When Plaintiffs Fail to Plead the “Local Controversy” Exception to CAFA

A narrow exception to CAFA’s broad removal provisions is the “local controversy” exception, which prohibits removal in certain cases where the dispute is deemed sufficiently contained within the forum state that the interests of the state’s courts in adjudicating the dispute trump the federal interest in conferring federal jurisdiction.  According to a recent Ninth Circuit case, invocation of this exception constitutes a rare occasion on which a plaintiff may amend its complaint in order to defeat removal jurisdiction.

The “local controversy” exception applies when the following criteria are met:  (i) greater than two-thirds of the putative class members are citizens of the forum state; (ii) at least one defendant from whom “significant relief” is sought, and whose conduct forms a “significant basis” for the asserted claims, is a citizen of the forum state; and (iii) principal injuries related to each defendant’s alleged conduct were incurred in the forum state.  When these three conditions are met, the federal court is required to remand the action to state court, assuming CAFA is the only basis for removal.

In Benko v. Quality Loan Service Corp., the plaintiffs alleged that six defendants—only one of which was a Nevada citizen–engaged in foreclosure practices that violated Nevada law.  The complaint was originally filed in Nevada state court.  One of the defendants removed the action under CAFA.  The plaintiffs then sought to amend their complaint to bolster their allegations against the Nevada defendant—specifically, by elaborating on estimates of the percentage of total claims asserted against the Nevada defendant, and the dollar value of those claims—in order to invoke the “local controversy” exception.  The federal district court held that it had jurisdiction, dismissed the operative complaint under Rule 12(b)(6), and denied leave to amend on the ground that amendment would be futile.

The Ninth Circuit, in a split panel decision, reversed.  The majority held that the district court abused its discretion in denying the plaintiffs leave to amend, because the proposed amendment related directly to the district court’s CAFA jurisdiction.  Analyzing the allegations in the proposed amended complaint, rather than the operative complaint, the court held that the plaintiffs had met their burden to establish the local controversy exception, and therefore instructed that the case be remanded to state court.

The majority acknowledged the general rule that jurisdiction is analyzed as of the pleadings filed at the time of removal, without reference to subsequent amendments.  The court then held, however, that “[w]here a defendant removes a case to federal court under CAFA, and the plaintiffs amend the complaint to explain the nature of the action for purposes of our jurisdictional analysis, we may consider the amended complaint to determine whether remand to the state court is appropriate.”  The panel expressed the concern “that a class action may be removed to federal court, with a complaint originally drafted for state court” that “may not address CAFA-specific issues, such as the local controversy exception.”  Permitting amendment is appropriate, the majority reasoned, to allow the plaintiffs to address those issues.

The apparent flaw in the majority’s reasoning—one recognized in the dissent—is that every removed complaint is “originally drafted for state court,” and that every state court class action faces at least a possibility that a defendant will attempt to remove it under CAFA.  If a plaintiff has a basis to defeat federal jurisdiction, why should he not be expected to plead it prior to the filing of a removal notice?  And why should the local controversy exception, or even CAFA in general, be exempt from this requirement?  The majority opinion offers no insight as to why a failure to plead that the relief sought from an in-state defendant in a class action is “significant” for local controversy purposes should be curable by amendment, but a failure to plead that the amount in controversy is below $75,000 in a non-class action complaint, for example, should not.

The issue raised by Benko is one that may well give rise to a circuit split over time.  For the moment, at least in the Ninth Circuit, defense counsel are on notice that a state court plaintiff’s failure to plead the local controversy exception in the first instance does not necessarily mean the case can be successfully be removed to federal court.

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Posted in Jurisdictional Issues

CAFA Removal: A Second Bite at the Apple?

Until a couple of years ago, plaintiffs’ attorneys seeking to keep their class actions in state court would frequently stipulate that they would not seek damages in excess of the $5 million CAFA threshold.  This practice fell by the wayside as courts increasingly rejected such stipulations.  It ended officially with the Supreme Court’s 2013 holding that stipulations cannot bind absent members of the putative class, and therefore cannot defeat CAFA jurisdiction.

An alternative strategy for plaintiffs that may be gaining traction is to allege a narrower class than they might be able to represent, in order to keep the amount in controversy below $5 million.  But a recent Ninth Circuit opinion illustrates the potential danger to plaintiffs in this approach—and a potential opportunity for defense counsel to raise or renew the jurisdictional issue after the class certification stage.

