This piece is adapted from Daniel P. Shapiro’s article published in the November 2013, issue of AHLA Connections. © 2013 American Health Lawyers Association.
Over the past three years, since mid-2010, the Supreme Court has handed down a series of related decisions that, taken together, constitute an instruction manual for American business on how to reduce litigation risk. As the world has “flattened” and trade has increasingly globalized and become borderless, it has been impossible to ignore that only in the U.S. economy is litigation such a prominent line item for business. This is particularly true with regard to class action litigation. No other country has the sort of class—or collective—action rules that the United States does. Perhaps in response to these facts, the Supreme Court has made it clear that through a combination of arbitration (as opposed to litigation) and class action waiver clauses properly used, businesses can contract out from under a great deal of litigation risk for the future and fundamentally change their litigation environment.
The new Supreme Court decisions offer instruction on how, exactly, to use arbitration clauses and class action waivers to mitigate litigation risk.
A Brief Moment for Definitions
For some readers this may be “old hat,” and for some less so, but it seems worth a moment to cover a couple of basic terms:
“Arbitration” does not take place in court, or in any government sponsored system. Arbitrations take place pursuant to agreements between parties stating that their disputes will be arbitrated rather than litigated. Arbitrators are privately engaged and paid by the parties to the dispute. Arbitrations, unlike court proceedings in litigation, are generally private and confidential. Depending upon the arbitration agreement, arbitrations can be less involved, faster, and less expensive than litigation, although not always. Arbitrations also have fewer procedural protections for the parties. For example, the rules of evidence in arbitrations tend to be more relaxed, and, with only narrow exceptions, arbitrations are final and binding. There are virtually no rights of appeal.
“Class actions” can take place in state or federal court, or in arbitration. A class action begins when the court (or arbitrator) approves the plaintiff’s request that the claims of all people or businesses that have allegedly suffered the same wrong at the hands of the same defendant be determined in a single proceeding with the named plaintiff acting as the representative for the entire class. Generally, the decision approving or rejecting the plaintiff’s request for class treatment (called “class certification”) is made early in a case, before liability or damages issues have been considered. Once a class is certified, all of the claims of the plaintiff class members are aggregated and, generally, the economic risk of the litigation to the defendant increases exponentially, sometimes to ruinous levels. Very often, cases settle after the class certification decision, if they have not settled before.
Recent Supreme Court Decisions
No single Supreme Court opinion provides a prescription for how to use arbitration and class action waiver clauses in contracts. The Court’s approach has been incremental, but the end result is a consistent, progressive layering of pronouncements by the Court about how to limit litigation exposure. Books and long articles are written on Supreme Court decisions, but here are a few thumbnail sketches that may be useful for immediate application.
To begin, in Stolt-Nielsen S.A. v. Animalfeeds International, Corp.,1 decided in April 2010, the Court considered a standard form arbitration clause used by parties to a commercial ocean shipping contract. The arbitration clause provided that any dispute between the parties would be subject to arbitration. The question presented was whether a class action should be included within the ambit of that clause.
The Court started its analysis with what would become its consistent starting point in these related cases: an arbitration provision, like any other provision of a contract, is the expression of an agreement between the contracting parties and their intent should ordinarily be given effect. The question, therefore, became whether the parties intended that a class claim was intended to be subject to arbitration when they agreed upon their arbitration clause. The Court decided that a class action would “change the nature of arbitration to such a degree that it cannot be presumed the parties consented to it by simply agreeing to submit their disputes to an arbitrator.”2 That is, the Court decided that silence with regard to the inclusion of class actions under an arbitration provision does not equal assent. The parties must be found, as a matter of fact and intent, to have agreed that class actions are to be included in the scope of an arbitration clause in order for that to be the case. It seems prudent, then, to say that an arbitration clause should expressly state that class actions are included, or not, depending on the intent of the parties.
