Consumer Law & Policy Blog

Rent-an-Arbitrator

by Deepak Gupta

It's been a pretty busy week for arbitration issues at the Supreme Court.  Yesterday, the Court heard oral argument in Rent-a-Center v. Jackson, a potentially very important arbitration case that I've discussed here before. (Disclosure: We're co-counsel for respondents, along with Public Justice and the Hardy Law Firm of Reno, Nevada.) 

The question in Rent-a-Center is whether companies that draft forced arbitration clauses can delegate unconscionability challenges -- challenges by consumers and workers to the fairness of the arbitration clause itself -- to the arbitrator rather than the court.  If the Supreme Court answers yes, it could mean that the company's hand-picked arbitrator gets to decide whether it's fair for the company to hand pick the arbitrator. You can read the transcript here. All of the briefs are available here.

Justice Scalia's questions yesterday showed that he has little empathy for those who find themselves in the position of signing extremely one-sided arbitration agreements because of unequal bargaining power, often as a precondition of employment or the receipt of essential goods and services. Here's what he said:

JUSTICE SCALIA: you can be a stupid person who voluntarily signs an unconscionable contract. Now, the courts may protect you because you are stupid, but you haven't been coerced.

That's an actual quotation from the argument, not a caricature. I suppose this means that, in Justice Scalia's world, a person who takes a low-wage job as a dishwasher, say, or as a line worker at a chicken processing plant, because it's the only job he or she can get, is simply "stupid" if they sign an employment contract containing various unconscionably one-sided terms.

Thankfully, several other Justices (including Justices Breyer, Sotomayor, Stevens, Ginsburg, and Kennedy, and possibly even Chief Justice Roberts) seemed less sanguine about the prospects of leaving all unconscionability challenges to the arbitrator. Much of the questioning focused on whether the challenge to be decided goes to the whole agreement or only to specific provisions in the agreement, and there was much confusion on that point throughout the argument. I wonder whether these questions stem more from the Justices' unfamiliarity with how state-law unconscionability doctrine works than anything else. Perhaps an amicus brief of contract-law professors could have cleared things up.  The reality is that there's not much distinction between the two types of challenges; you challenge the whole clause as unconscionable and it's up to the court whether to sever the bad provisions or not (if they are in fact logically severable).

Here's a sampling of some of the more interesting coverage of the case:

• Tony Mauro's report on the argument at the National Law Journal quotes my prediction that this will be a "watershed" case if the badguys win, and highlights two amicus briefs that were mentioned during the argument, including the brief of prominent professional arbitrators supporting Mr. Jackson.

• Marcia Coyle, also of the NLJ, situates Rent-a-Center among the end-of-term blockbuster cases.

• Dahlia Lithwick at Slate offers her as-always colorful commentary on the argument (including some links to interesting articles on the debate over forced arbitration), but I think she may be misreading the Justices' votes based on some of yesterday's advocacy missteps.  My reading of the argument is that the case is actually much closer that she suggests.

• Elizabeth Wydra of the Constitutional Accountability Center has an excellent blog post on the arguments. She focuses on the same quotation from Justice Scalia that I mention above. She concludes: "If ever there were an oral argument that drove home the need to have a Supreme Court that understands, as President Obama and others have put it lately, how the law affects 'ordinary Americans'—this was it.

• Laurel Newby focuses on the Justice Breyer's odd "Joe Bananas" hypothetical.

• The ContractsProf Blog has had running coverage of the case over the past several weeks, including an online roundtable of scholars.

• Public Citizen President Rob Weissman had this op-ed on the case, which has run in several newspapers. At the Huffington Post, similar sentiments were expressed by Nan Aron of the Alliance for Justice and Anthony Tarricone of AAJ.

• Stanford law student Aaron Tang at SCOTUSblog offered this preview of the parties' arguments.

