Posts belonging to Category Arbitration

New York’s Southern District has generated another arbitration-related decision that contributes to a far less dire post-Concepcion narrative than many had predicted.  See Rame, LLC v. Popovich, No. 12-cv-01684 (S.D.N.Y. Jul. 9, 2012) (Opinion re: petition to vacate) (available here).  Rather than expounding on whether cases are referred to arbitration in the first instance, which was the primary focus of Concepcion, Popovich addresses whether or not classwide arbitration is permissible where parties neither expressly waive nor expressly agree to classwide arbitration.

The underlying FLSA action was filed in the Southern District of New York by employees of Café Centro, a Park Avenue-based bistro and subsidiary of the elite Patina Restaurant Group.  The defendants moved to compel arbitration based on a Dispute Resolution Agreement (DRA) and Dispute Resolution Policy (DRP) that all employees were subject to.  In response, plaintiffs voluntarily dismissed the action and stipulated to arbitration, seemingly handing the defendants a victory.  See Opinion at 3.  The parties also stipulated to preliminary motion practice before an arbitrator as to the threshold issue of whether the claims for unpaid wages “could be brought in arbitration on a class or collective action basis,” since both the DRA and DRP were (as noted by the court) “devoid of any reference to arbitration on a class-wide or collective basis.”  Id. at 3, 6.  The arbitrator found that the FLSA action could proceed through arbitration on a classwide basis, prompting defendants to file a petition with the Southern District to vacate that decision.  Id. at 4.

Defendants primarily based their petition on a pre-Concepcion Supreme Court case, Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp., 130 S. Ct. 1758 (2010), which was widely assumed to stand for the inflexible proposition that, where an arbitration clause is silent as to collective or class treatment, classwide arbitration is impermissible, notwithstanding that the parties did not in fact expressly agree to foreclose it.  The defendants argued that collective or class treatment may not be compelled in such an instance, and an arbitrator who finds otherwise has exceeded his or her power under the Federal Arbitration Act.  See Opinion at 15-16.

However, the Popovich court distinguished Stolt-Nielsen, insofar as the parties in that case had stipulated to the at-issue arbitration clause being “silent” as to collective or class treatment.  See Opinion at 23.  The Second Circuit drew a similar distinction in Jock v. Sterling Jewelers Inc., 646 F.3d 113 (2d Cir. 2011), holding that, with no “silence” stipulation, a broadly-drafted arbitration clause constituted an implicit agreement to authorize class treatment.  Here, the DRA and DRP dictated that an arbitrator determine “all damages and relief allowed by law.”  Opinion at 25.  Analyzing Stolt-Nielsen, Jock, and New York state law principles of contract interpretation, the Popovich court found that, absent a stipulation of “silence,” broad language like that used in the DRA and DRP does in fact constitute an implicit agreement to submit to class arbitration.  Opinion at 23-25.  The Popovich court concluded that the arbitrator’s decision was not based upon the “alleged silence” on classwide arbitration in the DRA and DRP, but was instead based on the broad language that was actually present, to wit, that an arbitrator will decide “all claims” of an employee arising out of the employment and award “all damages and relief allowed by law.”  Id. at 24-25.  As such, the court found no basis for vacating the arbitrator’s decision.

Popovich, like Jock, demonstrates the limitations of the Stolt-Nielsen holding.  Indeed, Popovich demonstrates that, under Stolt-Nielsen, class arbitration may be proper even if the at-issue arbitration agreement contains no express authorization to that effect, and reaffirms that class arbitration is proper when parties have implicitly agreed to it.

In a turn of events that illuminates what critics contend is the fundamental unfairness of arbitration proceedings, FINRA — the Financial Industry Regulatory Authority — has fired three arbitrators who found in favor of investors in a proceeding against Bank of America subsidiary Merrill Lynch in 2011.  Bloomberg News first reported the story here.  FINRA is the securities industry’s largest private dispute-resolution company, and it is specified in many arbitration clauses that private investors are bound by.

In the underlying matter, husband and wife investors alleged that Merrill Lynch was negligent in monitoring their investments, and sought over $640,000 in damages.  The case progressed through the individual arbitration process, pursuant to a mandatory arbitration clause.  Though rulings in favor of plaintiffs in arbitration are rare, and substantial awards even more so, the panel awarded $520,000 in damages to the investors.  Merrill executives complained to FINRA about the ruling, and the firings began shortly thereafter, staggered over a roughly 11-month period.  Two of the three ousted arbitrators had considerable experience.  One of the affected arbitrators, Irma Gormly, has initiated a “whistle blower” complaint with the SEC; thus far, however, the SEC has not responded.

Despite seemingly taking issue with the substance of the decision favoring investors, Merrill Lynch has made no attempt to attack the ruling itself.  No appeal has been filed, nor are there any grounds for such, according to another sacked arbitrator, Fred Pinckney.  Pinckney sums up the situation (quoted by Bloomberg News) thusly: “It’s unbelievable that they would take such an experienced panel and get rid of it.  To me, this undermines the credibility of the entire FINRA process — I didn’t say kangaroo court — but when you have three well-credentialed people, doing their job, and there were no meritorious grounds for an appeal, and we get handed the ‘black spot’ — and not all at once — it makes for a pretty cheap novel.”

Relief for consumers may be on the horizon.  The Consumer Financial Protection Bureau (CFPB), created in 2011 by the Dodd-Frank Act, is currently conducting a study into mandatory arbitration clauses and their adverse impact on consumers’ ability to seek remedies for consumer protection violations.  The study is intended to help the CFPB determine whether to issue regulations regarding the mandatory arbitration process.  The deadline to submit comments to the bureau has passed; however, the comments submitted by the public are available here.