In Reyes v. Dollar Tree Stores, Inc., the plaintiff alleged that Dollar Tree had denied proper rest breaks to its employees.  The original complaint, filed in California state court, sought to recover on behalf of assistant managers of Dollar Tree stores in California who worked at least one 3.5-hour period during the class period without receiving a paid rest break.  Although the complaint alleged that the amount in controversy was below the $5 million CAFA threshold, Dollar Tree removed the case to federal court, arguing that given the class definition and the other allegations in the complaint, the $5 million threshold was necessarily exceeded.

In response, the plaintiff pointed to language in the complaint limiting the class to only those assistant managers who worked without another manager present.  The plaintiff argued that this narrow class definition rendered Dollar Tree’s calculations inaccurate.  The district court agreed and remanded the case to state court.

The plaintiff subsequently moved for certification of the narrow class.  The state court, however, concluded that this class would not be ascertainable.  In compliance with California law, which permits a court to depart from the plaintiff’s proposed definition and redefine the class, the state court certified a broader class of all assistant managers who had failed to receive the rest break—the same class definition on which Dollar Tree had based its original, unsuccessful removal.

Dollar Tree filed a second notice of removal.  Although it was undisputed that the state court’s ruling had increased the amount in controversy to above $5 million, the district court again remanded the case—this time on the ground that the removal was untimely because it was based on the same class definition that had been the basis of the first removal.

The Ninth Circuit reversed.  The court held that the state court’s certification order was “functionally indistinguishable” from an order permitting amendment of the complaint to alter the class definition.  The court further reasoned that the state court order was precisely the type of new or intervening event that would trigger a new removal period.  The court acknowledged that “defendants are not entitled to more than one bite at the apple, but the superior court’s certification order substituted a new apple.”

The plaintiff’s unusual class definition presumably was crafted with an eye toward avoiding removal.  There would appear to be no other reason for excluding managers who were denied their rest breaks merely because another manager was present.  (The plaintiff also appears to have been hedging his bet by avoiding any mention of the narrowed class in the class definition itself, leaving the door open to seek certification of the broader class if the defendant had not attempted to remove.)

Narrowing the class is sufficient to defeat federal jurisdiction when the complaint is filed, but when the plaintiff has to strain to do so, obstacles to certification—in this case, ascertainability—can result.  Thus, to the extent that plaintiffs rely on such arbitrarily narrow class definitions to avoid CAFA removal, the effect may be to shift the jurisdictional battle from the pleading stage to the class certification stage.

If the state court broadens the scope of the class—whether directly, as was done in Reyes, or through a denial of certification that forces the plaintiff to amend the complaint—defense counsel may have a basis for removal.  Thus, in some cases, it may be in defense counsel’s interest to argue for a broader class definition at certification.  In any event, any changes to the class definition in the middle of a state court class action should cue defense counsel to revisit the possibility of removal.

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Posted in Jurisdictional Issues, Uncategorized

CAFA Removal Jurisdiction: Using a Plaintiff’s Complaint Against It

Most cases involving the existence of removal jurisdiction under CAFA involve the $5 million amount in controversy.  In a recent Third Circuit opinion, determining whether or not the putative class had the requisite 100 members proved equally complex.  The case is instructive with respect to the extent to which class action defendants can use the allegations in a complaint to support a claim of jurisdiction.

In Judon v. Travelers Property Casualty Company of America, the plaintiff sought to represent a class of individuals who were injured while riding in common carriers insured by Travelers that were capable of transporting fewer than 16 passengers, and for whom Travelers limited the availability of first-party medical benefits to $5,000.  The plaintiff alleged that under Pennsylvania law, Travelers was required to offer up to $25,000 in first-party benefits.  Critically, the plaintiff alleged that “hundreds of members of the class” were wrongfully denied payment up to $25,000.

Travelers removed, based solely on the allegations in the complaint.  Travelers contended the reference to “hundreds of members” must mean at least 200, so that the numerosity requirement was met.  Travelers also argued that the amount in controversy exceeded $5 million, since (i) each class member could be entitled to $20,000 (the difference between the $25,000 which they were entitled and the $5,000 they were paid); (ii) $20,000 per class member times 200 class members would yield $4 million in compensatory damages; and (iii) the complaint demanded treble damages.

