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Here We Go Again: Another Attempt at Recovery for Ratepayers Resulting from KeySpan-Morgan Stanley Swap

Found recently in the National Law Reviewwas an article by Daniel E. Hemli and Jacqueline R. Java of Bracewell & Giuliani LLP regarding KeySpan-Morgan Stanley:

Another class action lawsuit has been filed against KeySpan Corporation (KeySpan) and Morgan Stanley Capital Group Inc. (Morgan Stanley), claiming damages for antitrust violations resulting from an allegedly illegal swap agreement that allowed KeySpan to manipulate energy prices in the New York City electric generating capacity market (NYC Capacity Market), see Konefsky et al. v. KeySpan Corp., et al., Case No. 1:12-cv-00017. The complaint was filed on January 6, 2012 in the U.S. District Court for the Western District of New York on behalf of electric customers of National Grid, which purchased electric energy and capacity in the NYC Capacity Market from 2006 through 2009. The plaintiffs, two law professors, are seeking on behalf of the class millions in damages and disgorgement of unlawfully obtained profits for alleged violations of Sections 1 and 2 of the Sherman Act and Section 7 of the Clayton Act, as well as analogous New York state laws.

As described in previous blog entries in February 2010 and February 2011, the underlying actions that led to this complaint involve a 2006 financial swap agreement between KeySpan and Morgan Stanley, which gave KeySpan an indirect financial interest in the sale of generating capacity by its largest competitor, Astoria Generating Company, in the NYC Capacity Market. At that time, approximately 1000 MW of new generation was poised to come online in that market. Previously, due to tight supply conditions, KeySpan, as the largest seller of installed capacity in the market, had been able to bid at or near the applicable bid cap without risking loss of sales. The anticipated addition of new generating capacity threatened to upset the status quo and put downward pressure on prices.

In February 2010, the Department of Justice (DOJ) brought an action against KeySpan alleging that the swap resulted in a violation of Section 1 of the Sherman Act. The DOJ claimed that KeySpan’s financial interest in Astoria’s capacity reduced KeySpan’s incentive to competitively bid its capacity, enabling KeySpan to profitably bid capacity at the price cap, despite the addition of significant new generating capacity that otherwise likely would have caused prices to drop. According to the DOJ, this arrangement led to higher capacity prices in New York City and, in turn, higher electricity prices for consumers than would have prevailed otherwise, thereby violating Section 1 of the Sherman Act. KeySpan agreed to pay $12 million in disgorgement of profits to the U.S. Treasury to settle the matter. The DOJ subsequently also took action against Morgan Stanley, simultaneously filing a complaint and proposed settlement on September 30, 2011 pursuant to which Morgan Stanley agreed to pay $4.8 million in disgorgement.

The latest class action complaint is similar to another class action brought against KeySpan and Morgan Stanley, in the U.S. District Court for the Southern District of New York, see Simon v. KeySpan Corp., et al., Case No. 1:10-cv-05437. That attempt to obtain a judgment on behalf of ratepayers was rejected by the district court in March 2011. In dismissing the Simon complaint, the court explained in its opinion that (i) because the class members were indirect purchasers of electric generation capacity, they had not suffered antitrust injury and therefore lacked antitrust standing to bring the case; (ii) the filed rate doctrine, which bars private actions where a rate has been previously approved by FERC, applied in that case; and (iii) plaintiff’s state law claims were barred by the doctrine of federal preemption. That case is currently being appealed to the Second Circuit.

Court of Appeal Reminds Litigants That Settling With Named Plaintiff Does Not Necessarily End Putative Class Action

An article recently published in the National Law Review by Neil A.F. Popović and Lai L. Yip of Sheppard Mullin Richter & Hampton LLP regarding Putative Damages and Class-Action Lawsuits:

If a defendant in a putative class action settles with the class representative prior to class certification, does the defendant nonetheless have to respond to pre-settlement discovery requests to identify absent class members? According to the California Court of Appeal in Pirjada v. Superior Court, 2011 WL 6144930, Case No. B234813 (Cal. App. Dec. 12, 2011), the answer is no, although the appellate court left open the possibility that the trial court could require some form of notice to protect the interests of absent class members.

Plaintiff Seeks Discovery Identifying Putative Class Members

Putative class representative Obaidul Pirjada (“Pirjada”) brought a purported class action on behalf of all security guards who had been employed in California by defendant Pacific National Security, Inc. (“Pacific National”) during the preceding four years, alleging violations of the California Labor Code and the California Business and Professions Code. Pirjada propounded discovery requesting, among other things, the names and addresses of all putative class members. Pacific National did not object or respond to the discovery requests.

Plaintiff, Without Counsel Involvement, Settles Directly With Defendant

Without the involvement of his attorneys, Pirjada settled directly with Pacific National after negotiating with its CEO. Then, by letter to his counsel, Pirjada requested that his claims be dismissed with prejudice, and enclosed the settlement agreement along with payment for legal services.

Plaintiff’s Counsel Files Motion for Order Providing Notice to Putative Class Members; Defendant Files Motion to Dismiss

Instead of dismissing the lawsuit, however, Pirjada’s counsel filed a motion seeking to provide notice to absent members of the proposed class that substitution of a suitable class representative was necessary. Pacific National filed a motion to dismiss based on the parties’ settlement, which Pirjada joined.

Superior Court Denies Both Motions

The superior court denied Pacific National’s motion to dismiss, noting that a plaintiff’s individual settlement does not vitiate plaintiff’s or his counsel’s fiduciary obligations to the putative class members. The court granted sixty days leave to amend to add a new plaintiff as class representative. The court denied counsel’s motion for notice, finding it unnecessary because unlike in CashCall, Inc. v. Superior Court, 159 Cal. App. 4th 273 (2008), and Best Buy Stores, L.P. v. Superior Court, 137 Cal. App. 4th 772 (2006), members of the putative class of security guards know whether they were injured and thus can determine without notice whether to assert claims against Pacific National. The court specifically noted, however, that regardless of notice, plaintiff’s counsel was authorized to communicate with potential class members.

Plaintiff’s Counsel Moves to Compel Discovery to Identify New Class Representative, Which Superior Court Denies

Plaintiff’s counsel then moved to compel responses to the previously propounded requests for information identifying putative class members, arguing that Pacific National had waived its objections by failing to respond; that Pirjada could not provide contact information for other putative class members because he worked at only one Pacific National location and was the only guard assigned there; and that Pirjada contacted counsel only after his employment at Pacific National had ended. The superior court denied the motion to compel, stating that Pirjada had settled his claims and that his discovery requests were therefore moot. The court reiterated, however, that counsel were free to communicate with class members, even if it they were not entitled to discovery.

Court of Appeal Denies Petition, Deciding Superior Court Did Not Abuse Discretion

Plaintiff’s counsel filed a petition for writ of mandate challenging the superior court’s denial of the motion to compel, as well as the denial of the motion to provide notice.

The Court of Appeal concluded that the superior court acted within its broad discretion in denying the motion to compel, and choosing instead to protect absent class members by allowing counsel leave to amend the complaint after using informal means to identify potential replacement class representatives.

