Articles from June 2013

In a trio of class action cases consolidated in Pennsylvania’s Eastern District in which the plaintiffs alleged that automatic credit card charges continued beyond the cancellation of a gym membership and that cancellation procedures were excessively onerous, the parties have agreed to terms whereby LA Fitness will provide the class members with combinations of a 45-day LA Fitness pass and a refund for the dues that were automatically charged after memberships were cancelled. See National Class Action Settlement and Release, Vaughn v. L.A. Fitness Int’l, LLC, No. 11-2644 (E.D. Penn. Mar. 13, 2013) (available here). This settlement is expected to influence other consumer class actions in which it is alleged that automatic credit card charges continued beyond the cancellation of a membership, and/or that cancellation procedures are unduly cumbersome.

Specifically excluded from the virtually nationwide settlement are California residents, likely because California has recently enacted among the strictest laws governing the cancellation of automatic monthly payments. Widely known as the “California Gym Cancellation Law,” the Health Studio Services Contract statute (Cal. Civil Code §§ 1812.80-1812.97) would likely have made approval of the Vaughn settlement vulnerable to choice of law doctrines. Also excluded are New Jersey residents, who are class members in a separate class action in which settlement has been reported to be imminent.

The Vaughn complaint, filed in Florida federal court, explained the swiftness with which new members could be signed up, and contrasted that with LA Fitness’ arduous and hard-to-find cancellation procedures: “[W]hile it takes minutes for LA Fitness to sign up a person for a monthly dues membership, it is virtually impossible for a person to cancel the membership and stop paying dues when they want to.” Complaint at ¶ 4, Vaughn v. L.A. Fitness Int’l, LLC, No. 11-0457 (M.D. Fla. Filed Mar. 4, 2011) (available here).

The crux of the allegations in Vaughn and the two other settled actions is that LA Fitness’ representation of a “monthly” contract was deceptive, because as a practical matter new members were obligated to pay dues for a minimum of three months, not merely one month – if they could even effectuate the labyrinthine cancellation procedures. Complaint at ¶¶ 5-7; 19-27. The cancellation procedure was thus designed to “extract dues” and frustrate cancellation, rather than facilitating members’ cancelling a membership they no longer wanted. Complaint at ¶ 7. Exemplifying a growing trend, the plaintiffs made considerable use of online forums in which LA Fitness customers frustrated by their cancellation experiences detailed their attempts to cancel. Complaint at ¶¶ 42-55.

When U.S. Supreme Court Associate Justice Antonin Scalia blithely dismissed adhesion contracts with the observation that “the times in which consumer contracts were anything other than adhesive are long past” (AT&T Mobility v. Concepcion, 131 S. Ct. 1740, 1750 (2011)), it was widely received as a death knell for the application of unconscionability analysis to arbitration agreements. And few contracts are more adhesive than those that are presented to employees on their first or last day of work; most newly-hired or newly-fired employees have little or no bargaining power. For that matter, employees typically have negligible bargaining power throughout their employment, when they are often asked to sign new contracts, tweaked to fully avail employers of new developments in the law.

Lou v. Ma Laboratories involved multiple agreements presented to plaintiff Cher Feng, both with and without arbitration provisions. See Lou v. Ma Labs., Inc., No. 12-5409 (N.D. Cal. May 17, 2013) (order denying motion to compel arbitration, available here). Yet despite the defendant having assiduously attempted to preserve its ability to force the plaintiff to arbitration, Judge William Alsup, of California’s Northern District, declined to enforce the at-issue arbitration agreement. See slip op. at 1-2.

Ms. Feng worked as an account manager at Ma Laboratories, and upon being hired, she signed a detailed, fourteen-page employment contract providing for disputes to be litigated in court. Slip op. at 1. However, a few months later, the plaintiff was asked to sign a nine-page “supplement” to the employment contract, which drastically changed the terms of her employment, including the addition of an arbitration clause, and which she contends she was required to sign in order to keep her job. Slip op. at 1-2.

Throughout the Lou decision, Judge Alsup’s focus was on the arbitration clause in the contract supplement. In finding the clause unconscionable, Judge Alsup undertook unconscionability analysis under California law, which has both a substantive and procedural component. “To determine whether an arbitration agreement is unconscionable, courts apply a sliding scale: ‘the more substantively oppressive the contract term, the less evidence of procedural unconscionability is required to come to the conclusion that the term is unenforceable, and vice versa.’” Slip op. at 3, citing Armendariz v. Foundation Health Psychcare Servs., Inc., 24 Cal. 4th 83, 114 (2000). By relying on Armendariz and only making passing reference to Concepcion, Alsup thus tacitly affirmed the continuing vitality of California’s unconscionability doctrine.

