Back to the drawing board: AT&T's arbitration agreement that bans class actions is still unconscionable

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It seems to me that the telecommunications and credit card industries are more determined to make an arbitration agreement with a class action ban stick than any other industry.  Most employers have given up that dream, but not the phone company and not the bank.  The latest arbitration agreement with a class action ban comes to us compliments of AT&T Mobility LLC.  But, in Laster v. AT&T Mobility LLC (October 27, 2009), the Ninth Circuit sends another class action ban to the unconscionability graveyard, and just in time for Halloween.

Those crazy mad scientists in the secret AT&T Arbitration Agreement Drafting Lab (also known as the "Triple A - DL" to those in the know), their latest scheme to ban class actions was ingenious, and could have helped them take over the world!  The plan was to circumvent the holding of Shroyer v. New Cingular Wireless Services, Inc., 498 F.3d 976 (9th Cir. 2007) with a little bonus payment clause:

[T]he phone company points to a new wrinkle: unlike the arbitration clause in Shroyer, this arbitration clause provides for a “premium” payment of $7,500 (the jurisdictional limit of California’s small claims court) if the arbitrator awards the customer an amount greater than the phone company’s last written settlement offer made before selection of an arbitrator. Hence, says the phone company, the arbitration clause is not an artifice that has the practical effect of rendering it immune from individual claims.

Slip op., at 14391.  The Ninth Circuit disagreed, and shot down a preemption argument along the way:

We will find, on second blush, the new “premium” payment does not distinguish this case from Shroyer, and that under California law, the present arbitration clause is unconscionable and unenforcable [sic]. Further, we will also find no merit to the phone company’s claim the Federal Arbitration Act (FAA) preempts California unconscionability law.

Slip op., at 14391.  Back to the Triple A - DL, Snidely.  For those not satisfied with just the holding, the Court's analysis relied heavily on Discover Bank v. Superior Court, 36 Cal. 4th 148 (2005):

The California Supreme Court addressed the unconscionability of class action waivers in arbitration agreements for the first time in Discover Bank v. Sup. Ct., 113 P.3d 1100 (Cal. 2005), holding that class action waivers were at least sometimes unconscionable under California law. 113 P.3d at 1108. Class actions, the court reasoned, serve the important policy function of deterring and redressing wrongdoing, particularly where a company defrauds large numbers of consumers out of individually small sums of money. Id. at 1105. Class action waivers pose a problem because, “small recoveries do not provide the incentive for any individual to bring a solo action prosecuting his or her rights.” Id. at 1106. In this way, the class action waiver allows the company to insulate itself from liability for its wrongdoing and the policy behind class actions is thwarted. Id. at 1109.

Slip op., at 14394.  The Court then explained how it interpreted the test in Discover Bank:

We have interpreted Discover Bank as creating a three-part test to determine whether a class action waiver in a consumer contract is unconscionable: (1) is the agreement a contract of adhesion; (2) are disputes between the contracting parties likely to involve small amounts of damages; and (3) is it alleged that the party with superior bargaining power has carried out a scheme deliberately to cheat large numbers of consumers out of individually small sums of money. Id. at 983. In Shroyer, we noted that “there are most certainly circumstances in which a class action waiver is unconscionable under California law despite the fact that all three parts of the Discover Bank test are not satisfied.” Id. Because we hold that the class action waiver at issue satisfies all three parts of the test, as was true in Shroyer, “it is unnecessary to explore those circumstances here.” Id.

Slip op., at 14395.  The application of the Discover Bank test tracks Shroyer.  The Court then disposed of AT&T's contention that the promise of a premium payment distinguished this agreement from Shroyer:

