SCOTUS Holds that Class Action Waivers in Employment Contracts Must be Enforced

By Stephen A. Fogdall

In a landmark decision, the U.S. Supreme Court has ruled 5-4 that arbitration clauses in employment contracts requiring individual dispute resolution procedures and prohibiting class actions and other collective litigation procedures must be enforced under the Federal Arbitration Act.  The Court rejected the position taken by the National Labor Relations Board and some private plaintiffs that employees’ right to engage in “concerted activities” for their “mutual aid or protection” recognized in Section 7 of the National Labor Relations Act makes such class and collective action waivers unenforceable.  The Court issued its ruling in three consolidated cases:  Epic Systems Corp. v. Lewis, Ernest & Young LLP v. Morris and National Labor Relations Board v. Murphy Oil USA, Inc.  In the latter case, the Fifth Circuit reversed the NLRB’s determination that the employer violated Section 7 by including an individual arbitration clause in its employment contract.  In the former two cases, the Seventh and Ninth Circuits respectively adopted the NLRB’s position and allowed private plaintiffs to pursue collective actions under the Fair Labor Standards Act notwithstanding that they had agreed to individual arbitration clauses in their employment contracts.

The Court, in a majority opinion written by Justice Gorsuch, began its analysis by noting that arbitration clauses in employment contracts fall squarely within the FAA’s command that all arbitration agreements “shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.”  The Court then rejected the argument that the final clause of this command, called the “savings clause,” implicates Section 7 of the NLRA.  The Court explained that the savings clause permits a party to oppose arbitration based on defenses, such as fraud in the inducement or duress, that might apply to “any contract.”  However, the savings clause does not allow a court to refuse to enforce an arbitration agreement based on defenses that specifically target arbitration.   The Court reasoned that a putative defense to enforcement of an individual arbitration clause on the theory that such a clause violates employees’ right to engage in “concerted activities” under Section 7 is precisely the type of defense that is not preserved by the savings clause because it specifically targets the alleged illegality of such clauses in the employment setting.  It is, by definition, not a defense of general applicability.

The Court likewise rejected the argument that there is a “conflict” between the FAA and Section 7 of the NLRA such that Section 7 overrides or impliedly repeals the FAA to the extent the FAA would require enforcement of an individual arbitration clause in an employment contract.  The Court held that there could be no conflict between Section 7 and the FAA because “Section 7 doesn’t speak to class and collective action procedures” and contains no “hint about what rules should govern the adjudication of class or collective actions in court or arbitration.”  The Court reasoned that “[u]nion organization and collective bargaining in the workplace are the bread and butter of the NLRA,” and it is “more than a little doubtful that Congress would have tucked into the mousehole” of Section 7 “an elephant that tramples the work done by” the FAA and other laws governing “the particulars of dispute resolution procedures in Article III courts or arbitration procedures.”

Lastly, the Court rejected the argument that the NLRB’s position was entitled to deference under the Chevron doctrine (which requires courts to defer to a federal agency’s interpretation of the statute it administers in certain circumstances).  The Court explained that Chevron was inapplicable because the NLRB did not confine itself to interpreting NLRA, the statue it administers, but rather “sought to interpret this statute in a way that limits the work of a second statute,” the FAA.  If an agency’s “reconciliation” of allegedly competing statutes were subject to deference under Chevron, then “[a]n agency eager to advance its statutory mission, but without any particular interest in or expertise with a second statute, might (as here) seek to diminish the second statute’s scope in favor of a more expansive interpretation of its own,” thus “bootstrapping itself into an area in which it has no jurisdiction.”

The decision is a significant win for employers seeking to limit the costs and risks of class and collective litigation by employees.

Chief Justice Roberts and Justices Kennedy, Thomas and Alito joined Justice Gorsuch’s majority opinion.  Justice Ginsburg wrote a dissenting opinion, joined by Justices Breyer, Sotomayor and Kagan.  The Schnader firm submitted an amicus brief in support of the enforceability of class action waivers in employment contracts in all three cases on behalf of the Mortgage Bankers Association and several state mortgage lending associations.