Judge Alsup determined that the at-issue arbitration clause was procedurally unconscionable due to it being a contract of adhesion, since there was effectively no opportunity to negotiate its terms. Slip op. at 3-4. In addition, Alsup held to California authority requiring that if the rules governing an arbitration are not attached to an arbitration contract that an employee signs, that weighs as evidence of procedural unconscionability. Slip op. at 4-6. It was as to the arbitration provision’s substantive unconscionability that Alsup deployed his sharpest criticism, assailing the contract’s lack of mutuality (the defendant could litigate claims for injunctive relief, whereas the employer couldn’t) and asymmetric, ambiguous fee-shifting provision. Slip op. at 7-8.

While the decision made clear that the ruling is limited to Ms. Feng’s arbitration agreement, and not to any other class member, it would be surprising if future motions to compel arbitration did not meet the same fate, since the company presumably used the same or similar documents and procedures with all of their employees.

In the continuing battle over class and representative actions, in which arbitration agreements have been increasingly found to be a valid tool for preventing groups of plaintiffs to adjudicate claims in a single proceeding, workers scored a victory this week: California’s Sixth Appellate District has held that the Federal Arbitration Act (FAA) does not require the enforcement of arbitration agreements that nullify workers’ statutory right to bring actions for recovery of civil penalties under PAGA, the California Labor Code’s Private Attorneys General Act. See Brown v. Super Ct. (Morgan Tire), No. H037271 (Cal. Ct. App. June 4, 2013) (available here).

“[A] private agreement purporting to waive the right to take representative action is unenforceable,” the unanimous three-judge panel held, “because it wholly precludes the exercise of this unwaivable statutory right.” Slip op. at 1. The panel noted that AT&T Mobility v. Concepcion, the leading case for those seeking to squelch representative actions through arbitration agreements, “does not require otherwise.” Slip op. at 2.

The plaintiffs worked for the defendant’s “Wheel Works” subsidiary and alleged various wage-and-hour violations. See slip op. at 2. In addition to seeking restitution and damages, the plaintiffs also sought to recover civil penalties, as the state’s proxy, arising from the same workplace violations. The plaintiffs signed a standard dispute-resolution contract, which provided for arbitration of disputes and prohibited arbitration “‘on a class basis or as a collective action or representative action.’” Slip op. at 3. When the action was filed, California had unambiguously made a public policy choice to invalidate representative action waivers in both consumer and wage-and-hour cases. Thereafter, however, a narrow majority of U.S. Supreme Court justices held, in Concepcion, that at least in the consumer context, the FAA trumped California’s policy decision as to representative action waivers. Seizing on the opportunity to extend Concepcion, the Brown defendant moved to compel arbitration, arguing that the FAA also abrogated California’s invalidation of representative action waivers in wage-and-hour actions. The trial court agreed and granted the defendant’s motion. Slip op. at 3.

The Court of Appeal reversed, formally by way of a writ of mandate. See slip op. at 4, 20. The decision comes amid anything but judicial unanimity on the dispositive issue, with Iskanian v. CLS Transportation coming down in favor of enforcing representative action waivers, whereas Franco v. Arakelian Ent. and Brown v. Ralphs hold that Concepcion does not require the enforcement of such waivers. The California Supreme Court is likely to forge the issue’s ultimate resolution when it decides whether to reverse or uphold Iskanian. And if, as did Associate Justice Eugene Premo in Brown v. Morgan Tire, the Supreme Court relies on Brown v. Ralphs, then reversal would appear likely in Iskanian, too.

Justice Premo explained that, similar to the Ralphs appellate court’s holding that FAA preemption would essentially nullify the benefits of PAGA, “[i]n the present case, the EDRP does not explicitly prohibit private attorney general actions but it does prohibit representative actions. Accordingly, it effectively prohibits the employee from prosecuting any PAGA claim at all.” Slip op. at 16. Thus, neither the FAA nor a particular arbitration contract may altogether block a worker from pursuing PAGA civil penalties on a class or collective basis, because a PAGA claim is intrinsically representative. See slip op. at 17.

U.S. District Judge John W. Lungstrum has denied a defendant’s motion to decertify a class of plaintiffs and refused to apply the Behrend v. Comcast Corp. decision. The defendant claimed that the plaintiff’s damages expert considered rejected theories of liability, as in the Comcast case. Judge Lungstrum’s ruling also ordered Dow to pay $1.2 billion in damages to the plaintiffs, who had alleged antitrust violations by Dow. In re Urethane Antitrust Litigation, No. 04-1616 (D. Kan. May 15, 2013) (order denying motion to decertify class) (available here).

Judge Lungstrum declined to apply Comcast, giving particular emphasis to Dow’s belated move to decertify, as the decision criticized Dow’s untimeliness in bringing its motion, “literally on the eve of trial.” Slip op. at 2. “Dow has not offered any reason why it could not have filed its motion much earlier. . . . Reconsideration of the Court’s certification order at that time or even post trial would cause severe prejudice to plaintiffs, who prepared for a long and complex trial at great expense.” Id.