The $7,500 premium payment is available only if AT&T does not make a settlement offer to the aggrieved customer in a sum equal to or higher than is ultimately awarded in arbitration, and before an arbitrator is selected. This means that if a customer files for arbitration against AT&T, predictably, AT&T will simply pay the face value of the claim before the selection of an arbitrator to avoid potentially paying $7,500. Thus, the maximum gain to a customer for the hassle of arbitrating a $30.22 dispute is still just $30.22. We held in Shroyer that a claim worth a few hundred dollars did not provide adequate incentive for a customer to bother pursuing individual arbitration. 498 F.3d at 986. The $30.22 at issue here is even less of an incentive to file a claim. As a result, aggrieved customers will predictably not file claims—even if the odds are that after the letter-writing and arbitrator-choosing, they will get a $30.22 offer—thereby “greatly reduc[ing] the aggregate liability” AT&T faces for allegedly mulcting small sums of money from many consumers. See id. The premium payment provision has no effect on this conclusion, nor do any of the other provisions of AT&T’s revised arbitration clause. The actual damages a customer will recover remain predictably small, thus under the rationale of Discover Bank and Shroyer, AT&T’s class action waiver is in effect an exculpatory clause, hence substantively unconscionable.

Slip op., at 14397-98.  I'll spare you any excerpts from the preemption discussion.  It's sufficient to say that the Court was impressed with a repeat of arguments rejected in Shroyer.

In re Tobacco II Cases receives more attention in Kaldenbach v. Mutual of Omaha

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In re Tobacco II Cases hasn't been out long, but its significance is already hard to deny.   Morgan, et al. v. AT&T Wireless Services, Inc. (September 23, 2009) was the first published opinion by a California Court of Appeal to apply In re Tobacco II Cases.  See blog post.  In Kaldenbach v. Mutual of Omaha Life Insurance Company, et al. (October 26, 2009), the Court of Appeal (Fourth Appellate District, Division Three) had occasion to discuss In re Tobacco II Cases in the context of an appeal of the denial of class certification in a "vanishing premiums" action.

Before discussing the opinion, a definition is in order.  “Generally speaking, so called ‘[v]anishing premium policies are paid dividends which in some instances can be sufficient to cause the premium to “offset” whereby dividend values are used to pay the premium. In such an instance, the cash premium “vanishes” and is no longer due from the insured.’”  Keyes v. Guardian Life Ins. Co. of America, 194 F.R.D. 253, 254, n. 1 (S.D. Miss. 2000), quoting Phillips v. New England Mut. Life Ins. Co., 36 F.Supp.2d 345, 347 (S.D. Miss. 1998).)  In other words, the theory is that a larger sum is paid into a policy for a few years, and then the investment of those funds should generate a dividend that is sufficient to pay the premium thereafter.

Returning to the opinion, the Court of Appeal spent significant time discussing the facts of the case and the nature of "vanishing premium" policies before summarizing the Trial Court's Order denying class certifiation:

The trial court denied the motion for class certification. It concluded Kaldenbach had not demonstrated numerosity other than his assertion that over 4,000 policies were sold.  Kaldenbach had not shown ascertainability as there was no evidence as to how it could be shown which of the policyholders had received illustrations during the sales presentation.

The court concluded Kaldenbach had not shown typicality because Meyerson testified in his deposition that the sale to Kaldenbach was not typical as he had a clearly defined dominant need, Kaldenbach testified he never received any explanation from Meyerson about how the policy worked, how interest rates or costs of insurance were determined, what the extent of his obligation to pay annual premiums was, and what might happen if he stopped paying premiums. By contrast, Meyerson testified he fully explained the policy to Kaldenbach. “If [Kaldenbach] and Meyerson cannot even agree as to what was stated during the [sales] presentation to [Kaldenbach], how can [Kaldenbach's] claim be typical [and] be used to prove 4,000 claims? . . . It will take . . . individual evaluation of each claim to determine liability.”

The court also found Kaldenbach had not established commonality. Kaldenbach primarily relied upon uniformity in Mutual‟s sales materials, training, and illustrations, but there was no evidence linking those common tools to what was actually said or demonstrated in any individual sales transaction. The training materials and methods were not uniform throughout the class period. None of the allegedly scripted or memorized sales materials covered the alleged misrepresentations. And there was no evidence that uniform training or sales materials were used with each putative class member. There was no evidence all independent agents were required to take the offered training, took the offered training, had the same training, or used the same training or materials in their sales presentations. In fact “[t]here was evidence that the agents were free to ignore the training and written manuals.” Mutual‟s agents were independent contractors over whom Mutual had little or no control. Meyerson testified he did not follow his training or manuals in making the presentation to Kaldenbach. Kaldenbach had argued commonality could be found based solely on the use of illustrations, but Kaldenbach testified he never looked at the entire illustration, he only looked at the part of the illustration that showed the premium could vanish in four years because that was what Kaldenbach wanted.

