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 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.

The Enhanced Scrutiny of Class Definitions Under the Ascertainability Requirement: An Additional Hurdle for Plaintiffs or an Increased Burden for Defendants?

Schnader Alert by Theresa Loscalzo and Ira Neil Richards:

This Schnader Alert discusses recent appellate authority on class certification, describing how courts are taking a closer look at whether class members can be identified from the class definition the plaintiff proposes and from the records available to the parties.

Please click here to read the full Alert.

Plaintiffs Attempting to Plead Equitable Tolling Need to do More than Simple “Box Checking”

By Christopher Reese

On July 19, 2013, the United States District Court for the Western District of Pennsylvania rejected plaintiffs’ attempts to utilize equitable tolling to save their untimely claims from dismissal because their allegations of due diligence amounted to little more than “perfunctory box checking.”

The plaintiffs in Menichino v. Citibank, N.A. and Manners v. Fifth Third Bank filed class action lawsuits against mortgage lenders, reinsurance entities affiliated with the mortgage lenders, and private mortgage insurers, alleging that reinsurance transactions between the parties violated Section 8 of the Real Estate Settlement Procedures Act (RESPA).  Plaintiffs alleged that the reinsurance agreements violated RESPA because the premiums ceded by the private mortgage insurers to the lender subsidiary reinsurers allegedly were not commensurate with the amount of reinsurance received in return.

The court granted the motions to dismiss filed by all defendants, finding that RESPA’s one-year statute of limitations had expired and that the plaintiffs had not adequately pled a basis for equitable tolling or fraudulent concealment.  The court began by rejecting the argument that issues regarding equitable tolling of the statute of limitations cannot be resolved on a Rule 12(b)(6) motion to dismiss, finding that it is not sufficient for plaintiffs to “invoke the [equitable tolling] doctrine with conclusory allegations.”  They must instead plausibly plead the basis for equitable tolling in a manner consistent with Twombly and Iqbal.  Stated differently, the court held that “it is reasonable to require the Plaintiffs to plead with specificity what they knew, when and how they knew it, and what they did about it, especially because they were in possession of those facts when they filed their Complaint.”  “Where . . . the factual predicate for pleading equitable tolling resides entirely with the Plaintiffs, they are obligated to set forth a plausible factual basis for its invocation.”  The court noted that specific pleading “is the only way the Court can determine whether fact discovery will show that [Plaintiffs] were not on inquiry notice during the limitations period.”  Alleging “in only generalized and conclusory terms that [Plaintiffs] could not have discovered the possible existence of their claims during the limitations period” is not sufficient.  The court ultimately held that “[w]ithout sufficient facts to determine what led the Plaintiffs to discover their claims and when,” their “claimed entitlement to equitable tolling [is not] plausible on its face.”

The court also held that “[w]ithout knowing the factual circumstances that ultimately gave rise to the Plaintiffs’ discovery of their injuries, [it] is similarly unable to determine” whether the due diligence they say they exercised, which consisted of reviewing loan documents and participating in closing and then contacting their lenders and/or the mortgage insurers for information years later, “was reasonable under the circumstances.”  The court found that plaintiffs’ allegations of due diligence “give rise to doubts rather than confidence that discovery will show that equitable tolling should apply.”  Plaintiffs’ allegations of due diligence were insufficient to invoke equitable tolling because they amounted to nothing more than “perfunctory ‘box checking.’”

Finally, the court rejected plaintiffs’ argument that their claims were timely under the continuing violations doctrine, holding that “it would be inappropriate as a matter of law to apply the continuing violations theory to RESPA’s statute of limitations.”

As the decisions in Menichino and Manners make clear, defendants in these types of RESPA actions and other related cases may be well-served by bringing early challenges to the sufficiency of allegations purporting to invoke the equitable tolling and/or fraudulent concealment doctrines.

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