The plaintiff’s motion for remand argued that Travelers, as the removing party, bore the burden of establishing jurisdiction under CAFA, and that Travelers had failed to show to a legal certainty either that the class had at least 100 members or that the amount in controversy exceeded $5 million.  The district court granted the motion to remand, holding that because the plaintiff “vigorously contested” the jurisdictional facts, Travelers was required to produce extrinsic evidence establishing jurisdiction by a preponderance of the evidence.

With respect to the numerosity of the class, however, the Third Circuit reversed.  The court held that numerosity was not “vigorously contested,” because the plaintiff never claimed that there were fewer than 100 class members—only that Travelers had failed to meet its burden.  Travelers was entitled to rely on the “hundreds of members” language in the complaint as an admission in favor of jurisdiction, and the district court should have required the plaintiff to prove to a legal certainty that there could not be 100 members in the class.

The court did not make a similar determination as to the amount in controversy, however, notwithstanding Travelers’ argument that its calculation, like its “200 members” inference, came directly from the allegations in the complaint.  While Travelers was entitled to assume a 200-member class in calculating the amount in controversy, the court held, Travelers’ assumption of $20,000 in damages per class member was faulty because it relied on the maximum exposure per plaintiff—when, in fact, many class members’ claims might well be smaller (indeed, the named plaintiff’s claim was less than $3,000).  Because Travelers’ calculation of the amount in controversy was based on questionable inferences from the complaint, and because Travelers had not submitted any extrinsic evidence to support its calculations or assumptions, the case was remanded.

The takeaways?  First, if a poorly crafted complaint explicitly concedes a jurisdictional fact, defense counsel is permitted to take it and rely on it.  Second, if the jurisdictional fact is not conceded in the complaint, but requires factual assumptions outside the complaint, a removing defendant probably will need to present extrinsic evidence.  And finally, even if the jurisdictional fact seems plain from the face of the complaint, it can’t hurt to bolster the inference with extrinsic facts.

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Posted in Jurisdictional Issues

“Buying Your Peace” in a Class Action Settlement

For defense attorneys negotiating class action settlements, a major consideration is ensuring that their client has indeed “bought its peace”—and won’t be facing follow-on litigation from plaintiffs who may not be bound by the class action settlement.  A recent Ninth Circuit decision helps protect defendants against duplictaive follow-on claims by state attorneys general.

In California v. Intelligender, LLC, the district court approved a nationwide settlement of a class action brought on behalf of disappointed users of Intelligender’s gender prediction test, which Intelligender billed as an accurate predictor of a fetus’ gender.  Subsequently, the state of California brought an action against Intelligender seeking civil penalties, injunctive relief, and restitution for some individuals who were bound by the class action settlement.  Intelligender’s motions for an injunction against the entire action, and then for an injunction only against the state’s restitution claims, were denied by the district court.

The Ninth Circuit upheld the district court’s refusal to enjoin the entire case, agreeing that Intelligender had not met its burden of showing that the class action could bind the state in its sovereign capacity, where it asserted both public and private interests.  The court held that “a CAFA class action settlement, though approved by the district court, does not act as res judicata against the State in its sovereign capacity . . . . Because the State action is brought on behalf of the people, it implicates the public’s interest as well as private interests, and therefore the remedial provisions sweep much more broadly.”

However, the panel reversed the district court’s denial of Intelligender’s motion to enjoin the state’s restitution claims, holding that the district court could and should enjoin these claims in the exercise of its continuing jurisdiction to enforce and administer the class action settlement.  At issue, the court held, was whether there was privity of interests between the class members and the state with respect to its restitution claims.  The district court had found insufficient privity, relying on its determination that (i) the individuals on whose behalf restitution was sought were different from the certified class and (ii) the amount sought by the state was different that allowed under the settlement.

The Ninth Circuit found fault with both premises.  With respect to the individuals involved, the district court had concluded that the class was limited to those individuals who had purchased the Intelligender test and received an inaccurate result, while the state sought restitution on behalf of all individuals who purchased the product, regardless of the result.  The panel noted that the class was not, in fact, limited to those who had received an inaccurate result; the class included all purchasers, but only those who received an accurate result were eligible to recover under the settlement.