Supreme Court Decides Stolt-Nielsen: No Class Arbitration Where Clause is "Silent"

by Deepak Gupta

The opinions are here. The vote is 5-3. Justice Alito delivered the opinion of the Court, joined by Justices Roberts, Scalia, Kennedy, and Thomas.  Justice Ginsburg filed a dissenting opinion, joined by Justices Stevens and Breyer. Justice Sotomayor was recused.

The Court today holds that imposing class arbitration on parties who have not agreed to authorize class arbitration is inconsistent with the Federal Arbitration Act. The arbitration panel, in the Court's view, "exceeded its powers" under Section 10(a)(4) of the Act by imposing its own "policy choice" allowing a class action instead of identifying and applying a rule of decision derived from the FAA or from maritime or New York law.

The Court relies heavily on the basic principle that, under the FAA, arbitration “is a matter of consent, not coercion,” and that arbitration agreements must be "enforced according to their terms." (quoting the Volt case). It follows, the Court holds, that a party may not be compelled under the FAA to submit to class arbitration unless there is a contractual basis for concluding that the party agreed to do so. An implicit agreement to authorize class action arbitration is not a term that the arbitrator may infer solely from the fact of an agreement to arbitrate. The differences between simple bilateral and complex class action arbitration are too great for such a presumption. 

All of this, supposedly, is based on the FAA and is what Congress intended when it passed the Act in 1924. If you like, you can think of it as a special clear-statement rule of federal common law -- a rule that elevates hostility to class actions above ordinary principles of contract interpretation, not to mention statutory limits on judicial review.

We had filed a brief arguing that this case was not ripe for judicial review, both as a prudential matter and as a matter of the Federal Arbitration Act, which limits judicial review of arbitral decisions to final "awards."  The arbitral panel had decided only a preliminary issue of clause construction, had not even certified a class, and issued no "award." Justice Ginsburg's dissent echoes those arguments. She would have dismissed the case as improvidently granted.

Even if Stolt-Nielsen had a plea ripe for judicial review, Justice Ginsburg goes on to say, the Court should have rejected it on the merits. She stresses that the parties jointly "asked the arbitrators to decide whether the arbitration clause in their shipping contracts permitted class proceedings. The panel did just what it was commissioned to do. It construed the broad arbitration clause and ruled,expressly and only, that the clause permitted class arbitration. The Court acts without warrant in allowing Stolt-Nielsen essentially to repudiate its submission of the contract-construction issue to the arbitration panel, and togain, in place of the arbitrators’ judgment, this Court’s de novo determination."

Stolt's implications for the larger debate over forced arbitration in consumer and employment cases are troubling -- especially for the ongoing fight over class-action bans. But the impact of the decision is unclear at this point, and will have to be worked out by the lower courts.

Although today's decision will undoubtedly affect consumers and workers, the Stolt case itself involved claims brought by a group of large businesses, who alleged that a handful of shipping companies had engaged in a global price-fixing conspiracy. One major question that will have to be addressed is how the decision will apply in cases where consumers' claims are especially small and a class action is the only realistic means of redress. The decision also does not address the fairness defenses that are available to consumers under general state contract law and the savings clause of FAA section 2.

Another Supreme Court Victory for Consumers: Ignorance of the Law Doesn't Excuse Collection Abuses

by Deepak Gupta

 In an opinion by Justice Sotomayor, the U.S. Supreme Court this morning handed consumers an important victory in the battle against abusive and deceptive debt-collection practices.  The Court ruled 7-2 that debt collectors who violate the Fair Debt Collection Practices Act can't evade liability for those violations by claiming ignorance or mistake of law. Resolving a circuit split, the Court rejected the collection industry's argument that the Act's defense for "bona fide errors," which excuses clerical or factual errors made despite adequate preventive procedures, also extends to errors of law.

I filed a brief in the case, which you can read here, on behalf of five national consumer groups (Public Citizen, AARP, the National Association of Consumer Advocates, the National Consumer Law Center, and U.S. PIRG: The Federation of State PIRGs). We argued that a mistake-of-law defense would deter enforcement, inhibit the development of precedent, and create a "race to the bottom," encouraging the very abuses that Congress sought to prevent when it passed the FDCPA.  Justice Sotomayor's majority opinion cites and quotes our brief, explaining that "the dissent's reading would give a competitive advantage to debt collectors who press the boundaries of lawful conduct."  The opinion also twice cites the NCLC's manual on the statute.

