Supreme Court Oral Argument on Arbitration Clauses With Class Action Waivers: American Express v. Italian Colors Restaurant

Posted on March 04, 2013 by Wystan M. Ackerman

What restrictions are there, if any, on companies’ use of arbitration clauses that prohibit class action arbitrations?  On February 27, the U.S. Supreme Court heard oral argument in a case that may address that question.  American Express Company v. Italian Colors Restaurant, No. 12-133 (transcript) is a sequel to the Supreme Court’s 2011 decision in AT&T v. Concepcion, which held that the Federal Arbitration Act preempted state law to the extent that state law on unconscionability invalidated an arbitration provision because it did not permit a class action arbitration procedure.  The Concepcion opinion contained significant discussion of the fact that AT&T’s arbitration provision was particularly consumer-friendly -- AT&T agreed to pay all the costs of arbitration for non-frivolous claims, the arbitration would be held where the claimant resided or by telephone, and if the claimant received an award higher that AT&T’s last settlement offer, they would receive a minimum of $7,500 plus twice their attorneys’ fees.  The AmEx settlement provision, in contrast, does not have these provisions.

In American Express, the question presented is “Whether the Federal Arbitration Act permits courts, invoking the ‘federal substantive law of arbitrability,’ to invalidate arbitration agreements on the ground that they do not permit class arbitration of a federal-law claim.”  American Express is an antitrust case brought by merchants who allege that AmEx has used an illegal “tying arrangement” under which merchants must accept AmEx revolving credit cards and pay higher fees to AmEx for those transactions than are charged by Visa or MasterCard.  AmEx’s ability to charge these higher fees is allegedly tied to its charge card business (i.e., cards requiring payment in full every month), which has more corporate cardholders and affluent individual cardholders.  AmEx’s contract with merchants requires them to accept all AmEx cards, and it has an arbitration clause with a class action waiver in it.  The plaintiffs argued that the class action waiver was unenforceable because it effectively deprives merchants of the ability to bring any antitrust claims, on the theory that the cost of bringing an individual antitrust suit far outweighs the potential individual recovery.  The plaintiffs presented, and the Second Circuit in ruling in their favor relied on, testimony from an antitrust expert that the cost of an expert report in this case would be between $300,000 and $2 million, which far exceeded what any named plaintiff could recover in an individual proceeding.  The Second Circuit found AmEx’s class action waiver unenforceable because the cost of expert testimony to prosecute an individual antitrust arbitration would make it impossible for an individual plaintiff to pursue an antitrust claim and AmEx would have essentially immunized itself against any and all such claims.  Justice Sotomayor is recused in the case because she was on the Second Circuit panel at an earlier point when it heard the case.

The oral argument in the Supreme Court focused heavily on whether it would truly be impossible for merchants to prove their antitrust claims in non-class arbitration proceedings, although it was suggested that this was a point that the Second Circuit had taken for granted.  Justice Breyer asked a number of questions suggesting that there are ways in which the arbitration could be completed without an expensive expert report, including by using an expert arbitrator with antitrust experience, or by using other evidence.  At one point, he suggested remanding the case for further exploration of that issue.  Chief Justice Roberts suggested that the merchants could have a trade association pay for the cost of an expert report that could then be used in many individual arbitrations.  Justice Kennedy also suggested that the arbitration could be a less formal and less costly proceeding, but he also pointed out that there was no factual record on that point.  There was also some suggestion that the parties had strayed to some degree from the question presented, and Justice Kagan suggested that perhaps the case was not properly framed.  Michael Kellogg argued for AmEx that there was no need for a remand because questions regarding what type of proof would suffice in arbitration, etc., would be for the arbitrator to decide in the first instance and thus not something the district court or court of appeals could answer definitively.  There was some discussion, however, about whether confidentiality requirements in the AmEx arbitration provision would present problems for using an expert report in multiple individual cases.  There was also discussion about whether the confidentiality provision could be severed.  Chief Justice Roberts also suggested that individuals bringing these arbitrations might take advantage of collateral estoppel to the extent it is available.  Kellogg responded that the law on that is unclear in the arbitration context.  Justice Ginsburg focused on how the AmEx arbitration provision did not have the type of plaintiff-friendly provisions that the AT&T agreement had.  Justice Scalia asked several questions focusing on the fact that the Sherman Act existed long before Rule 23, and thus to the extent that Sherman Act claims are costly to prove there was no right to bring them in a class proceeding when the statute was enacted.  Justice Scalia suggested that if the claim, as a practical matter, would be too expensive to bring on an individual basis in court, there is no special right to bring it in arbitration.  In response, Paul Clement argued for the plaintiffs that although there was no Rule 23 when the Sherman Act was enacted, procedures were in place at that time that would allow multiple claims to be heard together, and the AmEx arbitration provision does not allow joinder of multiple claims in arbitration.  Clement also argued that it was possible to construct an arbitration provision that could bar class actions and still allow for effective vindication of rights, but that the AmEx provision did not make the cut.  He used a Sovereign Bank arbitration provision as an example of one that would be adequate.

So what might the outcome be?  A New York Times article on the oral argument suggests that the Justices appear to be leaning in favor of AmEx’s position.  I don’t disagree with that.  The benefit here for companies also might be in the Court providing some further guidance on the contours of how companies can draft these arbitration provisions.  Whether the Court provides any real guidance, however, will depend on how the decision is written.  In the insurance industry there does not appear to have been much movement towards arbitration, perhaps because of some unique issues presented in the insurance context (see my August 22, 2011 blog post for some thoughts on that).  But if insurers do not move towards arbitration and other industries do, that could make insurers a heavier target for class action suits.  It will be interesting to see how things develop after this case is decided.

Auto Insurance Class Action Involving Seatbelts: California Federal Court Refuses to Compel Appraisal, Excludes Expert And Denies Class Certification

Posted on January 24, 2013 by Wystan M. Ackerman

A recent decision by the Eastern District of California addressed several significant issues in a putative class action alleging that an insurer improperly failed to cover the cost of replacing seatbelts after serious auto accidents.  In Watts v. Allstate Indemnity Company, No. CIV. S-08-1877 LKK/GGH, 2013 U.S. Dist. LEXIS 7407 (E.D. Cal. Jan. 17, 2013), the court denied the insurer’s motion to compel appraisal, but excluded the plaintiff’s expert witness and, based on the exclusion of the expert, denied class certification.

  • Appraisal:  The insurer demanded appraisal of the named plaintiff’s claim shortly after suit was filed, and moved to compel an appraisal.  In a prior decision, the court had concluded that the appraisal provision was unconscionable under California law in the class action context and therefore unenforceable.  The insurer sought reconsideration based on the Supreme Court’s decision in AT&T Mobility, LLC v. Concepcion.  The court appeared to recognize that the appraisal provision could no longer be deemed unconscionable in light of Concepcion, which held that the Federal Arbitration Act preempted California law on unconscionability.  But the court still denied the motion to compel appraisal on the grounds that the plaintiff’s theory of the case was that the insurer had a practice of never determining whether repair or replacement of seatbelts was appropriate, and pressuring repair shops not to include this in their estimates.  Id. at *10-12.  However, nearly every class action complaint drafted by skilled class counsel alleges some general, purportedly improper practice by the defendant.  Without such an allegation, there could be no colorable claim that the requirements for class certification can be satisfied.  If such an allegation can preclude the right to appraisal, doesn’t that essentially eviscerate the appraisal provision? 
  • Expert Testimony:  The insurer sought to exclude the plaintiff’s expert in support of class certification, who opined that: (1) replacement of seatbelts is necessary for all vehicles that have been in certain types of serious auto accidents; and (2) the expert could, by reviewing certain of the insurer’s electronic claims data, identify claims that involved collisions that, in her view, required replacement of seatbelts.  The court found the first opinion admissible, but excluded the second.  The court concluded that the expert had failed to adequately describe her methodology for analyzing the claim records, and there was no indication that the methodology had been or could be tested, subject to peer review or have a calculable error rate.  The court wrote that “[u]ltimately, [the expert] is asking the court to make an inferential leap from the data in Allstate’s computer systems to the alleged degree of damage to seatbelt systems based solely on her experience, without any explanation of her methods or justification for their reliability.”  Id. at *34-35.  In light of the exclusion of the expert testimony, and the fact that the expert’s opinion was critical to the motion for class certification, the court denied certification, but without prejudice.  The type of expert testimony proffered by the plaintiff here is typical of how plaintiffs try to establish class certification in an insurance case, often unsuccessfully.  This portion of the opinion illustrates how courts are applying Daubert standards more rigorously at the class certification stage, a subject on which the U.S. Supreme Court is expected to rule in the coming months in Comcast Corp. v. Behrend (for more on this case, see my November 9, 2012 blog post about the oral argument, and June 26, 2012 blog post about the grant of certiorari). 