One year later, in April 2011, the Court added its next layer of thought and direction. In AT&T Mobility LLC v. Concepcion,3 the Court considered a clause in a consumer contract that both required that all disputes be arbitrated, and prevented the consumer from bringing or participating in a class action. Anticipating that consumers would assert, and courts would find, that this combination of arbitration and class action waiver provisions was unconscionable and should not be enforced, AT&T also included provisions in this contract that heavily favored consumers. For example, AT&T was obligated to pay all of the consumer’s arbitration costs; the arbitrator was empowered to award punitive damages against AT&T; and, if the consumer obtained an award greater than AT&T’s last written settlement offer then AT&T was obligated to pay the consumer $7,500, plus two times the consumer’s attorney’s fees.
Notwithstanding these contract provisions intended to even the playing field and provide the consumer with remediation rights even without access to courts or class actions, the Ninth Circuit found this contract to be unconscionable and struck it down. That court opined that AT&T had used its contracts to remove the deterrent effect of class actions and effectively insulate itself from claims of consumer fraud.
The Supreme Court disagreed. It reversed the Ninth Circuit, finding that under the Federal Arbitration Act there is a presumption in favor of finding that arbitration provisions between parties are valid, and that AT&T had built in enough protections so that the consumer was not without remedies. The Court in Concepcion seems to have told the business community that given the relevant economics of a particular circumstance, if the party with unequal bargaining power is left with meaningful remedies, arbitration and express class action waiver provisions will be enforced, even in the face of unconscionability challenges.
Shortly after the decision in Concepcion, the Court in June 2011 handed down its opinion in Wal-Mart Stores, Inc. v. Dukes.4 This opinion is probably fairly characterized as being less about blazing new trails and more about the Court’s insistence on adhering to the existing rules governing class certification. Those rules require a showing of “commonality” before a class can be certified. By tightening up the requirements for class certification and sending a message to the lower courts and plaintiffs’ lawyers that the prerequisites for class certification will be taken seriously, the Court breathed new vitality into an important defense to class actions.
To understand the importance of the reinforcing message of Wal-Mart, recall that a class action is a device created by the courts to deal with many plaintiffs at the same time, in the same lawsuit. For that to work and be fair to all participants, all of the plaintiff class members must have at least allegedly suffered the same wrong at the hands of the same defendant. That is, the litigation has to solve the same complaint on common grounds for all of the class members. The rules on class certification refer to this as the requirement of “commonality.” In Wal-Mart, the plaintiff class alleged that its members had suffered discrimination in the workplace. But the court found there had been an insufficient showing that the defendant, as an enterprise, had acted uniformly, consistently, and with a common purpose. That is, the plaintiff class members may or may not have suffered discrimination on an individual basis, but there had not been enough of a showing by the plaintiff that the cause of that discrimination was “common” from case to case. There may have been a bad actor in a Des Moines store, and another in Albany, but nothing tying their actions together had been established. These were each, in essence, individual cases subject to individual inquiries, defenses, and proof. Class treatment, therefore, would be unfair to the defendant and would not be appropriate. The Court in Wal- Mart made clear that it was insisting that class certification decisions have to be grounded in the purpose and justification for class treatment, and that a rigorous approach to the “commonality” rule will be required, thereby making class actions more difficult to bring.
In January 2012, the Court put another brick in the wall it was building with its opinion in CompuCredit Corp. v. Greenwood.5 In this case, the plaintiff signed a credit agreement that included an arbitration clause requiring arbitration of all disputes. The plaintiff sued in court, rather than arbitrating, citing the federal Credit Repair Organizations Act (CROA). The plaintiff asserted that Congress had included in CROA a provision stating that a plaintiff with a CROA claim has the right to sue and that any waiver of that right is not enforceable. The plaintiff argued that his “right to sue” meant a right to bring a lawsuit in court and that he could not be deprived of that right and be forced to arbitrate. The Court disagreed. It found that in the absence of a clear statement by Congress that a court action, as opposed to an arbitration, was guaranteed in any particular statute, the Federal Arbitration Act required that the arbitration clause agreed to by the plaintiff be honored. The Court reinforced the idea that federal policy requires arbitration clauses be honored even in the face of statutory language that might invalidate that aspect of a contract between parties, unless that statutory language from Congress is without ambiguity.
In mid-2013 the Court, issued three more opinions, all continuing in the direction of further limiting class litigation.