Justice Breyer wrote a brief concurrence to stress that the dilemma lawyer-debt collectors may face--between zealous representation of their clients and fear of personal liability--can be cured by the FTC advisory opinion process.  He notes that the FTC hasn't issued many such opinions, but says that he "would expect" the FTC to issue more opinions if the dilemma proves serious, and joins the majority opinion "[o]n this understanding." Justice Scalia writes separately to say that the Court could have rested on textual analysis alone.

Justice Kennedy, joined by Justice Alito, dissents. Speaking for myself, I'm mildly surprised that there's a dissent in this case.  Justice Kennedy's opinion displays some worrying hostility to plaintiffs' lawyers, consumer litigation, class actions, and the statute itself.  Thankfully, it's just a dissent.

More Coverage of Rent-A-Center v. Jackson

by Deepak Gupta

 Last week, I blogged about Rent-a-Center v. Jackson, a very important arbitration case that will be argued before the U.S. Supreme Court on April 26. My post focused on the bottom-side amicus briefs in the case, particularly a brief of arbitrators and arbitration scholars supporting the plaintiff/respondent. You can read more coverage of the case at Text & History, PrawfsBlog, and ContractsProfBlog.  The Virginia Law Review's online component has just published an interesting essay by David Horton (Loyola Law School, Los Angeles) called "The Mandatory Core of Section 4 of the Federal Arbitration Act."  Here's an abstract:

This Essay . . . argues that parties cannot arbitrate the issue of whether the arbitration clause is unconscionable, even when there is "clear and unmistakable" evidence of their intent to do so, because courts possess the exclusive right to decide whether all or part of an arbitration clause is valid. The judiciary's monopoly on settling this matter arises from Section 4 of the FAA, which provides that if the "making of the arbitration agreement" is "in issue," the "court shall proceed summarily to the trial thereof." In fact, Section 4 only allows a court to submit a case to arbitration if it is "satisfied that the making of the agreement for arbitration . . . is not in issue." This language bars parties from contracting around the judicial duty to evaluate "the making of the arbitration clause." Moreover, this reading dovetails with the FAA's legislative history, which reveals that the statute's proponents cited this layer of judicial protection to allay concerns about privatizing a customary governmental function.

Should A Company's Hand-Picked Arbitrator Get to Decide Whether It's Fair for the Company to Hand Pick the Arbitrator?

by Deepak Gupta

Even prominent arbitrators agree: Decisions about whether arbitration clauses in the consumer and employment context are unconscionable shouldn't be left entirely in the hands of arbitrators themselves. Instead, courts must be able to step in and prevent abuses.

That’s the upshot of an amicus brief filed yesterday by 23 nationally prominent professional arbitrators and arbitration scholars in Rent-A-Center v. Jackson, a case that will be argued before the U.S. Supreme Court on April 26.

It was one of seven friend-of-the-court briefs filed Wednesday by a broad coalition of civil rights organizations, labor unions, and consumer groups. Although the Rent-A-Center case has so far received little media attention, the case could radically alter the landscape of access to the civil justice system for consumers, employees, and franchisees.

As many readers of this blog are probably aware, Section 2 of the Federal Arbitration Act makes arbitration agreements "enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract." The Supreme Court has made clear that one of the grounds encompassed in that savings clause is unconscionability under state law. So one would think that courts would lack power to enforce, i.e. compel arbitration under, an unconscionable arbitration agreement.  But, as I'll explain below, Rent-a-Center's legal theory challenges that very proposition.

Public Citizen Wins Supreme Court Victory Allowing Class Actions in Federal Court!

 The U.S. Supreme Court today decided that state laws barring class actions can't trump federal court rules allowing them.  The case, Shady Grove Orthopedic Associates v. Allstate Insurance Company, was argued by Public Citizen's Scott Nelson.  Congratulations, Scott!