The court also believed varying applicability of the statute of limitations and the delayed discovery rule to each putative class member‟s claim precluded class certification. The court noted the 70 percent lapse rate Kaldenbach alleged occurred with the policy at issue did not establish class-wide liability. There was no evidence it was an unusual lapse rate and no evidence as to why the policies had lapsed. For example, individual policyholders may have taken loans out against the cash accumulation, they may have decided to purchase a different product, or no longer needed the coverage. “[A]nalysis of why a policy lapsed is just one more issue that would need to be addressed on an individual and not class wide basis.”

Finally, the court listed the individualized issues that predominated and which could not be proven on a class-wide basis including: (1) did the agent take Mutual‟s training and read Mutual‟s manuals; (2) did the agent always use the training and materials; (3) what materials, disclosures, representations, and explanations were given to any given purchaser; (4) was an illustration used; (5) what information was input into the illustration; (6) did the purchaser rely on representations made in the sales presentation; (7) what were the customer‟s individual needs; (8) when did each class member‟s cause of action accrue; and (9) did the individual class member‟s policy lapse, and if so, why?

Slip op., at 11-13.   After describing the valuable benefits of class actions, and noting that the reasoning of the Trial Court is scrutinized when reviewing an order denying certification, the Court of Appeal observed:  "We may not reverse, however, simply because some of the court's reasoning was faulty, so long as any of the stated reasons are sufficient to justify the order. (Caro v. Procter & Gamble Co. (1993) 18 Cal.App.4th 644, 655-656 (Caro).)"  Slip op., at 14-15.

As the Court of Appeal turned to the merits, it began its discussion by cataloging a number of federal court decisions where class certification was denied on the same theory.  Parenthetically, the placement of this discussion suggests that the conclusions of those federal cases persuaded the Court of Appeal to affirm the Trial Court.

Eventually, the Court of Appeal turned to the promised discussion of In re Tobacco II Cases as it analyzed the denial of class certification for the UCL Cause of Action.  The language selected by the Court of Appeal for italicization clearly suggests the outcome:

A private person “may pursue representative claims or relief on behalf of others only if the claimant meets the standing requirements . . . and complies with [s]ection 382 of the Code of Civil Procedure.” (Bus. & Prof. Code, § 17203.) Recently, in In re Tobacco II Cases (2009) 46 Cal.4th 298, 3245, the Supreme Court held in the UCL class action context, the “injury in fact” standing requirement imposed by Proposition 64 applies only to the class representative and not to “absent class members in a UCL class action where class requirements have otherwise been found to exist.” (Italics added.) UCL relief is available on a class basis “without individualized proof of deception, reliance and injury. [Citations.]” (Id. at p. 320.)

Slip op., at 20.  The Plaintiff argued that the Trial Court incorrectly "premised its order denying class certification on the complexities of establishing each absent class members' reliance on the representations made and their injury."  Slip op., at 20.  The Court of Appeal wasn't concerned with this error:

There were myriad other individualized issues the court found to predominate including whether any given agent took Mutual's training, read its manuals, and routinely followed the training and materials; and what materials, disclosures, representations, and explanations were given to any given purchaser. These individualized issues go not to the injury suffered by a purchaser, but to whether there was in fact an unfair business practice by Mutual. Neither In re Tobacco II Cases, supra, 46 Cal.4th 298, nor Massachusetts Mutual, supra, 97 Cal.App.4th 1282, compel a different result.

Slip op., at 21.  The Court of Appeal went on to distinguish Kaldenbach's case from In re Tobacco II Cases and Massachusetts Mutual:

[B]oth In re Tobacco II Cases and Massachusetts Mutual involved identical misrepresentations and/or nondisclosures by the defendants made to the entire class. In re Tobacco II Cases targeted the tobacco industries' deceptive advertisements and statements disseminated to the public about the health effects of tobacco use. Massachusetts Mutual concerned the insurer's failure to disclose to policy purchasers and its agents its plan to decrease its discretionary dividend. In other words, there was no issue about defendants' uniform business practices giving rise to the UCL claim.