In March 2013, the Court ruled in Comcast Corp. v. Behrend.6 Here, the Court reviewed a decision certifying a class of more than 2 million people who claimed to have suffered antitrust injury at the hands of the defendant. The plaintiff, however, was unable to show that it would ever be possible to measure damages across the entire class. The Court reversed the two lower courts, which had found that class certification was nonetheless appropriate.
This opinion is important because class certification is almost always determined as an early stage, procedural matter. Courts often find not only that extensive factual investigation is not required for class certification, but that such factual investigation will not be undertaken at this early stage of the case if it will draw the court into any significant examination of facts that also go to the merits (liability and damages) of the case. The Supreme Court in Comcast, however, implicitly recognized that quite often, in fact almost always, the most important decision in a class action will be the question of class certification. The Court reversed the lower courts because it found there had not been sufficient factual development to demonstrate that the plaintiffs would ever be able to figure out damages for the class, even if they were able to win on liability. The Court insisted here that before a class is certified, the plaintiff must show that class treatment will be appropriate and workable over the life of the case. Before Comcast, a plaintiff’s lawyer had a better chance to get a class certified on almost no factual record and then have the cudgel of a certified class to use for purposes of settlement discussions. After Comcast, where factual questions come up as a part of the class certification decision, those questions have to be answered by the plaintiff’s lawyer before a class will be allowed to proceed. This imposes a significant burden on plaintiffs’ lawyers and lower courts and, in certain cases, makes the class certification threshold much more difficult to clear.
In June of 2013 the Court issued two more opinions, both of significance.
In Oxford Health Plans LLC v. Sutter,7 a pediatrician brought a class action against the defendant for failing to make full and prompt payments to doctors. The doctor’s contract with the plan provided, however, that all disputes between the parties would be subject to arbitration. The arbitration clause was silent, though, on whether it included class actions, or whether a class claim would be allowed to proceed in court. Because the arbitration clause was silent on whether class actions were included within its reach, it was left to the arbitrator to decide, as a factual inquiry, what the parties had intended.
This is reminiscent of the decision in Stolt-Nielsen discussed above. Here, though, the Court reminds the reader that courts have extremely limited authority to disturb the findings and decisions of an arbitrator. The arbitrator in this case determined that the language used by the parties in their arbitration clause was intended by the parties to include class actions. Another arbitrator may have decided differently. The Court’s opinion is another warning to contracting parties to state explicitly in their agreed upon arbitration clauses what the scope of those clauses are intended to be. Do you want class actions to be included, or not? (If it is left unclear, the arbitrator will decide for you.)
Answering the question of whether you want an arbitration clause to include class claims (assuming there is no class waiver provision) is complex and involves considerations of what benefits arbitration may provide, and what it may not. Appellate rights, particularly in class litigation, are an important and complicated consideration. However complex, though, it is clearly better to anticipate and decide those issues knowingly in advance.
Finally, on June 20, 2013, the Court issued its opinion in American Express Co. v. Italian Colors Restaurant.8 The plaintiff was a merchant claiming that American Express used monopoly power to force the imposition of excessive credit card fees. The suit was a class action alleging violations of the federal antitrust laws. The defendant relied on its contracts with the class members, which included both arbitration clauses and class action waiver provisions. The merchant argued that without a class action, there would almost certainly not be any litigation because the individual claims of each merchant were too small to warrant individual lawsuits. As a practical matter, without the economic incentives of a class action for plaintiffs’ lawyers, this suit would not be brought. This has been a common argument relied on by some courts to find class action waiver provisions to be unconscionable and unenforceable (see the Ninth Circuit’s reasoning in Comcast, above). The Supreme Court this time expressly rejected this argument and may have ended this aspect of the unconscionability debate. The Court decided that some claims may, as a practical matter, be too small to justify litigation, but that fact in itself is not enough to justify setting aside an agreement between the parties that they would not bring or participate in class litigation.
Risk Management Opportunities
The Court’s recent rulings have made profound changes in the law regarding the use and enforceability of arbitration and class action waiver clauses. Taking a step back and looking at these contract provisions in light of recent Supreme Court opinions, it is clear that there are real and significant benefits to be had.