Consumer Law & Policy Blog

En Banc Ninth Circuit Court Strikes a Blow for Fairness and Common Sense in Dispute Resolution

by Michael J. Quirk and Kate Gordon

Nearly two years after a Ninth Circuit panel wrongly held that arbitrators, not courts, should decide whether arbitration clauses are unfair and invalid under state law, the en banc Court came out with a decision firmly bringing the law back on track. In the case of Nagrampa v. MailCoups, Inc., No. 03-15955 (9th Cir. Dec. 4, 2006) (en banc), the U.S. Court of Appeals for the Ninth Circuit restored the rights of parties to challenge contracts that unfairly strip them of access to the civil justice system. In doing so, the en banc court overturned the earlier three-judge panel, whose misapplication of federal law would have allowed companies to enforce one-sided and abusive mandatory arbitration clause terms against workers, consumers, and small-business franchise operators like Connie Nagrampa.

Ms. Nagrampa’s victory comes after a long and complicated saga. She first attempted to open her own business in 1998 as a direct mail coupon advertising franchise operator. When Nagrampa contracted for this franchise with Mailcoups, Inc., a Massachusetts corporation, the company’s sales representative told her she would receive a 41% profit return on her investment. Instead, she incurred over $180,000 in personal debt, while paying Mailcoups over $400,000 in fees. Backed into a financial corner, she terminated the franchise after just two years.

Not content with the fees it had already collected from Nagrampa before she terminated the franchise, Mailcoups filed an arbitration action against her seeking another $80,000 in fees. Mailcoups filed this action pursuant to a standard-form mandatory arbitration clause in its franchise contract – a clause that it requires all franchise operators to accept. The arbitration was originally filed in Los Angeles. Nagrampa objected, requesting that the arbitration be moved nearer to her home and work in the San Francisco Bay area; she also objected to the burdensome cost of arbitration. The American Arbitration Association instead transferred the arbitration even further away, to Boston, the venue designated by Mailcoups in its arbitration clause. Nagrampa again objected to the venue and costs, arguing that these conditions effectively barred her from participating and putting forth her claims in the arbitration, but the arbitration proceeded without her. The arbitrator ultimately entered an order requiring Nagrampa to pay Mailcoups over $160,000.

Ninth Circuit En Banc Arbitration Decision

     By Brian Wolfman

    The Ninth Circuit, sitting en banc, has issued opinions in an arbitration case involving a dispute between a franshisor and franchisee.  See Nagrampa v. MailCoups, Inc., No. 03-15955 (Dec. 4, 2006).  The en banc majority held that because the gist of the franchisee's challenge went to the arbitration provision within the franchise contract and not the invalidity or enforceability of the contract as a whole, the federal court, as opposed to an arbitrator, was required to decide whether the arbitration provision was invalid under the Federal Arbitration Act, 9 U.S.C. 2.  The majority then went on to find the arbitration provision unconscionable in many, many ways under California law.  A partial dissent agreed that the question was one for the court, but disagreed that the arbitration provision was unconscionable.  One full dissent maintained that the issue should have gone to an arbitrator, and, in any event, the provision was not unconscionable, while another really full dissent agreed on those points and added that the franchisee had waived any challenge to the arbitration provision.  The opinions are long and boring, and so are only for the well-rested.  TLPJ's Kate Gordon, Leslie Bailey, and (CLP Blog contributor) Paul Bland are among the lawyers in the case.

Overlooking the Obvious in the Supreme Court's Disappearing Docket?

by Chris Peterson

Today's  New York Times reports that the Supreme Court has granted cert to 40% fewer cases this term than last.  Furthermore, "[t]he number of cases the court decided with signed opinions last term, 69, was the lowest since 1953 and fewer than half the number the court was deciding as recently as the mid-1980s." All this despite Chief Justice Roberts' stated intention to take more cases under his leadership.

The article goes on to speculate on possible causes of the decline. Some Court watchers hypothesize that the Justices are refusing to vote for cert. because they are worried about loosing. Others speculate that because Congress has not passed as many statutes lately, there are fewer circuit splits on statutory interpretation. A former Deputy Solicitor blames the clerks wondering if they refuse to recommend cert because they are afraid of loosing the high court equivalent of "street cred."  The article also quotes Orin Kerr who suggests we might all be better off anyway.

