Consumer Law & Policy Blog

Fifth Circuit Decides D.R. Horton, Overturns NLRB's Ruling that Class-Action Bans are Unfair Labor Practices

by Deepak Gupta

In a much-anticipated decision, the Fifth Circuit held today that the National Labor Relations Board overstepped its authority when it ruled that an employer violated federal labor law by requiring its employees to sign an arbitration agreement containing a class-action ban. Judge Leslie Southwick, joined by Judge King, isssued the opinion for the court. Here's the court's summary:

The National Labor Relations Board held that D.R. Horton, Inc. had violated the National Labor Relations Act by requiring its employees to sign an arbitration agreement that, among other things, prohibited an employee from pursuing claims in a collective or class action. On petition for review, we disagree and conclude that the Board’s decision did not give proper weight to the Federal Arbitration Act. We uphold the Board, though, on requiring Horton to clarify with its employees that the arbitration agreement did not eliminate their rights to pursue claims of unfair labor practices with the Board. 

The court began its decision by deciding that it did not need to decide the validity of the recess appointments to the NLRB--the question now before the Supreme Court in Noel Canning. On a separate quesiton--whether one of the Board member's recess appointments had expired--the court relied to a limited extent on the "de facto officer" doctrine and concluded that no timely challenge to the appointment had been preserved.

As to the FAA question, the court analyzed the issue in terms of two exceptions to the FAA's general rule that arbitration agreements are enforced according to their terms: the Act's savings clause (which preserves generally applicable defenses to a contract) and the rule that other federal statutes may trump the FAA. "The Board clearly relied on the FAA’s saving clause," the court explained, "Less clear is whether the Board also asserted that a contrary congressional command is present." On the first point, the court held that the NLRB's ruling could not be reconciled with the Supreme Court's decision in AT&T Mobility v. Concepcion: "Like the statute in Concepcion, the Board’s interpretation prohibits class- action waivers." As to the second point, the court held that nothing in the text or legislative history of the NLRA "contains a congressional command to override the FAA."

Judge Grave dissented. He would have affirmed the NLRB's decision "in toto." Specifically, he disagreed with the majority's conclusion that the NLRB's ruling conflicts with the FAA. Tracking the NLRB's ruling, he would have reasoned as follows:

• The purpose of the FAA was to prevent courts from treating arbitration agreements less favorably than other private contracts. To find that an arbitration agreement must yield to the NLRA is to treat it no worse than any other private contract that conflicts with federal labor law.

• The Supreme Court’s jurisprudence under the FAA makes clear that the agreement may not require a party to ‘forgo the substantive rights afforded by the statute. The right to engage in collective action – including collective legal action – is the core substantive right protected by the NLRA and is the foundation on which the Act and federal labor policy rest.

• Nothing in the text of the FAA suggests that an arbitration agreement that is inconsistent with the NLRA is nevertheless enforceable. To the contrary, Section 2 of the FAA provides that arbitration agreements may be invalidated in whole or in part upon any ‘grounds as exist at law or in equity for the revocation of any contract.'

• Even if there were a direct conflict between the NLRA and the FAA, there are strong indications that the FAA would have to yield under the terms of the Norris-LaGuardia Act.

Judge Graves would also have agreed with the Board that D.R. Horton violated the NLRA. "The Board made it clear that it was not mandating class arbitration in order to protect employees’ rights under the NLRA," he explained, "but rather was holding that employers may not compel employees to waive their NLRA right to collectively pursue litigation of employment claims in all forums, judicial and arbitral." 