Today's decision, written by Justice Scalia and joined by Chief Justice Roberts and Justices Stevens, Thomas and Sotomayor, accepted our argument that the federal rules, by their terms, authorize class actions in any case that meets the criteria set by the rules, and conflicting state laws cannot override the federal rules.  As the majority opinion put it, federal procedural standards "create a categorical rule entitling a plaintiff whose suit meets the specified criteria to pursue his claim as a class action," and that rule "automatically applies" in all cases in federal court, even if a class action would not be allowed in a similar case brought in a state court.

The case ensures that class actions will be available as a means for redress for plaintiffs advancing claims based on both state and federal substantive law if there is a basis for federal court jurisdiction over the case.  Because Congress expanded federal-court jurisdiction over class actions in the so-called "Class Action Fairness Act" (CAFA), state efforts to curtail class actions will not be effective for large numbers of cases over which CAFA provides federal jurisdiction.
 
This particular case, for example, involves a New York law that says that in New York courts, a class action cannot be maintained to seek "statutory penalties." The plaintiff class in this case sought to recover interest on late-paid insurance claims, as required by a New York statute.  If such lawsuits had to be brought on an individual basis, the claims of any one individual would probably not be worth litigating, so New York's rule barring class actions, if it applied, would effectively be the death-knell for the case.  But because the case was filed in federal court, where, under today's ruling, the New York class-action ban does not apply, the class may now have an effective remedy for the insurance company's practice of paying claims late without paying the required interest.

Delaware lawyer John Spadaro originally filed the case in federal district court and persuaded the Supreme Court to hear it after the lower courts had dismissed it on the basis of New York's class action ban.  Mr. Spadaro acted as co-counsel when the case was briefed and argued on the merits before the Supreme Court.  Public Citizen's Brian Wolfman was also co-counsel.

The briefs and opinion in the case are available online here.   Forbes wasted no time in letting us know that they don't like Justice Scalia's opinion.

Constitutional Challenges to Health Care Reform: Florida, et al. v. HHS and Virginia v. Sebelius

by Deepak Gupta

A few minutes after the President signed the Patient Protection and Affordable Care Act today, Virginia Solicitor General Duncan Getchell left his office and walked across the street to the federal courthouse in Richmond, where he filed Virginia's constitutional challenge to the new law. 

You can read the seven-page complaint in Virginia v. Sebelius here. It's not a model of legal writing, but it does have the virtue of being concise. It begins with a block quote from a hastily passed state statute affirming the right of all Virginians to choose not to maintain health insurance coverage. Unless I'm missing something, that statute is nothing more than a legally irrelevant political stunt.  The complaint goes on, however, to articulate what I take to be the only serious legal challenge to health care reform -- that the individual insurance mandate goes beyond Congress's Commerce Clause power.  Relying on United States v. Lopez and United States v. Morrison, Virginia appeals to history:

“It has never been held that the Commerce Clause … can be used to require citizens to buy goods and services. To depart from that history to permit the national government to require the purchase of goods and services would deprive the Commerce Clause of any effective limits ..."

This argument has some rhetorical force. It's also rooted in a radical conception of individual liberty that one can imagine attracting some judges -- why should I have to buy insurance simply as a condition of being alive? I'd prefer to live in a cabin and avoid any obligations to society -- but it's hard to square with existing law. In particular, it's difficult to reconcile the  argument with Gonzalez v. Raich. As with marijuana, individuals' decision to purchase health insurance can have a “substantial effect on supply and demand in the national market for that commodity." Id.; see also United States v. South-Eastern Underwriters Ass'n, 322 U.S. 533 (1944) ("No commercial enterprise of any kind which conducts its activities across state lines has been held to be wholly beyond the regulatory power of Congress under the Commerce Clause. We cannot make an exception of the business of insurance."). Even smart libertarians agree that the argument is exceedingly unlikely to succeed.