With respect to notice, the Court stated:

[P]recertification discovery may be allowed in appropriate circumstances to identify a substitute class representative in place of one who is not able to serve in that capacity, as well as to assist the lead plaintiff in learning the names of other individuals who might assist in prosecuting the action. But the obligation to notify absent class members before dismissing the case rests with the superior court, not the lead plaintiff or class counsel. The nature and extent of that notice must be decided by the court itself.

Pirjada, 2011 WL 6144930. at *14. The Court noted that under California Rule of Court 3.770, no notice to absent class members is required at all “if the court finds that the dismissal will not prejudice them.” Id. Moreover, because the superior court issued an order to show cause regarding dismissal, counsel will have the opportunity at that hearing to demonstrate that some form of notice is required to avoid prejudice to absent class members.

Lessons for Class Action Defendants

The somewhat unique circumstances in Pirjada highlight the importance of making sure to tie up procedural loose ends, such as outstanding discovery, when a defendant settles with the named plaintiff(s) prior to class certification. More broadly, the case serves as a reminder that named plaintiffs and their counsel have an ongoing fiduciary duty to potential class members, and courts must take reasonable steps to protect those interests, including through potential discovery and notice procedures.

Under Parris v. Superior Court, 109 Cal. App. 4th 285 (2003), and its progeny, “‘trial courts must apply a balancing test and weigh the actual or potential abuse of the class action procedure against the potential benefits that might be gained'” by allowing precertification discovery to identify a substitute class representative.Pirjada, 2011 WL 6144930, at *5 (quoting Starbucks Corp. v. Superior Court, 194 Cal. App. 4th 820, 825 (2011)). Addressing that standard remains a key consideration for defendants who seek to avoid ongoing class action litigation when they settle with a named plaintiff.

Beware of Online Applications and Background Check Authorizations

Posted in the National Law Review on December 15, 2011 an article by Luis E. Avila, Nancy L. Farnam, Richard D. Fries, Jeffrey T. Gray, Jr., Richard A. Hooker and David E. Khorey of Varnum LLP regarding class actions against employers’ conducting background checks:

An increasing number of employers have been recipients of proposed class actions alleging that the way they conduct background checks on prospective employees violates the Fair Credit Reporting Act 15 U.S.C. §1681 (“FCRA”).

A recent example is a claim filed in Virginia, which focuses on the employer’s online job application. The process asks potential employees whether they are willing to allow the company to obtain a consumer report or criminal background check on them. Applicants must then click a button labeled either “Accept” or “Decline.” The claim alleges that for purposes of the FCRA, an electronic disclosure is not one made “in writing” and that an electronic signature (Accept/Decline) does not satisfy the requirements of the act.

As it relates to employers conducting background checks on prospective employees, the FCRA requires that a person may not procure a consumer report for employment purposes with respect to any consumer, unless (1) a clear and conspicuous disclosure has been made in writing to the applicant at any time before the report is procured, in a document that consists solely of the disclosure that a consumer report may be obtained for employment purposes; and (2) the consumer has authorized in writing the procurement of the report by that person.

Electronic disclosures of this sort have traditionally been viewed as falling under the Electronic Signatures in Global and National Commerce Act (“E-Sign”). However, this claim challenges this understanding of E-Sign by alleging that the law does not apply to job applicants, but instead only to consumers, which it defines as an individual who obtains products or services.

Under the FCRA, employers may be liable to each class member for up to $1,000.00 or actual damages, plus punitive damages and attorneys’ fees and costs. So far this year, two companies have agreed to multimillion-dollar settlements in similar cases.

We strongly recommend that employers review their online job application process to ensure that it does not run afoul of the FCRA and obtain competent labor counsel to address any concerns

U.S. Supreme Court Stresses Importance of Commonality in Decertifying Massive Sex Discrimination Class of 1.5 Million Wal-Mart Employees

Barnes & Thornburg LLP‘s Labor and Employment Law Department recently posted in the National Law Review an article about the U.S. Supreme Court’s reversing the largest employment class certification in history

In Wal-Mart, Inc. v. Dukes, reversing the largest employment class certification in history, the U.S. Supreme Court appears to have limited the circumstances in which federal courts can certify class actions – and not just in employment cases. The Court held that the lower federal courts had erred by certifying a class that included 1.5 million female employees from virtually every part of the country. The plaintiffs sought injunctive and declaratory relief, punitive damages, and backpay as a result of alleged discrimination by Wal-Mart against female employees in violation of Title VII of the Civil Rights Act of 1964.

The Supreme Court held that class certification was improper because the class failed to meet the “commonality” requirement of Federal Rule 23(a)(3), which provides that a class can be certified “only if…there are questions of law or fact common to the class…” The Court noted that the mere allegation of “common questions” is insufficient under Rule 23. “Th[e] common contention… must be of such a nature that it is capable of classwide resolution – which means that determination of its truth or falsity will resolve an issue that is central to the validity of each one of the [individual class members’] claims in one stroke.”

The Court held that the Wal-Mart class did not meet the standard for commonality, because the evidence showed that Wal-Mart gave discretion to its supervisors in making employment decisions. The named plaintiffs “have not identified a common mode of exercising discretion that pervades the entire company… In a company of Wal-Mart’s size and geographical scope, it is quite unbelievable that all managers would exercise their discretion in a common way without some common direction.” The Court concluded that, “Because [the named plaintiffs] provide no convincing proof of a company-wide discriminatory pay and promotion policy, we have concluded that they have not established the existence of any common question.”

The lack of commonality found in Wal-Mart can arise in class actions of many kinds. Under Wal-Mart, a question is “common” under Rule 23(a)(3) only if it can be decided on a class-wide basis. In the past, many named plaintiffs, and some lower courts, have overlooked this essential point. And, as in Wal-Mart, in many cases a claim of commonality will fail precisely because there is no way to rule on the question without addressing the individual facts relating to each purported class member. Wal-Mart makes clear that such a lack of commonality is sufficient to defeat class certification.

In addition to meeting all of the requirements of Rule 23(a), a class must comply with one of the three subparts in Rule 23(b). The trial court in Wal-Mart had certified the class under Rule 23(b)(2), which allows a class where the defendant’s alleged conduct “appl[ied] generally to the class, so that final injunctive or declaratory relief is appropriate respecting the class as a whole…” Another issue before the Supreme Court was whether such certification was proper where the class sought recovery of substantial backpay based on Wal-Mart’s alleged discrimination.

The Court ruled that the purported class could not be certified under Rule 23(b)(2), holding that “claims for individualized relief (like the backpay at issue here) do not satisfy the Rule.” The Court said that Rule 23(b)(2) “does not authorize class certification when each class member would be entitled to an individualized award of monetary damages.”

Under the analysis in Wal-Mart , in the vast majority of class actions seeking a monetary recovery, the class can be certified (if at all) only under Rule 23(b)(3). Class certification under that provision is often more difficult, because a class plaintiff must prove that common questions “predominate” over individual questions and that a class action is “superior” to individual actions. In addition, under Rule 23(c)(2)(A), individual notice must be given to all members of a Rule 23(b)(3) class at plaintiff’s expense, while such notice is optional, within the trial court’s discretion, if the class is certified under Rule 23(b)(2).