Talesh Paper on How Corporations Use Private Dispute Mechanisms to Weaken Consumer Protection Laws

Shauhin A. Talesh of Irvin has written How the 'Haves' Come Out Ahead in the Twenty-First Century, 62 De Paul Law Review .519 (2013).  Here is the abstract:

This paper attempts to bridge and link the “speculations” in Marc Galanter’s seminal article in 1974 regarding how repeat players influence public legal institutions by playing for favorable rules and Lauren Edelman and Marc Suchman’s hypotheses in 1999 that organizational repeat players have created a private legal order.  In particular, I suggest the two theories need to be connected and explored empirically if we want to better understand the link between public and private legal orders and the effect public and private institutional arrangements have on statutorily created legal rights.  I focus not just on how repeat players play for favorable rules in courts, but how organizations play for favorable dispute resolution structures that operate outside courts but are ultimately codified into law, deferred to by courts and alter the infrastructure of access for consumers.  I use a case study of California consumer protection laws to show how manufacturers initially subject to powerful consumer protection laws, weakened the impact of these laws by creating dispute resolution venues.  The legislature and courts subsequently incorporated private dispute resolution venues into statutes and court decisions and made consumer rights and remedies largely contingent on consumers using manufacturer-sponsored venues.  In this instance, organizations created a private legal order, then influenced the public legal order, in order to utilize and maintain a private legal order.  Thus, I offer a theory that explores how organizations seamlessly flow through these increasingly blurred boundaries between the public and private sphere and ultimately shape the content and meaning of law designed to regulate them in both domains.

 

California Supreme Court addresses impact of Concepcion and Italian Colors

by Deepak Gupta

In a 70-page opinion by Justice Goodwin Liu, the California Supreme Court on Thursday issued its eagerly anticipated decision in Sonic-Calabasas v. Moreno. Addressing the impact of both AT&T Mobility v. Concepcion and American Express v. Italian Colors for the first time, the court makes clear that unconscionability -- focused on whether a contract is unfairly one-sided -- remains a viable defense to individual arbitration agreements in California. Both the majority opinion and dissent are long and dense; what follows are just some initial impressions. (Moreno is not a putative class action and the decision has little to say about class-action waivers.)

In an earlier 4-3 ruling in this case, just two months before Concepcion, the California high court had held "as a categorical rule" that it was "contrary to public policy and unconscionable for an employer to require an employee, as a condition of employment, to waive the right to a Berman hearing, a dispute resolution forum established by the Legislature to assist employees in recovering wages owed." In short order, the U.S. Supreme Court granted, vacated, and remanded that decision following Concepcion. 

Justice Liu's new opinion carefully explains both the reach and the limits of Concepcion and Italian Colors, holding that the Federal Arbitration Act preempts the categorical state-law rule announced in the court's earlier opinion, but fully preserves defenses available under generally applicable state contract law, including unconscionability, so long as state law doesn't discriminate against arbitration or mandate procedures "inconsistent with the fundamental attributes of arbitration." The opinion emphasizes that the unconscionability defense turns on whether the contract is "unfairly one-sided" and that a trial court's assessment of the defense may require consideration of evidence about the specific arbitral scheme at issue -- evidence that, here, will have to be considered for the first time on remand.

The vote was 5-2 to remand for further proceedings on the plaintiff's unconscionability defense, with a concurring opinion by Justice Corrigan and a concurring and dissenting opinion by Justice Chin. Justice Chin's dissent takes issue with many aspects of the majority's decision. As a procedural matter, he says, the court shouldn't have even considered the unconscionability defense because the plaintiff forfeited it. But the central thrust of the dissent is to accuse the court of adopting a "vague" and "unworkable" test for unconscionability that, in his view, is prempted under both Concepcion and Italian Colors. Justices Corrigan, Chin, and Baxter would limit unconscionability to the 19th-century "shocks the conscience" test rather than the modern one-sidedness test. 

Interestingly, the concurrence and dissent characterize California's generally applicable one-sidedness inquiry as too vague and insufficiently deferential to arbitration. But the whole point of the FAA is that state court's aren't supposed to modify the state's common law of contracts to account for the fact that an arbitration agreement is at issue. Short of parroting the indeterminate "shocks the conscience" standard, it's quite unclear what an unsconsionability defense would look like under the dissenters' approach.

Predicatably, defense lawyers are already criticizing Justice Liu's opinion for preserving even the limited, generally applicable unconscionability defense outlined in the opinion. But they seem to acknowledge that the case would be a poor candidate for Supreme Court review at this stage: "It is unclear if there is a suitable federal basis for the U.S. Supreme Court to take up the case," one defense firm observes, "nor is it clear that the defendant will even seek review in advance of a ruling upon remand that the arbitration agreement is, in fact, unconscionable."

