$15 million misclassification class judgment reversed in Duran v. U.S. Bank National Association

Exemption-based misclassification cases are hard to certify.  But when you certify an overtime exemption misclassification case, try it, and win a $15 million verdict, you'd think that the hard times are behind you.  Not so fast.  In Duran v. U.S. Bank National Association (February 6, 2012), the Court of Appeal (First Appellate District, Division One) reversed that verdict, decertified the class, and sent the whole thing back down to the trial court for further consideration of how to resolve the individual break claims in light of Brinker.

The plaintiffs in the case were 260 current and former business banking officers (BBO's) who claimed they were misclassified by USB as outside sales personnel exempt from California‘s overtime laws.  The procedural history was messy.  Exemption defenses were summarily adjudicated.  The defendant moved unsuccessfully to decertify.  The trial included motions about evidentiary exclusions.  It appears from the summary that a substantial amount of evidence the defendant sought to introduce was excluded from the trial.  Significantly, a small survey was conducted and then relied upon by a statistics expert to determine class-wide liability.

The Court issued a number of significant holdings, which all revolve around the propriety of proving liability in a misclassification class action with statistical evidence, as opposed to proving damages once liability is established.  For example, the Court held that use of statistical evidence to prove liability is inconsistent with cases examining such evidence at certification:

USB claims California law precludes class-wide liability determinations based on evidence obtained from a representative sample in employment cases alleging misclassification. USB relies on several state and federal wage and hour class action cases for the proposition that surveying, sampling, and statistics are not valid methods of determining liability because representative findings can never be reasonably extrapolated to absent class members in misclassification claims given that time spent performing exempt tasks may differ between employees. While all the cases cited by USB involve rulings on motions to certify or decertify class actions, they support the conclusion that improper procedures were followed in this case.

Slip op., at 47-48.  The Court also held that statistical sampling for proof of liability is inconsistent with its Bell III decision:

The procedures we approved in Bell III are only superficially similar to the procedures utilized in the present case.  Again, in Bell III we did not have occasion to consider the use of a representative sample to determine class-wide liability, since liability was not an issue on appeal. Accordingly, the only issue we addressed was the damages calculation itself, and not whether the plaintiff employees had a right to recover damages in the first place. And our assessment was based on a record evidencing cooperation and agreement among the parties and their counsel.

Slip op., at 45.  With respect to Bell III, the Court explained that the present case suffered a number of flaws (sample too small, no test studies to set sample size, lack of randomness, and no cooperation between the parties) not found in Bell III.  The Court then said:

Fifth, the restitution award here was affected by a 43.3 percent margin of error, more than 10 percentage points above the margin of error for the double-overtime award we invalidated in Bell III. In absolute terms, the average weekly overtime hour figure could conceivably be as low as 6.72 hours per week, as opposed to the 11.86 hour figure arrived at here. While we again will not set a bright line for when a margin of error becomes so excessive as to be deemed unconstitutional, we are troubled by this result.

Slip op., at 46.

Next, the Court concluded that the exclusion of 78 sworn statements that, if admitted, would have reduced the class size by about one-third, was a prejudicial error that violated the defendant's due process right to present relevant evidence in its defense: "The evidence USB sought to introduce, if deemed persuasive, would have established that at least one-third of the class was properly classified. Thus, this evidence USB sought to introduce is unquestionably relevant and therefore admissible."  Slip op., at 55.

The Court then explained that the fatal flaw in the trial management plan was the exclusion of virtually all means by which the defendant could have defended against class-wide liability:

Fundamentally, the issue here is not just that USB was prevented from defending each individual claim but also that USB was unfairly restricted in presenting its defense to class-wide liability. With that in mind, the cases relied on by plaintiffs are inapposite. Both Long v. Trans World Airlines, Inc. (N.D.Ill. 1991) 761 F.Supp. 1320 [protective order limited discovery of information from plaintiff flight attendants to a representative sample of class members], and In re Antibiotic Antitrust Actions (S.D.N.Y. 1971) 333 F.Supp. 278 [states sought recovery for alleged overcharges in the sale of certain antibiotics], concerned the damages phase of a trial, not the liability phase.

Slip op., at 58.  So, when a defendant asserts that this case stands for the proposition that it gets to defend agasint each individual class member's claim, be sure to remind the defendant and Court that the holding actually criticized the absence of any means to mount a defense, rather than specifying the specific forms that a reasonable opportunity to defend must take:

In sum, the court erred when, in the interest of expediency, it constructed a set of ground rules that unfairly prevented USB from defending itself. These ground rules were the product of the trial court. We do not suggest that the implementation of any particular additional procedural tool would have satisfied due process. We simply hold that the court, having agreed to try this matter as a class action, denied USB the opportunity to defend itself by flatly foreclosing the admission of potentially relevant evidence.

Slip op., at 60.

The Court spent some additional time commenting on the margin of error near 44 percent, which it found to be unacceptably large to form the basis of any reasonable result.  The Court concluded its opus by finding that, under the second motion to decertify, the trial court erred by failing to decertify the class.

I think I can sum all this up by observing that (1) misclassification cases in the exemption context are difficult cases and getting tougher all the time, and (2) defendants will incorrectly claim that this decision stands for a mythical due process right that the defendant gets to challenge each class member's claim.  Can't help with one, and can't stop two, but as to two, you can point out that there are many ways to provide a defendant with a reasonable opportunity to defend against class liability.

"Hot gas" case against Chevron lives to fight another day in Klein v. Chevron U.S.A., Inc.

