Courts Refuse To Enforce Class Action Waivers In Arbitration Agreements

Many businesses favor requiring contracting parties to agree to arbitration clauses as part of their transactions, particularly in situations involving individuals such as consumers and employees. The clear trend in the courts is to favor arbitration and to enforce properly made agreements to arbitrate, even in some "adhesion" situations. However, courts hae been much less willing to enforce some of the strings businesses attempt to attach. As two recent decisions illustrate, businesses that require agreements to arbitrate may not be able to avoid arbitrations purporting to be brought on behalf of a class.

In Gentry v. Superior Court, 42 Cal.4th 443, 165 P.3d 556, 64 Cal.Rptr.3d 773 (Aug. 30, 2007), for example, the California Supreme Court considered a law suit brought by a Circuit City employee claiming violations of the Labor Code and Business and Professions Code. Plaintiff sued on behalf of a class of similarly situated employees. Circuit City argued that plaintiff was obligated to arbitrate, and to do so only on his own behalf.

The California Supreme Court agreed to take the case to clarify its decision in Discovery Bank v. Superior Court, 36 Cal.4th 148 (2005), in which it held that class action waivers in consumer contracts can be unconscionable and unenforceable. The court noted that Discovery Bank had not involved claims based on statute, but that plaintiff's claims in Gentry were in pursuit of statutory rights. Furthermore, the statute at issue was expressly made non-waivable by the legislature. The court concluded that under some circumstances the class action waiver Circuit City sought to enforce would lead to a de facto waiver of statutory rights provided in wage/hour cna overtime cases, and therefore would be unenforceable.

U.S. Supreme Court Raises Pleading Bar For Securities Fraud

When Congress enacted the Private Securities Litigation Reform Act of 1995 (“PSLRA”), it appeared to resolve a circuit split regarding the threshold required for pleading a securities fraud cause of action. The courts of appeal agreed that securities fraud required scienter, but disagreed over whether a plaintiff must allege more than the conclusion that scienter existed. Congress adopted the most stringent approach, as expressed by the Second Circuit, that a plaintiff must “state with particularity facts giving rise to a strong inference that the defendant acted with the requisite state of mind,” 15 U.S.C. § 78u-4(b)(1). However, Congress did not codify the Second Circuit’s jurisprudence concerning the meaning of the term “strong inference,” and as a result courts diverged regarding the construction of that term.

In resolving that split in Tellabs, Inc. v. Makor Issues & Rights, Ltd., 127 S. Ct. 2499 (June 21, 2007), the U.S. Supreme Court said its task was “to prescribe a workable construction of the ‘strong inference’ standard, a reading geared to the PSLRA’s twin goals: to curb frivolous, lawyer-driven litigation, while preserving investors’ ability to recover on meritorious claims.” Its solution was to require a three-step process: (1) accept all factual allegations as true; (2) consider the complaint in its entirety plus documents incorporated into the complaint by reference or available through judicial notice; and (3) determine the plausible opposing inferences regarding scienter and dismiss the complaint unless “a reasonable person would deem the inference of scienter cogent and at least as compelling as any opposing inference one could draw from the facts alleged.” The Court rejected the argument that weighing competing inferences impinged upon the jury’s role, finding that Congress had the power to establish any special pleading requirements, as it had done in the PSLRA.

Tellabs does not represent a further application of the new fact-pleading rules emerging under Bell Atlantic Corp. v. Twombly, 127 S. Ct. 1955 (May 21, 2007) (see previous post), because it involved interpretation of heightened pleading requirements specifically codified into statute, rather than the federal rules of civil procedure or common law.

Compliance With Detailed Regulations Does Not Give Rise To Removal Jurisdiction

In a unanimous opinion, Watson v. Philip Morris Cos., Inc., 127 S. Ct. 2301 (June 11, 2007), the Supreme Court rejected application of the “Federal Officer” removal statute to private parties other than govern­ment contractors.

Plaintiffs had filed a state-court class action claiming that Philip Morris violated Arkansas unfair business practice laws in selling so-called “light” cigarettes. Philip Morris removed, citing 28 U.S.C. § 1442(a)(1), which permits removal by any officer of the United States “or any person acting under that officer.” The district court and the Eight Circuit agreed that in following the FTC’s detailed instructions governing cigarette testing and tar/nicotine disclosures in advertising, defendants were “acting under” the agency’s orders for purposes of the removal statute.

