Welcome to Baker Hostetler's Class Actions newsletter. We hope you find the information it contains of value. The newsletter will be published periodically as developments in this dynamic area of the law warrant. Please contact any member of Baker Hostetler's Employment Class Action Team with questions.
In This Issue:
By John B. Lewis and Ruth E. Hartman
For the third time, the Second Circuit considered the validity of class action waivers in an antitrust action brought against American Express ("AMEX") based upon the company's Card Acceptance Agreement. And, despite two intervening Supreme Court opinions, for the third time the appellate court held class action waivers involving federal statutory rights were unenforceable. The Second Circuit's February 1, 2012 opinion held "that each waiver must be considered on its own merits based on its own record and governed with a healthy regard for the fact that the [Federal Arbitration Act] is a congressional declaration of a liberal federal policy favoring arbitration agreements." A key factor in the Second Circuit's analysis was that it was not economically feasible for a plaintiff to pursue antitrust claims individually.
This latest opinion likely will have an impact beyond costly antitrust litigation, but the question is how far? Indeed, the opinion cited two District Court decisions denying enforcement of class action waivers in the employment law context.
The History
A brief review of the case's long appellate history is helpful. The appeal was originally argued on December 10, 2007. In Re American Express Merchants' Litigation, 554 F.3d 300 (2d Cir. 2009) ("AMEX I") the court held the class action waiver unenforceable "because enforcement of the clause would effectively preclude any action seeking to vindicate the statutory rights asserted by the plaintiffs." AMEX I at 304.
Stolt-Nielsen v. Animal Feeds Int'l Corp.
The U.S. Supreme Court vacated AMEX I and remanded it for reconsideration in light of its opinion in Stolt-Nielsen S.A. v. Animal Feeds Int'l Corp., 130 S. Ct. 1758 (2010). Stolt-Nielsen held that imposing class arbitration on parties that had not agreed to it conflicts with the Federal Arbitration Act ("FAA"). The Second Circuit, however, found that Stolt-Nielsen did not affect its original analysis and again reversed the District Court's decision and remanded the case. AMEX II, 634 F.3d at 199-200.
AT&T Mobility LLC v. Concepcion
On April 11, 2011, the appellate court placed a hold on the mandate in AMEX II so that AMEX could seek a writ of certiorari. During that time, the Supreme Court issued its opinion in AT&T Mobility LLC v. Concepcion, 131 S.Ct. 1740 (2011). The Concepcion decision held that the FAA preempted California law barring the enforcement of class action waivers in the consumer context. Concepcion involved California consumers who had been charged $30.22 in sales tax in connection with the purchase of cell phone services that were advertised as "free." A class action was filed, alleging, among other things, fraud and false advertisement. In Concepcion, the plaintiffs had signed an agreement which set forth a procedure involving arbitration for handling disputes. AT&T moved to compel arbitration under the terms of its agreement and the plaintiffs responded that arbitration was unconscionable.
Despite plaintiffs' victories in the district court and Ninth Circuit, Concepcion was heard by the U.S. Supreme Court, which held that the FAA preempted California's judicial rule regarding the unconscionability of class action waivers. Concepcion, 131 S.Ct. at 1745. Invoking the "full purposes and objectives of Congress" in establishing the FAA, the Supreme Court in Concepcion reversed the Ninth Circuit and held that the plaintiffs had to proceed with arbitration. After Concepcion, the Second Circuit considered supplemental briefing upon its potential impact on AMEX.
The Background
The Claims
The Merchants in the AMEX litigation brought antitrust claims under both the Sherman and Clayton Acts maintaining that the "Honor All Cards" provision in AMEX's Card Acceptance Agreement created an illegal "tying arrangement." The Merchants were "faced with the choice of paying supracompetitive merchant discount fees...on AMEX's new mass-market products [credit cards] or losing 'a significant portion of the sales they received from businesses, travelers, affluent consumers, and others' who are the traditional users of AMEX charge cards."
The Costs
The Court found that the Merchants' evidence "establishes, as a matter of law, that the cost of plaintiffs' individually arbitrating their dispute with AMEX would be prohibitive, effectively depriving plaintiffs of the statutory protection of the antitrust laws." In reaching that conclusion, the appellate court relied upon the affidavit of economist Gary L. French, Ph.D., which detailed the costs of expert assistance for individual plaintiffs in antitrust cases. Dr. French summarized those expert costs:
...the cost of [Nathan Associates'] expert assistance in individual plaintiff antitrust cases has ranged from about $300 thousand to more than $2 million. However, after reviewing the complaint and doing some preliminary research in this case, it is my opinion that...the cost for this case will fall in the middle of the range of [Nathan Associates'] experience.