Hot gas.  This is not a term of art describing oral argument.  It literally refers to gasoline, and its propensity to expand as it gets warmer.  In Klein v. Chevron U.S.A., Inc. (January 25, 2012), the Court of Appeal (Second Appellate District, Division Seven) dispensed wisdom, a drop at a time, about the viability of claims related to hot gas.  Before I pump up this case any more, allow me to fuel your appetite with some background.  After that we'll motor on to the significant holdings.

How does hot gas work again?  The Court explained:

Motor fuel expands in volume as it is heated. As a result of this thermal expansion, a gallon of motor fuel at a warmer temperature has less mass and less energy content than a gallon of motor fuel at a cooler temperature. A temperature increase of 15 degrees causes motor fuel to expand in volume by approximately one percent, with a corresponding one percent decrease in energy output. For example, when 231 cubic inches of motor fuel, which equals one volumetric gallon, is heated from 60 degrees Fahrenheit to 75 degrees Fahrenheit, the motor fuel will expand to occupy a volume of approximately 233 cubic inches.

Slip op., at 4.  Ahh.  Anyhow, after a lot of discussion about regulations, and how fuel must be temperature adjusted if sold in amounts about 5,000 gallons, the Court turned to the theories impacted by the trial court's rulings on a demmurer and motion for judgment on the pleadings.

First, the Court held that the trial court erred when it dismissed the plaintiffs' claims arising under the CLRA and UCL:

Chevron's arguments are predicated on the assumption that the only possible form of relief in this case is a court order mandating that Chevron offer its retail consumers temperature-adjusted motor fuel through the implementation of ATC technology or other similar technologies. The plaintiffs' complaint, however, seeks other relief, including a disclosure requirement that, if granted, might not require substantial changes to the way Chevron currently sells motor fuel at the retail level.

Slip op., at 26.  That "other relief" mentioned by the Court includes injunctive relief compelling disclosure to consumers.  The Court next concluded that no alternative means exist for addressing the plaintiffs' issues.  On that basis, the Court concluded that judicial abstention was improper.

The Court then turned to specific claims, beginning with a half-hearted standing challenge.  The Court wasn't impressed: "Chevron concedes that, at the pleading stage, a plaintiff asserting a UCL or CLRA claim 'satisfies its burden of demonstrating standing by alleging an economic injury.' (Boschma v. Home Loan Center, Inc. (2011) 198 Cal.App.4th 230, 254.)"  Slip op., at 35.  (Had to get that Boschma cite in there - my colleague, J. Mark Moore, argued that appeal.)

Next, the Court tackled the prongs of the UCL, beginning with the "unfair" prong:

At the pleading stage, we cannot presume that these alleged harms are not “substantial” or are otherwise outweighed by benefits that consumers derive from Chevron's practice of selling non-temperature adjusted motor fuel at the retail level. (Camacho, supra, 142 Cal.App.4th at p. 1403.) Although the evidence in this case may show that consumers do not suffer any substantial injury from the sale of nontemperature adjusted fuel or that the costs associated with remedying such injuries outweigh any benefit to consumers, we agree with the trial court‟s conclusion that such issues must “be determined on a developed factual basis.”

Slip op., at 37.  Chevron argued that it was not obligated to pass along or disclose its profit margins.  The Court distinguished Chevron's authority:

There are, however, important distinctions between this case and McCann. First, the holding in McCann has no relevance to plaintiffs' claim that, by selling non-temperature adjusted fuel at retail, Chevron is able to charge consumers more in purported motor fuel tax than it is required to pay to the government. Plaintiffs' tax-based claim has nothing to do with Chevron's failure to disclose its profit margins or the price at which it procures motor fuel at wholesale.

Second, unlike in McCann, the “gist” of plaintiffs‟ unfairness claim is not that Chevron was required to “disclose their own costs or profit margins” to consumers. (McCann, supra, 129 Cal.App.4th at pp. 1387, 1395 [“gist” of plaintiff's claim was that defendant “fails to disclose . . . that it gets a more advantageous rate of exchange on the wholesale market than it gives the customer”].) Instead, plaintiffs argue that, by failing to compensate for temperature variations in retail motor fuel, Chevron is engaging in a practice that misleads consumers as to the actual amount of motor fuel they are purchasing and the actual price that they are paying for that fuel. By contrast, the plaintiffs in McCann were informed of the specific exchange rate they would receive in their retail transactions (id. at p. 1382), but argued that the money transmitter had a duty to disclose the more favorable wholesale rate at which it was able to purchase foreign currency and pass those benefits on to consumers.

Were plaintiffs in this case simply alleging that Chevron had a duty to disclose the price at which it procured motor fuel at wholesale, McCann might foreclose such a claim. However, nothing in McCann suggests that the UCL does not, as a matter of law, apply to conduct that allows a retailer to charge more in taxes than it is required to pay to the government or to obscure the true cost of goods at retail.

Slip op., at 39.  The Court then dismantled a "safe harbor" argument, explaining that the "safe harbor" statute must "explictly" prohibit liability for the conduct.  Chevron's attempt to fashion a "safe harbor" by implication was rejected.

The Court then concluded that plaintiffs stated a claim under the "fraudulent" prong:

At the pleadings stage, we cannot say, as a matter of law, that consumers are not likely to be deceived in the manner alleged by plaintiffs. As the trial court observed, plaintiffs have alleged “facts which, if true, may reveal that members of the public . . . [assumed] that . . . they were receiving standardized units of motor fuel when, in fact, the energy content of each gallon depended on the temperature of the motor fuel at the time of purchase.” Plaintiffs have also alleged facts that, if true, may reveal that consumers were deceived as to the true price of motor fuel, which may vary depending on the temperature at which it is sold.