Supreme Court Grants Certiorari in American Express Case Involving Arbitration Provisions That Prohibit Class Action Arbitrations

Posted on November 13, 2012 by Wystan M. Ackerman

On November 9, the U.S. Supreme Court granted certiorari in American Express Co. v. Italian Colors Restaurant, No. 12-133 (order granting certiorari; docket).  The question presented is “Whether the Federal Arbitration Act permits courts, invoking the ‘federal substantive law of arbitrability,’ to invalidate arbitration agreements on the ground that they do not permit class arbitration of a federal-law claim.”  For my thoughts on the Second Circuit’s decision in this case and its potential impact on insurance class actions see my February 8, 2012 blog post. Justice Sotomayor, who sat on the original Second Circuit panel in this case, is recused from this case, which creates the possibility of a 4-4 decision if the Court is sharply divided (when this happens, it results in an affirmance of the lower court).  Subsequent to the decision that was the subject of my February 8 blog post, another set of opinions was issued when the Second Circuit denied rehearing en banc, with five judges voting to grant rehearing.  See In re American Express Merchants’ Litig., 681 F.3d 139 (2d Cir. 2012).  In dissenting from the denial of rehearing, Chief Judge Jacobs wrote:

[T]he panel opinion in this case uses public policy to hold that arbitration agreements containing class-action waivers are unenforceable when applied to federal statutory claims if (as is always so easy to assert) a claim would not be "economically rational" to pursue individually. In re Am. Express Merchs.' Litig., 667 F.3d 204, 214 (2d Cir.2012) (Amex III). The panel opinion thus impairs the Federal Arbitration Act's strong federal policy favoring the enforcement of arbitration agreements, and frustrates the goals of arbitration by multiplying claims, lawsuits, and attorneys' fees. "[T]he longstanding judicial hostility to arbitration agreements," Gilmer, 500 U.S. at 24, 111 S.Ct. 1647, is undiminished.

. . .

As I undertake to show, the public policy rationale which Amex III relies upon is wrong because: [1] it runs counter to the public policy that the Supreme Court has made paramount in the context of the Federal Arbitration Act ("FAA"); [2] it employs a dubious ground of distinction to overcome Concepcion, which teaches that the FAA does not allow courts to invalidate class-action waivers even if "class proceedings are necessary to prosecute small-dollar claims that might otherwise slip through the legal system," Concepcion, 131 S.Ct. at 1753; and [3] the dicta on which the panel precariously relies—that large "arbitration costs" cannot be allowed to prevent a plaintiff from "effectively vindicating" a statutory right—is pulled out of context and distorted.

Id. at 142-43 (Jacobs, C.J., dissenting).

With this addition, this Term will have several class action cases, also including Comcast Corp. v. Behrend, involving the applicability of Daubert at class certification (see blog post) and Standard Fire Ins. Co. v. Knowles, involving the Class Action Fairness Act (blog post). 

Microsoft Adopts Arbitration Provisions With Class Action Waivers: Will Insurance Companies Follow?

Posted on June 13, 2012 by Wystan M. Ackerman

A recent column by David Lazarus in the Los Angeles Times, “Microsoft Ending Consumers’ Ability to File Class-Action Suits,” reports that Microsoft is implementing arbitration provisions with class action waiver provisions.  The article discusses a blog post by Tim Fielden, Assistant General Counsel of Microsoft regarding this change.  Fielden’s blog post explains:

When a customer in the United States has a dispute about a Microsoft product or service, many of our new user agreements will require that, if we can’t informally resolve the dispute, the customer bring the claim in small claims court or arbitration, but not as part of a class action lawsuit. Many companies have adopted this approach, which the U.S. Supreme Court permitted in a case it decided in 2011.      . . .

We think this is the right approach for both Microsoft and our U.S. customers. Our policy gives Microsoft powerful incentives to resolve any dispute to the customer’s satisfaction before it gets to arbitration, and our arbitration provisions will be among the most generous in the country. For instance, we permit arbitration wherever the customer lives, promptly reimburse filing fees, and, if we offer less to resolve a dispute informally than an arbitrator ultimately awards, we will pay the greater of the award or $1,000 for most products and services—plus double the customer’s reasonable attorney’s fees. Most important, this approach means customer complaints will be resolved promptly, and in those cases where the arbitrator agrees with the customer’s position, the customer will receive generous compensation, and receive it quickly.

David Lazarus’ article argues that Microsoft’s action, and the Supreme Court’s decision in AT&T v. Concepcion, are unfair to consumers.  He writes:

[D]espite the company's assertions of increased customer satisfaction, the reality is that Microsoft is telling people they can stuff it if they want to join together in exercising their constitutional right to a jury trial.

And the company has the full backing of the U.S. Supreme Court in staking out this arrogant, deeply consumer-unfriendly position.

. . .

So Microsoft's barring of class actions will only serve to encourage other tech heavyweights to follow suit. As it stands, people can file a class-action lawsuit against Google. They can file a class action against Apple, and Facebook, and Twitter.

Anyone want to bet how long that'll last?

I don’t think Lazarus is correct.  Taking my class action defense lawyer hat off for a moment, when I, as a consumer, buy a product that I’m really unsatisfied with for one reason or another, and expect that other consumers also are unhappy, my current options are:  (1) taking the product back to the store and getting a refund, if that is an option; (2) calling the 800 number and arguing with the person on the other end of the line (which these days is often someone overseas) for a refund; or (3) waiting until someone brings a class action (it’s pretty unlikely I want to deal with the hassle of being a named plaintiff myself),  then waiting years for that case to work its way through the court system and eventually settle, if that happens, and then waiting months while the settlement works its way through the approval process until a check for some small amount of money, far below the purchase price of the product, finally arrives in my mailbox (while the lawyers representing the class pocket millions of dollars in attorneys’ fees).  The jury trial that Lazarus talks about is largely a fiction because class actions almost never go to trial, and those that do often result in settlement while on appeal.  In my mind, if options (1) and (2) are unavailable or unsuccessful, a quick-and-easy arbitration would be more preferable, and give me a better chance of obtaining significant relief for myself than waiting for a class action to materialize, if it does. 

Another question that Microsoft’s new adoption of arbitration brings to mind is whether insurance companies will follow what AT&T and now Microsoft have done.  I’ve written on that subject before on this blog a number of times, see my August 22, 2011 post, and the Arbitration/Appraisal topic area on this blog.  Insurers have a number of things to think about that differ from AT&T and Microsoft, including potential state statutory and regulatory obstacles, and the fact that insurance contracts tend to lead to more litigation and different types of litigation than cases that tend to be filed under a “shrinkwrap” software contract or a cell phone contract.  Arbitration may or may not be a successful strategy for the insurance industry.  Only time and trial and error will tell for sure, if any insurer adopts it (and it would likely have to be a major carrier that takes the lead since it would need to be a carrier that regularly faces class actions).  One risk that insurers have is that, if most or all of the other major industries that today are large targets for consumer class actions adopt arbitration provisions with class action waivers, insurers could see an uptick in class action filings against them simply because they have not implemented arbitration.

Insurance Information Institute (III) Blog Reports That Arbitration Saved Insurance Industry Over $700 Million in Litigation Costs in 2011: Will Similar Savings Be Achieved By Expanding Consumer Arbitrations?