Wal-Mart is an important case in the area of employment law; but the Supreme Court’s holdings on the requirements of Rule 23 are likely to be helpful in defending class actions of all kinds

U.S. Supreme Court Rejects Gender Discrimination Class Action Against Wal-Mart

Posted earlier this week at the National Law Review by the Labor and Employment Group of Sheppard, Mullin, Richter & Hampton LLP a good overview of the implications of the Wal-Mart Stores, Inc. v. Dukes case.

On June 20, 2011, the United States Supreme Court released its widely-anticipated decision in Wal-Mart Stores, Inc. v. Dukes, et al., 564 U.S. ___ (2011) (“Wal-Mart“). In Wal-Mart, the Supreme Court reversed the Ninth Circuit Court of Appeals and held that the proposed nationwide gender discrimination class action against the retail giant could not proceed. In a decision that will come as welcome news to large employers and other frequent targets of class action lawsuits, the Supreme Court (1) arguably increased the burden that plaintiffs must satisfy to demonstrate “common questions of law or fact” in support of class certification, making class certification more difficult, especially in “disparate impact” discrimination cases; (2) held that individual claims for monetary relief cannot be certified as a class action pursuant to Federal Rule of Civil Procedure 23(b)(2), which generally permits class certification in cases involving claims for injunctive and/or declaratory relief; and (3) held that Wal-Mart was entitled to individualized determinations of each proposed class member’s eligibility for backpay, rejecting the Ninth Circuit’s attempt to replace that process with a statistical formula.

The named plaintiffs in Wal-Mart were three current and former female Wal-Mart employees. They sued Wal-Mart under Title VII of the federal Civil Rights Act of 1964, alleging that Wal-Mart’s policy of giving local managers discretion over pay and promotion decisions negatively impacted women as a group, and that Wal-Mart’s refusal to cabin its managers’ authority amounted to disparate treatment on the basis of gender. The plaintiffs sought to certify a nationwide class of 1.5 million female employees. The plaintiffs sought injunctive and declaratory relief, punitive damages, and backpay.

The trial court and Ninth Circuit had agreed that the proposed class could be certified, reasoning that there were common questions of law or fact underFederal Rule of Civil Procedure 23(a), and that class certification pursuant to Rule 23(b)(2) – which permits certification in cases where “the party opposing the class has acted or refused to act on grounds that apply generally to the class, so that final injunctive relief or corresponding declaratory relief is appropriate respecting the class as a whole” – was appropriate because the plaintiffs’ claims for backpay did not “predominate.” The Ninth Circuit had further held that the case could be manageably tried without depriving Wal-Mart of its due process rights by having the trial court select a random sample of claims, determine the validity of those claims and the average award of backpay in the valid claims, and then apply the percentage of valid claims and average backpay award across the entire class in order to determine the overall class recovery.

The Supreme Court reversed. A five-justice majority concluded that there were not common questions of law or fact across the proposed class, and hence Federal Rule of Civil Procedure 23(a)(2) was not satisfied. Clarifying earlier decisions, the majority made clear that in conducting this analysis, it was permitted to consider issues that were enmeshed with the merits of the plaintiffs’ claims. The majority then explained that merely reciting common questions is not enough to satisfy Rule 23(a). Rather, the class proceeding needs to be capable of generating “common answers” which are “apt to drive the resolution of the litigation.” The four-justice dissent criticized this holding as superimposing onto Rule 23(a) the requirement in Rule 23(b)(3) that “common issues predominate” over individualized issues. The dissent believed that the “commonality” requirement in Rule 23(a) could be established merely by identifying a single issue in dispute that applied commonly to the proposed class. Because the trial court had only considered certification under Rule 23(b)(2), the dissent would have remanded the case for the trial court to determine if a class could be certified under Rule 23(b)(3).

The majority held that the plaintiffs had not identified any common question that satisfied Rule 23(a), because they sought “to sue about literally millions of employment decisions at once.” The majority further explained that “[w]ithout some glue holding the alleged reasons for all those decisions together, it will be impossible to say that examination of all the class members’ claims for relief will produce a common answer to the crucial question why was I disfavored.”

Addressing the plaintiffs’ attempt to provide the required “glue”, the majority held that anecdotal affidavits from 120 class members were insufficient, because they represented only 1 out of every 12,500 class members, and only involved 235 out of Wal-Mart’s 3,400 stores nationwide. The majority also held that the plaintiffs’ statistical analysis of Wal-Mart’s workforce (which interpreted data on a regional and national level) was insufficient because it did not lead to a rational inference of discrimination at the store or district level (for example, a regional pay disparity could be explained by a very small subset of stores). Finally, the majority held that the “social framework” analysis presented by the plaintiffs’ expert was insufficient, because although the expert testified Wal-Mart had a “strong corporate culture” that made it “vulnerable” to gender discrimination, he could not determine how regularly gender stereotypes played a meaningful role in Wal-Mart’s employment decisions, e.g., he could not calculate whether 0.5 percent or 95 percent of the decisions resulted from discriminatory thinking. Importantly, the majority strongly suggested that the rigorous test for admission of expert testimony (the Daubert test) should be applied to use of expert testimony on motions for class certification.

The Court’s other holdings were unanimous. For one, the Court agreed that class certification of the backpay claim under Rule 23(b)(2) was improper because the request for backpay was “individualized” and not “incidental” to the requests for injunctive and declaratory relief. The Court declined to reach the broader question of whether a Rule 23(b)(2) class could ever recover monetary relief, nor did it specify what types of claims for monetary relief were and were not considered “individualized.” The Court made clear, however, that when plaintiffs seek to pursue class certification of individualized monetary claims (such as backpay), they cannot use Rule 23(b)(2), but must instead use Rule 23(b)(3), which requires showing that common questions predominate over individual questions, and includes procedural safeguards for class members, such as notice and an opportunity to opt-out.

Lastly, the unanimous Court agreed that Wal-Mart should be entitled to individualized determinations of each employee’s eligibility for backpay. In particular, Wal-Mart has the right to show that it took the adverse employment actions in question for reasons other than unlawful discrimination. The Court rejected the Ninth Circuit’s attempt to truncate this process by using what the Court called “Trial by Formula,” wherein a sample group would be used to determine how many claims were valid, and their average worth, for purposing of extrapolating those results onto the broader class. The Court disapproved of this “novel project” because it deprived Wal-Mart of its due process right to assert individualized defenses to each class member’s claim.

Looking forward, the Wal-Mart decision will strengthen the arguments of employers and other companies facing large class action lawsuits. In particular, the decision reaffirms that trial courts must closely scrutinize the evidence when deciding whether to certify a class action, especially in “disparate impact” discrimination cases. Statistical evidence that is based on too small a sample size, or is not well-tailored to the proposed class action, should be insufficient to support class certification. Likewise, expert testimony that is over-generalized and incapable of providing answers to the key inquiries in the case (here, whether a particular employment decision was motivated by gender discrimination) should also be insufficient to support class certification. Finally, the Court’s holding that defendants have the right to present individualized defenses as to each class member, and that this right cannot be short-circuited through statistical sampling, will provide defendants with a greater ability to defeat class certification where such individualized determinations would otherwise prove unmanageable.