As to the disparity in amounts—Intelligender settled with the class for $10 for each claimant who submitted a declaration swearing that she received an inaccurate result, while the state sought restitution of the full $30 purchase price for each purchaser–the Ninth Circuit held this to be irrelevant to privity.  If anything, the court held, the disparity “merely confirms that the State is essentially seeking a double (or at least better) recovery.”  Moreover, the panel noted, the appropriate inquiry is whether the government is suing for the same relief already pursued by the class—not what relief was ultimately granted.  The court noted that CAFA requires prior notification of proposed settlements to appropriate federal and state authorities; had the state of California found the Intelligender settlement inadequate, it could have intervened and objected.

So Intelligender will still face the spectre of injunctive relief as well as civil penalties under California law–$2,500 for each untrue or misleading statement.  But with respect to restitution, Intelligender has indeed  “bought its peace.”

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Posted in Consumer Class Actions, Settlement, Uncategorized

Judge Posner’s Scathing Critique of a Proposed Coupon Settlement

The topic of potential self-dealing in class action settlements has been written about extensively.  While class counsel may be fully aligned with the class in seeking to maximize the settlement, their interests diverge sharply when it comes to determining the portion of the settlement earmarked for attorney fees.  And unlike the size of the settlement itself, the attorney fee award is likely to be of little concern to the defendant, so long as the total cost of the settlement to the defendant is minimized.

The subject may have been convered extensively, but (at least until now) not exhaustively.  A recent Seventh Circuit opinion—authored, predictably, by Judge Posner—addressed the potential conflicts in detail in chastising what it considered a lower court’s less-than-diligent review of a coupon settlement.  While there is nothing particularly extraordinary about the outcome, the opinion reads like an “A” response to a law-school “issue spotter” exam positing a suspect class action settlement.

In Redman v. RadioShack Corporation, a class action was filed on behalf of RadioShack consumers who made purchases with credit or debit cards and received receipts that showed the card’s expiration date—a violation of the Fair and Accurate Credit Transactions Act.  The lawsuit sought only statutory damages, as there was no evidence that the violation resulted in any actual identity thefts from the plaintiffs.

Class counsel and RadioShack agreed on a proposed settlement that would provide each responding class member with a $10 coupon and class counsel with just under $1 million in fees.  Approximately 83,000 potential class members submitted claims for the $10 coupons.  With an estimated $830,000 in coupons being distributed, and an additional $2.2 million in notice and other administrative costs to RadioShack factored in, the district court estimated the value of the settlement at around $4 million—with 25 percent going to class counsel.  The district court approved the settlement.

Judge Posner, in a detailed analysis of the actual value of the settlement and the incentives to the various parties involved, systematically picked apart various features of the settlement and excoriated the district court judge for failing to address them:

•           The panel held that the district court should not have counted RadioShack’s $2.2 million in administrative costs as part of the settlement.  Such costs, Judge Posner reasoned, are “not part of the value received from the settlement by the members of the class.”  While the class admittedly would “get nothing” if notice were not provided, Judge Posner noted that class counsel likewise would get nothing (since the class would derive no benefit from the settlement), and that “without reliable administration the defendant will not have the benefit of a valid and binding settlement.”  Thus, the district court’s calculation of the attorney fee award as “a respectable-seeming 25 percent” of the total settlement was incorrect, because the total settlement was artificially inflated by the administrative costs.

•           Even excluding the administrative costs, Judge Posner concluced that the district court made “[n]o attempt” to estimate the “actual value” of the coupon settlement.  Although approximately $830,000 in coupons were to be distributed, the settlement could not reasonably be valued at $830,000.  Not everyone who received a coupon could be expected to use it, particularly given the short redemption period and the likelihood that “[s]ome recipients of coupons will use them or forget about them.”  And if the customer used the coupon on an item costing less than $10, the proposed settlement did not allow for a cash refund, thereby diminishing the value of the coupons even for some class members who used them.

•           The district court instead based the fee award on the amount of time expended by class counsel, with a 25 percent increase to reflect the risk of the lawsuit to class counsel. Judge Posner responded that “the reasonableness of a fee cannot be assessed in isolation from what it buys.”  As to the risk premium:  “[A]ttorneys’ fees don’t ride an escalator called risk into the financial stratosphere.  Some cases should not be brought . . . and others are such long shots that prudent counsel will cut his expenditure in litigating them of time, effort, and money to the bone.  Neither course was followed by class counsel in this case.”