Slip op., at 43.  The Court distinguished Bardin v. Daimlerchrysler Corp. (2006) 136 Cal.App.4th 1255 on the ground that the plaintiffs alleged a specific expectation in the public about what they receive at a gasoline pump.  Following that discussion, the Court immediately turned to the CLRA, noting that conduct which is "fraudulent" under the UCL also violates the CLRA.  And, stay with me here, since the plaintiffs stated a claim under the CLRA, based on the same deceptive conduct that satisfied a UCL "fraudulent" claim, they, by definition, stated a UCL claim under the "unlawful" prong, since it borrows the CLRA violation.  Presto.

The breach of contract and unjust enrichment claims didn't do so well.  Saved you eight pages of reading right there.

And to think that I was not impressed with the "hot gas" theory when I heard it years ago.  What was I thinking?

Arbitration agreement did not clearly and unequivocally delegate to arbitrator the power to determine unconscionability

Rent-A-Center, W., Inc. v. Jackson, 561 U.S. ___, 130 S.Ct. 2772 (2010) held that parties could delegate to the arbitrator the power to decide threshold decisions of arbitrability.  This, of course, leads to questions about how explicit such a delegation must be to pass muster.  Rent-A-Center observed that, unless the parties "clearly and unmistakably provide otherwise," the question of arbitrability is one for the Court.  In Ajamian v. CantorCO2e, L.P. (February 16, 2012), the Court of Appeal (First Appellate District, Division Five) examined an arbitration agreement to determine whether the trial court erred by deciding the arbitration question and concluding that the agreement was unconscionable.

The Court first considered the issue of who should decide the arbitrability question:

The “clear and unmistakable” test reflects a “heightened standard” of proof. (Rent-A-Center, supra, 130 S.Ct. at p. 2777, fn. 1.) That is because the question of who would decide the unconscionability of an arbitration provision is not one that the parties would likely focus upon in contracting, and the default expectancy is that the court would decide the matter. (First Options, supra, 514 U.S. at pp. 943-945.) Thus, the Supreme Court has decreed, a contract's silence or ambiguity about the arbitrator's power in this regard cannot satisfy the clear and unmistakable evidence standard. (Id. at pp. 943-945.)

Slip op., at 9.  Turning to the language of the agreement, the Court concluded that the agreement was ambiguous.  The Court held that a provision directing “[a]ny disputes, differences or controversies” to arbitration could apply to the threshold question of arbitrability or all substantive disputes.  Becasue the language was not clear and unmistakable, the Court held that no delegation of the threshold question was enforcable.

Next, the Court considered whether a reference to AAA rules, which give arbitrators the right to decide arbitrability, was sufficient to delegate that question to the arbitrator.  The Court examined existing decisions, finding a split of authority on the issue.  After identifying cases on both sides of the issue, the Court concluded that a reference to AAA rules, without more, was insufficient:

In our view, while the incorporation of AAA rules into an agreement might be sufficient indication of the parties' intent in other contexts, we seriously question how it provides clear and unmistakable evidence that an employer and an employee intended to submit the issue of the unconscionability of the arbitration provision to the arbitrator, as opposed to the court. There are many reasons for stating that the arbitration will proceed by particular rules, and doing so does not indicate that the parties' motivation was to announce who would decide threshold issues of enforceability.

Slip op., at 19.  The Court also noted that the agreement was unclear as to whether AAA rules or rules of another arbitration entity would govern.

The Court next reviewed the trial court's finding of unconscionability.  First, the Court exmained the procedural unconscionability:

Substantial evidence supports the court's finding. Ajamian, who had already been working as a broker for almost 10 months, had no realistic bargaining power and was required to sign the Employment Agreement to receive her promised compensation – for work she had already performed. Furthermore, the Employment Agreement was not the subject of any negotiation. Ajamian stated in her declaration that she wanted to make changes to the Employment Agreement and felt uncomfortable signing it, but felt she had no choice based on Margolis' statements.

Slip op., at 26.  The Court concluded that it was unnecessary to quantify the degree of procedural unconscionability, since substantive unconscionability was evident in several ways:

In finding that the arbitration provision was unconscionable, the court found that the damages limitation in the arbitration provision was unlawful and the attorney fees clause elsewhere in the Employment Agreement (which the arbitration provision would enforce) was unconscionable. Ajamian also argued, as she does here, that the arbitration provision is substantively unconscionable for reasons the trial court did not rule upon: the provision requires her to forfeit numerous unwaivable substantive California statutes; it grants CantorCO2e discretion to choose the arbitration rules and source of the arbitration panel; and it forces Ajamian to pay tens of thousands of dollars she did not have when she entered into the agreement to obtain relief by arbitrating before three arbitrators in New York.

Slip op., at 28-29.  During its extensive discussion, the Court explained by Pearson Dental did not apply:

As a general proposition (where the clear and unmistakable test does not apply), we agree that ambiguous terms should be construed, where reasonable, in favor of arbitration. But the Pearson Dental rule does not apply here. In Pearson Dental, the court considered a single potentially unconscionable term in an arbitration agreement; here, there are multiple unconscionable terms in the Employment Agreement. Moreover, the term in Pearson Dental was ambiguous and did not expressly preclude the plaintiff from pursuing any remedy; by contrast, the unconscionable terms in the Employment Agreement categorically mandate that arbitration proceed, under the laws of New York and an arbitration organization of CantorCO2e's choosing, without the relief to which Ajamian would be entitled in California, but with an obligation to pay CantorCO2e's attorney fees if unsuccessful. Further, the language of the arbitration provision does not lend itself to an interpretation that the arbitrator may make awards contrary to the terms of the Employment Agreement; indeed, the Employment Agreement explicitly states just the opposite. (See Wherry, supra, 192 Cal.App.4th at pp. 1249-1250.)

