Articles from June 2013

With U.S. business owners celebrating the Supreme Court’s embrace of “the liberal federal policy favoring arbitration” and hastening to add arbitration clauses with class action waivers to the stack of first-day paperwork for new hires to sign, news from China suggests an approach far more aggressive than anything Rule 23 contemplates. Charles Starnes, co-owner of Florida-based Specialty Medical Supplies, arrived at his Beijing factory last week intending to lay off 30 employees. However, Starnes was preempted by the employees, who rather than being escorted out of the building by an officious HR employee, took Starnes hostage. The employees/captors have since benefitted from the Chinese government’s apparent indifference, if not its affirmative support, as Starnes remains in captivity.

Accounts vary as to exactly what happened, though it seems that Starnes’ meeting with employees went awry like an unsuccessful mediation writ large, with employees having expected a more generous severance package. Instead of responding with the usual counter-offer, they put Starnes in something that looks a lot like a conventional jail, albeit with more elegant bar beveling than is usually seen in prisons. Apparently, according to the Washington Post, “a lot of CEOs get taken hostage in China.”

The paper documents a similar incident that took place in Shanghai, in January of this year, but no others, noting only that workers taking their boss hostage “doesn’t make for international headlines.” This time, however, it did make headlines. Even so, Starnes remains in captivity, as no international groundswell has demanded his release. No word on whether Starnes will be required to resolve the dispute with his captors under the efficient, streamlined auspices of arbitration.

The Supreme Court today issued its long-awaited rulings on both the federal Defense of Marriage Act (DOMA) and California’s Proposition 8, striking down a key DOMA provision as unconstitutional and dismissing the state case on lack-of-standing grounds, thereby clearing the way for gay marriage to again be legal in California.

The principal consequence of the DOMA ruling is that legally married same-sex couples will be eligible for the same federal benefits as heterosexual couples. See Windsor v. United States, 570 U. S. ____ (2013) (slip opinion available here). In the Proposition 8 ruling, the Court ruled that the plaintiffs didn’t have standing to challenge the lower court’s ruling that struck down the voter initiative banning gay marriage. See Hollingsworth v. Perry, 570 U. S. ____ (2013) (slip opinion available here).

The narrow Hollingsworth majority didn’t consist of the usual suspects, as Chief Justice Roberts wrote the opinion, joined by Ginsburg, Breyer, Kagan and Scalia. Dissenting in the DOMA decision, Scalia was ironically consistent in urging that the Supreme Court limit itself to a modest, deferential role. See Windsor, slip op., dissent at 1 (“We have no power to decide this case. And even if we did, we have no power under the Constitution to invalidate this democratically adopted legislation. The Court’s errors on both points spring forth from the same diseased root: an exalted conception of the role of this institution in America.”).

While the entirely technical Proposition 8 ruling was without the soaring language that has characterized Supreme Court decisions on issues of broad consequence, the DOMA opinion contained several quotable passages, including: “By creating two contradictory marriage regimes within the same State, DOMA forces same-sex couples to live as married for the purpose of state law but unmarried for the purpose of federal law, thus diminishing the stability and predictability of basic personal relations the State has found it proper to acknowledge and protect.” Windsor, slip op. at 22.

Last week’s U.S. Supreme Court decision in American Express Co. v. Italian Colors Restaurant, 570 U. S. ___ (2013) has occasioned diverse responses, ranging from the usual “nothing to see here” from more Pollyanic plaintiffs’ advocates, to the defense bar proclaiming that Amex III is apocalypse, again, for class actions, after having predicted roughly the same thing following the Supreme Court’s Dukes, Concepcion, and Comcast decisions.

The always thoughtful Paul Bland, of Trial Lawyers for Public Justice, has titled his piece on Amex III “Worst Supreme Court Arbitration Decision Ever,” and focuses on the Amex III majority’s candid embrace of class arbitration waivers as de facto exculpatory clauses: “You see, until now, the Supreme Court has said that courts should only enforce arbitration clauses where a party could ‘effectively vindicate its statutory rights.’ Today, in a sleight of hand, the five conservative justices said that this means that arbitration clauses should be enforced even when they make it impossible for parties to actually vindicate their statutory rights, so long as they have a theoretical ‘right’ to pursue that remedy.” 

Kimberly Kraweloc’s respected and much-watched UCL Practitioner also accentuated the negative, noting that “the Court held 5-3 that the arbitration clause was enforceable even though an arbitration proceeding would provide no effective means to vindicate the plaintiffs’ statutory rights under the federal antitrust laws.”

However, recalling the extreme predictions that immediately followed earlier decisions concerning similar subject matter, Paul Karlsgrodt is more measured in his ultimate assessment, asking “Will Amex III finally be the case to end class actions as we know them?” and responding: “Concepcion hasn’t, so I doubt Amex III will either.”

Blogger Michael Fox described the most likely practical consequence of Amex III for employers as follows: “a large number of employers who have not implemented arbitration plans will be re-thinking the decision.” With the Supreme Court also having recently endorsed class-wide arbitration in Oxford Health Plans LLC v. Sutter, employers will likely seek to provide for a waiver of class actions along with mandatory arbitration clauses.

Finally, the ever-florid Cato Institute proclaimed that Amex III “is a victory for freedom of contract, a boost for arbitration as an alternative to litigation, and a step forward in the Court’s ongoing recognition that the class action is just one legal vehicle among many, not some priority express train to be favored over other traffic.”