However, the Supreme Court found that Congress did not intend to encompass private parties whom a federal regulatory agency directs, supervises, and monitors, even if very closely and in considerable detail. In the Court’s view, such activities amount to nothing more than regulation and compliance, as opposed to “acting under” the direction of a federal officer, and mere com­pliance with regulations does not open the door to federal jurisdiction. It distinguished cases in which removal was permitted by private government contractors, finding that such cases involve helping federal officers fulfill tasks that the government otherwise would have to perform itself.

California’s Unfair Competition Law Now Requires Representative Claimant To Have Injury And Meet Class Action Prerequisites

In 2004, the voters of California approved Proposition 64 to amend the Unfair Competition Law (Bus. & Prof. Code §§ 17200, et al.) (“UCL”). Until that time, the statute permitted individuals to act as private attorneys general to bring lawsuits for alleged unfair competition on behalf of others even if the plaintiffs themselves had not suffered loss of money or property. Because the traditional requirements for class actions and individual standing did not have to be met, the UCL had been the subject of controversy. Proposition 64 added the requirements that the representative have suffered injury in fact, and that the action “complies with Code of Civil Procedure Section 382.”

In Amalgamated Transit Union, Local 1756 v. Superior Court, 55 Cal. Rptr. 3d 585 (Cal. App. (2d Dist.) Feb. 28, 2007, modified Mar. 22, 2007), the court held that that despite the lack of any express language in proposition 64 concerning class actions, the reference to § 382 was meant to engraft onto the Unfair Competition Law the requirement that any representative action proceed as a class action and satisfy traditional certification requirements.

[Note that on June 20, 2007, the California Supreme Court granted review, superceding this opinion. Amalgamated Transit Union, Local 1756 v. Superior Court, 161 P.3d 1, 61 Cal.Rptr.3d 459 (Cal. June 20, 2007).]

Time To Appeal Of Class Certification Ruling Not Extended By Renewed Motion

Interlocutory appeal of rulings on class certification motions is available, at the discretion of the appellate court, by filing a petition under Fed. R. Civ. P. 23(f) within ten days of the ruling.

In Carpenter v. Boeing Co., No. 04-3334, 2006 WL 2244242 (10th Cir. Aug. 8, 2006), the Tenth Circuit held that the 10-day period is not subject to extension through the filing of a motion seeking the district court’s reconsideration of its ruling. In the Carpenter case, plaintiffs filed a petition within 10 days after the district court denied their “renewed” motion for class certification. The appellate court viewed that motion as a motion to reconsider, and dismissed the petition as untimely.

Supreme Court Vacates California Case Allowing Class-Wide Arbitration

In Garcia v. DirecTV, Inc., No. B158570, 2002 WL 31769224 (Cal. App. (2d Dist) Dec. 11, 2002) (unpublished), independent dealers commenced an arbitration, and also filed a class action, alleging that DirecTV had failed to pay them certain compensation. The trial court ordered arbitration on a class-wide basis as permitted under state law.

DirectTV appealed, arguing that the parties agreed to be governed only by federal law, which bars class-wide arbitration; however, the Court of Appeals affirmed. The U.S. Supreme Court summarily vacated the case and remanded "for further consideration in light of Green Tree Financial Corp. v. Bazzle [123 S. Ct. 2402 (2003)]." Hughes Elect. Corp. v. Garcia, No. 02-1752, 2003 WL 21313782 (U.S. Oct. 6, 2003). In Green Tree, the Court held that the arbitrator, not the court, decides whether an arbitration contract forbids class arbitration.

Missouri Deceptive Trade Practices Statute Protects Nonresidents From Missouri Misconduct

Various states have grappled with the question of whether their deceptive trade practices statutes can be applied to nonresidents, such as through certification of a nationwide class. The intermediate appellate court of Missouri recently held that the state’s Merchandising Practices Act expressly anticipated protection of victims of deceptive trade practices, regardless of residence, if the trade or commerce occurred in or from the state of Missouri. State ex rel. Nixon v. Estes, 108 S.W.3d 795 (Mo. Ct. App. (W. Dist.), June 30, 2003). The court distinguished cases considering the broader question of whether a state constitutionally could “project its legislation into other states” because (1) Missouri’s statutory language was unique, and (2) under the facts of this case there was no doubt that the defendant victimized consumers through a business originating trade or commerce from Missouri.