Posted on February 12, 2012 by Wystan M. Ackerman

I found interesting a recent blog post by Claire Wilkinson of the Insurance Information Institute (III) reporting that:

In a new record, nearly 520,000 insurance claims disputes valued at more than $2.4 billion were resolved via arbitration in 2011, Arbitration Forums Inc reports.

According to AF, the nation’s largest provider of inter-insurance dispute resolution services, it is saving the property/casualty insurance industry more than $700 million in litigation costs annually.

. . .

Some 98 percent of the arbitration filings in 2011 were made electronically, via AF’s electronic subrogation claims system known as E-Subro Hub – more than twice the percentage of a few years earlier.

. . .

E-Subro Hub significantly streamlines the process by enabling users to electronically send and receive subrogation demands, attach supporting documents, manage subrogation claims and electronically file inter-company arbitration where necessary.

The question I have is whether this kind of positive outcome would extend to arbitrations between insurers and their personal lines insureds.  Regular readers of my blog will recall that I’ve mused on several occasions (see my August 22, 2011 blog post, for example) about whether insurers might increase the use of arbitration, with arbitration clauses that preclude class actions, in order to take advantage of the Supreme Court’s decision last year in AT&T v. Concepcion.  The data recently reported by the III suggests that arbitration can achieve substantial costs savings where there are sophisticated entities (insurers) on both sides and proceedings are streamlined.  Some of that simplification could be used in small consumer arbitrations, and indeed might be welcomed by many policyholders (and by insurance commissioners) as a good alternative to costly and lengthy litigation.  Even as an insurance lawyer I might be more inclined to buy coverage from a company that offers a fair and simple arbitration process for resolving small claim disputes.  But expanding consumer arbitrations in insurance also raises some issues that would not be reflected in the data regarding inter-company arbitration, including:

  • Will there be many more contested and lengthy arbitration proceedings because individual insureds will not operate as rationally as a sophisticated entity on the other side of the dispute?  Will that add substantial cost?  Can that problem be ameliorated through the procedures employed for insured-insurer arbitrations?
  • To what extent will plaintiffs’ lawyers increase indemnity payments and arbitration costs by pursuing arbitrations that they would never bother to pursue in court, if the arbitrations are easier, faster and potentially have a minimum award for a prevailing plaintiff?
  • Will there be more frivolous arbitrations than frivolous lawsuits?  Can a provision be built into the arbitration clause that reduces the filing of frivolous arbitrations by imposing costs on insureds if the arbitrator finds the case frivolous?
  • Will the prohibition on class actions and costs savings generated thereby outweigh any additional costs from the individual arbitrations?

I’d be interested to know if anyone has, or is aware of, any data regarding whether and how cost savings can be achieved by using consumer arbitrations in insurance (if there is any), or other industries that might be somewhat analogous.   

Class Action Waiver in Arbitration Provision Found Unenforceable By Second Circuit in American Express Case, Notwithstanding AT&T v. Concepcion

Posted on February 08, 2012 by Wystan M. Ackerman

On January 30, I published a blog post about a Southern District of New York decision holding that an arbitration clause barring class actions was unenforceable because the costs of an individual arbitration effectively would preclude the plaintiff from pursuing her statutory rights under the Fair Labor Standards Act.  The Second Circuit has now reached a similar result in In re American Express Merchants’ Litigation, No. 06-1871-cv, 2012 U.S. App. LEXIS 1871 (2d Cir. Feb. 1, 2012).  I’m not sure this result or the court’s rationale has much, if any, application to insurance, for reasons I’ll explain below.  But it’s nevertheless important to take this decision into account as insurers consider expanding the use of arbitration after Concepcion.

The American Express Opinion

American Express is a long-running antitrust case brought by merchants who allege that AmEx has used an illegal “tying arrangement,” in violation of the Sherman Act, under which merchants must accept AmEx revolving credit cards and pay higher fees to AmEx for those transactions than are charged by Visa or MasterCard.  AmEx’s ability to charge these higher fees is allegedly tied to its charge card business (i.e., cards requiring payment in full every month), which has more corporate cardholders and affluent individual cardholders.  AmEx’s contract with merchants requires them to accept all AmEx cards, and it has an arbitration clause with a class action waiver in it.  The plaintiffs argued that the class action waiver was unenforceable because it effectively deprives merchants of the ability to bring any antitrust claims, on the theory that the cost of bringing an individual antitrust suit far outweighs the potential individual recovery.  The plaintiffs presented, and the Second Circuit relied on, testimony from an antitrust expert that the cost of an expert report in this case would be roughly in the middle of a range between $300,000 and $2 million, which far exceeded what any named plaintiff could recover in an individual proceeding.

The Second Circuit concluded that the issue presented by the American Express case was not decided or even addressed by the Supreme Court in AT&T v. Concepcion or Compucredit Corp. v. Greenwood.  The Second Circuit noted that “Supreme Court precedent recognizes that the class action device is the only economically rational alternative when a large group of individuals or entities has suffered an alleged wrong, but the damages due to any single individual or entity are too small to justify bringing an individual action.”  Id. at *25.  The court also found guidance from the Supreme Court in Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614 (1985), Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20 (1991) and Green Tree Financial Corp.-Alabama v. Randolph, 531 U.S. 79 (2000).  The court interpreted these three opinions, particularly Green Tree, as recognizing that class action waivers in arbitration clauses are unenforceable if the plaintiff can establish, with convincing proof, that “class-action waivers barred them from vindicating their statutory rights.”  Id. at *34.  The Second Circuit found AmEx’s class action waiver unenforceable because the cost of expert testimony to prosecute an individual antitrust arbitration would make it impossible for an individual plaintiff to pursue an antitrust claim and AmEx would have essentially immunized itself against any and all such claims.  The result, given that parties cannot be forced to arbitrate in a class proceeding (under the Supreme Court’s decision in Stolt-Nielsen) was that a class action can proceed in court.

Applicability to Insurance

I’d expect plaintiff’s lawyers to attempt to develop factual support similar to that used in American Express and then rely on this case in opposition to defendants’ efforts to invoke AT&T v. Concepcion.  However, I’m not sure this decision will apply in the insurance context for several reasons:

  • Insurance class actions hardly ever involve federal statutory rights because the states control insurance regulation.  Even if Congressional intent behind other federal statutes may control vis-à-vis the Federal Arbitration Act (FAA) in this circumstance, I’m not sure the same would be true of state common law or statutory rights that may conflict with the FAA.
  • Insurance class actions on claims or underwriting issues rarely involve circumstances where it would be impossible for an individual plaintiff to arbitrate an individual claim because the cost of arbitration would exceed the potential recovery.  The kind of expensive expert testimony that is required for an antitrust case is rarely necessary in an insurance class action.  State law also frequently provides mechanisms whereby statutory penalties or attorneys’ fees potentially become available that make individual disputes practical to arbitrate or litigate.  AmEx’s arbitration clause exempts small claims lawsuits from the arbitration requirement, which is something insurers may wish to consider as well.
  • Even where individual claims are small and dispute resolution costs large, it may not be impossible to vindicate individual claimants’ rights outside of the class action mechanism, if a large number of claimants wish to pursue claims and they do so in a coordinated fashion (but not through a formal class action mechanism).  Individual claimants and their attorneys generally are free to join resources and jointly retain and pay for experts or other collective costs.  An arbitration clause with a class action waiver cannot bar numerous claimants from signing up with the same lawyer and filing thousands of individual arbitrations.  They can also take advantage of collateral estoppel against the defendant where it is available under applicable law in the arbitration context.  Even in the American Express case that would seem to me to be a potential option not considered by the Second Circuit (although I’m not an authority on antitrust law or how those cases proceed).  What this means, as a practical matter, is that plaintiffs’ lawyers need to sign up a large number of clients who want to pursue claims rather than just finding one client and bringing a class proceeding.  Requiring this to happen in order for a large proceeding to go forward effectively limits mass proceedings to those driven somewhat more by the plaintiffs than by their lawyers.  If the mass proceeding is not viable unless thousands of people who feel they have been harmed sign up to pursue their claims, plaintiffs’ lawyers are more limited in their ability to pursue claims that have less merit because they will not be able to find enough clients to make it worthwhile.  But defendants who have engaged in an improper practice that harms many consumers who have meritorious grievances will not escape unscathed if plaintiffs’ lawyers can aggregate claims in this fashion.     