•           The district court did not scrutinize the proposed settlement’s “clear-sailing clause,” in which RadioShack agreed not to contest class counsel’s fee request.  Since a defendant ordinarily will not agree to such a clause without a reduction in the portion of the settlement that goes to class members, clear-sailing clauses “illustrate[] the danger of collusion in class actions between class counsel and the defendant, to the detriment of class members.”  Judge Posner added that such clauses are particularly suspect in non-cash settlements, such as coupon settlements, where the value of the settlement to class members is more difficult to ascertain.

•           Class counsel filed its fee request after the deadline for objections to the settlement, thereby violating the requirement in Rule 23(h) that fee requests be directed to class members “in a reasonable manner.”  Athough the proposed settlement placed potential objectors on notice of the amount of attorney fees to be requested, the details regarding class counsel’s hours and expenses—as well as class counsel’s rationale for its fee request—were not submitted until the fee request was made.

•           The lead plaintiff was employed by class counsel’s former law firm.  This was not cited as a basis for overturning the settlement, but Judge Posner used the opportunity “to remind the class action bar of the importance of insisting that named plantiffs be genuine fiduciaries, uninfluenced by family ties . . . or friendships.”

In reversing approval of the settlement, the court urged the parties to renegotiate the settlement in a manner that would “shift some fraction of the exorbitant attorneys’ fee awarded class counsel in the existing settlement that we are disapproving to class members.”  The only alternative, the court noted, would be to increase the value of the settlement to class members while leaving counsel’s fee intact.  As RadioShack “is in terrible financial shape,” the court observed, “[a]dding millions to the cost of the settlement to RadioShack might, if not precipitate the company’s failure, make it more likely—an outcome that might leave very little for class members.  A modest settlement is the prudent course.”

The moral of the story?  We’ve said it before:  While class action defendants may not have a direct interest in the division of settlement proceeds between class members and class counsel, they do have an interest in having their settlement approved.  Settlements weighted too heavily in favor of attorney fees will be suspect.  Settlements with such counsel-friendly provisions as “clear sailing clauses” will be even more suspect, particularly where the named plaintiff appears to be under class counsel’s control.  Avoiding such settlements serves the interests of both sides.

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Posted in Consumer Class Actions, Settlement, Settlement Approval, Settlement Approval Issues

No Harm, No Foul in Apple E-Book Notice Screw Up

In mid-September, class notices went out in the ongoing Apple E-books class action lawsuit that might have momentarily had Apple’s attorneys a little concerned. Over three million potential members of the class received information detailing the next phase in the litigation–the trial to determine the extent of damages against Apple. The problem, of course, is that the damages trial was canceled a few months ago.
In this latest (and least substantive) chapter of the ongoing e-book antitrust saga, Plaintiffs’ counsel were forced to explain to the Court that they had for “currently unknown reasons” accidentally sent out notices informing class members about the canceled upcoming damages trial. Plaintiffs thereafter sent a letter to U.S. District Judge Denise L. Cote, clarifying that the class notice had erroneously been sent.
Prior to being rendered unnecessary by the settlement, the second phase of the trial was set to fix Apple’s liability arising from its e-book antitrust violations. After some initial skepticism, Judge Cote approved the settlement in August, eliminating the need for any further litigation on Apple’s damages.
The settlement finally put to rest claims that Apple’s 2010 distribution deal with the top five publishers in the market illegally raised the prices of e-books. The five publishers settled with the government, but Apple took the case to trial, and In July 2013, Judge Cote ruled that the company had orchestrated the scheme in violation of the Sherman Act, which prohibits anti-trust violations. Of course, any damages for antitrust violations could have been trebled, leaving Apple on the hook for potentially hundreds of millions of dollars.
Apple’s schadenfreude in class counsel’s notice error was short lived as Judge Cote quickly allowed the Plaintiffs’ attorneys to correct their error.

Posted in Uncategorized

Cozen’s Tom Wilkinson Comments on Seventh Circuit Opinion Rejecting Class Action Settlement

Cozen O’Connor member Tom Wilkinson is quoted extensively in this article from the ABA’s Litigation News regarding a recent Seventh Circuit opinion rejecting a class action settlement as “scandalous.” The opinion was highly critical of class counsel.

