicy Juice is bad for children’s brain development, just that ‘the scientific evidence is mixed’ as to whether DHA (an omega-3 fatty acid, and one of the nutrients in fish oil capsules) is beneficial to children.”) (Kleinfeld, J., dissenting) (footnote omitted).

However, without acknowledging the controversy around Twombly and Iqbal, the majority engaged the permissive analysis commonly associated with motions on the pleadings, concluding that the plaintiffs “have adequately pled that ‘members of the public are likely to be deceived’ by the Juicy Juice Brain Development labeling and advertisements,” since their complaint, which “must be taken as true,” contains “the product name; the product labels and advertisements that induced Appellants’ reliance; and the allegation that the product actually contains very small amounts of the touted ingredient, DHA.” Memo. at 2.

In another decision likely to be assigned “grant and hold” status pending the California Supreme Court’s decision in the soon-to-be landmark Iskanian v. CLS Transportation case, the California Court of Appeal’s First Appellate District has affirmed a trial court’s holding that an arbitration clause categorically proscribing class and representative actions is unconscionable. See Natalini v. Import Motors, Inc., ___ Cal. App. 4th ___ (Cal. Ct. App. 2013).

Natalini, like the pro-arbitration AT&T Mobility v. Concepcion decision, arose in the consumer context. The Natalini plaintiff filed claims against Import Motors, from which he had bought a car, including claims arising under California’s Consumer Legal Remedies Act (CLRA) and the Rees-Levering Motor Vehicle Sales and Finance Act. See slip op. at 1.

Despite conceding that Concepcion overruled Discover Bank v. Super. Ct., 36 Cal. 4th 148 (2005), a leading unconscionability decision, the unanimous Natalini panel found enduring vitality in the unconscionability doctrine, stating, “ ‘Concepcion did not overthrow the common law contract defense of unconscionability whenever an arbitration clause is involved. Rather, the [c]ourt reaffirmed that the [FAA’s] 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 5-6 (internal citations omitted). The court went on to conclude that “an adhesive arbitration provision [that] is unconscionable because it is crafted overly in favor of the drafter does not rely on any ‘judicial policy judgment’ disfavoring arbitration.” Slip op. at 6 (internal citation omitted).

The decision candidly notes that “the Second District concluded in Flores v. West Covina Auto Group (2013) 212 Cal.App.4th 895, that a very similar provision was not substantively unconscionable.” Slip op. at 12 n.7. Unswayed, the Natalini panel stated, “[w]e adhere to our analysis and conclusion.” Id. However, it is the California Supreme Court, in Iskanian, that will establish the definitive analysis and conclusion of the unconscionability issue for California consumers.