Posts belonging to Category Caselaw Developments

This past February, California’s Fourth Appellate District issued an opinion where it declined to broadly interpret the U.S. Supreme Court’s AT&T Mobility v. Concepcion decision in the employment context. See Mayers v. Volt Management, No. G045036, ___ Cal. App. 4th ____ (available here). In June, the California Supreme Court agreed to take up the case, but further action is deferred pending disposition in a case from the Second Appellate District, Sanchez v. Valencia Holding Co. (201 Cal. App. 4th 74 (2011)), which addresses a related issue in the consumer context.

The question presented in Sanchez is: “Does the Federal Arbitration Act, as interpreted in AT&T Mobility LLC v. Concepcion, preempt state law rules invalidating mandatory arbitration provisions in a consumer contract as procedurally and substantively unconscionable?” (citations omitted). Sanchez is now fully briefed, but oral argument has not been scheduled.

In the underlying Mayers suit, the plaintiff alleged California Fair Employment and Housing Act (FEHA) violations against his former employer. The defendant responded by attempting to compel arbitration, relying on its standard arbitration clause which was included in its employment application, employment agreement, employee handbook, and ADR policy, all of which were ostensibly received by and consented to by Plaintiff in the course of his job application and orientation process. See slip op. at 3-7. The trial court denied the defendant’s motion to compel arbitration, and a unanimous panel of the Fourth Appellate District’s Division Three upheld the ruling. See id. at 12-19.

The Mayers panel rejected the defendant’s argument that even if the contested clauses were unconscionable, as the plaintiff had argued and the trial court had ruled, such terms could be severed while preserving the overall arbitration provision. See id. at 2-4. The Court of Appeal detailed the ways in which the asymmetric, unconscionable terms and procedures so pervaded the at-issue terms as to render them fatal to any enforcement of the arbitration clause: (1) the plaintiff was not provided a copy of the arbitration rules governing the process, nor told how to find them; (2) the arbitration provisions failed to identify the specific American Arbitration Association (AAA) rules that applied; and (3) the provisions included a prevailing party attorney fees term which would expose Plaintiff to greater liability for fees than if he pursued the claims in court. Thus, the court found the arbitration provisions to be unconscionable and therefore unenforceable, and stated that “[b]ecause the unconscionable terms cannot be severed from the rest of the arbitration provisions, plaintiff cannot be compelled to arbitrate his claims against defendant.” Id. at 3.

Though many have questioned whether California’s unconscionability doctrine would continue to have vitality in the wake of Concepcion, Mayers and Sanchez represent key decisions in the increasingly formidable post-Concepcion bulwark against the enforcement of arbitration clauses or terms deemed unconscionable. In Sparks v. Vista Del Mar Child and Family Servs. (available here), California’s Second Appellate District reached a substantially similar conclusion, holding that the plaintiff was not bound by an arbitration clause buried within a lengthy employee handbook.

The California Supreme Court’s decisions in Mayers and Sanchez are expected to bring much-needed clarity to California’s post-Concepcion landscape.

United States District Court Judge Stefan Underhill has issued a ruling that augments the growing body of law rebuffing defendants’ attempts to use the U.S. Supreme Court’s 2011 decision in AT&T Mobility v. Concepcion to force plaintiffs seeking classwide relief into individual arbitration. See Fromer v. Comcast Corp., No. 09-02076 (D. Conn. Aug. 21, 2012) (ruling on motion to compel arbitration) (available here).

Comcast customer Robert Fromer filed the class action in 2009, alleging that the company violated antitrust laws by bundling its digital voice service with a modem, essentially forcing subscribers to rent the modem. Comcast sought to use Concepcion to force the plaintiff to arbitrate his claims pursuant to the arbitration clause in his subscriber agreement, which included a class action waiver. Judge Underhill denied Comcast’s motion and found the ban on classwide arbitration to be void, since it would “effectively preclude[] Fromer from pursuing federal statutory remedies.” Fromer at 11. Judge Underhill cited the cost of individual litigation versus the potential gain for plaintiffs, stating that “Fromer can expect to recover approximately $1 for every $202 spent in litigation.” Id. at 10.