Posted in Uncategorized

Fourth Circuit: Rule 23(f) Review Does Not Apply to Decertification Denials

Rule 23(f) provides for discretionary interlocutory review of an order “granting or denying class-action certification” if a party files a petition for permission to appeal within 14 days after the order is entered.  Last month, the Fourth Circuit rejected an attempt to extend that deadline to appeals from the denials of decertification motions.

In Nucor Corp. v. Brown, the district court originally certified two classes.  Over the next two years, the defendants filed a series of four decertification motions, finding partial success on the second motion, which decertified one of the two classes; the first, third, and fourth motions were denied.  After the denial of their fourth decertification motion, the defendants sought interlocutory review of the denial under Rule 23(f).

The Fourth Circuit, persuaded by the prior like decisions of the Third, Fifth, Seventh, Tenth, Eleventh and D.C. circuits, held that the denial of the decertification motion was not appealable under Rule 23(f).  The order did not grant or deny class-action certification;  it merely refused to disturb the two-year-old original order granting class certification.  In fairly strong words, the court remarked:  “We will not render the Rule 23(f) deadline ‘toothless’ by permitting Nucor to ‘easily circumvent Rule 23(f)’s deadline by filing a motion to amend or decertify the class at any time after the district court’s original order’ . . . .”

The takeaway:  in the Fourth Circuit (and probably every other circuit), the 14-day period runs from the original certification order.  A subsequent order on class certification will be appealable only if it alters the class action status in some way (thus, the plaintiff presumably could have appealed the court’s partial grant of the defendants’ second decertification motion within 14 days).  Mere denial of a motion to reconsider the original ruling, or otherwise decertify the class, is not appealable under Rule 23(f).

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Posted in Class Certification

Third Circuit: Courts, Not Arbitrators, Decide Whether to Require Classwide Arbitration

Recent Supreme Court precedent has clearly reinforced the validity of contractual class action/arbitration waivers.  In AT&T Mobility v. Concepcion, the Court made clear that class action waivers are enforceable, even if state common law would hold them unconscionable.   In American Express Co. v. Italian Colors, the Court extended the same enforceability to class arbitration waivers, even where they effectively eliminate a plaintiff’s ability to vindicate a federal statutory right.

But what if an arbitration provision is silent about the availability of a classwide proceeding?  Can a defendant be required to submit to classwide arbitration?  And is that a decision for the court or for the arbitrator?

According to a Third Circuit opinion issued last week, whether an arbitration provision can be construed to permit classwide arbitration is a question for the court.  In Opalinski v. Robert Half International, the issue was whether this question is a “question of arbitrability.”  The Supreme Court has held that questions of arbitrability—a narrow range of “gateway” issues that go to whether a case is to be arbitrated at all—are presumptively for courts to decide.  Typical questions of arbitrabiltiy include whether the parties are bound by a particular arbitration provision, or whether the provision applies to a certain type of controversy.  Other questions are deemed “procedural” questions that are for the arbitrator to decide.

The Supreme Court has not decided which category characterizes the availability of class arbitration.  A plurality opinion in 2003 concluded that the question was not one of arbitrability, but more recent opinions have emphasized that the issue remains unresolved by the Court.

In holding that the availability of classwide arbitration is a question of arbitrability, the Third Circuit followed the lead of the Sixth Circuit—the only other circuit thus far to squarely weigh in on the issue.  The Third Circuit reasoned that the availability of class arbitration implicates whose claims the arbitrator may resolve, since the procedure would empower the arbitrator to resolve claims of individuals who are not parties to the litigation.  The panel also concluded that allowing class arbitration implicates the type of controversy submitted to arbitration because, as the Supreme Court has recognized in the past, class arbitration changes the nature of the arbitration to such a degree that parties should not be presumed to have consented to it merely because they agreed to the arbitration provision.

Thus, in the Third Circuit, courts will presume that the availability of classwide arbitration is an issue for the court.  What can overcome the presumption?  Nothing short of “express contractual language unambiguously delegating the question of arbitrability to the arbitrator. . . . Silence or ambiguous contractual language is insufficient to rebut the presumption.”

It remains to be seen whether other circuits will follow suit, or whether this question will ultimately work its way up to the Supreme Court.  In the meantime, would-be class action defendants who wish to avoid being forced into class arbitration by an arbitrator can protect themselves by ensuring that their contracts expressly (i) prohibit class arbitration and (ii) provide that all questions of arbitrability are to be decided by a court of competent jurisdiction.