Slip op., at 33.  The Court concluded its analysis by rejecting an argument that an Employee Handbook referencing an arbitration policy that would be signed by employees could create an enforceable arbitration agreement.

The arbitration arms race continues...

Supreme Court activity for the week of February 13, 2012

With a lot of catching up to do, I'm starting easy.  The California Supreme Court held its (usually) weekly conference on February 15, 2012.  Notable results include:

• On a petition for review, review was granted in In re Cipro Cases I & II.  This case is one to follow if you practice in the area of anti-competitive behavior.  There's a big dash of pre-emption thrown in, along with some procedural questions about a trial court's obligation to rule on evidentiary objections at summary judgment.
• On a petition for review, review and depublication were denied in Collins v. eMachines, discussed on this blog here. The Court of Appeal held that “injury in fact” can be satisfied by alleging as damages the difference between the actual purchase price and the fair market value of a defective product. 

Strong-ARM tactics dealt a stunning setback in Boschma v. Home Loan Center, Inc.

After the great real estate implosion, lenders have been very busy, attempting to justify a number of questionable practices and products.  One such loan product, the Option ARM, has been challenged in state and federal courts.  Option ARM loans are complex forms of adjustable rate loans that generally include several payments options during the early years of the loan.  One payment option includes the ability to make a "minimum" payment for several years.  However, many Option ARM loan minimum payments are insufficient to pay accruing interest after an initial "teaser" interest rate that is very low.  Once the "teaser" rate period expires, the unpaid interest is added onto the loan, increasing the principal balance owed on the loan (negative amortization).  Because of their complexity, clear disclosures to borrowers are essential.  In Boschma v. Home Loan Center, Inc. (August 10, 2011), the Court of Appeal (Fourth Appellate District, Division Three) held that a complaint alleging a lender's failure to disclose that negative amortization would definitely occur (instead describing that scenario as merely possible), was sufficient to state violations of the UCL and common law fraud.

The Court described the claims of the Second Amended Complaint:

The gravamen of plaintiffs' operative complaint is that defendant failed to disclose prior to plaintiffs entering into their Option ARMs: (1) "the loans were designed to cause negative amortization to occur"; (2) "the monthly payment amounts listed in the loan documents for the first two to five years of the loans were based entirely upon a low 'teaser' interest rate (though not disclosed as such by Defendants) which existed for only a single month and which was substantially lower than the actual interest rate that would be charged, such that these payment amounts would never be sufficient to pay the interest due each month"; and (3) "when [plaintiffs] followed the contractual payment schedule in the loan documents, negative amortization was certain to occur, resulting in a significant loss of equity in borrowers' homes, and making it much more difficult for borrowers to refinance the loans [because of the prepayment penalty included in the loan for paying off the loan within the first three years of the loan]; thus, as each month passed, the homeowners would actually owe more money than they did at the outset of the loan, with less time to repay it."

Slip op., at 13.  The Court began its analysis by explaining what was not at issue in the case at this time:

It is important to demarcate the boundaries of this dispute. The following is not at issue in this case: (1) should it be legal to offer Option ARMs to typical mortgage borrowers; and (2) should it be legal to utilize "teaser" ("discounted") interest rates (here 1.25 percent for the first month of a 30 year loan), which bear no relation to the actual cost of credit? Our only concern in this case is whether plaintiffs stated a cause of action under state law based on defendant‘s allegedly misleading, incomplete, and/or inaccurate disclosures in the Option ARM documents provided to plaintiffs.

Slip op., at 15.  The Court then observed that no California state court had addressed the exact issues presented in the case.  However, the Court noted that a number of federal courts had examined similar issues.

The Court began by addressing the Defendant's contention that strict compliance with TILA provided it with a safe harbor of sorts:

A string of cases (involving strikingly similar Option ARM forms/disclosures to those used in the instant case) have held that a borrower states a claim for a violation of TILA based on, among other disclosure deficiencies, the failure of the lender to clearly state that making payments pursuant to the TILDS payment schedule will result in negative amortization during the initial years of the loan.

Slip op., at 18.  The Court concluded that, since the allegations could support a cause of action for TILA violations, it would be nonsensical to dismiss the claims at this stage, based on a claim of compliance with TILA disclosure obligations.  Note:  There was no TILA claim asserted in this action, only UCL and fraudulent concealment claims.

Next, the Court considered the state law fradulent concealment claims.  The Court began its discussion by citing a number of federal cases that allowed state law claims to proceed along with TILA claims.  The Court then turned to the sufficiency of the fraud pleading.  The Court found that the failure to disclose the exceedingly low teaser rate adequately was a sufficient omission to suppor the fraudulent concealment claim: "The teaser rate creates an artificially low (compared to the actual cost of credit) initial payment schedule and guarantees that the actual applicable interest rate (after the first month of the loan) will exceed the interest rate used to calculate the payment schedule for the initial years of the loan."  Slip op., at 24.

Turning to the UCL, the Court found that the allegations were sufficient to support a UCL under all three prongs.  The "unfair" prong discussion was the most interesting of the three:

As noted above in our discussion of damages, it may be difficult for plaintiffs to prove they could not have avoided any of the harm of negative amortization — they could have simply paid more each month once they discovered their required payment was not sufficient to pay off the interest accruing on the loan. But plaintiffs may show they were unable to avoid some substantial negative amortization. And we see no countervailing value in defendant's practice of providing general, byzantine descriptions of Option ARMs, with no clear disclosures explaining that, with regard to plaintiffs' particular loans, negative amortization would certainly occur if payments were made according to the payment schedule. To the contrary, a compelling argument can be made that lenders should be discouraged from competing by offering misleading teaser rates and low scheduled initial payments (rather than competing with regard to low effective interest rates, low fees, and economically sustainable payment schedules). Finally, to the extent an "unfair" claim must be "tethered" to specific statutory or regulatory provisions, TILA and Regulation Z provide an adequate tether even though plaintiffs are not directly relying on federal law to make their claims.