The CFPB Takes Aim at Arbitration Clauses in Contracts for Consumer Financial Products

Schnader Alert by Monica Clarke Platt:

The Consumer Financial Protection Bureau (CFPB) last week issued two proposals aimed at weakening and discouraging arbitration clauses in contracts for consumer financial products. First, the CFPB proposes prohibiting the application of arbitration clauses to class actions proceeding in court. Specifically, the Bureau is considering a requirement that arbitration clauses in covered consumer financial contracts provide that the arbitration agreement is inapplicable to putative class actions filed in court unless and until class certification is denied or the class claims are dismissed. This proposal could significantly increase putative class claims in the consumer finance sector (indeed, increasing access to class litigation appears to be the Bureau’s goal). Second, the Bureau seeks to require entities that use arbitration agreements in their contracts to submit to the Bureau notice of claims filed in arbitration proceedings and arbitration awards, potentially for publication.

Please click here to read the full Alert.

Nationwide class allegations dismissed due to plaintiff’s lack of standing in lender-placed insurance case

By Monica C. Platt

In Lauren v. PNC Bank, N.A., a judge in the Western District of Pennsylvania dismissed nationwide class allegations in an action challenging lender-placed insurance practices. The decision limits named plaintiffs’ ability to bring state law claims under the laws of states where they do not reside and where they were not injured.

Ultimately, the issues in this case boiled down to whether a named plaintiff who did not suffer injuries in a particular state has standing to assert a proposed national class action for claims based on that state’s laws, and whether a standing determination must await class certification. The court found—prior to certification—that such a plaintiff lacks standing.

Lauren, whose property was located in Ohio and who was a resident of Ohio, asserted unjust enrichment claims under Ohio law and under other states’ laws on behalf of putative class members. Defendants argued that although she could assert the Ohio claims, she lacked standing to assert unjust enrichment claims under the laws of any other state. The district court agreed. Lauren claimed that because she clearly had standing to assert the Ohio law claims, her fitness to assert claims under the law of other states on behalf of class members should be deferred until after class certification. Circuits are split on this issue, but the court decided that the named plaintiff’s standing to assert state law claims is a threshold issue that should come before class certification.

The court relied primarily on the analysis of the Eastern District of Pennsylvania in In re Wellbutrin XL Antitrust Litigation, which found that standing must be analyzed claim-by-claim and state-by-state. The judge adopted the Wellbutrin court’s analysis that “[a] named plaintiff whose injuries have no causal relation to, or cannot be redressed by, the legal basis for a claim does not have standing to assert that claim.” Therefore, if a named plaintiff’s injuries have no relation to the state in which a claim is made, and that state’s laws cannot provide any remedy, the named plaintiff does not have standing to assert a violation of that state’s laws.

The court also found persuasive the Wellbutrin court’s analysis that to determine standing only after a class is certified would allow the named plaintiffs to engage in time-consuming class discovery in potentially every state and possibly result in named plaintiffs representing the “claims of parties whose injuries and modes of redress they would not share.” This, the Wellbutrin court found, was exactly what the doctrine of standing was designed to prevent, and would result in the court having to address the same question later in litigation.

National banks should be unhappy with the Supreme Court’s new removal decision

By Stephen A. Fogdall

At one time, regulations issued by the Office of the Comptroller of the Currency prohibited state officials from bringing enforcement actions against national banks under state law. The OCC perceived such actions as an exercise of “visitorial powers,” which state officials might assert over their own state-charted banks, but which they could not assert over national banks. Then, in 2009, the U.S. Supreme Court decided Cuomo v. Clearing House Association, L.L.C. That decision rejected the OCC’s position and held that a national bank can be sued by a state attorney general acting to enforce a state law against the bank (at least if the state law is not itself substantively preempted by federal law).

While Clearing House left national banks exposed to state enforcement actions, it said nothing about where these actions could be litigated. Some federal courts interpreted a provision of the Class Action Fairness Act in a way that would permit a national bank to remove such actions from state court to federal court. This provision states that a so-called “mass action” — meaning an action “in which monetary relief claims of 100 or more persons are proposed to be tried jointly on the ground that the plaintiffs’ claims involve common questions of law or fact” — is removable to federal court so long as it meets the removal requirements otherwise applicable to class actions. Some courts, including the U.S. Court of Appeals for the Fifth Circuit, interpreted the language “100 or more persons” to include not only cases involving 100 or more named plaintiffs, but also cases seeking monetary relief on behalf of 100 or more real parties in interest. On this interpretation, an enforcement action filed by a state attorney general seeking monetary relief on behalf of residents of a state would be removable under CAFA, provided at least 100 residents were putatively entitled to relief.

