Posts belonging to Category Arbitration

Last Friday, Orange County (California) District Attorney Tony Rackauckas announced that a $16 million settlement had been reached with Toyota concerning sudden acceleration defects. This settlement is entirely separate from last December’s widely-publicized $1.3 billion settlement compensating consumers for economic damages in connection with the same defects. Numerous cases also remain pending in federal multidistrict litigation on behalf of those who died or were injured as a result of sudden acceleration.

Using a procedural device whereby a DA may file an action on the public’s behalf, Tony Rackauckas stood in the role usually occupied by class representatives. While just a modest proportion of the total damages Toyota will ultimately pay as a result of the sudden acceleration defect, the Orange County DA’s $16 million settlement is significant in that it is precisely the kind that, if brought by individual consumers instead of a public official, could be blocked by the increasingly broad interpretation of the Federal Arbitration Act (FAA) that expounds on the five-member majority’s anti-class action doctrine in AT&T Mobility v. Concepcion.

California’s Unfair Competition Law (UCL) empowers district attorneys and other specified public officials to enforce important public rights or seek broad remedies for stark, unitary wrongs (like the sudden acceleration defect) that are suitable for class treatment. Even the most ardently hostile reading of the FAA does not support forcing a public prosecution into private arbitration, or finding that a prosecutor tacitly waived class or representative procedures. Thus, the device employed by District Attorney Rackauckas may stand as an impregnable bulwark against the continuing attack on consumers and workers seeking rational, efficient adjudication of claims in a single class or representative proceeding.

Of the $16 million paid by Toyota, $4 million is designated to pay costs and fees (including payment to outside counsel hired to prosecute the case), $4 million will go into a fund to help combat economic crime, and the remaining $8 million will be paid to a local gang prevention program. While fighting economic crime and gang activity has no obvious connection to automobile defects, at least one can argue that these programs are beneficial to the public at large.

As the battle between individual arbitration and litigated class actions continues across state and federal jurisdictions, California’s intermediate appellate court has underscored that, at least in California, an unconscionable contract that would otherwise be unenforceable will not be deemed enforceable merely because the subject matter is arbitration. See Compton v. Super. Ct., ___ Cal. App. 4th ___ (Cal. Ct. App. 2013) (available here).

In reaching this decision, the panel relied heavily on the California Supreme Court’s Armendariz v. Foundation Health Psychcare Servs., 24 Cal. 4th 83 (2000), a decision that defined the California standard for unconscionability at the time it was issued. Armendariz turned on the asymmetry of the at-issue arbitration provision, whereby the employer unilaterally got to determine which claims would be submitted to arbitration and which would be pursued in court. The court found such one-sidedness to be substantively unconscionable when presented in a contract of adhesion imposed by an employer on an employee, reasoning that, “[a]lthough parties are free to contract for asymmetrical remedies and arbitration clauses of varying scope, . . . the doctrine of unconscionability limits the extent to which a stronger party may, through a contract of adhesion, impose the arbitration forum on the weaker party without accepting that forum for itself.” Armendariz at 118. Reinforcing two prior appellate decisions, the court held that such arbitration agreements must have at least a “modicum of bilaterality” to be enforceable. Id. at 117.

Similarly, in Compton, the at-issue arbitration provision, along with other one-sided terms, enumerated the types of claims that could and could not be submitted to arbitration. The employer included claims most likely to be brought by employees, while excluding claims most likely to be brought by the employer, thus allowing the employer to litigate in court claims that were important to it, while forcing employees into arbitration on claims most important to them. Compton slip op. at 4-5. After discussing the provision’s many asymmetric terms, all of which accrued to the defendant employer’s benefit, the 2-1 Compton majority reversed the trial court and found the at-issue arbitration clause unconscionable. Id. at 17-22. Because the Compton majority reversed the trial court’s finding as to unconscionability, it did not address two additional grounds also offered for reversal: that the defendant waived any entitlement to arbitration and that the ability to bring class actions is protected concerted action under the National Labor Relations Act. Id. at 9-10.