Slip op., at 29.

Fun fact: the Court cited Kwikset when rejecting the Defendant's contention that the Plaintiffs did not adequately allege standing under the UCL.

Disclosure:  J. Mark Moore of Spiro Moss argued this matter before the Court of Appeal and contributed significantly to the briefing on appeal.

Prevailing wage laws apply where a public entity provides a land rent credit to a private entity

Labor Code section 1720, subdivision (a)(1) of the Public Wage Law ("PWL") defines " 'public works'" to mean: "Construction, alteration, demolition, installation, or repair work done under contract and paid for in whole or in part out of public funds . . . ."  When public funds end up in the hands of private entities, it is not always clear whether the PWL applies.  In Hensel Phelps v. San Diego Unified Port District (July 26, 2011), the Court of Appeal (Fourth Appellate District, Division One) had no trouble following the money trail.  The Court considered whether a hotel construction project on land that the San Diego Unified Port District (the Port District) leases to the hotel owner qualified as a public work within the meaning of the PWL where the lease specified that the Port District would provide what the lease refers to as a "rent credit" in the total amount of $46.5 million during the first 11 years of the lease.  Characterizing the "rent credit" as a source of public funds flowing to the private hotel project, the Court concluded that the PWL applied:

In assessing CCCC's argument, we note that no case law exists interpreting the phrase "rents . . . that are . . . reduced, . . . waived, or forgiven" in section 1720, subdivision (b)(4). However, when interpreting a statute, "'"[t]he words of the statute should be given their ordinary and usual meaning and should be construed in their statutory context." [Citation.] If the plain, commonsense meaning of a statute's words is unambiguous, the plain meaning controls.' " (People v. King (2006) 38 Cal.4th 617, 622.) Here, we agree with CCCC that the phrase "rents . . . that are reduced" has a plain everyday meaning that is clear and unambiguous. Under a plain commonsense meaning, rent is reduced when the amount of the rental obligation is set at a certain amount by agreement or by operation of law, and a discount is given from that amount. Under a plain commonsense meaning, rents are waived or forgiven when a party agrees not to impose or demand rents.

Applying this plain commonsense meaning, we agree with CCCC that rents were reduced, waived or forgiven by the Port District. The Lease sets forth a monthly and minimum annual rent amount that OPB is obligated to pay to the Port District. The rent credit constitutes a reduction in that payment obligation. In addition, the 100 percent rent credit during the first 34 to 36 months of the Lease is not only a reduction, but also could be considered a waiver of the rent because no rent at all is due in that period.

Slip op., at 23-24.

Fourth Appellate District, Division Three, scoffs at notion that Concepcion preempts all state unconscionability law

As soon as a blockbuster decision hits the street, zealous litigators work to stretch it as far as it can go.   AT&T Mobility LLC v. Concepcion (April 27, 2011) is getting that elastic band treatment right now.  For example, AT&T Mobility (Concepcion) was the subject of a brief aside in Mission Viejo Emergency Medical Associates v. Beta Healthcare Group (July 25, 2007).  In a lawsuit between an insured and the insurer, a motion to compel arbitration of a dispute arising out of the policy was denied by the trial court.  The Court of Appeal reversed and remanded for further proceedings regarding a claim of unconscionability.  In the course of the discussion, the Court said:

We invited the parties to provide their comments on the recent United States Supreme Court case, AT&T Mobility LLC v. Concepcion (2011) __ U.S. __ [131 S.Ct. 1740] (AT&T). Defendants appear to argue that AT&T essentially preempts all California law relating to unconscionability. We disagree, as the case simply does not go that far. General state law doctrine pertaining to unconscionability is preserved unless it involves a defense that applies "only to arbitration or that derive[s] [its] meaning from the fact that an agreement to arbitrate is at issue." (Id. at p. __ [131 S.Ct. at p.1746].) This simply does not apply here.

Slip op., at 13, n. 4.  The Court then concluded that the asserted unconscionable provisions in the arbitration agreement could be dealt with by the trial court when it considered any motion to sever provisions:

The specific provisions that plaintiffs raise — regarding arbitration in San Francisco, the even split of the cost, and the nonarbitrability of discretionary decisions — can be the subject of a motion to sever before the trial court if the parties cannot reach agreement on the terms of arbitration. (Civ. Code, § 1670.5, subd. (a).) Although we may decide this issue as a matter of first impression (see Higgins v. Superior Court (2006) 140 Cal.App.4th 1238, 1251), given the relative lack of factual development as to these issues, we believe that deference to the trial court would better serve the ends of justice.

Slip op., at 15.

So there you have it from the Fourth Appellate District, Division Three: AT&T Mobility (Concepcion) doesn't preempt all California law on the subject of contractual unconscionability.  They didn't even break a sweat figuring that out.  Interestingly, this is the second decision (Brown v. Ralphs being the first) that asked for supplemental briefing on AT&T Mobility (Concepcion) but issued a decision that is relatively unaffected by it. 

More on AT&T Mobility LLC v. Concepcion

Unless you've been living in a compound, off the grid with no internet access in a medium sized city outside the capital of a troubled nation in South Asia, you undoubtedly are aware of the Supreme Court's decision in AT&T Mobility LLC v. Concepcion (April 27, 2011).  For a number of reasons, which I will revisit obliquely in a moment, I decided against providing any immediate analysis.  Apparently this silence was disconcerting to some, as several readers actually inquired about my silence.  Beginning first with a synopsis, here are some, but not all, of my comments on Concepcion.