But here there is no such uniformity. Although Kaldenbach claimed Mutual's presentations relating to ALPs were uniform, it utilized standardized training methods, materials, and scripts to which agents were required to adhere, the evidence showed the opposite. Mutual's policies were sold by independent agents, and during the class period, they were not required to attend training or utilize any given sales materials. Agents were not required to adhere to a scripted sales presentation. Indeed Meyerson, who sold Kaldenbach his policy, testified at his deposition he did not use a scripted sales presentation or any training materials in making the sale to Kaldenbach.

Slip op., at 22.  If nothing else, analyses like this will encourage sales policies that state vague guidelines and some variation in sales approaches to eliminate uniformity of representations to consumers.  In any event, Kaldenbach's argument that he was entitled to an "inference of injury" for his fraud claim met with a similar fate, as the Court of Appeal noted that the inference is only available where the misrepresentations are uniform.

The Court of Appeal ignored the balance of the Trial Court's Order, concluding that the predominance of individualized issues was a sufficient ground for denying class certification.  A complicated set of facts coupled with a seemingly conservative Court of Appeal made this outcome all but a formality.

En banc hearing requests denied in Gorman v. Wolpoff & Abramson

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On October 21, 2009, in Gorman v. Wolpoff & Abramson (previously discussed by this blog here), the Ninth Circuit panel issued an amended Opinion that does not substantively alter the original Opinion and denied all petitions for panel rehearing or rehearing en banc.  When everybody wants a case reheard en banc, it was either a very good opinion or a disasterously bad opinion.  In this instance, it's much closer to the former.  Read the Opinion for pointers on how to be an effective disgruntled consumer and provide sufficient notice to your credit card company that you are royally ticked off about some goods you've received to reduce the likelihood of unqualified negative credit report entries.

This time it's the big corporation suing after a Justice Department anti-trust investigation: AT&T sues LCD manufacturers for price fixing

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The AmLaw Litigation Daily, part of the law.com network of websites, is reporting that AT&T (a collection of various AT&T entities) have filed "an antitrust suit filed against liquid crystal display screen makers after four LCD makers paid a historic $585 million in criminal antitrust fines last November."  Alison Frankel, Crowell & Moring Files AT&T's Antitrust Complaint Against Liquid Crystal Display Manufacturers (October 21, 2009) www.law.com.  According to the complaint, AT&T purchased over 300 million handsets with LCD screens (Paragraph 5) that were impacted by the alleged price-fixing conspiracy.  That does not include LCD panels purchased by AT&T in all other forms, including computer monitors used internally by AT&T.  As AmLaw notes, an antitrust suit by a corporate reseller is not something you see every day.

I guess this means that I paid too much for all of my LCD screens too.  If I didn't have the tail end of a cold, I'd be angry about that.  On a related note, I have to assume that, if there aren't consumer anti-trust suits on file yet, there will be soon.

Today's lessons from the Court of Appeal: things not to do

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Complex litigation and civil procedure frequently intersect, probably because everyone is scrutinizing every crossed T and dotted I in high stakes litigation.  Today, the Court of Appeal (Second Appellate District, Division Six) offers not one, but two procedural lessons that are at least as likely to arise in complex litigation matters as they are in the simplest of civil actions.

Our first of two lessons comes from Alvis v. County of Ventura (October 20, 2009).  If you have an expert, and he writes a report, and you try to oppose summary judgement with an expert declaration that contradicts his own prior report on a material point, make sure he explains why he changed his tune:

Most significantly, Singh's declaration asserts that the slide started at the bottom of the cliff when the wall failed. This directly contradicts his prior statement in a report to an insurance company that "[f]ailure started as a landslide in the upper reaches and then flowed at a rapid rate down to the developed area below." This is not a minor point. Singh's statement that the slide started in the upper reaches of the cliff directly undercuts the premise on which his entire declaration is based. Yet, Singh offers no explanation.

Slip op., at 15.  If the expert had provided a credible explanation for why he altered his opinion, it might have made it past the summary judgment stage.