More From Linda Mullenix on the Supreme Court's Arbitration Decisions

Linda Mullenix of Texas has written The Court's 2012 Class Act:  A Little Bit of This, a Little Bit of That, 40 Preview of U. S. Supreme Court Cases 328 (2013). Here's the abstract:

Building on the Court’s heightened interest in class action litigation, the Court during the 2012-13 term issued an unprecedented six decisions dealing with class action issues. However, scholars searching for coherent class action jurisprudence will have to await another day (maybe another decade); consistent with its other recent decisions, the Court rendered class action opinions that favored both sides of the docket. Plaintiff and defense counsel both may claim some large and small victories in this term’s class action decisions.

Nonetheless, the Court continues its plodding case-by-case approach to class litigation that fails to illuminate any overarching abstract theory of aggregate litigation. Instead, the Court’s attitude towards class action litigation is chiefly characterized by pragmatism and not-so-veiled policy concerns. Moreover, the 2012-13 class action decisions highlight the Court’s liberal and conservative division, with the Court’s conservative wing prevailing generally in its antipathy toward class litigation. As the Court’s conservatives incrementally make it more difficult to pursue class litigation, the Court’s liberals have become more vociferous in expressing their dismay over shrinking access to justice for large groups of claimants.

The Court’s six class action cases embraced a grab bag of issues. The two most closely watched cases, Amgen, Inc. v. Connecticut Retirement Plans and Trust Funds (Docket No.11-1085) and Comcast v. Behrend (Docket No.11-864), dealt with class certification requirements. In another pair of appeals the Court again returned to its fascination with problems of class-wide arbitration clauses:  Oxford Health Plans LLC v. Sutter (Docket No.12-135) and American Express Co. v. Italian Colors Restaurant (Docket No.12-133).  Finally, two appeals addressed jurisdictional requirements for class actions:  in Standard Fire Ins. Co. v. Knowles (Docket No.11-1450), the Court considered pleading issues under the Class Action Fairness Act of 2005, and in Genesis HealthCare Corp. v. Symczyk (Docket No.11-1059) the Court focused on standing issues for collective actions under the Fair Labor Standards Act.

This article evaluates the significance and impact of the Court’s six class action decisions during the 2012-13 term, commenting on the Court’s incremental refinement of Rule 23 as well as the Court’s failure to address significant class action issues.

Arizona Court Strikes Down Arbitration Clause as Too Expensive for Plaintiff

By F. Paul Bland   On Twitter @PblandBland

This is a classic good news/bad news type of case for plaintiffs.  The good news is that a court struck down as unconscionable an arbitration clause that imposed enormous fees on an individual before the individual could go to arbitration.  The bad news is that the case shows what a heavy evidentiary burden is placed on plaintiffs.

In Clark v. Renaissance West, a man sued a nursing home for medical malpractice, alleging that neglect had caused him to develop a severe pressure ulcer that caused enormous problems.  The nursing home (of course) tried to force the case into arbitration.  An Arizona state Court of Appeals held that the man had proven that the arbitration clause would impose prohibitively expensive costs of arbitration on him before he could pursue his claim, and it struck down the clause as unconscionable.

The court held that a plaintiff alleging that an arbitration clause would be prohibitively expensive has the burden of showing specific facts proving that claim, with reasonable certainty.  So in this case, the plaintiff had an expert who testified about the average hourly rates of arbitrators in the Phoenix area (hundreds of dollars an hour), and who testified that the complexity of the plaintiffs' claims would require him to put forward testimony from enough expert and fact  witnesses that an arbitration hearing on his claims would likely take five days.  Because the arbitration clause required that any case be heard by a three arbitrator panel (a typical sign of a clause where a corporation is trying to make arbitration too expensive for the individual), the upshot is that the plaintiff -- a retiree with a fixed income -- would have had to pay $22,800 to arbitrate his claims, and he couldn't afford it.