The result was all but pre-determined by the way in which the issue was framed: "We consider whether the FAA prohibits States from conditioning the enforceability of certain arbitration agreements on the availability of classwide arbitration procedures."  Slip op., at 1.  But Justice Scalia, writing for the Court, went ahead with the rest of the opinion.  The Court summarized the findings in the courts below:

In March 2008, AT&T moved to compel arbitration under the terms of its contract with the Concepcions. The Concepcions opposed the motion, contending that the arbitration agreement was unconscionable and unlawfully exculpatory under California law because it disallowed classwide procedures. The District Court denied AT&T’s motion. It described AT&T’s arbitration agreement favorably, noting, for example, that the informal disputeresolution process was “quick, easy to use” and likely to “promp[t] full or . . . even excess payment to the customer without the need to arbitrate or litigate”; that the $7,500 premium functioned as “a substantial inducement for the consumer to pursue the claim in arbitration” if a dispute was not resolved informally; and that consumers who were members of a class would likely be worse off. Laster v. T-Mobile USA, Inc., 2008 WL 5216255, *11–*12 (SD Cal., Aug. 11, 2008). Nevertheless, relying on the California Supreme Court’s decision in Discover Bank v. Superior Court, 36 Cal. 4th 148, 113 P. 3d 1100 (2005), the court found that the arbitration provision was unconscionable because AT&T had not shown that bilateral arbitration adequately substituted for the deterrent effects of class actions. Laster, 2008 WL 5216255, *14.

The Ninth Circuit affirmed, also finding the provision unconscionable under California law as announced in Discover Bank. Laster v. AT&T Mobility LLC, 584 F. 3d 849, 855 (2009). It also held that the Discover Bank rule was not preempted by the FAA because that rule was simply “a refinement of the unconscionability analysis applicable to contracts generally in California.” 584 F. 3d, at 857. In response to AT&T’s argument that the Concepcions’ interpretation of California law discriminated against arbitration, the Ninth Circuit rejected the contention that “ ‘class proceedings will reduce the efficiency and expeditiousness of arbitration’ ” and noted that “ ‘Discover Bank placed arbitration agreements with class action waivers on the exact same footing as contracts that bar class action litigation outside the context of arbitration.’ ” Id., at 858 (quoting Shroyer v. New Cingular Wireless Services, Inc., 498 F. 3d 976, 990 (CA9 2007)).

Slip op., at 3.  At this point, I parenthetically comment as follows: "Right."

After describing the "liberal" federal policy favoring arbitration agreements, the Court described the savings clause of the FAA thusly:

The final phrase of §2, however, permits arbitration agreements to be declared unenforceable “upon such grounds as exist at law or in equity for the revocation of any contract.” This saving clause permits agreements to arbitrate to be invalidated by “generally applicable contract defenses, such as fraud, duress, or unconscionability,” but not by defenses that apply only to arbitration or that derive their meaning from the fact that an agreement to arbitrate is at issue. Doctor’s Associates, Inc. v. Casarotto, 517 U. S. 681, 687 (1996); see also Perry v. Thomas, 482 U. S. 483, 492–493, n. 9 (1987). The question in this case is whether §2 preempts California’s rule classifying most collective-arbitration waivers in consumer contracts as unconscionable. We refer to this rule as the Discover Bank rule.

Slip op., at 5.  California law includes an unconscionability defense to any contract.  The consumers in Concepcion argued that this generally applicable defense, and California's general policy against exculpation, are not arbitration-specific, and even if they are, the same principles apply to any dispute resolution contract.  The Court commented:

When state law prohibits outright the arbitration of a particular type of claim, the analysis is straightforward: The conflicting rule is displaced by the FAA. Preston v. Ferrer, 552 U. S. 346, 353 (2008). But the inquiry becomes more complex when a doctrine normally thought to be generally applicable, such as duress or, as relevant here, unconscionability, is alleged to have been applied in a fashion that disfavors arbitration. In Perry v. Thomas, 482 U. S. 483 (1987), for example, we noted that the FAA’s preemptive effect might extend even to grounds traditionally thought to exist “ ‘at law or in equity for the revocation of any contract.’ ” Id., at 492, n. 9 (emphasis deleted). We said that a court may not “rely on the uniqueness of an agreement to arbitrate as a basis for a state-law holding that enforcement would be unconscionable, for this would enable the court to effect what . . . the state legislature cannot.” Id., at 493, n. 9.

Slip op., at 7-8.  Before this decision was rendered, I knew that the outcome is dependent upon how you choose to look at the situation.  It is very subjective.  If one views a policy against exculpation as a policy applicable to all contracts, it is arbitration neutral.  If one views a policy against exculpation as directed at arbitration agreements, it would be invalidated under just that logic.  When the outcome is so subjective, the result is highly dependent upon the predilictions of the majority.

The Court then did something that I find highly inconsistent with Justice Scalia's professed refusal to consider legislative intent and other indicia of legislative meaning.  The Court restricted the FAA's savings clause to preclude any generally applicable contract defense that might interfere with the FAA (which begs the question of what defense that overcomes an arbitration agreement does not do so):

Although §2’s saving clause preserves generally applicable contract defenses, nothing in it suggests an intent to preserve state-law rules that stand as an obstacle to the accomplishment of the FAA’s objectives. Cf. Geier v. American Honda Motor Co., 529 U. S. 861, 872 (2000); Crosby v. National Foreign Trade Council, 530 U. S. 363, 372–373 (2000). As we have said, a federal statute’s saving clause “ ‘cannot in reason be construed as [allowing] a common law right, the continued existence of which would be absolutely inconsistent with the provisions of the act. In other words, the act cannot be held to destroy itself.’ ” American Telephone & Telegraph Co. v. Central Office Telephone, Inc., 524 U. S. 214, 227–228 (1998) (quoting Texas & Pacific R. Co. v. Abilene Cotton Oil Co., 204 U. S. 426, 446 (1907)).