The Justices themselves are apparently at a loss. The Times reports that "[i]n private conversations, the justices themselves insist that nothing so profound is going on, but rather seem mystified at what they perceive as a paucity of cases that meet the court’s standard criteria."

Here's another clue in the mystery of the declining docket: maybe the cases are being arbitrated. Readers of the Consumer Law and Policy Blog are familiar with the chorus of complaints on the increasing use of mandatory, binding arbitration clauses in boilerplate contracts with borrowers, buyers, and employees. A significant bulk of disputes over federal regulation can now be effectively diverted out of the judicial system into a private, secret, profit-seeking, dispute resolution system. Many doctrinal areas we should expect to create a significant amount of appellate litigation--employment discrimination, employee benefits, warranty law, and consumer credit law--are all amenable to arbitration. The country cannot develop circuit splits without stare decisis.

Obviously we will not know until someone comes up with an empirical study showing the effect of arbitration on the volume of cases meeting the Supreme Court's cert. criteria. Coming up with reliable control variables would probably be tough. I am wondering whether anyone out there in the blogosphere has any clever ideas on a way to measure this?

Choosing Between Judicial and Arbitral Fora in Class Actions

by Mike Quirk

This is a response to Roger Mandel's post from earlier this week, "Arbitration: Should it Sought Rather Than Fought?", and is the third in a series of posts on arbitration and class actions.

Roger has provided an important and provocative analysis that we practitioners who represent consumers must give serious consideration. In light of the data Roger has gathered and analyzed, consumer class action lawyers must give serious consideration to the pros and cons of the judicial and arbitral fora before proceeding with particular cases.

What follows is meant as a critique not of Roger's analysis, but of the actual arbitral system he describes. This arbitral system for deciding when cases may or may not proceed as class actions raises serious questions of sensibility, legitimacy, and ultimately sustainability.

1. Sensibility

The first step in this process is a "clause construction phase," where the arbitrator decides if a clause allows for class arbitration. But, as described, the case only gets to the arbitrator for this determination if the ARBITRATION SERVICE has already determined that the clause is silent concerning class actions (which it is not in the vast majority of cases where companies now expressly ban class claims). Putting aside the appropriateness of the service making this pre-threshold determination, what is an arbitrator to do in "interpreting" a provision already found to be silent on the subject at issue?

More fundamentally, what is the sense of looking to a contract to determine what procedures will govern a dispute? Can any of us imagine a court or other competent decision-maker deciding class certification, discovery rights, or rights to present testimony by looking to a private contract rather than neutral and generally applicable rules? It is an indisputable fact that consumer arbitration clauses are written by businesses. Having already allowed the business party to pick the forum, why would we let the party to a dispute write the rules by which the dispute is going to be resolved?

Arbitration: Should It Be Sought Rather Than Fought?

by Roger L. Mandel

Mr. Mandel is an attorney at Stanley, Mandel and Iola of Dallas, Texas. CL&P invited him to discuss the following original and provocative proposal, which he presented at a panel on class actions & arbitration at the NCLC Class Action Symposium in Miami last month. This post is the second in a series based on that panel; in the first post, Mike Quirk discussed judicial decisions striking down class arbitration bans.

Plaintiffs’ class action lawyers have long fought tooth and nail against mandatory arbitration clauses. Today, in some instances they may be advised to file arbitrations rather than fight the arbitration clauses in court.

Class Arbitration Rules

Many arbitration clauses specify or allow use of the American Arbitration Association (“AAA”) or JAMS as arbitration providers. Both of those providers have specifically enacted class arbitration rules, which are available on their websites, www.adr.org and www.jamsadr.com, respectively. Both sets of rules provide for a three-step process in class arbitration:

1. A clause construction phase during which the arbitrator decides whether the arbitration clause in question allows for class arbitration;

2. If the arbitrator finds that class arbitration is allowable under the arbitration clause, a class certification phase pursuant to standards identical to Federal Rule of Civil Procedure 23; and

3. Decision on the merits of either the classwide or individual claims.

At the end of both phase 1 and phase 2, the arbitrator enters interim awards and is required to stay the proceedings for thirty (30) days to allow either party to appeal the interim award in court. If an interim award is appealed, the arbitration remains stayed during the pendency of the appeal.