The ruling follows a similar decision by the 2nd Circuit Court of Appeals (available here) holding that American Express could not invoke its arbitration clause in an antitrust lawsuit filed by merchant customers.

In a decision likely to be influential beyond both its jurisdictional and factual settings, the Second Circuit Court of Appeals has held that securities fraud plaintiffs need not prove that fraud-on-the-market applies in order to satisfy the predominance requirement for certification of a settlement class, the Second Circuit Court of Appeals held. In re Am. Int’l Grp., Inc. Secs. Litig., No. 10–4401 (2d Cir. Aug. 13, 2012) (available here). The influential Second Circuit also underscored the pragmatic doctrine whereby settling class action parties, despite being required to establish most elements of certification to the same degree of proof as in a contested certification motion, are not required to establish the manageability of the settled action. See Slip op. at 21 (“with a settlement class, the manageability concerns posed by numerous individual questions of reliance disappear”).

The unanimous opinion, written by Circuit Judge Gerard R. Lynch, explained that “a Section 10(b) settlement class’s failure to satisfy the fraud-on-the-market presumption does not necessarily preclude a finding of predominance,” and “the fact that the plaintiff class is unable to invoke the presumption, without more, is no obstacle to certification.” Id. at 23-24. Judge Lynch was joined by Circuit Judges Ralph K. Winter and Robert A. Katzman. The three-judge panel members were appointed, respectively, by presidents Obama, Reagan, and Clinton.

Though decided in the context of securities litigation, the American Int’l decision will likely function as a potent counterpoint in any circumstance where a class action settlement objector attempts to invoke the irrelevant “manageability” criterion to urge courts to deny motions for settlement approval.

Almost lost amidst the holiday weekend news vortex, last Friday the United States Supreme Court agreed to hear a case that is likely to add to the Court’s aggressive remaking of class action jurisprudence. See Knowles v. The Standard Fire Ins. Co., No. 11-04044, Petit. for Writ of Certiorari (available here). In addressing the damages threshold under the Class Action Fairness Act of 2005 (CAFA) for invoking federal jurisdiction, Knowles could result in a substantial change in the division of class actions between state and federal courts. See 28 U.S.C. § 1332(d) (“district courts shall have original jurisdiction of any civil action in which the matter in controversy exceeds the sum or value of $5,000,000”). 

The Knowles case addresses whether a named plaintiff can effectively promise to seek less than $5 million in aggregate damages, not just on his own behalf but on behalf of all class members, and thereby prevent the case’s removal under CAFA. In the underlying case, the named plaintiff alleged only state-law claims and filed a stipulation — purportedly binding on all prospective class members — that less than $5 million in aggregate damages would be sought in the action. The Eighth Circuit upheld the plaintiff’s stipulation, even though the defendant was able to show that the amount in controversy, absent the stipulation, would exceed $5 million. The plaintiff accomplished the “legal certainty” requirement by seeking to recover damages for a period shorter than the applicable statute of limitations. Strangely, the defendant’s calculation of the aggregate amount in controversy only exceeded the threshold by a mere $24,150.

Knowles is expected to test the maxim that a plaintiff is the “master” of his or her complaint — all the more with the claims of prospective, not-yet-represented class members also at stake. See, e.g., Brill v. Countrywide Home Loans, Inc., 427 F.3d 446, 449 (7th Cir. 2005) (“[A] removing defendant can’t make the plaintiff ’s claim for him; as master of the case, the plaintiff may limit his claims (either substantive or financial) to keep the amount in controversy below the threshold.”). Existing caselaw appears to affirm the plaintiff’s position that the “master of his/her complaint” principle should be strictly interpreted. Potentially decisive will be how the Court applies the body of authority holding that class counsel functions in something other than a pure stranger relationship vis-à-vis prospective class members, notwithstanding that a formal attorney-client relationship does not attach pre-certification.

The case will be argued sometime this winter, with a decision expected in mid-2013.