Consumer Law & Policy Blog

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.

Talking Arbitration, the Supreme Court, and Civil Rights

I'm presenting at a few CLE programs over the next few days and I thought readers of the blog might be interested. The first can be accessed via phone; the other two will be at the American Association of Justice's Annual Convention in San Francisco:

• A one-hour phone briefing on American Express v. Italian Colors: Practical Implications for Class Action Attorneys, on Tuesday, July 23 at 10-11 Pacific/1-2pm Eastern. I represented the respondents in Italian Colors and will be joined by Archis Parasharami of Mayer Brown, who represented the U.S. Chamber of Commerce as amicus.  The program is moderated by Professor Thomas Stipanowich of Pepperdine Law, a leading expert on the law of arbitration. (There's a $25 discount for CL&P readers.)

• A talk on the U.S. Supreme Court Term in Review to AAJ's Civil Rights Section, Monday, July 22, 11am.

• A talk on Arbitration Developments to AAJ's Class Action Litigation Group, Tuesday, July 23, 2:15pm.

Times Report: Automakers Push Back Against Consumer Protections

Here.  The story is about how car makers are using arbitration clauses to defeat consumer protections, including state lemon laws, and keep defects secret.

Charles Schwab drops its class-action ban, at least for now

In February, the brokerage firm Charles Schwab won a ruling from a hearing panel of FINRA, the financial industry regulatory authority, invalidating FINRA's rule against class-action bans and allowing Schwab to use a class-action ban in its customer agreements.  The panel concluded that "the amended language used in Schwab's customer agreements to prohibit participation in judicial class actions does violate FINRA rules, but that FINRA may not enforce those rules because they are in conflict with the Federal Arbitration Act," as interpreted by the U.S. Supreme Court in AT&T Mobility v. Concepcion.

Now, just three weeks after Public Citizen launched a campaign to shame Schwab into dropping its class-action ban, it has done just that -- at least for now.  Here's Public Citizen's statement and here's Schwab's statement describing its decision:

SCHWAB STATEMENT ON CLASS ACTION WAIVERS

SAN FRANCISCO, May 15, 2013 — The Charles Schwab Corporation today made the following statement about class action waivers in Schwab client account agreements:

Effective immediately, Schwab is modifying its account agreements to eliminate the existing class action lawsuit waiver for disputes related to events occurring on or after May 15, 2013 and for the foreseeable future.

While the company believes that dispute resolution is best handled via FINRA arbitration, we have chosen to voluntarily remove the waiver going forward until the issue is resolved by the appropriate regulatory and/or court decisions.  Given that the process will likely take considerable time to resolve, and may leave clients with a degree of uncertainty about their dispute resolution options in the meantime, we have elected to remove that uncertainty until the legal and regulatory process is completed.

To help ensure that small investors have access to pursue any claims they consider appropriate within the arbitration forum available to them, we will continue our existing policy of paying for the arbitration fees of any investor electing to pursue an arbitration claim under $25,000 against Schwab.

Related articles

UPDATE 1-Schwab reverses ban on client class-action lawsuits

Charles Schwab Drops Forced-Arbitration Clause From Contracts

Walmart Sequel - More SCOTUS Hostility to Class Actions

Today the Supreme Court ruled in Comcast Corp. v. Behrens that an antitrust class action was improperly certified because Justice Scalia and four other Justices found the plaintiffs' damage theory inadequately supported by expert testimony.  Others will no doubt have more to say on this, but I found the majority opinion transparently result-oriented, and disturbing in its cavalier implications.  The issue on appeal, as the dissent points out, was reframed several times by the Court, and began as whether factual issues that go to the merits of a claim should be resolved in deciding whether to certify a class action under Rule 23.  The majority opinion answers that question in the affirmative, and then goes on to reverse both lower courts' factual rulings on the damage proof issue as erroneous. 

Worse, Justice Scalia assumes, without explanation, that if the plaintiffs' class-wide damages theory fails, then a class cannot be certified under Rule 23(b)(3).  That part of the rule requires that common issues of law or fact predominate over individual issues.  It does not require that damages  be proved on a class-wide basis.  In a given case, common issues of liability might predominate over individualized damages issues.  The opinion does not say that Rule 23(b)(3) precludes class actions where individual damage determinations are necessary, and the dissent insists that such is not the holding, but the logic of the reversal is hard to square with any other reading. 