In addition to its class action rules, AAA has a class arbitration policy. Under that policy, it will place on its class arbitration docket any claim involving an arbitration clause that is silent as to class arbitration. It will refuse, however, to place on its class arbitration docket a case that contains an explicit class arbitration ban. JAMS does not have such a policy and will place on its class arbitration docket any claim that is filed as a class action, regardless of the contents of the arbitration clause.

Both providers maintain special national panels of class action arbitrators. Based on my review of those panels, most plaintiffs’ lawyers would prefer the JAMS panel, although there are a number of acceptable choices on the AAA panel.

Running the Numbers: The Role of the Arbitrator's Incentives

AAA maintains on its website its entire class arbitration docket, which is extensive. It posts the claims (complaints) and all of the interim and final awards entered by the arbitrators. This allows research into trends in AAA class arbitration.

Sen. Tim Johnson (D-Citibank) Wants to Roll Back Landmark Law on Predatory Lending to Military Servicemembers

by Ira Rheingold

While many in the consumer advocacy community are excited about the recent change to leadership in Congress, we need to recognize that oftentimes there is not a dime’s (make that a corporate millions) bit of difference between Democrats and Republicans when it comes to the issues we care about.  Just check out these quotes, about the great legislation on predatory lending to the military (the Talent-Nelson amendment) that was passed just this October, from a leading Democrat on the Senate Banking Committee in Wednesday’s American Banker:

Sen. Tim Johnson said in an interview that a top priority is the military lending measure, which caps at 36% the annual percentage rate, including fees, that can be charged to service members and their dependents. The South Dakota Democrat warned that the provision--intended to curb payday lending--may interfere with the credit system.

The measure "may have a lot of unintended consequences that will go far beyond just the payday industry," he said. "We are going to have to revisit that issue and make sure that the end result of this legislation isn't to deny military members and their families access to banking services that they've always assumed would be there."

Opening the Door Back Up for Consumer Claims

by Mike Quirk

This is a followup to a panel presentation given at NCLC's Class Action Symposium in Miami earlier this week.  Over the past year, consumers have continued to make progress fighting back against companies that impose mandatory arbitration clauses banning arbitral awards of class-wide relief.  Consumers prevailed on challenges to these clauses before the U.S. Court of Appeals for the First Circuit and the State Supreme Courts of Illinois and New Jersey.  The carefully reasoned decisions of these three courts give consumers the chance to assert federal and state law claims that the class bans would have extinguished.

While these decisions represent important victories for consumers, none is an unqualified victory.  For consumers and their advocates who continue to encounter these clauses, there are at least two important lessons to be taken from the recent appellate decisions.  First, none of these courts holds that class arbitration bans in consumer contracts are per se unenforceable.  Rather, the decisions invalidating the bans turn on particular characteristics of the claims that were before each court.  Second, in assessing the validity of these class bans and whether it would be prohibitive for consumers to bring claims individually, each of the three courts was influenced by different factors.  What follows is a short overview of these decisions to hopefully guide consumers and advocates who will need to rely on these cases as companies continue to hide behind these class arbitration bans.

Real ADR

by Richard Alderman

For several decades, alternative dispute resolution (ADR) has been viewed as the savior of the American civil justice system.  ADR is viewed as providing a voluntary, cheaper, quicker, and more efficient alternative to our slow, expensive justice system.

Like most, I support the notion of ADR.  How can anyone argue with an alternative system that is cheaper, quicker and more efficient?  I have long had problems, however, with what currently passes for ADR. Arbitration, especially in the context of consumers, is fast becoming the norm, rather than an alternative, and it is anything but voluntary or cheaper, not to mention the problems of unfairness and the elimination of precedent and stare decisis.  Mediation, while better in theory, is often used only late in the civil justice process and simply adds another expense and formal process.  When I graduated from law school, we were told most cases settle “on the courthouse steps.”  Today, students are told they settle in formal mediation, and that your client must pay the fees of the mediator.

This is not to say I don’t support an alternative way of resolving disputes. In fact, I think arbitration, when truly voluntarily agreed to, can be an excellent forum, and mediation, if pursed early in the litigation process, can often result in a prompt settlement, without much of the cost and hostility of litigation.