This case is instructive for plaintiffs' lawyers.  While most sophisticated corporations are willing to pay nearly all the cost of arbitration (mostly because they want to ban class actions, and they don't want to lose their shield against class action liability because they've gouged individuals with prohibitive arbitration costs), other types of corporations -- and nursing homes are by far the worst actors in the marketplace right now on this point -- DO like to stick individuals with enormous fees to arbitrate claims.

The key, though, is that plaintiffs' lawyers have to really put some effort into proving how expensive arbitration is.  Every year, when I sit and read through stacks of cases involving unconscionability challenges to arbitration clauses when I'm working on updating the National Consumer Law Center's manual Consumer Arbitration Agreements, I see a ton of cases where courts rejected challenges to arbitration clauses because the plaintiffs hadn't proven their case adequately.  This case shows that plaintiffs CAN win these challenges, but that they have to really shoulder the heavy evidentiary burden that most courts will put on them.

Hawaii Supreme Court Says No Arbitration Without Meaningful Consent

By Paul Bland, On Twitter  @PblandBland

 

This is a case with very painful facts – according to the complaint, a Kaiser patient went in to see his doctor and was told he had a particular type of cancer that his doctor wasn’t familiar with, but would do “internet research” about, that he might die within a month or so from the cancer.  Then the doctor proposed surgery.  The patient decided to go to another hospital (Duke) to get a second opinion (you can see why that would have seemed like a really good idea), and discovered he had a different type of cancer which should be treated a different way.  (Duke’s treatment worked.)  Kaiser refused to cover the costs of the treatment at Duke, saying it was “elective, non-emergency, non-urgent care.”  (Query about what illness would be more “urgent” than one that might kill you in a month.  The guy sued Kaiser, which (naturally) tried to force him into arbitration.

Kaiser's arbitration clause, by the way, like so many of them, would have required the plaintiff to pay substantial costs to arbitrate his case, has sharp limitations on the plaintiff's ability to take discovery, and has onerous secrecy provisions. 

The trial court enforced the arbitration clause, but the Hawaii Supreme Court reversed, finding in a great opinion that there had been no mutual assent or meeting of the minds.  The court noted that the burden was on Kaiser, as the party moving to compel arbitration, to demonstrate that the patient had assented to arbitration.  The court held that to form an agreement to arbitrate, a contract must be unambiguous as to the intent of the parties to submit disputes to arbitration.

The court points to a variety of useful facts in finding that there was not assent:  the enrollment form referenced “terms and conditions,” but the group agreement had no section with that title; there was no signature line for an applicant to acknowledge having read or received the documents; that there was no evidence that the agreement was ever provided to the HMO member; the arbitration clause was substantially amended but the changes were not included in communications to the HMO members in a “Summary of Important Changes.”  Basically, Kaiser's argument amounts to this:  the patient could have found it if he's pestered his employer for every piece of paper related to his health plan and read through it.  And the Court found this unpersuasive -- no real person would have had meaningful, realistic notice that they were supposedly giving up these important rights.

Having lost on consent, Kaiser then offered a grab bag of arguments for how the court might enforce the arbitration clause even where the member didn't agree to it.  So Kaiser argued that the HMO member’s employer was his “agent” for the purpose of agreeing to arbitration; that he was a third party beneficiary of a contract between his employer and Kaiser that provided for arbitration; that he was estopped from pointing out that he’d never agreed.  The Court rejects each of these arguments for a variety of legal reasons; none of these technicalities was sufficient to supplant the idea that arbitration is supposed to be a matter of consent, for people who agree to it.

The bottom line is that “In this case, the Enrollment Form that Michael signed did not reference the arbitration agreement and the record does not establish that Michael was otherwise informed of the existence of the arbitration agreement, much less that he assented to it.

 

Congratulations to Matt Winter of Davis Levin Livingston in Honolulu for this fantastic achievement.  This is one of the best decisions I’ve seen all year.