The majority rejected the defendant’s contention that the Armendariz “bilaterality rule” imposes a requirement of “perfect mutuality of obligation” on arbitration contracts, but not contracts generally, thereby uniquely burdening arbitration contracts in contravention of AT&T v. Concepcion. See id. at 18-22. After extensively citing to and quoting from Armendariz, Justice Laurence D. Rubin (writing for the Compton majority and joined by Justice Madeline Flier) explained that: “Concepcion did not discuss the modicum of bilaterality standard adopted by Armendariz . . . [or] overrule Armendariz. We . . . are therefore bound to . . . apply Armendariz to this case. Accordingly, we conclude that Concepcion does not apply to invalidate Armendariz’s modicum of bilaterality rule, at least in this context.” Compton slip op. at 21 (internal citation omitted).

In dissent, Justice Tricia Bigelow found the at-issue arbitration terms entirely symmetric as to the wage and hour claims brought by the plaintiff, and concluded that the arbitration provision therefore “binds [the parties] equally.” See Compton dissent at 4. Additionally, Justice Bigelow noted that any one-sided carve-outs as to certain claims could easily be severed from the agreement. Id.

Bigelow also cited with approval the decision of the Second Appellate District, Division Two (Compton was decided within Division Eight) in Iskanian v. CLS Transp. Los Angeles, LLC, holding that a mandatory waiver of class claims does not render an arbitration agreement imposed by an employer on an employee unconscionable. The California Supreme Court has granted review in Iskanian, which is expected to reconcile the application of Concepcion in the employment context.

Once again, a court of law has weighed in on a case that has serially addressed the major issues in current class action jurisprudence. This time, the case was before the Second Circuit, where the panel considered the defendant’s appeal of a district court’s denial of its motion to compel arbitration. See Parisi v. Goldman, Sachs & Co., No. 11-5229 (2d Cir. Mar. 21, 2013) (available here).

In mid-2011, the at-issue motion to compel arbitration was referred to a Southern District of New York Magistrate Judge, who held the Federal Arbitration Act’s (FAA) preference for arbitration to be subordinate to federally-created statutory rights, and determined that the arbitration clause in plaintiffs’ contract with the defendant must be invalidated because arbitration would preclude the plaintiffs from vindicating a statutory right. See Chen-Oster v. Goldman, Sachs & Co., No. 10-6950, 2011 U.S. Dist. LEXIS 73200 (S.D.N.Y. Jul. 7, 2011) (“Chen-Oster I”). Then, in 2012, District Judge Leonard B. Sand denied the defendant’s motion to strike class allegations. See Chen-Oster v. Goldman, Sachs & Co., No. 10-6950 (S.D.N.Y. Jul. 17, 2012) (“Chen-Oster II”).

Parisi, aka Chen-Oster III, is the Second Circuit’s disposition of the defendant’s appeal of the denial of its motion to compel arbitration in Chen-Oster I. At issue in the appeal was the contention of the named plaintiffs, three female Goldman Sachs employees, that they had a substantive right under Title VII to pursue a “pattern-or-practice” discrimination claim, which is only available to class plaintiffs. The plaintiffs argued that because they cannot proceed on a class-wide basis in arbitration without the defendant’s consent, they must be permitted to proceed in court as a class action. See Chen-Oster I at *10-15. However, in holding that “there is no substantive statutory right to pursue a pattern-or-practice claim,” the Second Circuit reversed Chen-Oster I. See Parisi at 4.

While acknowledging that there are instances when the FAA must yield to federally-created statutory claims, the Second Circuit determined that plaintiffs’ purported pattern-or-practice claim is not eligible to join certain antitrust claims and claims related to statutorily-authorized damages in trumping the FAA: “The availability of the class action Rule 23 mechanism presupposes the existence of a claim; Rule 23 cannot create a non-waivable, substantive right to bring such a claim. Since private plaintiffs do not have a right to bring a pattern-or-practice claim of discrimination, there can be no entitlement to the ancillary class action procedural mechanism.” Parisi at 7 (internal citations omitted).

The Second Circuit relied heavily on the Supreme Court’s Wal-Mart v. Dukes decision in deciding Parisi, thus making it unlikely that this issue will be considered, much less reversed, by the U.S. Supreme Court. However, if the past is any indication, this is not the last we will be hearing of the Chen-Oster case.

Related Articles:  Chen-Oster: Distinguishing Concepcion;  Chen-Oster v. Goldman Sachs: Court Distinguishes Dukes, Denies Motion to Strike Class Allegations

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.