How Plaintiff-Friendly Does An Arbitration Clause Need to Be to Trigger AT&T v. Concepcion? Southern District of New York Opinion Weighs In

Posted on January 30, 2012 by Wystan M. Ackerman

One of the interesting open questions after AT&T v. Concepcion was decided by the Supreme Court is to what extent an arbitration clause must be plaintiff-friendly in order for a ban on class actions to be fully enforceable.  A recent opinion by Judge Kimba M. Wood of the Southern District of New York addressed this issue, and concluded that an arbitration clause was unenforceable where the plaintiff had made a persuasive showing, in an employment case, that the maximum recovery obtainable in an individual arbitration under the arbitration clause was not large enough to make it sensible to pursue such an arbitration on an individual basis.  See Sutherland v. Ernst & Young, LLP, 2012 U.S. Dist. LEXIS 5024 (S.D.N.Y. Jan. 17, 2012). 

Here is what I viewed as the heart of the court’s opinion: 

To support its argument that Sutherland's ability to vindicate her rights is irrelevant, Ernst & Young points to the statement by the majority in Concepcion that "[t]he dissent claims that class proceedings are necessary to prosecute small-dollar claims that might otherwise slip through the legal system. . . . But States cannot require a procedure that is inconsistent with the FAA, even if it is desirable for unrelated reasons." 131 S.Ct. at 1753. There is a difference, however, between claims that might slip through the cracks because plaintiffs choose not to prosecute them individually, and claims for which a plaintiff seeks redress but is precluded from vindicating her rights. This difference is the difference between the situation faced by the Concepcions and that faced by Sutherland. The terms of the arbitration agreement at issue in Concepcion ensured that the Concepcions could bring their claim in arbitration on an individual basis, either representing themselves or with counsel. The fact that a plaintiff in the same situation as the Concepcions might choose not to make a claim for such a small overcharge is not the Court's concern, even if a class-action lawyer might be eager to bring the case on behalf of all similarly situated plaintiffs, but for the class-action waiver. By contrast, the terms of the arbitration agreement and the cost of discovery in Sutherland's case preclude her from redressing alleged FLSA violations.

Sutherland's case is similar instead to situations discussed by the Supreme Court in which it has stated that it may not enforce contractual agreements that would operate "as a prospective waiver of a party's right to pursue statutory remedies." Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 637, n.19 (1985); see also Green Tree Fin. Corp.— Alabama v. Randolph, 531 U.S. 79, 90 (2000).

 Id. at *20-22. 

This ruling is contrary to some other decisions, including the Eleventh Circuit’s opinion in Cruz v. Cingular Wireless, LLC, 648 F.3d 1205 (11th Cir. 2011).   It will be interesting to see how this plays out as more courts address it.  I’m not going to hazard a guess at this point.  This is something to consider in drafting an arbitration clause to try to take advantage of Concepcion.

ABA Premier Speaker Series Webinar on Class Actions

Posted on January 26, 2012 by Wystan M. Ackerman

Earlier this week I attended the ABA’s national webinar entitled “The Future of Class Actions,” part of its Premier Speaker Series.  The panelists were Paul Bland of Public Justice, Mark Perry of Gibson Dunn and Judge Lee Rosenthal of the Southern District of Texas.  Here is what I found most interesting: 

  • Paul Bland, the plaintiffs-side member of the panel, argued that Wal-Mart, as an employment case, is distinguishable in many consumer class action contexts.  His example was where cases are based on identical contract documents and a common practice by the defendant.  That almost describes to a tee what plaintiffs typically argue in seeking to certify insurance class actions, which suggests we may see more focus on insurance.  But when you dig into the details, frequently the policy language for the proposed class is not identical and the “common practice” is really nothing more than a guideline with plenty of case-by-case exceptions to it, making the case much more analogous to Wal-Mart. 
  • There seemed to be a general consensus among the panelists that, post-Wal-Mart, more evidentiary hearings (essentially mini-trials) are being held on class certification in federal courts, and we are likely to see more of that.  I think that’s a good thing regardless of which side of the case you’re on, such a hearing tends to focus a busy judge more intently on the evidence on class certification.  It also gives class action lawyers more opportunities to conduct evidentiary proceedings, given the very few class actions that go to trial. 
  • Mark Perry made an interesting point about a sometimes overlooked part of the class action rule requiring that courts certifying a class “must define the class and the class claims, issues, or defenses . . . .”  Fed. R. Civ. P. 23(c)(1)(B) (emphasis added).  He made the point that under this rule and in light of Wal-Mart, district courts should be carefully examining each element of the plaintiffs’ causes of action and each defense, and determining whether they can be tried on a classwide basis.  I thought that was a great point.  Some decisions fall into the trap of looking at the issues in the case too broadly without digging into the details of each cause of action and each defense.  The need for individual proof of defenses can be critical in defending against class certification. 
  • Judge Rosenthal pointed out that there is a significant open question after Wal-Mart as to whether a Rule 23(b)(2) class can recover an award of relatively small penalties on each class member’s claim, which, when aggregated, amount to a very large penalty that can potentially cripple a defendant, particularly a smaller company.  This is an issue the insurance industry needs to be paying very close attention to because insurance claim-handling statutes sometimes provide for these types of penalties.  The Louisiana Supreme Court’s recent decision in Oubre v. Louisiana Citizens Fair Plan, No. 2011-C-0097, 2011 La. LEXIS 3014 (La. Dec. 16, 2011) is a good example of how this type of aggregation of small penalties can result in a huge potential exposure for an insurer (see my recent blog post on Oubre for more).  The latest word on Oubre is that the Louisiana Supreme Court denied rehearing and that Louisiana Citizens intends to petition for certiorari in the U.S. Supreme Court, as recently reported on Property Casualty 360.  I wouldn’t hold your breath for that petition to be granted, but you never know.   
  • On AT&T v. Concepcion, Paul Bland took the position that if Concepcion results in enforcement of arbitration provisions barring class action arbitrations even in circumstances where it is not financially viable for an individual to pursue an arbitration (as the Eleventh Circuit has held), then consumer class actions will disappear except in circumstances where there is no contract between the putative class members and the defendant.  Mark Perry pointed out that the Consumer Financial Protection Bureau will have the power to bar the use of arbitration clauses by lenders within its jurisdiction, and that the NLRB has recently ruled that it is an unfair labor practice for employers to ban class arbitrations (this is on appeal).  They didn’t mention insurance, but, as I’ve noted here before, that is another area where state regulators and state legislatures have power to regulate the use of arbitration provisions (see my August 22, 2011 and December 14, 2011 blog posts for more on this).  One risk I see here is that if the insurance industry does not pursue greater use of arbitration post-Concepcion and most other industries do, that could make the insurance industry a more prominent target of the plaintiffs’ class action bar. 
  • There was an interesting discussion about the Fifth Circuit’s opinion in In re Monumental Life Ins. Co., 365 F.3d 408 (5th Cir. 2004), a case involving allegations of racial discrimination in the sale and administration of low-value industrial life insurance policies.  In a 2-1 decision, the majority reversed a denial of class certification, holding that damages potentially could be obtained under Rule 23(b)(2).  The majority accepted the plaintiffs’ argument that damages, although individualized, could be calculated in an across-the-board way through the use of the insurer’s rating practices and data, and thus were proper under Rule 23(b)(2).  The court also suggested that, although notice and opt out procedures are not required under Rule 23(b)(2), they can be used in (b)(2) cases, and might be appropriate in that case.  Judge Rosenthal suggested that there are open questions as to whether these holdings survive Wal-Mart. 

Arkansas Supreme Court Allows Insurance Class Action to Proceed Despite Arbitration Provision

Posted on December 14, 2011 by Wystan M. Ackerman

As I’ve noted in prior posts regarding the U.S. Supreme Court’s decision in AT&T Mobility, LLC v. Concepcion (see, for example, my August 22, 2011 post), the insurance industry is in a somewhat unique position with respect to the use of arbitration clauses as a mechanism of avoiding class action exposure.  One reason for this is that under the McCarran-Ferguson Act some courts have concluded that a state law barring or restricting the use of arbitration in insurance policies may override the Federal Arbitration Act (this is called “reverse preemption”).  This result has now come to pass post-Concepcion in a recent decision by the Arkansas Supreme Court.