A federal district court has denied a motion to compel arbitration, holding that arbitration would strip the plaintiffs of substantive statutory rights and that multiple individual actions would be inefficient and costly, with expert fees alone amounting to hundreds of thousands to millions of dollars.  See In re Elec. Books Antitrust Litig., No. 11-02293 (S.D.N.Y. June 27, 2012) (Opinion & Order) (available here).  The plaintiffs allege that they paid higher prices for electronic books because a group of major publishing companies conspired to artificially inflate e-book prices, in violation of the federal Sherman Antitrust Act.  See Order at 3.

One of the publisher defendants, Penguin, moved to stay the proceedings and to compel those plaintiffs who bought e-books through Amazon.com or Barnes & Noble to individually arbitrate their claims.  See id. at 3-4.  The standard agreements between these vendors and their customers provide that customers must arbitrate all disputes.  Id. at 4-5.  Additionally, the at-issue arbitration clauses require that any litigation be pursued through an individual action, rather than as a class.  Id.  After reciting the broad federal preference for arbitration embodied in the Federal Arbitration Act (FAA), the court noted that a plaintiff “may successfully invalidate an arbitration agreement that contains a class action waiver on the grounds that the agreement would prevent them from ‘effectively vindicating’ their federal statutory rights.”  Id. at 5, citing In re American Exp. Merchants’ Litig., 667 F.3d 204, 216 (2d Cir. 2012).

Southern District Judge Denise Cote concluded that enforcing the arbitration agreements would, as a practical matter, prevent the plaintiffs from vindicating their substantive rights, since the cost of litigation would be prohibitively high in relation to plaintiffs’ expected recovery.  Order at 8-9.  At this point, plaintiffs have already spent about $45,000 on experts, and stand to recoup “at most a median recovery of $540 in treble damages,” thus rendering individual arbitration completely illogical.  Id.  Judge Cote noted that the defendants “presented no serious argument to the contrary.”  Id. at 9.  As to defendants’ suggestion that plaintiffs in individual actions simply “pool resources and share the cost of expert fees,” Judge Cote responded, “[t]his argument blinkers reality.”  Id.

Perhaps the most ominous prediction that accompanied the Supreme Court’s Wal-Mart v. Dukes decision was that a wave of decertifications would nullify many, if not most, already-certified actions.  Yet more than a year after Dukes, that prediction has not come to pass, a fact underscored by a recent decision from California’s Central District.  See Kingsbury v. U.S. Greenfiber, LLC, No. 08-CV-00151 (C.D. Cal. Jul. 2, 2012) (order denying motion to reconsider order granting class certification) (available here).  In Kingsbury, the plaintiff successfully moved for certification in May of 2011, a ruling that was upheld with the court’s denial of the defendant’s motion to reconsider.  Id.

The action was filed in 2008 by a group of homeowners whose homes contained allegedly defective insulation that was prone to water retention and mold contamination.  See Order at 1-2.  The plaintiffs claim that the defendant failed to inform them of the mold risk.  Id.  In attempting to reverse the 2011 class certification ruling, the defendant argued that decertification was required under both Dukes and the Supreme Court’s other much-discussed 2011 class action decision, AT&T v. Concepcion, and that Concepcion also supported the defendant’s contention that all disputes with the plaintiffs should be resolved in arbitration.  See Order at 2-3.  Judge A. Howard Matz rejected both arguments.  Id. at 10.

As to the Concepcion-based arbitration argument, Judge Matz found that the defendant had waived any entitlement to arbitration, “because even before [Concepcion] was decided, [the defendant] was well aware of its right to arbitrate.  By engaging in extensive litigation for almost four years, [the defendant] waived its arbitration rights.”  Order at 3.

Addressing the defendant’s argument that common questions of law or fact did not predominate in light of the new standard presented in Dukes, the court held that “Dukes does not alter the Court’s decision to certify a class,” because “there are numerous common contentions that are central to the resolution . . . of each class member’s claim.”  Order at 10.  Judge Matz went on to enumerate the predominant common questions, and in doing so provided useful guidance for plaintiffs and counsel who confront perhaps the most recurring of class action defenses where commonality is dispositive to certification.  The common questions included: whether the defendant’s purchase agreement is deceptive under California’s Unfair Competition Law; whether the at-issue insulation is prone to water retention and mold; whether a reasonable consumer would expect disclosure of these risks; whether the presence of the at-issue insulation affects home values; and whether the defendant concealed material information about the insulation.  Id. at 10.

Kingsbury is far from an outlier among cases where defendants have invoked Dukes in an attempt to decertify misrepresentation and non-disclosure claims.  See, e.g., Johnson v. General Mills, Inc., 276 F.R.D. 519 (C.D. Cal. 2011) (Carney, J.) (finding predominance of common questions, notwithstanding Dukes); Jermyn v. Best Buy Stores, Inc., 276 F.R.D. 167 (S.D.N.Y. 2011) (McMahon, J.) (same).  More notable are the instances where decertification motions were denied in Dukes-like employment discrimination cases or other circumstances with a similarly subjective, individualized element.  See, e.g., United States of America v. City of New York, 276 F.R.D. 22 (E.D.N.Y. 2011) (Garaufis, J.) (denying decertification motion in employment discrimination case, notwithstanding Dukes); DL v. District of Columbia, 277 F.R.D. 38 (D.D.C. 2011) (Lamberth, J.) (denying decertification motion in Individuals with Disabilities and Education Act action and distinguishing Dukes).  The latter cases further undermine the myth that few certifications would survive post-Dukes.