U.S. Supreme Court: Federal Court Could Not Enjoin State Court from Addressing Class Certification Issue

Posted yesterday at the National Law Review by Scott T. Schutte of Morgan, Lewis & Bockius LLP a great overview of the U.S. Supreme Court’s recent ruling in Smith v. Bayer Corp.

In a decision with implications for companies facing class action litigation, the U.S. Supreme Court ruled unanimously that a federal district court, having rejected certification of a proposed class action, could not take the additional step of enjoining a state court from addressing a motion to certify the same class under state law. In an opinion authored by Justice Kagan, the Court inSmith v. Bayer Corp., No. 09-1205, 564 U.S. ____ (June 16, 2011), held that principles of stare decisis and comity should have governed whether the federal court’s ruling had a controlling or persuasive effect in the later case, and the state court should have had an opportunity to determine the precedential effect (if any) of the federal court ruling.

Facts of Bayer

In Bayer, a plaintiff sued in West Virginia state court alleging that Bayer’s pharmaceutical drug Baycol was defective. After removal to federal court, the plaintiff moved to certify the action as a class action on behalf of all West Virginia purchasers of Baycol. The federal court rejected class certification because proof of injury from Baycol would have required plaintiff-specific inquiries and therefore individual issues of fact predominated over common issues. It then dismissed the plaintiff’s claims on independent grounds.

A different plaintiff, who had been a putative class member in the first action and was represented by the same class counsel in the federal action, moved to certify the same class in West Virginia state court. Bayer sought an injunction from the federal court in the first case, arguing that the court’s rejection of the class bid should bar the plaintiff’s relitigation of the same class certification question in state court. The district court granted the injunction, and the Circuit Court affirmed.

The Supreme Court’s Decision

The issues before the Court were (i) the district court’s power to enjoin the later state-court class action to avoid relitigation of the previously decided classcertification determination; and (ii) whether the federal court’s injunction complied with the Anti-Injunction Act, 28 U.S.C. § 2283, which permits a federal court to enjoin a state court action when necessary to “protect or effectuate its judgment.” The Court granted certiorari to resolve a circuit split concerning the application of the Anti-Injunction Act’s relitigation exception.

The Supreme Court overturned the injunction. It determined that enjoining the state court proceedings under the circumstances of the case was improperly “resorting to heavy artillery.” The Court noted that “[d]eciding whether and how prior litigation has preclusive effect is usually the bailiwick of the second court.” It observed that a federal court may under the relitigation exception to the Anti-Injunction Act enjoin a state court from relitigating an already decided issue-including whether to certify a case as a class action-when two conditions are met: “First, the issue the federal court decided must be the same as the one presented in the state tribunal. And second, [the party in the later case] must have been a party to the federal suit, or else must fall within one of a few discrete exceptions to the general rule against binding nonparties.” Notably, the Court commented that, in conducting this analysis, “every benefit of the doubt goes to the state court” being allowed to determined what effect the federal court’s prior ruling should be given.

The Court held that neither condition was met in Bayer. The issue of class certification under West Virginia’s Rule 23 (the language of which mirrored Federal Rule of Civil Procedure 23) was not “the same as” the issue decided by the federal court because the West Virginia Supreme Court had expressly disapproved of the approach to the “predominance” analysis adopted by federal courts interpreting the federal class action rule. In addition, the Court also held that unnamed persons in a proposed class action do not become parties to the case if the court declines to certify a class. By contrast, the Court affirmed the established rule that “a judgment in a properly entertained class action is binding on class members in any subsequent litigation.”

According to the Court, Bayer’s “strongest argument” centered on a policy concern that, after a class action is disapproved, plaintiff after plaintiff may relitigate the class certification issue in state courts if not enjoined by the original court. The Court suggested that these concerns were ameliorated by the Class Action Fairness Act of 2005, through which Congress gave defendants a right to remove to federal court any sizable class action involving minimal diversity of citizenship. The Court noted the availability of consolidating certain federal class actions to avoid inconsistent results and offered that the Class Action Fairness Act’s expanded federal jurisdiction should result in greater uniformity among class action decisions and in turn reduce serial relitigation of class action issues.

Implications of Bayer

Bayer exposes defendants to the potential for repetitive class action litigation by plaintiffs in state courts. Bayer does not alter existing standards for class certification, however, and its holding is a limited one: a defendant who has defeated class certification may not invoke the “heavy artillery” of an injunction against future state-court bids for class certification in a case raising the same legal theories unless that future bid is advanced by the same named plaintiff(s) (or a person who falls within one of the few discrete exceptions to the general rule against binding nonparties) and the defendant can establish that state standards for class certification are similar to Federal Rule 23. In this regard, the Court held that “[m]inor variations in the application of what is in essence the same legal standard do not defeat preclusion,” but if the state courts would apply a “significantly different analysis” than the federal court, an injunction will not be upheld. The Anti-Injunction Act analysis from Bayer applies directly only where the enjoining court is a federal court and the second court is a state court.

The Bayer opinion also highlights avenues for companies facing serial class actions to mitigate risk. The Court all but acknowledged that “class actions raise special problems of relitigation.” These relitigation problems in the class action context and beyond will remain after Bayer. But a number of strategic steps can be taken to reduce the burdens, expenses, and risks associated with multiple lawsuits. For example, the enactment of the Class Action Fairness Act provides expanded federal jurisdiction over many class actions and therefore permits enhanced removal opportunities for state court class actions. If subsequent class actions are filed and removed, the Court noted that multidistrict litigation proceedings may be available for coordination of pretrial proceedings to avoid repetitive litigation. Even if transfer and consolidation cannot be effectuated, the Court observed that “we would expect federal courts to apply principles of comity to each other’s class certification decisions when addressing a common dispute.”

Finally, the Court’s treatment of absent class members as nonparties to the class certification question in the first action may have significance to other issues in class actions, including often hotly disputed issues relating to communications with putative class members by the defendant before class certification.

The Need for a Detailed Procedure of Judicial Review of Civil Rights Arbitration Awards after Rent-A-Center West, Inc. v. Jackson

Congrats to Nicole Farbes-Lyons of St. John’s University School of Law – winner of the National Law Review Spring Student Legal Writing Contest. Nicole’s topic explored several components underlying the Supreme Court’s recent Rent-A-Center decision and the subsequent need for clearer guidance per civil rights arbitration.