Freer on Recent (and Future?) Supreme Court Class Action Cases

Richard D. Freer of Emory has written The Supreme Court and the Class Action: Where We Are and Where We Might Be Going.  Here's the abstract:

In 2010 and 2011, the Supreme Court decided five class action cases. In 2012, it has agreed to hear four more. This piece summarizes what the Court has done and where it appears to be going concerning aggregate litigation. The goal of this piece is more practical than theoretical: to place all nine cases in context and draw preliminary conclusions about the impact these cases have had and will have --not only on class action practice, but in other areas, including the Erie Doctrine, waivers of class arbitration, anti-suit injunctions, the binding effect of judgments on class members, enforcement of Rule 10b-5, and the apparent efforts of defendants to front-load litigation by demanding greater consideration of merits-based facts (and qualification of experts) at the class certification stage.

The cases dealing with waivers of class arbitration implicate the role of the civil suit in law enforcement. If small (usually consumer) claims cannot be pursued on an aggregate basis, they may never be vindicated; individuals and lawyers will not find it economically feasible to do so. Yet the Court appears unwilling to recognize a public-policy exception to the primacy of contract. Thus, if the underlying contract waives aggregate litigation or arbitration, apparently this will not be trumped by the concern that the relevant law (often consumer protection laws) will not be enforced through civil litigation.

 

 

Shay Lavie Paper on Class Actions

Shay Lavie of Harvard has written The Malleability of Collective Litigation, forthcoming in the Notre Dame Law Review. Here is the abstract:

In Wal-Mart v. Dukes (131 S.Ct. 2541 [2011]), Wal-Mart avoided class action because employment decisions were made by local supervisors. However, it was Wal-Mart who chose to delegate discretion; by doing so, it made class litigation less likely. Wal-Mart’s choice of business administration, then, substantially reduces its expected liability. This is but one example of a broader, overlooked phenomenon. Mass defendants can control, before the occurrence of damages, the scope of future collective litigation. Collective litigation procedures are malleable, sensitive to the defendant’s pre-damages choice of actions. The Article develops and substantiates this insight.

The Article elaborates on two manifestations of this phenomenon. First, defendants can avoid class actions by “individualizing” the prospective class, injecting individual differences that preclude class treatment. Second, defendants can selectively contract with future victims, buying out the stronger, leaving only weak victims with a claimable right, and reducing the prospective class’s capacity to litigate. Against this backdrop, the Article proposes an array of mechanisms to strengthen collective litigation procedures, including shifting the burden to defendants to justify the business action that prevented collective litigation, and taxing defendants for making the plaintiffs’ case weaker.

Ninth Circuit OKs Facebook class settlement, holding that it’s fair for all the settlement funds to go to a defendant-created foundation

by Greg Beck

The Ninth Circuit today upheld a district court’s decision approving a class-action settlement against Facebook over the company’s long-defunct “Beacon” program—one of the first of what turned out to be a long string of privacy fiascos for the social media company. With Beacon, Facebook teamed up with Blockbuster to post users’ video rentals online—allegedly without permission—thus running afoul of the Video Privacy Protection Act, which provides $2,500 in statutory damages for revealing private rental information.

Rather than giving class members any of their statutory damages, the settlement approved by the district court would give all the settlement funds—$9.5 million—to a new foundation created by Facebook to “educate” users about privacy. The court held that such a foundation sufficiently advanced class members’ interests in privacy, though Beacon does not appear to have been a failure of user education. If anything, Facebook was the one in need of privacy education.

Even worse, the settlement provided that Facebook’s own chief lobbyist would occupy one of the three seats on the foundation’s board, where he would influence the foundation’s distributions. The court was not troubled by the defendant’s retention of control over the damages, holding that the settlement was the product of compromise and need not be “ideal.” The court noted that no precedent disallowed cy pres funds on the ground of a defendant’s retention of control. That, however, is presumably true only because nobody has dared try it before.