Dr. French then considered those expert witness costs in relation to a plaintiff's potential recovery. He concluded:
The largest volume named plaintiff merchant, with reported American Express Card volume of $1,690,749 in 2003, might expect four-year damages of $12,850, or $38,549 when trebled. In my opinion as a professional economist...it would not be worthwhile for an individual plaintiff...to pursue individual arbitration or litigation where the out-of-pocket costs, just for the expert economic study and services, would be at least several hundred thousand dollars, and might exceed $1 million. (Emphasis added).
Largely based on Dr. French's affidavit, the Second Circuit concluded that "the only economically feasible means for plaintiffs enforcing their statutory rights is via a class action." In AMEX I the court had found the expert's affidavit was "essentially uncontested." 554 F.3d at 317. In reaching its conclusion, the court discounted the fact that the Clayton Act provides for treble damages and the recovery of attorneys' fees and expenses.
Legal Analysis in AMEX III
AMEX argued that Concepcion required a reversal of the holding in AMEX III. The Second Circuit rejected that argument stating:
It is tempting to give both Concepcion and Stolt-Nielsen such a facile reading, and find that the cases render class action arbitration waivers per se enforceable. But a careful reading of the cases demonstrates that neither one addresses the issue presented here: whether a class-action arbitration waiver clause is enforceable even if the plaintiffs are able to demonstrate that the practical effect of enforcement would be to preclude their ability to vindicate their federal statutory rights. (Emphasis added).
The Court, in a footnote, also brushed aside the Supreme Court's opinion in CompuCredit Corp. v. Greenwood, 2012 WL 43517 (Jan. 10, 2012). CompuCredit Corp. held that because the Credit Repair Organization Act was silent on whether claims could be arbitrated, the FAA mandated that the arbitration agreement be enforced. Even after CompuCredit Corp., the Second Circuit found that Congressional intent could be discovered in the history or purpose of a statute. So,
[a]lthough the Sherman Act does not provide plaintiffs with an express right to bring their claims as a class in court, forcing plaintiffs to bring their claims individually here would make it impossible to enforce their rights under the Sherman Act and thus conflict with congressional purposes manifested in the provision of a private right of action in the statute. (Emphasis added).
The Court instead looked to Supreme Court precedent to find support for whether arbitration can be rejected if it does not fully vindicate federal statutory rights. It cited Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., for the proposition that arbitration can be "an effective vehicle for vindicating statutory rights but only 'so long as the prospective litigant may effectively vindicate its statutory cause of action.'" Citing Mitsubishi, 473, U.S. 614, 632 (1985). The Court then looked to dicta in Green Tree Financial Corp-Alabama v. Randolph, stating "that the existence of large arbitration costs could preclude a litigant...from effectively vindicating her federal statutory rights in the arbitral forum." 531 U.S. 79, 90 (2000). Because Mitsubishi and Green Tree were not impacted by Stolt-Nielson or Concepcion, the Second Circuit felt it was free to rely on those opinions.
The Court emphasized that it relied not on the size of the Merchants involved but "on the need for plaintiffs to have the opportunity to vindicate their statutory rights." As support of this analysis, the Court cited two employment cases—Raniere v. Citigroup, Inc., No. 11 Cir. 2248, 2011 WL 5881926 (S.D.N.Y., November 22, 2011) and Chen-Oster v. Goldman, Sachs & Co., No. 10 Cir. 6950, 2011 WL 2671813 (S.D.N.Y. July 7, 2011). Raniere involved a putative nationwide collective action under the Fair Labor Standards Act, as well as a New York class action under the New York Labor Law. The District Court found that since Concepcion involved state not federal rights, "even if...read broadly to acquiesce to the enforcement of an arbitral agreement that as a practical matter would prevent the vindication of state rights in the name of furthering the strong federal policy favoring arbitration, that would not alter the validity of the federal statutory rights analysis..." (Emphasis added).
The underlying action in Chen-Oster was a pattern and practice claim for gender discrimination under Title VII of the Civil Rights Act of 1964. After considering Concepcion, the judge in Chen-Oster found it was not a "controlling decision." Indeed, the District Court stated that the United States Supreme Court had not been presented with these issues before, that is, "whether the Supreme Court, faced squarely with the issue presented here, would protect the full robustness of a federal right—particularly when that right requires proceeding on a class basis—or would mandate arbitration...." Chen-Oster, 2011 WL 2671813 at *4. Both Raniere and Chen-Oster cited AMEX II as controlling precedent. So, what these two lower court decisions really illustrate is that the reasoning in AMEX III may well extend into other areas of federal law.