Last week, the U.S. Supreme Court unanimously rejected this interpretation in Mississippi ex rel. Hood v. AU Optronics Corp. The Court held that “100 or more persons” in CAFA means 100 or more named plaintiffs. In a typical enforcement action brought by a state attorney general, there is only one named plaintiff (the attorney general). Thus, the Court concluded, such an action is not removable as a “mass action” under CAFA.

The combined effect of Clearing House and AU Optronics is that national banks now not only are subject to enforcement actions brought by state attorneys general under state law, but they will generally be stuck litigating such actions in state court.

Is the U.S. Supreme Court Poised to Eviscerate the Fraud-on-the Market Theory?

By Eric A. Boden

On November 15, 2013, the U.S. Supreme Court granted a cert petition in Halliburton Co. v. Erica P. John Fund, Inc., f/k/a Archdiocese of Milwaukee Supporting Fund, Inc. The petitioner, Halliburton, wants the Court to reverse a Fifth Circuit decision that refused to allow Halliburton to introduce price impact evidence at the class certification stage to rebut the presumption of reliance under the fraud-on-the-market theory.

If the Court rules for Halliburton, it would overrule or substantially modify Basic Inc. v. Levinson, which adopted the fraud-on-the-market theory and its associated presumption of classwide reliance in securities fraud class actions.

Halliburton challenges Basic’s fundamental premise: that an economic theory of inherent market efficiency should be dispositive, at the class certification stage, on the issue of reliance. First, Halliburton contends that the efficient market hypothesis has been roundly rejected by empirical evidence. Second, Halliburton cites to the difficulty federal courts have encountered applying the fraud-on-the-market theory and to the fact that no state courts have recognized it. Finally, Halliburton emphasizes that the Court’s more recent class-certification decisions in Wal-Mart Stores, Inc. v. Dukes and Comcast Corp. v. Behrend make clear that the elements of class certification cannot be satisfied by a presumption (like the presumption of reliance under the fraud-on-the-market theory) but instead must be “proven in fact.”

It is possible the Supreme Court will overrule Basic in its entirety, rejecting the fraud-on-the-market theory, which would draw into question the future of securities class actions. However, the Court may follow a more moderate course, and simply allow a defendant in a putative securities class action to rebut the presumption of reliance with evidence that alleged misrepresentations did not distort the market price of its stock.

The Latest Decision on Expert Testimony at the Class Certification Stage

By Stephen A. Fogdall

A judge in the United States District Court for the Northern District of California just entered an order in  In re Cathode Ray Tube Antitrust Litigation on an issue we follow on this blog:  the evaluation of expert testimony at the class certification stage. (For earlier discussions of this issue, click here.)

The Cathode Ray Tube court granted a motion to certify a class of indirect purchasers who said that they had paid inflated prices due to the defendants’ alleged conspiracy to fix the prices of cathode-ray tube technology. At the same time, the court rejected the defendants’ Daubert challenge to the expert testimony the plaintiffs offered to establish antitrust injury on a classwide basis.

The defendants argued that the expert’s analysis was flawed because it utilized average prices instead of actual prices and was based on erroneous assumptions about the susceptibility of the industry to price-fixing. The court concluded that the defendants were asking for “a full-blown merits analysis, which is forbidden and unnecessary at the class certification stage.”

As we have previously discussed, the U.S. Supreme Court sent somewhat mixed signals this last term regarding the resolution of merits issues on a motion for class certification. On the one hand, the Court held in Behrend that “arbitrary” or “speculative” expert testimony could not support class certification even if the expert’s model would apply on a classwide basis. On the other hand, the Court held in Amgen, an alleged securities fraud case, that the plaintiffs need not establish materiality at the class certifications stage, but need only show that materiality could be established on a classwide basis at trial. Therefore, in one case the Court said that classwide applicability of proof would suffice for class certification, while in another case the Court said that flaws in the evidence could defeat class certification notwithstanding classwide applicability.