One wonders, though, whether the Scalia-led arbitration crusade even views class actions as “just one legal vehicle,” or aims to consign class actions to something even less significant. And while prior legislative responses have stalled, efforts such as the Arbitration Fairness Act of 2013, which would among other things prohibit arbitration agreements and class action waivers as a condition of employment, are drafted and ready to be acted on should the Supreme Court overreach.

The Supreme Court has issued its highly-anticipated decision in “Amex III”, the latest installment in an attack on class actions thinly disguised as an affection for the “liberal federal policy favoring arbitration.” The 5-3 majority (Justice Sotomayor abstained) reversed the Second Circuit and held that the Court of Appeals ruled contrary to the Federal Arbitration Act (FAA) when it invalidated an arbitration clause’s class action waiver, even though a class action would have been the plaintiff’s only way of effectively vindicating its antitrust claims against the defendant, American Express. See American Express Co. v. Italian Colors Restaurant, 570 U. S. ___ (2013) (slip opinion available here).

Italian Colors Restaurant, joined by other restaurants and retailers, sued American Express alleging that the credit card mainstay violated antitrust law by forcing merchants to accept its debit cards as a condition of accepting its charge cards. American Express sought to enforce an arbitration agreement, which included a class action waiver, but was rebuffed by the Second Circuit, which held that a prohibition against collective actions would impair the plaintiffs’ ability to enforce their statutory rights under the Sherman Act because the cost of plaintiffs’ individually arbitrating their dispute would be prohibitive and would thus effectively deprive them of protection under the antitrust laws. See In re Amer. Express Merchants’ Litig., 667 F. 3d 204 (2d Cir. 2012).

However, the majority opinion written by Justice Antonin Scalia stated that “the antitrust laws do not guarantee an affordable procedural path to the vindication of every claim.” Slip op. at 4. After some odd bedfellow-ing in recent Fourth Amendment decisions, the Court returned to its familiar split, with Justices Alito, Thomas and Kennedy joining Scalia, along with Chief Justice Roberts. Justice Kagan wrote a dissent supported by three votes that will no doubt be widely described as “stinging,” which explains that: “here is the nutshell version of today’s opinion, admirably flaunted rather than camouflaged: Too darn bad.” Slip op., dissent, at 1. Justice Sotamayer recused herself because she had been on the Second Circuit when the case was before it.

Ostensibly at least, the decision turned on careful consideration of the “effective vindication doctrine,” which is widely regarded to have originated in Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614 (1985), and which stands for the reasonable proposition that an arbitration clause that functions as an exculpatory clause (e.g., a clause prohibiting all antitrust claims) need not be enforced. The majority suggests that the doctrine “originated as dictum” (slip op. at 6), before going into several paragraphs of analysis that treat the doctrine as if it were in fact dictum (slip op. at 6-7). On this point, the dissent gets the better of the argument, and in doing so likely saves what it portrays as a narrow doctrine. See slip op., dissent at 8, n.3. Justice Kagan persuasively argues that the majority is “dead wrong” when it contends that, in Mitsubishi, the Supreme Court didn’t reach the issue of whether an arbitration agreement’s potential deprivation of the right to pursue federal remedies is a permissible ground for deeming the arbitration agreement unenforceable, by noting that Mitsubishi merely did not reach whether the at-issue arbitration clause did in fact nullify the ability to vindicate a federal right. Id. (“But [in Mitsubishi] we stated expressly that if the agreement did so (as Amex’s does), we would invalidate it.”)

A similar issue of particular importance in California — whether an arbitration agreement that purports to waive a person’s ability to seek civil penalties under PAGA may be deemed unenforceable — is unaffected by the Amex III decision, as the controlling law remains that PAGA waivers in arbitration agreements may be properly found unenforceable, since a PAGA action is “fundamentally a law enforcement action designed to protect the public and not to benefit private parties,” and thus does not frustrate the purposes of the FAA. See Brown v. Ralphs Grocery, 197 Cal. App. 4th 489, 502 (2011). Likewise, while Amex III exclusively discusses the economic factors that could impede the vindication of a right, it does not address or alter the non-economic factors that the California Supreme Court identified in Gentry v. Super. Ct. that are to be considered in determining whether an arbitration agreement in the employment context impermissibly blocks vindication of an unwaivable right. See Gentry, 42 Cal. 4th 443 (2007).

In Amex III, however, the majority brought to bear arguments more compelling than those in earlier arbitration/class action rulings, noting that the at-issue class action waiver “no more eliminates those parties’ right to pursue their statutory remedy than did federal law before its adoption of the class action for legal relief in 1938.” Slip op. at 7. While the Kagan dissent didn’t directly address that argument, it had a provocative retort, styled around arbitration provisions that would be permissible under the majority’s scheme and are indistinguishable from candidly exculpatory provisions that the majority would have to concede the invalidity of, including the Amex CEO as the designated arbitrator, no relief even on a finding of liability, and prohibiting economic testimony in an antitrust case. See slip op., dissent at 3.

Perhaps naively, the three-member dissent argues that “[w]hat the FAA prefers to litigation is arbitration, not de facto immunity.” Slip op., dissent at 5. While that might be an accurate statement of what the drafters of the FAA intended, it appears that the majority is tacitly on the side of providing businesses not just with access to the arbitration forum, but also the de facto immunity that is any rational company’s most desired endgame when it aims to catch consumers or employees in arbitration’s adhesive flypaper.