Slip op., at 9.  After spending some time criticizing the dissent for disputing the majority's characterization of the legislative purpose in passing the FAA, the Court rejected the Discover Bank rule as a rule interfering with the FAA.  In doing so, the Court candidly declared all consumer contracts to be contracts of adhesion:

California’s Discover Bank rule similarly interferes with arbitration. Although the rule does not require classwide arbitration, it allows any party to a consumer contract to demand it ex post. The rule is limited to adhesion contracts, Discover Bank, 36 Cal. 4th, at 162–163, 113 P. 3d, at 1110, but the times in which consumer contracts were anything other than adhesive are long past.

Slip op., at 12.  Troubling comment pepper the Court's opinion.  For instance the Court observes, "And faced with inevitable class arbitration, companies would have less incentive to continue resolving potentially duplicative claims on an individual basis."  Slip op., at 13.  So what this evidently means is that, if a company faces only sporadic, individual challenges to its misconduct, it will have some incentive to buy those few people off, but if it faces a whole class, it will fight tooth and nail to retain its ill-gotten goods.  Charming.  What a great reason to favor arbitration agreements and bar class actions.

Wrapping up, the Court said, "States cannot require a procedure that is inconsistent with the FAA, even if it is desirable for unrelated reasons."  Slip op., at 17.  One might observe two things at this point:  (1) There is a notable absence of conservative protection of federalism where the federal government is imposing dispute resolution procedures on state law claims in state courts, and (2) setting aside the unconstitutionality of federal interference in state dispute resolution procedures related to their substantive law, the federal government can certainly impose procedures that are inconsistent with the FAA.

Justice Thomas "reluctantly" concurred.  In his view, "As I would read it, the FAA requires that an agreement to arbitrate be enforced unless a party successfully challenges the formation of the arbitration agreement, such as by proving fraud or duress."  Slip op., concurrance, at 1-2.

Justice Breyer delivered the dissenting opinion, crisply defining the subjectivity of this debate in his summary of the issue:

The Federal Arbitration Act says that an arbitration agreement “shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” 9 U. S. C. §2 (emphasis added). California law sets forth certain circumstances in which “class action waivers” in any contract are unen­ forceable. In my view, this rule of state law is consistent with the federal Act’s language and primary objective. It does not “stan[d] as an obstacle” to the Act’s “accomplish­ment and execution.” Hines v. Davidowitz, 312 U. S. 52, 67 (1941). And the Court is wrong to hold that the federal Act pre-empts the rule of state law.

Slip op., dissent, at 1.  The dissent found good support for its position in other California decisions:

The Discover Bank rule does not create a “blanket policy in California against class action waivers in the consumer context.” Provencher v. Dell, Inc., 409 F. Supp. 2d 1196, 1201 (CD Cal. 2006). Instead, it represents the “appli­ cation of a more general [unconscionability] principle.” Gentry v. Superior Ct., 42 Cal. 4th 443, 457, 165 P. 3d 556, 564 (2007). Courts applying California law have enforced class-action waivers where they satisfy general uncon­ scionability standards. See, e.g., Walnut Producers of Cal. v. Diamond Foods, Inc., 187 Cal. App. 4th 634, 647–650, 114 Cal. Rptr. 3d 449, 459–462 (2010); Arguelles-Romero v. Superior Ct., 184 Cal. App. 4th 825, 843–845, 109 Cal. Rptr. 3d 289, 305–307 (2010); Smith v. Americredit Financial Servs., Inc., No. 09cv1076, 2009 WL 4895280 (SD Cal., Dec. 11, 2009); cf. Provencher, supra, at 1201 (considering Discover Bank in choice-of-law inquiry). And even when they fail, the parties remain free to devise other dispute mechanisms, including informal mechanisms, that, in con­text, will not prove unconscionable. See Volt Information Sciences, Inc. v. Board of Trustees of Leland Stanford Junior Univ., 489 U. S. 468, 479 (1989).

Slip op., dissent, at 2-3.  The dissent then questioned the majority's asseration that individual, rather than class, arbitration is a "fundamental attribute" of arbitration:

When Congress enacted the Act, arbitration procedures had not yet been fully developed. Insofar as Congress considered detailed forms of arbitration at all, it may well have thought that arbitration would be used primarily where merchants sought to resolve disputes of fact, not law, under the customs of their industries, where the parties possessed roughly equivalent bargaining power.

Slip op., dissent, at 6.  If fact, the dissent spent a good deal of time challenging the assertions of the majority, which appear thinly supported in some areas:

the majority provides no convincing reason to believe that parties are unwilling to submit high-stake disputes to arbitration. And there are numerous counterexamples.

Slip op., dissent, at 8.    And the dissent also observed:

Because California applies the same legal principles to address the unconscionability of class arbitration waivers as it does to address the unconscionability of any other contractual provision, the merits of class proceedings should not factor into our decision. If California had applied its law of duress to void an arbitration agreement, would it matter if the procedures in the coerced agreement were efficient?

Slip op., dissent, at 9.  It is with irony not lost on me that the dissent concluded as follows:

[F]ederalism is as much a question of deeds as words. It often takes the form of a concrete decision by this Court that respects the legitimacy of a State’s action in an individual case. Here, recognition of that federalist ideal, embodied in specific language in this particular statute, should lead us to uphold California’s law, not to strike it down. We do not honor federalist principles in their breach.