Posted in Uncategorized

Caveat Empty Box

In a strong defense victory from earlier this year, the U.S. District Court for the Eastern District of California denied a proposed class of laptop purchasers the opportunity to proceed against Toshiba as a class, instead forcing individuals with complaints to engage in arbitration with the manufacturer.  In the decision, Herron v Best Buy Stores LP, Senior Judge Garland Burrell upheld the enforceability of an arbitration provision contained within the box packaging for Toshiba laptops–and only brought to the court’s attention two years after the case was initiated. 

The case, originally filed in state court on behalf of a proposed class of consumers who purchased Toshiba laptops at Best Buy, alleged violations of California’s Consumer Legal Remedies Act and California’s Unfair Competition Law.  The plaintiff claimed that the defendants misrepresented the lifespan of Toshiba laptop batteries, and as a result of these misrepresentations, the plaintiff (and his proposed class) were induced to purchase the laptops for a higher fee.  Importantly, a Limited Warranty was found in the box for each laptop and contained a capitalized and bold-faced arbitration provision.  The provision stated that any disputes between the customer and Toshiba “arising from or relating to” the Limited Warranty or use of the laptop would be resolved “exclusively and finally by binding arbitration.”  The provision continued:  “Customer understands that, in the absence of this provision, customer would have had a right to litigate disputes through a court in front of a judge or jury, including the right to litigation claims on a class-wide or class action basis, and that customer has expressly and knowingly waived those rights and agreed to resolve any disputes through binding arbitration … .”  Moreover, the laptop itself was sealed in a plastic bag, affixed to which was a sticker repeating the arbitration provision language.

The motion to compel arbitration arrived at a unique procedural posture.  The parties initially engaged in motion practice on the merits, which resulted in the filing of three amended complaints following partial grants of motions to dismiss.  Only upon the filing of the Third Amended Complaint – nearly two years after the case was originally filed – did Toshiba file a motion to compel arbitration.  In its motion, Toshiba argued that the plaintiff unequivocally agreed to submit his claims to arbitration, and that any delay in compelling such arbitration was not prejudicial to plaintiff and should therefore not preclude arbitration.  The plaintiff attacked Toshiba’s motion as “forum shopping,” pointing out that the case had been litigated on the merits for two years and that only upon losing on the merits did Toshiba attempt to move the case before an arbitration panel.  The plaintiff argued that the right to arbitrate had been waived and further argued that the arbitration clause in the packaging was provided only after the laptop was purchased; as such, arbitration was not agreed to and was rather only a “proposal for additional terms,” which the plaintiff had not accepted.  Finally, the plaintiff argued that the arbitration clause itself was unconscionable – procedurally, because it was a “form contract” that provided plaintiff only with a “take it or leave it” option, and substantively, because the arbitration clause was unclear as to the range of disputes over which it would govern.

In a concise, strongly-worded opinion, Judge Burrell gave little credence to the plaintiff’s concerns and forced the matter into arbitration.  The court first held that the placement of the arbitration provision in the laptop box – to be found only after its purchase – did not undermine the provision’s enforceability.  The court relied on existing case law that “contracts contained in boxes are no less enforceable than any other type of contract.”  The court also declined to find the arbitration provision unconscionable.  Rather than determining the issue of unconscionability, the court noted that the arbitration provision contained a delegation clause vesting the arbitration panel with the exclusive power to hear challenges to the validity of the agreement – including claims of unconscionability.  Finally, the court refused to find that Toshiba had waived its right to arbitrate the dispute.  Citing the “strong federal policy favoring enforcement of arbitration agreements,” the court dismissed the plaintiff’s concerns that he had already expended considerable resources and time litigating the case in court and his argument that Toshiba was merely seeking “a second bite at the apple” in an alternate forum.  The court summarily called these concerns “conclusory” and noted simply that the plaintiff had not met his high burden to demonstrate prejudice from the delay.  Notably, the court did not specifically address the lapse in time or the motion practice that had been initiated prior to the filing of the motion to compel.

Defendants should take comfort in the Herron ruling.  If there were ever circumstances that would defeat a strongly-worded arbitration provision, the two-year delay and extensive motion practice in this case would surely qualify.  And yet, the court gave these concerns the back of the hand, demonstrating that federal courts still really, really (really) want to find ways for cases to go to arbitration.  The case is continuing against Best Buy.

Posted in Arbitration Issues
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