Introduction

The November 17, 2010 New York Times article “Justices Are Long on Words but Short on Guidance” blasted the Supreme Court of the United States for its issuance of sweeping and politically polarized decisions, and criticized the quality of the Court’s “judicial craftsmanship” by positing that “[i]n decisions on questions great and small, the Court often provides only limited or ambiguous guidance to lower courts. And it increasingly does so at enormous length.” [1] The article continued that critics of the Court’s work “point to reasoning that fails to provide clear guidance to lower courts,” and described the Court’s recent rulings as “fuzzy” and “unwieldy.”[2]

In the past, the Supreme Court has been notably divided over issues such as abortion and the death penalty. But the “fuzziness” in many recent rulings is owed to an obvious ideological divide in the area of arbitration. Over the past decades, a significant number of controversial decisions have arisen from the considerable attention (and contention) the Supreme Court has given arbitration as it endeavors to counterbalance pro-arbitration rulings and assurances that arbitration does not erode sufficient, constitutionally proscribed judicial control.[3] However, these decisions have been largely criticized as providing, at best, a fuzzy blueprint for lower courts to design more specific rules.

Rent-A-Center v. Jackson [4] is the most controversial, ideologically split arbitration decision of the Supreme Court’s recent term. The central issue arose because Rent-A-Center requires employees to sign a two-part arbitration agreement as a condition of their employment, stipulating first that all disputes arising out of the employment relationship be settled by arbitration, and second, that an arbitrator must settle all challenges to the validity of the arbitration agreement.[5] When plaintiff Jackson, a Rent-A-Center account manager, brought a 42 USC § 1981(a) / 42 USC §§. 2000(e)(2) employment discrimination claim against the company, Rent-A-Center insisted that the claim be resolved through arbitration.[6]

Jackson argued that the arbitration agreement was unconscionable because it denied him meaningful and appropriate access to court for a satisfactory remedy in the exact way prohibited by federal statute. Rent-A-Center argued that this threshold question of whether there was a valid and fair agreement to arbitrate Jackson’s employment grievance was a matter for the arbitrator under the Federal Arbitration Act. Jackson asserted that because the unconscionability challenge went to both parts of the arbitration agreement, arbitrability of the agreement was a question for the court.

By a vote of five to four, the Supreme Court ruled in Rent-A-Center’s favor. Led by Justice Scalia, the Court held that if Jackson had solely questioned the second part of the contract – that the agreement must be arbitrated – then the challenge would have been proper before the court. But because the employee’s grounds for unconscionability applied equally to the agreement to arbitrate all employment disputes, the general question of unconscionability was no longer a “gateway issue” before the court, and was a matter for the arbitrator.[7]

Though it generated very little media attention, the majority decision in Rent-A-Center incited much sideline animosity. Critics of Rent-A-Center argued that the case is incorrectly decided and the latest, deadliest blow to consumers and employees in a trajectory of pro-arbitration rulings that are supplanting the constitutional right to court access with compulsory arbitration. Lawmakers have admonished the Court’s short-sightedness, and Senate Judiciary Committee Chairman Patrick Leahy referred to Rent-A-Center as “a blow to our nation’s civil rights laws”.[8] Throughout the blogosphere, commentators described Rent-A-Center as “audacious,” and, as Justice Stephens described in his dissent, “fantastic”.[9]

In addition to the political arguments arising from Rent-A-Center, critics also raised concerns about procedural challenges facing professional arbitrators in light of the Court’s holding. The recent case law culminating in Rent-A-Center has drawn criticism for its lack of guidance instructing either the courts or arbitrators about their respective roles within civil rights arbitration. Broad principles of arbitration and specific doctrines of the Supreme Court encourage but do not demand that the federal protections of civil rights statutes must be enforced in private arbitration. Though the Supreme Court gives assurance that courts may reject arbitral awards for “manifest disregard,” in regards to statutory protection, the courts do not agree as to whether a showing of manifest disregard is proper grounds for vacating an arbitration award.[10]

This conundrum is disturbing, and the doctrine culminating in Rent-A-Centercreates, at best, a blueprint for potential interpretations of arbitration agreements and judicial remedies for arbitrable disputes. The question left before the legal community is, then, whether the Supreme Court’s next step will be to clarify a specific process for civil rights arbitration. Until then, the courts will likely remain divided over the issue of whether, and under what circumstances, statute-created court access can be circumvented with compulsory arbitration agreements, without violating due process of law.

This paper will explore several components underlying the Rent-A-Centerdecision and the subsequent need for clearer guidance per civil rights arbitration. First, this paper will prepare the background and context of civil rights arbitration by exploring the legislative history and statutory framework of the Federal Arbitration Act (“FAA”) and the Civil Rights Acts, particularly focusing on 42 USC §1981(a) right to recovery under Title VII of the Civil Rights Act of 1964 (“Title VII”). Second, this paper will introduce problems of separability stemming from the Supreme Court’s efforts to increase the preemptive reach of the FAA under a broad definition of interstate commerce. Finally, this paper will assert potential remedies towards ameliorating the ambiguities that culminate in the Rent-A-Center decision, in light of this judicial and legislative history.

I. Background and Context of Civil Rights Arbitration

A. Statutory History of 42 USC § 1981

The civil right at issue in Rent-A-Center was Jackson’s right to protection against racial discrimination under 42 USC § 1981. During the Reconstruction Era, restrictive employment covenants were an acknowledged social evil used by former slave owners to deny freedmen any opportunity to exercise their rights to property and employment.[11] Recognizing the elements that impaired the emancipated slaves’ ability to obtain a fair trial in former Confederate states, Congress observed that, “To say that a man is a freeman and yet is not able to assert and maintain his right in a court of justice is a negation of terms.”[12]

The framers of the Civil Rights Acts had a specific legislative goal of rooting out discrimination. The Reconstruction Congress determined that the Civil Rights Acts would only have force if the statutes also created a clear mechanism of judicial enforcement, and delineated a remedy at law that would ensure all Americans the right to a fair tribunal.[13] Accordingly, this Congress created statutes providing a federal right to action as protecting against discrimination.[14]

The legislative history behind the Reconstruction Era Civil Rights Acts is not antiquated, and the Supreme Court has recognized that, “ameliorating the effects of past racial discrimination [is] a national policy objective of the highest priority.‟[15]A predominant effect of the Civil Rights Acts, particularly 42 USC § 1981(a), is that federal law prohibits discrimination in employment based on race, gender, disability, and sexual orientation. In 1991, the 102^nd Congress expanded the provisions of 42 USC § 1981(a) and subsequent law to provide statutory basis for arbitration and alternative dispute resolution to “the extent available by law.”[16]

B. Statutory History of the Federal Arbitration Act

Formal arbitration practices can be dated to the Middle Ages, and many primary themes continue in modern arbitration: greater confidentiality, group amelioration, arbitrators with particularized commercial expertise, less formality than court proceedings, greater expedition, compromise, judgments that are final in merit, and the idea that, optimally, resolution of the dispute allows the parties to maintain favorable business relationships.

