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.

Administrative Closure Not Final Disposition Allowing Appeal

Appellate courts sometimes get very technical about the finality requirement for appeals.

In CitiFinancial Corp. v. Harrison, No. 04-60979, 2006 WL 1644828 (5th Cir. June 15, 2006), a financial services consumer brought claims in state court concerning a contract that included an arbitration clause. CitiFinancial removed the case.

While it was pending before one judge, CitiFinancial filed its own lawsuit before another judge seeking an order to compel arbitration and to stay the first case. The court granted that motion and the judge in the original case complied, “administratively closing” the case that was now stayed.

The consumer appealed the order staying the first case and compelling arbitration. The Fifth Circuit concluded that under normal circumstances it has jurisdiction over an appeal from an order compelling arbitration because such an order essentially is final. Here, however, part of the dispute was still ongoing in the original court. The Fifth Circuit ruled that the “administrative closure” did not count as ending the case, because such closures merely stay the case while removing the case from the court’s active docket for statistical purposes, without permanent dismissal.

Federal Arbitration Act Does Not Authorize Nationwide Service Of Process.

In Dynegy Midstream Services, LP v. Trammochem, 451 F.3d 89 (2d Cir. June 13, 2006), several parties arbitrated a dispute before a New York panel of arbitrators. One of the parties sought to subpoena Dynegy, a Texas-based third-party, and the panel served a subpoena for documents to be produced in Houston.

After Dynegy ignored the subpoena, the interested party successfully moved to compel compliance with the subpoena in New York federal court, and Dynegy appealed.

The Second Circuit held that the Federal Arbitration Act does not authorize nationwide service of process. While it empowers arbitrators to “summon in writing any person to attend before them” and to bring documents, it also requires that service of such a summons be made in the same manner as a Rule 45 subpoena. In this case, the New York panel could not have served the Houston company under the geographic limitations of Rule 45, and the district court lacked personal jurisdiction.

Amount In Controversy In Lawsuit Challenging Arbitration Award Includes The Full Matter At Stake In The Arbitration

If a defendant removes a case to federal court but the plaintiff successfully moves to remand the case, 28 U.S.C. § 1447(c) provides that a district court "may require payment of just costs and any actual expenses, including attorney fees, incurred as the result of the removal."

In Sirotsky v. New York Stock Exchange, No. 02-3240, 2003 WL 22442988 (7th Cir. Oct. 29, 2003), as the losing party in an NYSE arbitration, plaintiff was ordered by the arbitrators to pay the NYSE's $4,800 arbitration fee. Plaintiff sued her opponent and the NYSE in Illinois state court to vacate that order on the ground that her opponent's lawyer was not licensed to practice in Illinois. Defendant believed plaintiff was litigating both over the $4,800 fee and over the original arbitration in which she sought $242,000, and therefore removed on diversity grounds. The court determined that only the $4,800 fee was at stake, and remanded based on failure of the jurisdictional minimum. Plaintiff then asked for an award of attorneys' fees under § 1447(c), but the district court denied the motion.

On appeal, for the first time in the case, plaintiff clarified that she only was litigating over the $4,800 fee. However, the Seventh Circuit held that it was reasonable for defendant to assume that plaintiff would not have made a federal case out of the fee award alone, and had the right to assume plaintiff was intending to reopen the arbitration. As such, the amount in controversy in any new arbitration proceeding that plaintiff hoped to commence would have been the original $242,000. Thus, it was clear at the time of removal that defendant properly removed a case with an amount in controversy exceeding $75,000.

Regarding the denial of attorneys' fees, the Seventh Circuit found no abuse of discretion. It clarified that although the statue does not set forth the criteria for awarding fees and costs, the cases are in agreement that the plaintiff must show that removal was improper and need not establish that defendant acted in bad faith. Furthermore, the court noted that the Seventh Circuit has taken the further step of holding that, provided removal was improper, there is a rebuttable presumption that the plaintiff is entitled to an award of fees, as under standard fee-shifting statutes. Here, the removal itself was not even improper.

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.

Action to Compel Arbitration Satisfied Diversity Jurisdiction Amount

Sometimes it can be difficult to determine whether a plaintiff has presented a diversity case alleging an amount in controversy exceeding the federal minimum of $75,000. In an action to compel arbitration, for example, the relief sought from the district court is not a damage award. In Woodmen of the World Life Ins. Society v. Manganaro, 342 F.3d 1213 (10th Cir. Sept. 9, 2003), the Tenth Circuit adopted the technique of several other circuits that “look through to the possible award resulting from the desired arbitration.” Here, although the policyholders claimed that only $13,000 was at stake, they also demanded a mass mailing costing over $75,000 plus attorney’s fees and punitive damages that could not be considered unattainable “to a legal certainty.”