Slip op., dissent, at 12.  So Concepcion ends with the "liberal" justices decrying the death of federalist principles.  I think we need to revisit the "strict constructionist" labels that get tossed around.  Maybe Posner really has it right when he says, essentially, that every judge does whatever they damn well want, reverse engineering a justification that makes them feel good about their decision.

I've seen a number of theories floated around for responding to Concepcion.   In Marks v. United States, 430 U.S. 188 (1977), the Supreme Court oexplained how the holding of a case should be viewed where there is no majority supporting the rationale of any opinion: “When a fragmented Court decides a case and no single rationale explaining the result enjoys the assent of [the majority], the holding of the Court may be viewed as that position taken by those Members who concurred in the judgments on the narrowest grounds.” Marks, 430 U.S. at 193.  I don't think it likely that California courts will parse the holdings of the Court and the concurring opinion for a narrower holding.  Justice Thomas said that, even though he differs slightly in the reasoning, the result will generally be the same.  Marks isn't going to accomplish what plaintiffs would like it to accomplish.

Calling for legislative action is just silly.  Either something gets through Congress or it doesn't.  If it does, it may moot all of this, but the assumption must be that it won't.  With that in mind, non-legislative responses to Concepcion should occupy the plaintiffs' class action bar.

I've suggested on several occasions that I favor the argument that the FAA is unconstitutional when applied to state law claims in state courts.  I believe, and will believe even if a Court says otherwise, that the FAA is exclusively a procedural statute regulating how substative claims are to be resolved.  Unless the federal government would purport to pre-empt contract law of the states, a dubious effort in its own right, I believe the Commerce Clause goes too far when it treads upon the sovereignty of states deciding their own dispute resolution procedures.  Procedural rules are no place for some form of partial pre-emption.  But I also doubt that any Court would have the stomach to declare the FAA unconstitutional as applied to state law claims in state courts.

I have a project in the works that may affect how far Concepcion applies in, at least, the wage & hour context.  Once it is in the can and safe from intermeddlers, I'll report in detail on that project and what I view as better ways to keep Concepcion in its proper place.

Breaking News: Supreme Court invalidates Discover Bank in AT&T Mobility LLC v. Concepcion

Today, in AT&T Mobility LLC v. Concepcion (April 27, 2011), the Supreme Court held, 5-to-4, that California's Discover Bank rule is preempted by the Federal Arbitration Act.  What a thing to wake up to after sleeping extra to try and recover faster from being sick.  I'll write more about the deaths of class arbitration and state's rights later.  So much for federalism.  This is truly the era of the Central Planning Bureau.

Despite daunting facts, Court of Appeal confirms that California class actions are "opt-out" classes

Use of an opt-in approach for class actions has been rejected as contrary to California law.  Hypertouch Inc. v. Superior Court, 128 Cal. App. 4th 1527 (2005).  In Los Angeles Gay & Lesbian Center v. Superior Court, the rule in Hypertouch was tested with a more challenging set of facts, namely, the need to protect medical privacy rights.  The Court of Appeal (Second Appellate District, Division One) held, in Los Angeles Gay & Lesbian Center v. Superior Court (April 13, 2011), that the opt-out rule stated in Hypertouch is indeed the rule for class notice.  However, the Court fashioned other relief intended to protect the substantial privacy interest in medical information.

This matter was before the Court of Appeal for the second time.  In Bomersheim v. Los Angeles Gay & Lesbian Center, 184 Cal. App. 4th 1471, 1478 (2010) (Bomersheim I), the Court reversed the denial of class certification.  The matter alleged that, from January 1999 to March 2004, the Center administered an incorrect form of penicillin to person with confirmed or suspected cases of syphilis.

Once the matter was certified, the issue of notice became a focus of the litigation.  The Center argued that, due the sensitive nature of medical nature of the claims at issue, the court should utilize an opt-in mechanism.  The trial court held that an opt-out notice was appropriate and the Center filed a petition for a writ of mandate.  The Court heard the matter, saying, "This case presents the novel issue of whether an opt-out class is appropriate under California law where privacy rights and the physician-patient privilege will be severely compromised by the traditional opt-out procedure."  Slip op., at 11.

In concluding that opt-out notices were the only appropriate approach to class action notice proceedings, the Court said:

We recognize the benefits of a class action do not as readily accrue where members must affirmatively join the class. Here, the putative class members are those seeking free medical advice, and only approximately two-thirds of them responded to the Center's explanation of the error in medication and sought free retreatment. It is less likely that such members would affirmatively seek to join a class. Without the mandatory joinder effect of an opt-out class action, the Center will not obtain res judicata effect of a judgment; small individual class plaintiffs will not obtain the benefit of a settlement; and the cost of administering many small actions will not be avoided. Nonetheless, the Center points out that it has been more than six years since the error in medication, and if small class plaintiffs had wanted to come forward and file individual suits, they would have. This fact only underscores the point that the class plaintiffs in this action are likely of limited means and have limited access with which to pursue their claims judicially. A class action in which they automatically become participants benefits them.

Slip op., at 16-17.  However, the Court issued very specific instruction to protect the privacy of class members from disclosure without consent:

To the extent putative class members opt-out of the class, their names, other identifying information, and Medical Information shall not be subject to disclosure and shall remain sealed. With respect to those class members who do not opt-out of the class action, no class members' name, identifying information, or medical information is to be disclosed without that class members' prior authorization. Further, the trial court is to take steps to ensure that the names, identifying information, and medical information of the class members are not subject to disclosure under any circumstances in any public proceeding or public filing.

Slip op., at 24.  The Court limited disclosure of the class list to the third party administrator that would handle mailing of the notice.