Nevada Federal Court Strikes Down Egregiously Unfair and Hidden Arbitration Clause

By Paul Bland

On Twitter: @PBlandBland

 

    In the wake of recent Supreme Court decisions, forced arbitration clauses are generally enforced unless a corporation sticks something particularly overreaching and unfair in its arbitration clause, or drafts an arbitration clause in an unusually stupid way.  A U.S. district court in Nevada just found that Zappos did both in its arbitration clause in a privacy/security breach class action, and in a thoughtful opinion refused to enforce Zappos’ arbitration clause.

     First, the unusually stupid part.  Most on-line retailers require consumers to click on a button saying that they agree to all the fine print terms and conditions (what Elizabeth Warren famously called “word barf”), which generally included forced arbitration clauses.  Zappos was lazier than the average bear, though, and as a result the court refused to enforce its arbitration clause. Zappos’ arbitration clause provided that “Accessing, browsing or otherwise using the site indicates your agreement to all the terms and conditions in this agreement, so please read this agreement carefully before proceeding.”  Go back and read that sentence again.  Really?  According to this, if I simply BROWSE on a website, look say at one paragraph of text, that means I’ve agreed to word barf buried in some link on some other page or some other part of the clause?

     Well, not so much, it turns out.  In this case, the federal district court held that the consumer plaintiffs had not agreed to an arbitration clause merely because the arbitration clause was on the defendants’ website.  The court noted that there was no evidence that the plaintiffs had actual knowledge of the arbitration clause (I suspect it would take someone with OCD, or perhaps a descendent of the Amazing Kreskin to have actual knowledge of the arbitration clause), and that there was not reasonable notice of the terms of the clause.  The court noted that the clause was inconspicuous and buried.

     In one striking passage, the court (quoting another recent case), remarked that “Very little is required to form a contract nowadays–but this alone does not suffice.”  More hopefully, the court stated that “the Internet has not changed the basic requirements of a contract, and there is no agreement where there is no acceptance, no meeting of the minds, and no manifestation of assent.”

     Now for the particularly overreaching and unfair part.  Zappos’ clause states, “We reserve the right to change this Site and these terms and conditions at any time.”  In keeping with a long line of cases from around the country, the court held that this rendered the arbitration clause “illusory,” because Zappos had the sole power to unilaterally change the terms at any time.

     It’s nice to see a court still paying attention to the idea that arbitration clauses, as much beloved as they are by the U.S. Supreme Court, still must meet certain extremely low minimums of fairness and consent.  This decision is plainly right, and in accord with a lot of other cases, but it’s still very welcome.

Pa appellate court holds nursing home's arbitration clause doesn't cover tort claims

by Paul Bland

On Twitter @PblandBland

 

In Setlock v. Pinebrook, a Pennsylvania appellate court read a nursing home's arbitration clause to cover only the types of disputes named, refusing the home's invitation to re-write the clause more broadly.

This is a tragic wrongful death and survivorship case, where nursing home personnel allegedly accidentally moved an elderly woman in a wheelchair in a negligent way that resulted in tossing her onto her head and face, which killed her.  The arbitration clause focused on disputes arising out of the Resident Agreement, and many of the surrounding paragraphs of the agreement deal with billing disputes, late fees, price increases, financial services, etc.

After discussing the details of the contract language at some length, the intermediate Pennsylvania state appellate Court concluded that the dispute predominantly dealt with financial obligations and contract terms, and was not intended to cover tort claims.

One issue lurking behind the opinion is how arbitration clauses are to be interpreted.  Corporations often turn to language from a 1983 U.S. Supreme Court decision, Moses H. Cone, which indicates that arbitration clauses should be interpreted generously to find that claims arising under them are arbitrable.  But in a subsequent decision, the Supreme Court applied the normal rule that a contract is to be construed against its drafter, in the case of Mastrobuono v. Shearson Lehman Hutton, Inc., 514 U.S. 52, 63, (1995), and the relationship between these two cases has often come up in lower court decisions. 

 

The family's lawyer, John R. Kantner, did a terrific job presenting the case to the court.