In Southern Pioneer Life Insurance Co. v. Thomas, 2011 Ark. 490, 2011 Ark. LEXIS 573 (Ark. Nov. 17, 2011), the plaintiffs purchased a vehicle (it was a 2006 PT Cruiser for readers curious about such details) under a finance contract.  At the time of sale, they also bought a credit life insurance policy that would pay off the loan if one of them died before it was paid off.  The plaintiffs paid off the loan early, but were not refunded any of the premium.  They then filed a putative class action seeking refunds of unearned premiums under these policies.  Id. at *2-3.  The loan application on which the plaintiffs purchased the life insurance included an arbitration provision, and the insurer sought to compel arbitration of the named plaintiffs’ claims in defending the suit.  (As I’ve explained before, this is a common tactic in defending class actions – if the named plaintiffs’ claim must go to arbitration, once the arbitration is resolved, regardless of the outcome they should not be able to pursue a class action.)

The Arkansas Supreme Court held that the arbitration agreement was unenforceable under an Arkansas statute that provides generally for the validity and enforceability of arbitration agreements, but states that it “shall have no application  . . . to any insured or beneficiary under any insurance policy or annuity contract.”  Ark. Code Ann. § 16-108-201(b).  The court explained that:

Under the McCarran-Ferguson Act, reverse preemption occurs if (1) the federal statute at issue does not specifically relate to the business of insurance; (2) the state law was enacted for the purpose of regulating the business of insurance; and (3) application of the federal statute will invalidate, impair, or supersede the state law.

Id. at *5.  The court found reverse preemption appropriate because: (1) the Federal Arbitration Act is not specific to insurance; (2) the portion of the state law at issue regulated insurance, although it also applied to other contexts; and (3) enforcement of the arbitration provision under the Federal Arbitration Act would effectively invalidate the Arkansas statute.  The court therefore affirmed the lower court’s ruling denying the motion to compel arbitration.

This result is not surprising.  Absent some creative avenue around the McCarran-Ferguson Act, which I haven’t looked into extensively (and may be a case-by-case determination in each applicable state), it seems to me that the options insurers have, to the extent they want to take advantage of the Concepcion decision, are:  (1) expanding the use of arbitration provisions only in states where the applicable law does not prohibit or limit the use of arbitration in insurance policies; (2) lobbying state legislatures to allow arbitration in states that currently prohibit or restrict it; and (3) lobbying Congress to fix this on a national basis by enacting a statute that allows the use of arbitration provisions in insurance contracts.   A national “fix” would be possible without amending the McCarran-Ferguson Act because it has an express exception where another federal statute specifically relates to insurance.  Whether the political option is viable at the national level I will leave to others who know more about that.  But I would think a viable argument could be made that in the case of large disasters, for example, people who have smaller disputes with their insurance companies are better off with a quick, easy and fair arbitration process than a lengthy and expensive court proceeding.  The devil is probably in the details of how such a process would function.

Recent New Insurance Class Actions Involving Use of Staff Counsel, Wildfire Claims, and Depreciation on Auto Claims

Posted on November 29, 2011 by Wystan M. Ackerman

Several notable recent class action filings against insurers have come across my desk (or computer screen) and seem worthy of interest to readers of this blog.  I will summarize and comment briefly on them.  If you’d like a copy of any of the complaints, just e-mail me.

  • Use of Staff Counsel:  In Golden v. State Farm Mutual Automobile Insurance Company, Cause No. 02D01-1110-PL-363 (Indiana Superior Court, Allen County; removed to federal court), the plaintiff alleges that State Farm improperly fails to disclose to its insureds that it may use staff counsel to represent them in defending lawsuits under liability insurance coverage.  There are two proposed classes:  (1) insureds in Indiana that have purchased or renewed a policy with State Farm within the last two years, containing liability coverage; and (2) insureds in Indiana who were represented by State Farm staff counsel within the last two years.  The causes of action are breach of an alleged duty to disclose the use of staff counsel (at the time of policy issuance or renewal), breach of a duty of good faith and fair dealing by not disclosing the use of staff counsel at the time of policy issuance or renewal, unjust enrichment, and injunctive relief barring State Farm from continuing to issue or renew policies without disclosures regarding staff counsel, and barring State Farm from assigning staff counsel to represent insureds where no prior disclosure was made.  It will be interesting to see if this complaint survives a motion to dismiss.  There may not be any legal duty to inform insureds about the use of staff counsel absent a statute or regulation requiring it.  It also seems unclear that anyone is injured by a failure to disclose at the time the policy is issued or renewed, particularly if they have never been sued.  The complaint seems to suggest that the use of staff counsel is somehow a new or unusual practice not followed by other insurers.  I’m not sure what the practice has been in Indiana, but as far as I know all of the major insurers have been using staff counsel to defend in the vast majority of jurisdictions for some time (except for a few jurisdictions where use of staff counsel is prohibited).  The complaint also seems to suggest, without articulating any basis, that staff counsel is somehow inferior to private outside counsel.  On the other hand, there is probably no harm in disclosing the use of staff counsel, and some insurers probably are doing that.  It’s hard to imagine that people buy their auto or homeowners’ policies based on whether the insurer is going to use staff counsel in defending them in a lawsuit.
  • Wildfire Claims:  In Abed v. Allstate Ins. Co., Case No. BC 473460 (Cal. Super. Ct., Los Angeles County), the named plaintiffs assert a variety of claims against Allstate arising from their claim for smoke damage to their house from the “Station Fire” in Southern California in August of 2009.  They assert various individual claims but only one cause of action on behalf of a putative class, alleging that Allstate’s policies failed to comply with California law on appraisal, and the efficient proximate cause doctrine.  The appraisal-related claim focuses on a provision in the California standard fire insurance policy providing that “In the event of a government-declared disaster, as defined in the Government Code, appraisal may be requested by either the insured or this company but shall not be compelled.”  Cal. Ins. Code § 2071.  The plaintiffs assert that the “Station Fire” was a “government-declared disaster” within the meaning of this provision.  They claim that Allstate improperly sought to compel a mandatory appraisal, and the appraisal clause in its policy failed to include this sentence.  The efficient proximate cause claim is a bit difficult to discern from the complaint.  That doctrine applies where a loss has more than one cause, and it appears that the claims at issue here were attributable only to the wildfire.  There is no suggestion that I can identify of another cause.  On the appraisal issue, although I think it involves the kind of individual issues that would not be appropriate for class treatment, insurers may want to check into their practices in California with respect to appraisal of claims for government-declared disasters given the unusual statutory language.
  • Depreciation on Auto Claims:  In Silvin v. Geico General Insurance Company, Case No. 1:11-cv-24128-CMA (S.D. Fla.), the plaintiff seeks to certify a nationwide class on the question of whether a particular Geico policy form allows for deduction of “betterment” or depreciation on auto claims under either comprehensive or collision coverage.  The policy language that is quoted in the complaint does not appear to make any reference to a deduction for “betterment” or depreciation.  It will be interesting to see what happens with this case.  This also seems like an area in which insurers may want to check what their policies say and what their practices are.

Will Concepcion End Class Actions? Law Professor Says "Yes"

Posted on November 03, 2011 by Wystan M. Ackerman

There has been a lot written about what impact the Supreme Court’s decision in AT&T Mobility, LLC v. Concepcion will have on the future of class actions (if you haven’t followed this closely, see my prior posts about the Supreme Court’s decision, opinions by the Colorado federal court and Northern District of California applying Concepcion, and Concepcion’s potential impact on insurance class actions).  