The next lesson is as much for arbitrators as it is for parties to litigation.  Burlage v. Superior Court (Spencer) (October 20, 2009) observes that "[i]t is not often that a trial court vacates an arbitration award and an appellate court affirms the order."  Slip op., at 1.  Since Moncharsh v. Heily & Blase, 3 Cal. 4th 1 (1992), lower courts have struggled to define the limited circumstances when a trial court can properly review an arbitration award.  Burlage concludes that one such circumstance arises when the arbitrator excludes material evidence, denying one contracting party the benefit of the arbitration bargain:  "The parties to an arbitration have bargained for a final and binding decision.  (Moncharsh v. Heily & Blase, supra, 3 Cal.4th at p. 10.) But without the opportunity to present material evidence, Spencer did not receive the benefit of that bargain."  Slip op., at 7.  Notably, there is a dissent, which argues, in substance, that the exclusion of evidence followed a ruling of law that the evidence was inadmissible, and the accuracy of that ruling cannot be reviewed by the trial court.

Credit goes to Presiding Justice Gilbert for both opinions.

Consumer Attorneys of San Diego offers its Second Annual Class Action Symposium on October 23-24

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The educational opportunities for class action practitioners in California improved greatly in recent years (oddly coincident with significant increase in the number of attorneys trying their hand at class action litigation).  One of those great new opportunities for class action CLE occurs this Friday and Saturday in San Diego's gaslamp quarter.  Consumer Attorneys of San Diego will present its 2nd Annual Class Action Symposium.  The speakers include judges, mediators, and practitioners from both sides of the "v."

The blogosphere will be well represented by speaker Kim Kralowec, The UCL Practitioner and a Partner at Schubert Jonckheer Kolbe & Kralowec LLP.  And speaking of The UCL Practitioner, her blog now notes that you can register for one day of the two day symposium.  If obligations on Friday prevent you from attending, consider attending on Saturday.  You can also save money by registering more than one attendee from the same firm.

If nothing else, send the youngest attorneys in your firm so they can learn first hand from the people that do it right.  Because of the special nature of representative litigation, we have an obligation to maintain the highest possible practice standards.

California Supreme Court activity for the week of October 12, 2009

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The California Supreme Court held its (usually) weekly conference on October 14, 2009.  Notable results include:

  • An additional Request for Depublication was denied in Doppes v. Bentley Motors (Song‑Beverly Consumer Warranty Act permits recovery of prejudgment interest under Civil Code section 3287).  This is the companion opinion to the more headline-grabbing Opinion (in case no. G038734) which held that the trial court abused its discretion by failing to impose terminating sanctions against defendant for misuse of the discovery process.

In my subjective opinion, there were no other events of significance for purposes of this blog.  However, the Supreme Court denied a Petition for Review and depublication request in Kobayashi v. Superior Court. For reasons that may become obvious to you, I am not going to comment at all on the underlying case.  But if you are the curious sort, and enjoy carefully worded opinions, you can find the original opinion here, and the supplemental opinion here.

in brief: More commentary about Nazir v. United Airlines, Inc.

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Whether it is the intensity of the Opinion, the facts discussed in the Opinion, or a combination of the two, Nazir v. United Airlines, Inc. (October 9, 2009) is generating a fair bit of commentary.  Workplace Prof Blog encourages everyone to read the entire opinion.  Storm's California Employment Law agrees, saying, "You have to read this opinion."  I agree.  You should read the opinion.

In theory, Brinker Restaurant Corporation, et al. v. Superior Court (Hohnbaum) is fully briefed

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The Brinker docket shows that all parties have filed their answers to the many amicus briefs.  In theory, this means that briefing is done.  But don't doubt the ability of attorneys to come up with a (good) reason for some supplemental brief or other.  See you next year for more on Brinker.

Media coverage of Nazir v. United Airlines, Inc.

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Mike McKee's Recorder column on the recent decision in Nazir v. United Airlines, Inc. (October 9, 2009), previously available only by subscription, is now available without a subscription from Law.com.  Mike McKee, On Summary Judgment, Judge Gets a Spanking (October 13, 2009) www.law.com.