Perhaps we should be thinking outside of the box when it comes to consumer ADR.  For example, how about compulsory mediation held promptly after the dispute arises, allowing the parties to try to work out their differences?  What about allowing the parties to make a post-dispute decision to utilize an informal consumer court that conducts hearings in the evening or on the weekend, and promptly issues a binding judgment for parties who agreed to use it?  Could we create a less expensive, truly voluntary, form of arbitration?  Or, maybe trade associations could form tribunals to resolve disputes, settling claims through a common fund.  Like worker’s compensation, members’ fees could be based on the past history of complaints.  Finally, how about authorizing designated consumer organizations to act as “private attorney generals,” and maintain litigation on behalf of aggrieved consumers, limiting relief to restitution or repair?

Alternatives to our current form of ADR do exist, and should be considered. Can they work?  To see a truly innovative way of dispute resolution, take a look at the Tokyo Tuna Court, discussed in Eric Feldman’s article, The Tuna Court: Law and Norms in the World's Premier Fish Market, 94 Cal. L. Rev. 313 (2006) (describing how "Tokyo's tuna merchants make use of a highly specialized court created by the state--the Tuna Court--that follows formal rules and procedures that are contained in a government ordinance. The supposed disadvantages of legal rules are nowhere apparent. The Tuna Court is fast and inexpensive, and the process of articulating and resolving claims serves to strengthen individual relations and the cohesion of the market community.").

"Outsourced Justice"

by Deepak Gupta

This weekend's Los Angeles Times Magazine included a lengthy and critical look at arbitration in California.  The piece covers a wide spectrum, from the voluntary resolution of commercial and marital disputes to industry's use of binding mandatory binding arbitration as a means of stifling consumer grievances.  But perhaps the most telling--and certainly the most ironic--feature of the article is that the author couldn't even get it published in the Times without first submitting to the very evil at which his criticism is directed:

[B]ecause arbitration clauses are often buried in fine print, employee manuals or the junk that comes with credit card bills, "people are obviously entering into these agreements without any understanding of what rights they're giving up," [California Supreme Court Justice] Ronald George says.

I do know what I gave up. To write this story, The Times made me sign a contract in which I "waive and give up any right to a jury trial" if I wind up with a grievance against the newspaper.  Instead, I've got to use JAMS.  I'd rather have a jury than a JAMS judge decide such things.  But, practically speaking, I had no choice.

More on Unaccountable Arbitrators

  by Scott Nelson

Paul Bland concludes his post on the extraordinary leeway that courts give arbitrators to botch legal and factual issues by saying, "If that is a system of judicial review that is 'sufficient,' I’d REALLY hate to see what an insufficient judicial review system would look like."

Paul might've gotten his chance to see an insufficient system if the petitioners in John Hancock Life Insurance Co. v. Patten, No. 06-49, had convinced the Supreme Court to hear their claim that even the extremely limited review now available for arbitration awards that are issued in "manifest disregard of law" is too much -- even though, by the petitioners' own count, challengers to arbitration awards have prevailed under that standard in only six reported federal cases over the past fifty years!  As Deepak Gupta reported a couple of days back, the Court denied certiorari in Patten, but I expect that industries that seek to channel consumer claims into arbitration will continue to look for opportunities to get the Supreme Court to kill the manifest disregard standard.  Their chances to attack the standard, however, are limited by the fact that they almost never lose under it.  One might think they'd be content to leave well enough alone.

Meanwhile, one of the other cases Paul mentions -- the Wise v. Wachovia Securities case, where Judge Posner stood up for the right of arbitrators to issue "wacky" decisions in contract cases -- is also the subject of a petition for certiorari filed by the plaintiffs who lost in the court of appeals.  The petition, No. 06-331, was filed September 5, and will probably be up for consideration at the Court's November 9 Conference.  Although I haven't yet seen the petition, I doubt if it directly challenges Posner's "wacky" comment because the comment appears to be dictum.  (It referred to the standard applicable in a case involving contract interpretation, which, as he noted, was not the issue in Wise.)  The principal issue the plaintiffs raised in the Seventh Circuit was the absence of any evidence to support the arbitration award, a claim that Judge Posner also found to be an insufficient basis for a judicial challenge.  In any event, we'll keep tabs on the petition and report on the Court's disposition of it.