Finally, the court concluded that, given the risks of litigation, it was reasonable and fair for class members to settle their $2,500 statutory damages claims in exchange for nothing.

In dissent, Judge Kleinfeld writes: "This settlement perverts the class action into a device for depriving victims of remedies for wrongs, while enriching both the wrongdoers and the lawyers purporting to represent the class."

Quite a decision. If this kind of thing is OK, I don't see any reason defendants won't find it an attractive option in many cases.

Myriam Gilles on Arbitration Clauses After Concepcion

Myriam E. Gilles of Cardozo has written Killing Them with Kindness: 'Consumer-Friendly' Arbitration Clauses after AT&T Mobility v. Concepcion, forthcoming in Notre Dame Law Review.  Herer's the abstract: 

In AT&T v. Concepcion, the Supreme Court struck California’s so-called “Discover Bank rule” – a judge-made rule providing that arbitration agreements attended by class action waivers are unenforceable, if those agreements are contained in standard form consumer contracts. But, arguably, Concepcion leaves open and unresolved the viability of a state law challenge to a bilateral arbitration clause which is shown, in a particular case, to impose a forfeiture of the claimant’s ability to vindicate his state law rights. Meanwhile, in the context of federal claims, the Second Circuit in American Express III reaffirmed in light of Concepcion its earlier holdings that a class action waiver contained in an arbitration agreement is unenforceable if it is proven in the individual case that the arbitration clause at issue would force the claimant to shoulder such costs as would prevent the claimant from effectively vindicating its federal statutory rights. On both the state and federal levels, then, cost-based vindication of rights challenges remain a significant concern to corporate defendants looking to exculpate themselves from exposure to aggregate litigation.

All of this begs a question this paper seeks to answer: will the robust recognition of cost-based, evidence-backed vindication of rights challenges swallow up the basic ruling of Concepcion, rendering unenforceable arbitration agreements and class action waivers that the Supreme Court has held are otherwise to be enforced?

It’s only natural.

By Steve Gardner

As litigation director for the Center for Science in the Public Interest, I follow private lawsuits involving deceptive marketing claims for foods. I’ve noted the significant number of lawsuits that focus on food companies’ willy-nilly use of “natural” to describe food products that are anything but.

Although USDA has a definition of natural that’s pretty workable (the ingredient must be “minimally processed”), the FDA has long refused to adopt its own definition or even to adopt the USDA’s definition.

Thus, companies slap the “natural” claim on foods with completely unnatural — and heavily processed — ingredients like high-fructose corn syrup, trans fat oils, and (a relative newcomer to the food ingredients category) high-maltose corn syrup.

Companies like to say that these ingredients are natural because they come from corn or other plants. To me, that’s like saying that a plastic spoon is natural because it comes from dinosaur.

And this cavalier attitude has resulted in a number of lawsuits. CSPI has been part of a small fraction of these lawsuits (e.g., Nature Valley, 7UP, and Capri Sun).

While it warms my heart to see so many companies having to defend so many deceptions, my heart would be even warmer if the food companies stopped making these claims.

Thus, we need some kind of clear definition of “natural” by FDA.

The question then becomes how to define the word. I don't give a dang what a scientist or a lawyer thinks “natural” means, because the only thing that matters in the marketplace is what consumers think.

Going to the grocery store should not become a pop quiz of one’s scientific or legal acumen. From a consumer-protection standpoint, all that matters is what a consumer thinks “natural” means.

FTC’s policy is to act if a marketing practice is deceptive or unfair to a "reasonable consumer acting reasonably under the circumstances."

But completely reasonable consumers often act irrationally. That doesn't make them unreasonable. Just mistaken.

Consumers may think something is natural when it isn't, or that something is not natural when it is. But the bottom-line truth (i.e., what a scientist or a lawyer might think) doesn't matter.

All that matters, from a consumer-protection perspective, is what consumers understand a claim of “natural” to mean. Purchasing decisions are not made based on lengthy and deliberative thought. They are often far from rational decisions.

That’s fine. We aren't robots. Consumers are entitled to make non-rational decisions — most marketing efforts are indeed aimed at getting consumers to do so.

But this ongoing deception must stop.

C’mon FDA, earn your keep!