The Cathode Ray Tube court essentially put these decisions together and extracted this principle:  if a plaintiff’s expert testimony survives Daubert scrutiny and applies on a classwide basis, then class certification is appropriate.

We will continue to monitor decisions in this area to see if other federal courts adopt this same approach in the wake of Behrend and Amgen.

The Seventh Circuit Suggests that Cy Pres Still Has a Place in Class Actions When Potential Individual Awards Seem Too Small to Justify Class Treatment

By Ira Neil Richards and Gary M. Goldstein

A ruling last week out of the Seventh Circuit, Hughes v. Kore of Indiana Enterprise, Inc., suggests that cy pres can be used as a remedy for a class to support class certification even when the size of potential damages awards to individual class members would otherwise seem too small to justify class treatment.

When class action settlements involve high costs of distributing money to eligible class members, or where there is money left over after a settlement fund has been distributed, the settling parties often turn to “cy pres.”  Cy pres is a term borrowed from trust law.  In the class action context, settling parties use it to refer to a distribution of settlement funds to charity or other third parties instead of to class members themselves.  Objectors to class action settlements though increasingly focus on any cy pres component.  The result has been an increase in appellate authority that can help guide parties in determining when and how to use cy pres as part of a class action settlement.

Objections raised in response to cy pres distributions of class action settlement funds include challenges that the awards improperly distribute funds to charity instead of fully compensating class members.  Challenges have also focused on a perceived lack of nexus between the cy pres recipient and the lawsuit’s compensatory objectives. Other objections have questioned whether a judge’s discretion in approving a cy pres recipient, or a party’s (or their counsel’s) ability to direct funds to a chosen charity, creates a conflict of interest. Under the guiding principle that cy pres awards “are inferior to direct distribution to the class” (In re Baby Prods. Antitrust Litig.), courts have rejected cy pres awards because they are susceptible “to the whims and self interests of the parties, their counsel, or the court” and “create an appearance of impropriety.”  Nachsin v. AOL. Objectors have also complained when courts have not discounted any cy pres amount when awarding attorneys’ fees to class counsel.

Despite the recent skepticism towards cy pres class action settlement payments, courts continue to recognize that there are times when cy pres makes sense.  The Seventh Circuit’s decision in Hughes is the most recent example.  In that case, the Seventh Circuit reviewed a district court’s decision decertifying the class because the district court believed the potential recoveries of individual class members were too small to justify class treatment and because it would be hard to give class members individual notice.  The plaintiff claimed that he and other potential class members were entitled to statutory damages under the Electronic Funds Transfer Act because the defendant had not provided required notices of ATM fees.  The district court concluded that the statutory limit on damages made class members better off if they filed their own claims.

On the notice question, Judge Posner, writing for the Seventh Circuit, explained that notice can be given by publication when individual class members’ addresses cannot be obtained from available records.  With respect to the district court’s conclusion that a class action recovery would not provide meaningful recovery, Judge Posner suggested that cy pres might provide the best option.  Since the cost of distribution of any recovery to individual class members would outweigh the recoveries, a “[p]ayment … to a charity whose mission coincided with, or at least overlapped, the interest of the class … would amplify the effect of the modest damages in protecting consumers.”

The Seventh Circuit’s opinion that cy pres can be appropriate where the distribution costs are high relative to any individual class member’s share is consistent with the Ninth Circuit’s decision in Lane v. Facebook.  In that case, the Ninth Circuit rejected challenges to a settlement that included a cy pres distribution because paying small amounts to individual class members would not be feasible and because the recipient of the cy pres distribution had a relationship to the subject of the litigation (online privacy).  Notably, the Court rejected a challenge to the settlement based on the fact that a Facebook employee sat on the board of directors of the recipient of the cy pres distribution.

While cy pres can attract the attention of objectors to class settlements, which can lead to delays in settlement finality and increased litigation costs, cy pres can still have a place in a settlement.  Parties need to be mindful that courts will scrutinize any proposed cy pres payments as they relate to the cost to give money directly to class members.  In addition, designating a cy pres recipient that has some connection to the subject matter of the litigation might also help in getting final settlement approval.

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