Despite this equitable premise, many difficulties hindered arbitration until the 20th century, such as difficulty in enforcing awards and judicial concern over jurisdictional ouster. In 1920, the New York State legislature enacted the first modern arbitration statute, which was followed in 1925 by enactment of the FAA and, subsequently, the advent of arbitrable statutes in most of the states.[17]Core principles of the New York statute were cloned in the FAA, particularly the idea that a pre-dispute agreement compelling arbitration is contractual, and therefore a litigant must assert a valid contract defense such as fraud, duress or unconscionability to prove the agreement is unenforceable.[18]Where a counter party to a pre-dispute agreement brings a case, a party can move to stay the court case by showing the agreement was arbitrable or, if there is general recalcitrance, move to compel arbitration.[19]

C. Common Criticisms of Modern Arbitration

These attributes of modern arbitration have been greatly criticized in the context of statutory arbitration, particularly in respect to Title VII claims.[20] In the legal discussions surrounding Rent-A-Center, Jackson’s supporters argued that he, and similarly situated employees, did not have a choice about whether to sign the Rent-A-Center mandatory pre-dispute arbitration agreement; Jackson had no opportunity to negotiate its terms, and the failure to sign would have precluded employment.[21] Additionally, supporters argued that Jackson should not have been expected to understand that his acceptance of the employment agreement was a waiver of his statutory right to court access.[22] Finally, supporters believed that, even in favorable arbitration circumstances, acceptance of all arbitration terms was likely to favor the employer with respect to fees, discovery, and procedures.[23] However, the Supreme Court has noted many times that these criticisms are not unique to civil rights arbitration but instead are inherent to the very nature of dispute resolution.[24]

The Court of Appeals has noted the issue of enforceability in employment contracts mandating employees’ waiver of court access with respect to all employment disputes relating to discrimination.[25] The court described an arbitrator who resolves statutory claims as a “private judge,” but noted that, unlike a judge, an arbitrator is not publicly accountable and the lack of public accountability may favor companies over individuals.[26] The court also acknowledged that confidentiality is won at the cost of binding precedent, which presents both a potential barrier to future plaintiffs’ ability to locate necessary information as well as reduced effectiveness of binding precedence.[27] The Court of Appeals also noted that the competence of an arbitrator to analyze and decide purely legal issues in connection with statutory claims might be questioned because arbitrators do not have to be legal professionals.[28] Nonetheless, the Court of Appeals dismissed all of these criticisms by stating that the Supreme Court has decided that, as a general rule, employment discrimination claims are fully subject to binding arbitration.[29]

The Supreme Court and Court of Appeals’ dismissal of these critical issues does little to assuage the valid concerns raised regarding civil rights’ arbitration.[30]Particularly in light of the legislative history substantiating 42 USC § 1981, the Court of Appeals’ deference, without meaningful underlying analysis behind its decision, is demonstrative of the enormous lack of guidance criticized by the New York Times.

II. The Preemptive Reach of the Federal Arbitration Act

A. Basic Principles of Federal Preemption in Arbitration

The FAA is something of an anomaly in the field of federal-court jurisdiction.[31]The FAA does not vest exclusive subject matter jurisdiction in the federal courts though it creates the body of federal substantive law establishing and regulating arbitration.[32] Unless there is either a federal question or complete diversity, it is up to the state courts to apply the FAA and the federal case law standards for its implementation in any cases involving interstate commerce.[33]

Some, including some Supreme Court Justices, take this to mean that the congressional intent was that the FAA should only apply in federal court as a federal remedy.[34] The disagreement between jurists of the correct application of the FAA is, at least, indicative of the lack of clarity in the congressional intention behind the Act. The FAA says that it applies to all matters involving “interstate commerce.”[35] However, interstate commerce of 1925 was a restricted concept, to the point that a business’ involvement in interstate activity did not create sufficient minimum contact to assert jurisdiction over it.[36] Therefore, it is questionable whether this statutory language should be imposed upon by a modern definition of interstate commerce.

B. Federal Preemption of the FAA and Substantive Law Under Erie

Additionally, the Supreme Court did not distinguish substantive diversity of state versus federal law until Erie v. Tompkins in 1938.[37] Under Erie, state contract law is applied to interpret the substantive meaning of the arbitration agreement.[38] Within the context of preemption – under which interstate commerce is broadly sweeping, without regard to its substantial impact – the Court has construed the FAA as broadly as the constitutional limit.[39] Under the constitutional provisions of the Supremacy Clause, the Supreme Court has held that state courts and legislatures cannot enact statutes restricting arbitration.[40]Likewise, states cannot ease the federal presumption of arbitrability.[41]

C. Restrictions to Separability

This imposition of preemption may be the most problematic because of its restrictions to common law contract defenses. In his dissent to Prima Paint Corp. v. Flood & Conklin Mfg. Co., Justice Black described the Court’s holding that the preemptive reach of the FAA compels a counter party to carry out his agreement to arbitrate even though the a court might find the agreement void because of fraud as “fantastic.”[42] Justice Black continued in his dissent that he was unconvinced that a broad preemptive application of the FAA is not a denial of a person’s rights to due process of law.[43]

Under contract law,undue influence, fraud, and unconscionability are remedies available to parties attempting to rescind a contractual clauses. Contract defenses may be ruled on separately or prior to arbitration. This makes sense because, as Justice Stevens suggested, there is no need to arbitrate an unenforceable agreement.[44] In Rent-A-Center, plaintiff Jackson presented a well-pleaded case of unconscionability, relying on the separability of contract and arbitration.[45]However, the Supreme Court’s decision in Rent-A-Center, that a defense of unconscionability should be heard by the arbitrator, entirely undermines the presumed separability of the arbitrable matter and the arbitration agreement.[46]

This ruling is unwieldy, at best. It does not make sense to compel arbitration of the validity of an arbitration agreement when a party claims to have contractual defenses to that arbitration agreement.[47] Nevertheless, the Rent-A-Centerdecision approves this conceptual change to separability. In light of the legislative intent of the FAA and Title VII, any denial of court access resulting from this faulty logic must be considered a lack of due process.[48]

III. Judicial Review of Arbitration Awards Post-Rent-A-Center

A. Lack of Guidance on Judicial Review of Civil Rights Arbitration

Jackson’s argument in Rent-A-Center was that the making of the arbitration agreement was unconscionable, and therefore required the court to make a determination of the agreement’s legality before compelling any arbitrable review of the dispute.[49] However, as illustrated in the previous sections, even those legal minds most versed in the FAA are unable to agree whether compulsory arbitration of employment discrimination suits can be forced on employees. The Court’s ruling in Rent-A-Center dramatically affects the ability of employees to challenge the enforceability of arbitration agreements, because it sends valid challenges to arbitration to the arbitrator.[50]

However, the Rent-A-Center decision provides little guidance on judicial review of contractual defenses to arbitration. The decision does not consider the obvious question that arises from its holding: in light of this decision, has the scope of review of arbitration awards changed such that the arbitrator’s determination of whether to arbitrate is a valid ground for judicial review?

The Rent-A-Center decision is premised on the assumption that an arbitrator’s ruling on unconscionability is still subject to post-award review under the FAA.[51]In fact, Justice Scalia was insistent that an arbitrator would not be able to disregard the law when determining whether an arbitration agreement is unconscionable.[52] However, the Rent-A-Center decision does not provide any guidance on the procedure of this scope of review.