The Future
AMEX III left many questions unanswered. While the court cautioned, it did not hold that class action waivers were "per se unenforceable, or even that they are per se unenforceable in the context of antitrust actions," it provided little guidance for future litigants. Instead of considering whether Congress intended to preclude arbitration of the statutory claims involved, it focused on whether arbitration would preclude vindication of the federal statutory rights. AMEX III also took a broad view of the way in which the statutory rights would be determined. It apparently based its decision on a case-specific analysis of litigation costs (expert witness fees) and discounted the potential benefits of multiple damage awards, attorneys' fees and expenses provided to successful plaintiffs by the federal statutes involved. But does that mean that future litigants will have to engage in a battle of the experts to determine whether it is economically feasible to sustain an individual action?
AMEX III pointed out that many plaintiffs failed in their quest. "The fact that plaintiffs so often fail in their attempts to overturn such waivers demonstrate that the evidentiary record...is not easily assembled, and that the courts are capable of the scrutiny such arguments require." But are they? Is it only where vindication of the federal rights would be impossible? And, does the ability to bring aggregate actions become a substantive right when the statute does not mention the procedure and when the federal statute provides multiple damages, attorneys' fees for prevailing parties and other fee shifting provisions. Under what circumstances will the statutorily created remedies be considered inadequate? Hopefully, the Supreme Court will resolve some of these issues and properly interpret Concepcion when AMEX III is considered on certiorari.
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By Gregory V. Mersol
The Supreme Court made clear in Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007), and Ashcroft v. Iqbal, 556 U.S. 662 (2009), that a complaint cannot simply parrot the elements of a claim but must make specific factual allegations regarding the actions the plaintiffs seek to challenge. Since that decision, several courts have rejected "bare bones" class action complaints because they do not meet the Twombly/Iqbal standards.
In response, some plaintiffs have tried to strike defenses from the defendant's answer on the grounds that they do not meet those standards. While these arguments may have a certain "tit for tat" feel, an answer is not the same as a complaint in that the plaintiff is the one to frame the dispute, and the defendant is not in the same position at the outset of the case to spell out its defenses in detail. Further, in the case of a class action, a defendant has no meaningful way to spell out the facts that relate to each individual class member and may very well intend to argue that each claim is different. Thus, answering to Twombly/Iqbal standards would become a monumental task that would convert the preparation of an answer into a lengthy process.
Most courts seem to reject the application of Twombly and Iqbal at this stage, and a recent case reflects such a rejection in the class action context. In Dudley v. Regions Financial Corp., Case No. 1:11-CV-2700-RLV (N.D. Ga. Jan. 26, 2011), the plaintiff sought to pursue a collective action under the FLSA. She moved the court to dismiss several of the defendant's 18 or more affirmative defenses (such as "accord and satisfaction," "arbitration," or "mitigation of damages") under the Twombly/Iqbal standards.
District Judge Robert L. Vining, Jr., denied the motion. The court found as a preliminary matter that the decisions in Twombly and Iqbal did not apply to answers. It found independently that the plaintiff's arguments were premature given the lack of discovery at that stage of the case and the level of detail already provided by the defendant. The court aptly noted that: "the plaintiff asks this Court to make improper and premature factual determinations about the applicability of [defendant's] affirmative defenses before the close of discovery." Although it ultimately urged the defendant to drop those defenses it did not intend to pursue, the court found that the defenses were adequately pleaded. Then, the District Court took a common sense approach and found the Twombly/Iqbal pleading standard inapplicable to answer in class action cases.
Baker Hostetler's Employment Class Action Blog provides updates for employers, clients and other interested parties on developing issues impacting employment class actions, including those involving employment discrimination, wage and hour, civil rights and benefits issues. Please visit the blog to see what trends are shaping the current landscape of employment class actions in the wake of AMEX III and Twombly/Iqbal.
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Seventh Circuit Finds Certification of Overtime Disputes Meets Dukes StandardsThe Seventh Circuit has now issued a decision relating to the application of Wal-Mart Stores, Inc. v. Dukes, 131 S. Ct. 2541 (2011), to state law overtime disputes. While the decision is curious for many reasons, it may prove problematic for Seventh Circuit employers as it relates both to the issue of class definitions and as to how the Dukes "commonality" determination will apply to wage and hour claims.
Dukes Claims California Meal and Rest Period CasesThe Supreme Court's decision in Wal-Mart Stores, Inc. v. Dukes, 131 S. Ct. 2541 (2011), seems to be taking hold in meal and rest period cases in California, as shown by two decisions handed down this month.
Court Refuses to Approve Collective Action Settlement Without Disclosure of TermsConfidentiality provisions in employment settlements are routine, but they can be problematic in the context of the settlement of a class or collective action. Class action settlements require court approval under Rule 23(e) (if the class is certified) and FLSA settlements require approval from either the United States Department of Labor or a court. See Lynn's Food Stores v. United States, 679 F.2d 1353 (11th Cir. 1982). So, can the parties get that approval without publicly disclosing the terms through a court filing?