Pottow Paper (with others) Compares Canadian and US Arbitrabilty Rules

John A. E. Pottow of Michigan, and two recent graduates, Jacob Brege and Tara J Hawley, have written A Presumptively Better Approach to Arbitrability, 53 Canadian Business Law Journal (2013).  Here's the abstract:

One of the most complex problems in the arbitration field is the question of who decides disputes over the scope of an arbitrator’s purported authority. Courts in Canada and the United States have taken different approaches to this fundamental question of “arbitrability” that necessarily arises when one party disputes the contractual validity of the underlying “container” contract carrying the arbitration clause. If arbitration is a creature of contract, and contract is a product of consensual agreement, then any dispute that impugns the underlying consent of the parties to the container contract implicates the arbitration agreement itself (i.e., no contract, no arbitration agreement).

The U.S. approach of “separability” dates back a half-century to a Supreme Court case that was controversial when it was decided and remains so today. The Supreme Court has added several more decisions trying to clarify its arbitrability rules within just the past few years. The Canadians too have tried to sort out this mess, seizing upon the hoary legal distinction between law and fact, also offering recent Supreme Court pronouncements. Neither country’s approach is normatively or functionally satisfying.

After discussing and critiquing the two approaches comparatively, we offer our own proposal. We too deploy legal presumptions, but in our case we focus on what we contend are the two most relevant criteria: (1) the nature of the legal challenge to the underlying container contract, and (2) the type of contract at issue. Challenges to consent in contract formation and contracts involving adhesion should be specially scrutinized by the courts before carting parties off to arbitration, whereas commercial agreements between sophisticated actors should presumptively be for arbitral resolution, even for “constitutive” challenges to the underlying contract.

Another day, another decision wiping away consumer claims on alter of forced arbitration

by Paul Bland, Senior Attorney, Public Justice, Of Counsel, Chavez & Gertler 

On Twitter @PblandBland

In Kennedy v. Wells Fargo, Judge King of the Southern District of Florida enforced another arbitration clause that tosses out consumer claims in the multi district litigation involving checking overdraft claims.  The plaintiffs had several arguments that the particular arbitration clause at issue in this case was unconscionable, but the district court batted those aside. 

Under the U.S. Supreme Court's decision in Rent-A-Center v. Jackson, 130 S. Ct. 2772 (2010), if an arbitration clause has a provision stating that challenges to the enforceability of the arbitration clause (such as unconscionability arguments) are delegated to the arbitrator, then (with a few exceptions, none apparently applicable here) courts are not to consider such challenges but just compel arbitration and let the arbitrator consider them.  I have used the old cliche of such clauses creating a Fox Guarding the Henhouse situation, as arbitrators VERY rarely (if ever) strike down arbitration clauses.  Not to be overly cynical, but one reason for arbitrators not to do this is that if they strike down the arbitration clause, then they can no longer bill the file by the hour for work done arbitrating the dispute.  In any case, the empirical experience of the many consumer lawyers with whom I have spoken is pretty clear about what happens where courts have enforced these so-called "delegation clauses."  I have heard of a few cases where arbitrators re-wrote the clauses somewhat, but I have yet to learn of a case where an arbitrator tossed out the entire clause, as many courts have done in the past.

In this case, Judge King noted that the arbitration clause contained a so-called "delegation clause" leaving unconscionability challenges to the arbitrator, and that was the end of the matter.

This is just another example of how harmful mandatory arbitration clauses are for consumers.  This case is one of a host of cases against banks involving a shady practice whereby banks manipulate the order in which they cash checks in a way that dramatically maximizes the number of hefty late fees their customers will end up paying.  In cases where banks did not have arbitration clauses, or the arbitration clauses were defeated for various reasons, a number of lenders who engaged in this practice were forced to refund tens and sometimes hundreds of millions of dollars to rooked consumers.  In cases such as this one, where the forced arbitration clause is enforced, the consumers have gotten and will get NOTHING back from the banks.

There are a lot of cases like this. I recently wrote a posting at the Public Justice blog documenting another situation where consumers did very well where they defeated forced arbitration clauses and were wiped out when they did not.

 This is the type of case that legislators and appropriate regulatory officials should be notcing.