B. The Doctrine of Manifest Disregard

Justice Scalia’s insistence that an arbitrator may not disregard the law hints at the doctrine of manifest disregard, and the validity of its application to the scope of review. The Supreme Court has ruled that, so long as the litigant may vindicate his or her statutory claim in the arbitral forum, the statute will continue to serve both its remedial and deterrent function.[53] However, actual judicial review of arbitration awards is strictly limited under section 10 of the FAA.[54] The award may be vacated only if the proceeding was tainted with corruption, misconduct or bias; if the arbitrator exceeded his or her authority; or if the arbitrator acted in “manifest disregard of the law.”[55]

Generally, manifest disregard means that the arbitrator knew the applicable law but purposefully chose to ignore it or refused to apply it.[56] Since the inception of the doctrine, there has been a great expansion of the arbitrator’s authority over disputes.[57] This expansion of power has been so broad that, under applicable arbitration rules, the arbitrator himself may not correct his award after release for substantive deficiencies.[58] Because judicial review of arbitration awards is rare, it seems a convincing argument that manifest disregard applies in circumstances where arbitrators have exceeded their powers.[59] However, the doctrine is also contested because the language of section 10 does not specifically refer to manifest disregard as an independent ground for vacating arbitration awards.[60]

A good deal of confusion around the extent of the arbitrator’s power and the applicability of manifest disregard is owed to the lack of guidance provided by recent Supreme Court decisions. Prior to Rent-A-Center, the Supreme Court held in Hall Street Assocs., LLC v. Mattel, Inc. that the statutory grounds for judicial review under section 10 are exclusive. This ruling indicated that manifest disregard was not valid grounds for review.[61] Shortly after the Hall Streetdecision, the court concluded, in dictum, that if an arbitration panel exceeds its powers, the courts are authorized by section 10(b) of the FAA to either direct a rehearing or review the question de novo.[62] The federal circuit courts have been diametrically opposed in their rulings, as they struggle to interpret the meaning of these conflicting Supreme Court writings.[63]

C. Post-Award Judicial Review after Rent-A-Center

Historically, courts have been reluctant to even review arbitration awards, let alone vacate or demand rehearing. However, Rent-A-Center may be an opportunity for a new post-award standard of review.

Consider the following: An arbitration panel is selected to hear an employment discrimination dispute. Though the panel members are all industry experts and well versed in employment discrimination issues, they are not lawyers. The employee asserts that not only have her Title VII rights been violated, but also that the arbitration agreement is invalid because it was fraudulently induced. In its misunderstanding of applicable contract law, the panel misinterprets the employee’s claim and decides that the arbitration agreement is enforceable. The panel proceeds with arbitration.

This example illustrates a potential conflict arising from the Supreme Court’sRent-A-Center and Hall Street decisions. Does the arbitrators’ incorrect determination manifest purposeful disregard of the law? Although section 10 of the FAA does not allow a court to set aside an award for an error of law per se, an argument could be made that, in such a case as the previous scenario, the arbitrator exceeded his or her powers under section 10(a)(4) by acting on an unfamiliar area of law. However, there is no precedent on how the court should proceed to review such a situation. As the Supreme Court continues to expand the scope of post-award judicial review, more guidance and clearer judicial intent will be required to direct both arbitrators and the courts.

Professional mediator and former Columbia University Negotiation and Conflict Resolution faculty member, Bathabile Mthombeni, vehemently agrees that the Supreme Court must put forth specific rules relating to civil rights arbitration claims. Professor Mthombeni is an enthusiastic supporter of mediation, including employment and statutory mediation. However, her wariness of compulsory arbitration has increased over the years in tandem with Supreme Court pro-arbitration rulings.

“I am very concerned about the way that Rent-A-Center was decided because of the impact this has on access to the courts – especially by people who are likely the most vulnerable,” Professor Mthombeni stated. “Do potential employees really have a choice? [In the future, will] this mean that an employee cannot file with the EEOC? And, as the dissent inRent-A-Center points out, how are the lawyers arguing these cases supposed to anticipate how thinly they must slice their arguments as to the seperability of various portions of the agreement to arbitrate?”

Professor Mthombeni’s concern about the Rent-A-Center case’s impact on employees and consumers is based in her extensive knowledge of both dispute resolution and civil rights statutes. She suggests that arbitrators should be held to the same standards of evidential and procedural rules that would pertain in court. “The framers of [42 U.S.C. § 1981(a)] did not anticipate those claims being investigated or decided in arbitration. My recollection of 1981 legislation is that it is especially articulated in order to allow individuals to act as attorneys general, recognizing the particular interest that society has in rooting out civil rights violations.

“It does not seem that arbitration is a forum that champions this end. I am at least concerned about the lack of protections afforded to litigants in arbitration – in particular… the rules of evidence and civil procedure not being strictly adhered to.”

Professor Mthombeni suggests that not only should post-judicial review standards be more defined but also that the Supreme Court should parallel its rulings with evidential and procedural rules of arbitration. “Some might argue that the rules of evidence and civil procedure are themselves flawed. But at least they are part of a commonly understood scheme that has evolved and been tested over several hundred years that puts everyone on level ground – so long as they all understand the rules.”

Conclusion

In their best light, the Supreme Court’s pro-arbitration rulings can be dense and confusing. The Court has upheld the validity of mandatory compulsory arbitration agreements that waive an employee’s right to court access as predicated by Title VII. The Court has held that this negation of the legislative intent of Title VII is still fair, so long as arbitration provides the same statutory remedy as the court system. The Supreme Court has previously held that, because arbitration agreements are separable contractually, a party may seek judicial review of defenses to the arbitration agreement.

However, the Supreme Court has now ruled in Rent-A-Center that the entire arbitration agreement, even the contractual defenses, may be removed to the arbitrator, for a determination of whether the agreement to arbitrate is valid. This ruling is not only a confusing departure, but also requires the Supreme Court to go further with an explanation of the scope of review for civil rights arbitration.

The Rent-A-Center opinion holds that judicial review of challenges to civil rights arbitration agreements is still available under the FAA, but does not address how this review should happen. Without guidance and procedure for post-award review, and without guidance of whether manifest disregard is applicable under the FAA, the criticism of the Supreme Court’s pro-arbitration rulings as “sweeping”, “politically polarized,” and “fuzzy” will likely continue.

[1]Liptak, Adam. “Justices Are Long on Words but Short on Guidance.” The New York Times Online. 17 November 2010, available athttp://www.nytimes.com/2010/11/18/us/18rulings.html?pagewanted=1&_r=1.

[2]Id.

[3]See Halligan v. Piper Jaffray, Inc., 148 F.3d 197, 200-01 (2d. Cir. 1998).

[4]Rent-A-Center, West, Inc. v. Jackson, 130 S.Ct. 2772 (2010).

[5]Id.

[6]Id.

[7]See id.

[8]Marks, Clifford M. “Supreme Court’s Arbitration Ruling Draws Liberal’s Ire.” The Wall Street Journal Blogs. 21 June 2010, available athttp://blogs.wsj.com/law/2010/06/21/supreme-courts-arbitration-ruling-draws-liberals-ire/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed:+wsj/law/feed+%28WSJ.com:+Law+Blog%29.