Down in good ole Tallahassee this afternoon, Florida AG Bill McCollum filed a 22-page complaint on behalf of himself and the AG's of 12 other states (South Carolina, Nebraska, Texas, Utah, Louisiana, Alabama, Michigan, Colorado, Pennsylvania, Washington, Idaho, and South Dakota). The Florida suit, whose architect is David Rivkin of Baker Hostetler in D.C., echoes Virginia's challenge to the individual mandate.  It also raises two arguments that have even less chance of success: (1) that the legislation violates the Tenth Amendment's anti-commandeering principle, and (2) that the penalty on uninsured persons is a capitation or direct "tax" that is not apportioned among the states according to census data, in violation of Article I, section 9 ("No Capitation, or other direct Tax shall be laid, unless in Proportion to the Census or enumeration herein before directed to be taken."); see Eisner v. Macomber, 252 U.S. 189, 206 (1920).  Huh?

Chrysler Assumes Post-Bankruptcy Product-Liability Claims

by Adina Rosenbaum

In a reversal of its position in the bankruptcy proceeding, Chrysler has agreed to assume liability for people injured after the Chrysler bankruptcy by vehicles sold before the bankruptcy.

As background, in late May and early June, Public Citizen represented a bunch of consumer organizations in objecting to the Chrysler bankruptcy sale because the sale documents purported to sell Chrysler "free and clear" of product liability claims. We particularly got involved to represent the interests of future claimants -- that is, the claims of people who would be injured or killed in accidents that occurred after the bankruptcy but were caused by defects in Chrysler vehicles sold before the bankruptcy. The bankruptcy court approved the sale free and clear of such future claims, and I argued the issue in front of the Second Circuit. Within minutes after that argument ended, the Court announced that it was upholding the sale for substantially the same reasons as the bankruptcy court and that opinions would be forthcoming. Four days later, we filed a petition for certiorari.

Public Citizen Releases Statistical Survey of Public Interest Cases in the Latest Supreme Court Term

  The Supreme Court's October 2008 Term ended June 29th, when the Court released the final opinions of the Term. In an attempt to quantify the Court's decisions, Public Citizen's Supreme Court Assistance Project has gone beyond its usual Watch List to conduct a statistical survey of the Court's treatment of public interest cases.

Our survey--prepared by Public Citizen's current Supreme Court Fellow Leah Nicholls--measures how often the Court and each of the Justices decided in favor of expanding individual and environmental rights versus contracting those rights. Via both text and graphs, it examines cases in four categories:

• Access to Courts and Remedies
• Civil Rights
• Constitutional Rights, and
• Environmental Claims.

The report concludes with a brief discussion of the opinion-drafting assignments in the Term's most important public-interest cases. We hope you find the survey interesting and useful.

Cuomo Case Great News for State Attorneys General

by Christopher Peterson

The Supreme Court has issued an opinion striking down the federal banking regulatory preemption of state fair lending enforcement lawsuits. The Court confronted whether ambiguity in the National Bank Act left the Office of the Comptroller of the Currency free to preempt state fair lending litigation originally brought by former New York Attorney General Eliot Spitzer. In applying the administrative deference standard of Chevron U. S. A. Inc. v. Natural Resources Defense Council, Inc., the Court explained:

[T]he presence of some uncertainty does not expand Chevron deference to cover virtually any interpretation of the National Bank Act. We can discern the outer limits of the term “visitorial powers” even through the clouded lens of history. They do not include, as the Comptroller’s expansive regulation would provide, ordinary enforcement of the law. Evidence from the time of the statute’s enactment, a long line of our own cases, and application of normal principles of construction to the National Bank Act make that clear.

Cuomo v. Clearing House Association, LLC.,  No. 08-453, slip. op. at 3 (U.S. June 29, 2009).

The decision reverses the trend in recent years, discussed here and here, of giving free reign to federal banking regulators to squelch the consumer protection efforts of state attorneys general. While the long-term impact of the decision is yet to be clear, the opinion is likely to embolden some state AGs in litigation against national banks and their subsidiaries over the subprime mortgage debacle.