The boldest claim I have seen is in a recent article in Class Action Watch -- “Did the Supreme Court Just Kill the Class Action?” by Professor Brian Fitzpatrick of Vanderbilt Law School.  His article is quite short and to the point, it’s a good read.  He argues that Concepcion “could lead to the end of class actions brought against businesses across most – if not all – of their activities.”   He makes three claims:  (1) large businesses can require nearly everyone who might bring a class action against them to sign an arbitration agreement that includes a class action waiver, including consumers, employees and shareholders (these three groups combined bring nearly all class actions); (2) based on Concepcion, state law obstacles should not bar any class action waivers, because Justice Scalia’s opinion (Fitzpatrick clerked for Scalia) did not turn on anything unique in California law, or on the particular provisions of AT&T’s arbitration clause; and (3) he thinks it unlikely that any other federal law, except for the Dodd-Frank Act (which allows the Consumer Financial Protection Bureau to regulate the use of arbitration clauses in consumer financial products), will trump the Federal Arbitration Act.  He notes that Congress could effectively overrule or limit Concepcion with new legislation, but that seems unlikely with the current political balance. 

Last week I attended a telephonic debate hosted by the Federalist Society between Professor Fitzpatrick and Ted Frank of the Center for Class Action Fairness (Ted, who regularly objects to class action settlements he finds unfair, was recently profiled in the Wall Street Journal blog).  Frank argued that, while it may be possible for a lot of class actions to be defeated through increased use of arbitration, we have not seen companies eager to use arbitration.  He noted that employers have been able to compel arbitration of Title VII claims for a long time, but many do not do that and we see plenty of Title VII suits.  He said public companies have not implemented arbitration agreements with shareholders likely because they are looking for a safe harbor ruling from the SEC.  He also argued that many consumer transactions are small enough that there isn’t room for the transaction costs of arbitration or there may be no opportunity, as a practical matter, to obtain the consumer’s consent to an arbitration agreement.  Frank also noted that some courts have stricken down arbitration provisions after Concepcion.  (For a thorough recent update on that case law, see the recent post on Andrew Trask’s Class Action Countermeasures Blog, and also the post about a recent California Court of Appeal decision on the Class Action Defense Strategy Blog).  In response, Professor Fitzpatrick argued that almost any consumer transaction can be the subject of a “shrinkwrap” type of agreement which courts have enforced, and that there is nothing in federal law that prevents requiring shareholders to agree to arbitration with issuers.    

So where do I stand on this?  Some might say I have a vested interest in the outcome of this debate because if class actions disappear so would this blog, but then again so will Professor Fitzpatrick’s research focus, Ted Frank’s public interest center and numerous other blogs.  But the end of class actions would not end the insurance industry’s need for legal representation, and I’d probably change my focus to another area that is part of my practice and of intellectual interest to me.  In any event, one point I see missing here is that broad-scale implementation of arbitration provisions by businesses not only potentially could end class actions as we know them, it would fundamentally change litigation as we know it.  Unless these arbitration provisions are somehow carefully restricted in some manner that targets them toward disputes that give rise to class actions (typically, but not always, smaller dollar-value disputes) and exempts other disputes that America customarily fights out in court, what Prof. Fitzpatrick is suggesting could completely change our legal system as we know it -- a vast number of disputes would end up in arbitration.  There are good reasons why, despite the Federal Arbitration Act being in place for over 80 years, the number of lawsuits still overwhelmingly exceeds the number of arbitrations.  Arbitrations frequently (but not always) can be more costly (someone has to pay the arbitrators, but not a judge), more time consuming (arbitrators usually have another day job, unlike judges), less predictable (arbitrators are sometimes not bound by legal precedent, and are not subject to appellate review), and involve collateral disputes that do not happen in litigation (such as disputes over selecting the arbitrator(s), their impartiality, what procedures to follow, etc.).  By using arbitration provisions, businesses who have lots of smaller, non-class action disputes with their customers, including insurance companies, would be fundamentally changing how many of those disputes are resolved and in a way in which the potential impact on the bottom line could be very difficult to predict.  This potentially could eliminate class actions, but with what ultimate savings or cost?  Will customers be more or less likely to use arbitration than litigation, and will the outcomes be more or less favorable to businesses?  That remains to be seen.  I think we will see some companies experimenting with greater use of arbitration after Concepcion in order to reduce their class action exposure, and others will not do this because they are not as comfortable with arbitration or they haven’t been faced with significant class action exposure.  The end of the class action eventually could come, but only if companies find that arbitration is ultimately cheaper than litigation and the balance of power in Congress and on the Supreme Court does not fundamentally change in a way that undermines or invalidates Concepcion.

Insurers are in a somewhat unique position on this issue, as I noted in a prior post.  The McCarran-Ferguson Act postdates the Federal Arbitration Act and some federal appellate courts have held that state law barring or restricting arbitration controls over federal law.  But there are many states that have no statutory bar on insurance arbitrations, and state legislatures in states that have such laws might be persuaded to change them if the new law provides adequate protection to insureds.  I have not yet seen any articles about insurance companies taking advantage of Concepcion, but that does not surprise me.  These kinds of internal decisions take quite a while and even once a decision is made to try to implement arbitration, it could take substantial time for regulatory approval of changes to policy forms.  One risk I see that insurers have is that if plaintiffs’ lawyers who bring consumer class actions no longer have viable targets in other industries (telecommunications, manufacturing, etc.) because of wide-scale implementation of arbitration provisions, and the insurance industry either largely decides not to use arbitration or it has greater obstacles in implementing it, the insurance industry could become a much larger target for the plaintiffs’ bar.  The same is true where some companies in a given industry decide to go the arbitration route and others choose not to – the ones that don’t implement arbitration will become the class action targets.  The top plaintiffs’ lawyers make millions in fees in class actions and don’t go away easily.

Further Thoughts on How Insurance Companies Might Take Advantage of Concepcion

Posted on August 22, 2011 by Wystan M. Ackerman

In my prior post about the Supreme Court’s decision in AT&T Mobility v. Concepcion, I made some preliminary observations about how insurance companies might take advantage of the opportunity provided by that decision to potentially reduce class action exposure through the use of arbitration clauses that bar class arbitrations.  I’ve given some further thought to that recently and thought I would share my thoughts with readers of my blog: 

  1. In order to significantly limit class action exposure through the arbitration mechanism, arbitration clauses would need to be added to homeowners’ policies (which currently have only appraisal provisions) and life insurance policies, and the scope of such clauses in auto insurance policies would need to be expanded (currently arbitration is typically limited to UM/UIM coverage).  That would require a major change in the manner in which disputes under these types of policies historically have been resolved.  Some insurers may not be comfortable having a dispute over a $250,000 loss to a house resolved in arbitration, with no appellate review and limited means of judicial review.  But class actions rarely involve $250,000 losses, so one approach might be to limit the scope of what is arbitrated to only small claims (perhaps under $10,000).
  2. Some insurers and their counsel are much more comfortable with judges deciding coverage issues, and there may be concern about leaving coverage issues significant enough to be raised in a putative class action for arbitrators to resolve.  One potential way of addressing this issue would be to have the arbitration clause require the use of an arbitrator with insurance expertise.  That might even lead to better results than the parties might get before a generalist judge, say one who just joined the bench after 20 years of a practice limited to criminal law.
  3. Whether the outcome in a small arbitration could somehow be the basis for collateral estoppel in a future case is an issue requiring research in any jurisdiction where this approach might be considered.
  4. There are some jurisdictions that have statutes barring the use of arbitration in insurance policies.  Under the federal McCarran-Ferguson Act, state law barring arbitration might “reverse preempt” the Federal Arbitration Act.  For a couple of cases addressing this issue, see American Bankers Ins. Co. v. Inman, 436 F.3d 490 (5th Cir. 2006) and McKnight v. Chicago Title Ins. Co., 358 F.3d 854 (11th Cir. 2004).
  5. Regulatory approval is obviously an issue but it seems that insurance companies would have a strong argument that an appropriately-drafted arbitration clause providing for swift resolution is fairer to insureds who have small disputes than subjecting them to time-consuming and expensive litigation.
  6. There may be some benefit to waiting to see how things play out in court decisions applying Concepcion and in arbitrations under other consumer contracts before an insurance company decides what to do on this.  AT&T, for example, recently got hit with a large number of arbitrations filed by a couple of law firms, attempting to challenge its merger with T-Mobile (see this Reuters article for more information).  AT&T has filed suits seeking to block these arbitrations on the grounds they are effectively an end-run around the prohibition on class arbitrations, and they seek relief beyond the scope of what AT&T’s arbitration clause provides for.  This development suggests that using arbitration clauses may lead to some unanticipated problems.  

If anyone has further thoughts about additional considerations I haven’t addressed on this issue, I’d be interested to hear them by e-mail. 

Can an Adhesion Contract Defense Preclude Enforcement of an Arbitration Provision After AT&T v. Concepcion? Colorado Federal Court Says No

Posted on August 03, 2011 by Wystan M. Ackerman

Following the Supreme Court’s decision in AT&T Mobility, LLC v. Concepcion (see my prior blog post), a key battleground is going to be what defenses to arbitration of a named plaintiff’s claim remain viable.  We know that the mere fact that the arbitration provision does not allow a class arbitration is not enough to render it unenforceable.  But there are other defenses under state law that plaintiffs might try to use.  One of those is that some states’ law limits or precludes the enforceability of certain kinds of “adhesion” contracts or some provisions therein.  Plaintiffs sometimes argue, and courts sometimes find, that insurance contracts sold to individuals on a standard form, with no opportunity for bargaining over the contract terms are purportedly “adhesion” contracts.  A recent decision by a Colorado federal court, however, says that Concepcion bars a generalized adhesion contract defense to an arbitration provision.

In Daugherty v. Encana Oil & Gas (USA), Inc., 2011 U.S. Dist. LEXIS 76802 (D. Colo. July 15, 2011), the plaintiffs entered into independent contractor agreements with the defendant, under which they worked as pumpers who serviced and maintained the defendant’s natural gas wells.  The plaintiffs claimed that under the Fair Labor Standards Act they should have been treated as employees and paid overtime.  Id. at *2-3, 7. The defendant sought to compel arbitration of their individual claims under an arbitration clause in the independent contractor agreements.  The plaintiffs submitted affidavits stating that they were not aware of the arbitration clause, no one explained it to them, and they did not believe they had any ability to negotiate the contract terms.  Id. at *25.  The court concluded that, prior to Concepcion, it probably would have found the arbitration clause unconscionable under applicable Colorado law, but based on Concepcion, the arbitration clause was enforceable:

Plaintiffs' argument has some validity and the Court would likely have found that the arbitration agreement at issue here unconscionable pursuant to the Davis analysis if it were issuing this decision pre-Concepcion. But the Court has to take the legal landscape as it lies and cannot ignore the Supreme Court's clear message. Plaintiffs are essentially arguing that the adhesive nature of the contracts at issue here (i.e., standardized forms, lack of ability to negotiate, power disadvantage, etc.) makes the arbitration agreement unconscionable.

In Concepcion, the Supreme Court rejected the idea that arbitration agreements are per se unconscionable when found in adhesion contracts. The Court recognized that California's rule applied only to adhesion contracts and observed that "the times in which consumer contracts were anything other than adhesive are long past." The Court noted that states were "free to take steps addressing the concerns that attend contracts of adhesion - for example, requiring class-action-waiver provisions in adhesive arbitration agreements to be highlighted" but ruled that "[s]uch steps cannot, however, conflict with the FAA or frustrate its purpose to ensure that private arbitration agreements are enforced according to their term.”

The fact that the contract at issue in Concepcion was an adhesion contract did not affect the Supreme Court's analysis and, indeed, the majority in Concepcion appeared to be little troubled by that fact. As a result, this Court has no alternative but to discount the weight to be attributed to the adhesive nature of the arbitration clause at issue here. Accordingly, the Court finds that the arbitration agreement contained within the ICAs is not unconscionable.

Id. at *26-27 (emphasis added; citations omitted).  The court found, however, that provisions of the arbitration clause requiring the plaintiffs to contribute to the cost of the arbitration, and requiring them to pay the defendant’s attorneys’ fees if the defendant prevailed, were unenforceable, but those provisions were severable from the remainder of the arbitration provision.  Id. at *27-36.  Subject to those limitations, the court compelled arbitration.

This decision is helpful to insurers that are seeking to compel an arbitration or appraisal of a named plaintiff’s claim in a putative class action.  As this court concluded, generalized defenses based on the purported adhesive nature of an insurance contract should not bar enforcement of the arbitration or appraisal provision.  

 

Does Stolt-Nielsen Allow An Arbitrator To Decide Whether An Arbitration Agreement Allows Class Arbitration Implicitly? Second Circuit Panel Says "Yes" In A 2-1 Decision

Posted on July 21, 2011 by Wystan M. Ackerman

A recent Second Circuit decision suggests that there may be a loophole in the Supreme Court's decision in Stolt-Nielsen, S.A. v. AnimalFeeds International Corp., 130 S. Ct. 1758 (2010), which may allow arbitrators to decide, in some circumstances, whether an arbitration agreement permits class arbitration where it does not expressly provide for it.

In Jock v. Sterling Jewelers Inc., 2011 U.S. App. LEXIS 13633 (2d Cir. July 1, 2011), the plaintiff filed a Title VII complaint with the EEOC and later a class action suit alleging that she and other female employees of the defendant suffered gender discrimination in pay and promotion.  The employment contract provided for arbitration through AAA, and the litigation was stayed pending what the plaintiff sought to pursue as a class arbitration.  The arbitration agreement did not make any mention of a class arbitration, but the arbitrator found that a class arbitration was permissible, construing the contract against the employer because the employer drafted the contract and the arbitrator found it to be a contract of adhesion.  The arbitrator also noted that the agreement gave the arbitrator “the power to award any types of legal or equitable relief that would be available in a court of competent jurisdiction.”  Id. at *8-9.

The district court held that the arbitrator’s decision was contrary to the Supreme Court’s opinion in Stolt-Nielsen and should be vacated.  The Second Circuit reversed, in a 2-1 decision.  The majority extensively analyzed the Stolt-Nielsen opinion, focusing intently on the parties’ stipulation in that case that the arbitration clause was “silent” with respect to class arbitration, and what that stipulation meant.  The court found that in Stolt-Nielsen there was a stipulation not only that the arbitration clause did not mention class arbitration, but also that the parties did not intend to reach any agreement, expressly or implicitly, with respect to class arbitration.  Id. at *16-18.  According to the Second Circuit, the Supreme Court did not hold that an arbitration agreement must expressly provide for class arbitration; rather, it is possible for class arbitration to be permissible if there was an implicit agreement to class arbitration which somehow can be inferred from the terms of the contract.  Id. at *19-20.  The Second Circuit further held that the arbitrator did not exceed her authority in deciding that the arbitration agreement implicitly permitted class arbitration, explaining that the arbitrator’s decision was not contrary to the Supreme Court’s opinion in Stolt-Nielsen, and in any event the arbitrator’s decision was made prior to the Supreme Court’s opinion and an intervening change in controlling law by itself is not grounds to vacate an arbitration award.  Id. at *32-33.  The court suggested in a footnote that in deciding class certification the arbitrator may need to consider the Supreme Court's Wal-Mart decision.  Id. at *40 n.3.

Judge Winter dissented, describing Stolt-Nielsen as “binding precedent on all fours.”  Id. at *41 (Winter, J., dissenting).  He read the Court’s reference to “silence” in Stolt-Nielsen as simply referring to the fact that the arbitration clause did not expressly allow or bar a class arbitration.  Id. at *43.  He noted that if the Supreme Court’s decision were as narrowly focused on the parties’ stipulation in Stolt-Nielsen as the Second Circuit majority suggests, the Court would not have granted certiorari to address such a narrow, idiosyncratic issue.  Id. at *45 n.2.  He further read Stolt-Nielsen as barring an inference that an arbitration agreement allows class arbitration based on the absence of an express bar on class arbitrations; otherwise, there would have been a remand in Stolt-Nielsen.  Id. at *46.  Judge Winter also interpreted the arbitrator’s decision as finding that class arbitration was allowable because the arbitration agreement did not prohibit it, not because the parties implicitly agreed to it.  Id. at *56.  He would have found this to be a manifest disregard of the law.  Id.

The key takeaway here is that, at least according to this Second Circuit panel, Stolt-Nielsen may not have fully resolved whether an arbitration agreement that is silent with respect to class arbitration (in the sense that it does not expressly provide for or prohibit it) may allow an arbitrator to find that class arbitration is appropriate.  Although en banc rehearings in the Second Circuit are quite rare, this case might call for it, and a grant of certiorari is also possible.   

In insurance policies, arbitration and appraisal clauses are often narrowly constructed, and it would be difficult for plaintiffs to argue that class treatment was implicitly agreed to.  Nevertheless, if the decision of whether there was an implicit agreement is left in the hands of an arbitration panel with only limited court review, there will be some risk.  In drafting new policy provisions, insurers would be wise to include an express bar on class treatment if feasible. 

Title Insurance Class Actions: Arbitration As A New Defense Strategy After AT&T Mobility v. Concepcion

Posted on July 07, 2011 by Wystan M. Ackerman

Law360 alerted me to one of the first significant decisions applying the Supreme Court’s opinion in AT&T Mobility v. Concepcion (see my blog post about the Concepcion decision) – the Northern District of California decision in In re California Title Insurance Antitrust Litigation, No. 08-01341 JSW, slip op. (N.D. Cal. June 27, 2011).  (I don’t have a cite or link to this slip opinion online, so e-mail me if you would like a copy.) 

This case involves antitrust claims that the defendants, who allegedly dominate the title insurance market in California and nationwide, allegedly manipulated and controlled prices and fixed prices at unfairly high rates.  There were arbitration provisions either in the title insurance policies or the loan documents.  (The opinion is not particularly clear with respect to how arbitration provisions in loan documents would apply but the court concludes they would.)

The court grants a motion to compel arbitration, explaining that Concepcion “held that courts must compel arbitration even in the absence of the opportunity for plaintiffs to bring their claims as a class action.”  (Slip op. at 4.)  The plaintiffs argued that the defendants had waived their right to arbitration by not raising it earlier in the case, but the court concluded that, prior to Concepcion, such an argument would have been futile under the California Supreme Court’s Discover Bank rule.  The court also found that the plaintiffs had failed to show prejudice from the failure to raise the arbitration issue earlier.  The court notes that Concepcion still allows plaintiffs to raise “generally applicable contract defenses” to arbitration agreements that do not focus on the fact that the agreement is an arbitration agreement.  It does not appear that such a defense was raised by the plaintiffs in this case, however.

The takeaway I see here is that title insurance companies (and other insurers) involved in pending class actions should consider seeking to compel an arbitration of the named plaintiffs’ claims, even if the litigation is substantially advanced.  It may not be too late to take advantage of Concepcion.   

Appraisal Under Property Insurance Policies: California Court of Appeal Rules That Trial Courts Have Discretion To Defer Appraisal Until After Resolution Of Declaratory Judgment Claim

Posted on June 01, 2011 by Wystan M. Ackerman

The California Court of Appeal recently held in a putative class action that trial courts have discretion to defer an appraisal (which is similar to arbitration but limited to resolution of the amount of a property insurance loss) until after resolution of a declaratory judgment claim.  The court did not address what impact that may have on class certification proceedings, if the trial court chooses to defer an appraisal. 

In Doan v. State Farm General Insurance Company, the plaintiff brought a putative class action alleging that State Farm improperly calculated depreciation on property insurance claims.  The allegations regarding depreciation were similar to the allegations in a class action against Farmers Insurance that I recently posted about.  The trial court granted State Farm’s demurrers (equivalent to motions to dismiss) on the grounds that the plaintiff failed to plead that he had submitted his claim to appraisal under the policy.  On appeal, the only issue raised was whether the plaintiff had a right to obtain a declaratory judgment with respect to the legal requirements for applying depreciation before submitting his claim to appraisal. 

The court of appeal assumed (in footnote 6 of the opinion) that under California’s statute requiring use of the standard fire insurance policy, an appraisal is mandatory if there is a dispute over the amount of loss.  The court concluded that: (1) appraisal was not an exclusive remedy where California also allows a party to seek declaratory relief; and (2) a trial court has discretion on whether the appraisal or the declaratory judgment claim should go first.  The court relied in part on Kirkwood v. California State Automobile Association, 193 Cal. App. 4th 49 (2011), which reached a similar result.   The court, however, did not give trial courts much guidance in exercising their discretion, explaining that “there is a strong policy favoring arbitration . . . [b]ut there is also a strong policy favoring declaratory relief,” and “[a]nother consideration is judicial economy.”  The case was remanded for the trial court to “exercise its discretion to consider whether and when declaratory relief should be granted.” 

What is missing from this opinion is any discussion of the fact that this case is a putative class action, or how trial courts should exercise their discretion in a putative class action.  A trial court might conclude that, rather than undergoing time consuming and costly proceedings on class certification, the inexpensive and swift appraisal process, which might completely resolve the dispute between the named plaintiff and the insurer, should take place first.  Alternatively, would there be a mechanism for both parties to obtain a ruling on the merits of the declaratory judgment claim before the parties conduct class discovery and class certification motion practice?  Such a ruling could not bind members of a putative class but might be the more efficient course of action. 

Supreme Court Decision In AT&T Mobility v. Concepcion: Potential Impact on Insurance Class Actions

Posted on May 04, 2011 by Wystan M. Ackerman

The Supreme Court recently issued a decision in AT&T Mobility LLC v. Concepcion.  The majority upheld the use of a class action waiver in an arbitration provision in cell phone contracts.  The Court held that the Federal Arbitration Act preempted California state law on unconscionability.  The Ninth Circuit had held that under California law the arbitration provision was unconscionable because it prohibited class arbitrations.  The Supreme Court reversed, concluding that “[r]equiring the availability of classwide arbitrations interferes with fundamental attributes of arbitration and thus creates a scheme inconsistent with the FAA.”  (Opinion, at 9.)

Notably, AT&T’s arbitration clause had various procedures favorable to claimants – AT&T would pay all the costs for non-frivolous claims, the arbitration would be held where the claimant resides or by telephone, and if the claimant receives an award higher that AT&T’s last settlement offer, they get a minimum of $7,500 plus twice their attorneys’ fees.

Justice Scalia’s opinion has a lengthy discussion about how class arbitrations are unworkable because: (a) they require lengthy proceedings and procedural formality that detracts from the advantage of arbitration; and (b) the stakes are too high to resolve class-wide disputes without meaningful appellate review.  Justice Scalia writes:

We find it hard to believe that defendants would bet the company with no effective means of review, and even harder to believe that Congress would have intended to allow state courts to force such a decision.  (Opinion, at 16-17.) 

An article in the New York Times said this decision:

appeared to provide businesses with a way to avoid class-action lawsuits in court. All they need do, the decision suggested, is use standard-form contracts that require two things: that disputes be raised only through the informal mechanism of arbitration and that claims be brought one by one.

I think that goes a little too far. The Court clearly said that an arbitration provision cannot be invalidated simply because it does not provide for a class arbitration.  But that does not mean that companies can write arbitration clauses any way they please.  Not every arbitration clause is as favorable to claimants as AT&T’s clause in this case, and courts will always need to address every provision on its own with respect to its enforceability against individual claimants.

Here is where I see the impact of this decision on insurance class actions: 

  • When a class action is filed, insurance companies sometimes demand an arbitration (under an auto policy) or appraisal (under property coverage) on the named plaintiffs’ claims, asserting that the dispute must be resolved by those mechanisms rather than in a lawsuit.  Courts, including an Eleventh Circuit opinion, have held that plaintiffs seeking to bring a class action must submit their claims to arbitration or appraisal.  This Supreme Court decision further supports that result.  Insurance class actions will not disappear, however, because not every dispute raised in a proposed class action falls within the scope of an arbitration or appraisal clause.

 

  • I wonder if any insurer will try to include an express class action waiver in an arbitration provision.  I have never seen a policy with such a provision.  Unlike consumer contracts used by most other large companies, provisions used in homeowners and auto policies generally require insurance department approval.  Will insurance departments approve such class action waivers?  Would the Federal Arbitration Act preempt a regulatory refusal to approve such a provision, or would the McCarran-Ferguson Act override that?