[9]Lithwick, Dahlia. “Justice by the Hour.” Slate.com. 26 April 2010. Accessed 10 November 2010. http://www.slate.com/id/2252001/pagenum/all/#p2.

[10]See Coffee Beanery, Ltd. v. WW, L.L.C., 300 F.3d 415 (6th. Cir. 2008) (holding that manifest disregard is an applicable standard of review). But see Citigroup Global Markets, Inc. v. Bacon, 562 F.3d 349(5th Cir. 2009) (holding that manifest disregard is not an applicable standard of review.)

[11]A common antebellum holding, reflecting Justice Taney’s decision in Dred Scott,was that freedmen did not have the right to exercise the same civil rights as white men. See e.g., Howard v. Howard, 51 N.C. 235 (1858).

[12]Cong. Globe, 39th Cong., 1st Sess. 41 (1866). See generally Report of the Joint Committee on Reconstruction Pt. II, 240 (1866).

[13]See, e.g., Cong. Globe, 39th Cong., 1st Sess.1758 (1866) (statement of Sen. Trumbull).

[14]42 U.S.C. § 1981(a).

[15]Franks v. Bowman Transp. Co., 424 U.S. 747, 779 (1976).

[16]Pub. L. 102-166, Title I §118. There has been consistent disagreement between the circuit courts whether this statutory language refers to the extent defined by Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20 (holding that an agreement to arbitrate employment claims could be binding even under the ADEA), versus Alexander v. Gardner-Denver Co., 415 U.S. 36 (holding that an employee’s suit under Title VII of the Civil Rights Act of 1964 is not foreclosed by the prior submission of his claim to arbitration).

[17]N.Y. C.P.L.R. § 7501.

[18]9 U.S.C. § 1-16.

[19]9 U.S.C. § 4.

[20]Halligan v. Piper Jaffray, Inc., 148 F.3d 197, 203 (2d. Cir. 1998).

[21]Brief of Amicus Curiae Service Employees International Union, Legal Aid Society, Employment Law Center, National Employment Lawyers Association, National Employment Law Project, Women’s Employment Rights Clinic, and The Employee Rights Advocacy Institute for Law & Policy in Support of Respondent. Part I, p. 6.

[22]Id.

[23]Id.

[24]Rodriguez de Quijas v. Shearson/American Express, Inc., 490 U.S. 477, 481 (1989).

[25]Cole v. Burns Int’l Sec. Servs., 105 F.3d 1465, 1476 (D.C. Cir. 1997).

[26]Id. at 1477.

[27]Id.

[28]Id.

[29]Id. at 1478, see also Gilmer, 500 U.S. 26, 34-35.

[30]Id.

[31]Moses H. Cone Mem’l Hospital v. Mercury Constr. Corp., 460 U.S. 1, 26.

[32]Id.

[33]Id.

[34]Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20 (J. Stevens dissenting).

[35]The Citizens Bank v. Alafabco, Inc., 539 US 52, 53 (2003).

[36]Gilmer,500 U.S. at 39-40 (J. Stevens dissenting).

[37]See Erie Railroad Co. v. Tompkins, 304 U.S. 64 (1938)

[38]Allied-Bruce Terminix Cos. v. Dobson, 513 U.S. 265, 271 (1995). “The Act’s provisions (about contract remedies) are important and often outcome determinative, and thus amount to “substantive”, not “procedural” provisions of law.”

[39]Id.

[40]Id.

[41]Prima Paint Corp. v. Flood & Conklin Mfg. Co.,388 U.S. 395, 400.

[42]Id.at 407 (J. Black dissenting).

[43]Id.

[44]Id.

[45]Id. As a matter of substantive federal law, a claim of fraud in the inducement of a contract containing an arbitration clause is for the arbitrator, but the issue of fraud in the inducement for the arbitration clause itself is a question for the court.Id.

[46]Id.

[47]130 S. Ct. at 2782 (J. Stevens dissenting).

[48]Gilmer,500 U.S. at 39-40 (J. Stevens dissenting).

[49]Brief of Amicus Curiae The American Federation of Labor and Congress of Industrial Organizations in Support of Respondent. Part I, p. 5-9.

[50]130 S. Ct. at 2782 (J. Stevens dissenting).

[51]9 U.S.C. § 10.

[52]130 S. Ct. at 2781.

[53]Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614 (1985).

[54]Halligan v. Piper Jaffray, Inc., 148 F.3d 197, 202 (2d. Cir. 1998).

[55]Merrill Lynch v. Jaros, 70 F.3d 418, 421 (6th. Cir. 1995).

[56]Halligan, 148 F.3d at 202.

[57]The concept of manifest disregard was first used by the Supreme Court inWilko v. Swan, 346 U.S. 427 (1953).

[58]A.A.A., Rule R-46.

[59]Stolt-Nielsen S.A. v. AnimalFeeds Int’l. Corp., 548 F.3d 85, 95 (2d. Cir.

2008), rev’d on other grounds, 130 S. Ct. 1758 (2010).

[60]9 U.S.C. § 10.

[61]Hall Street Assocs., LLC v. Mattel, Inc., 552 U.S. 579, 589 (2008). “[T]he statutory text gives us no business to expand the statutory grounds [of judicial review under the FAA].” Id.

[62]Stolt-Nielsen, S.A.,130 S. Ct. at 1772.

[63]Supra note 10.

Seeking CAFA Clarity: A Summary of Recent Case Law Addressing Challenges to Jurisdiction Under the Class Action Fairness Act

Very comprehensive article explaining intracacies of CAFA – the Class Action Fairness Act recently posted at the National Law Review by James A. Comodeca and M. Gabrielle Hils of Dinsmore & Shohl LLP.

I. The Class Action Fairness Act (“CAFA”)

In 2005, CAFA was enacted to assure fair and prompt recoveries for class members with legitimate claims, restore the intent of the framers of the United States Constitution by providing for Federal court consideration of interstate cases of national importance under diversity jurisdiction, and benefit society by encouraging innovation and lowering consumer prices. Pub. L. No. 109-2, 119 Stat. 4 (2005), LEXSEE 109 PL 2.

To achieve these stated purposes, 28 U.S.C. §1332 was amended to expand diversity jurisdiction in class action litigation. Subsection (d)(2) of §1332 provides that in class action cases involving 100 or more class members:

(2)        The district courts shall have original jurisdiction of any civil action in which the matter in controversy exceeds the sum or value of $ 5,000,000, exclusive of interest and costs, and is a class action in which–

(A)        any member of a class of plaintiffs is a citizen of a State different from any defendant;

(B)        any member of a class of plaintiffs is a foreign state or a citizen or subject of a foreign state and any defendant is a citizen of a State; or

(C)       any member of a class of plaintiffs is a citizen of a State and any defendant is a foreign state or a citizen or subject of a foreign state.

CAFA eliminates some of the traditional procedural impediments to removal by no longer placing a 1 year limit on removal, allowing removal even if the defendant is a citizen of the state where the suit was initiated, and no longer requiring the removing defendant to obtain consent to removal from the co-defendants. 28 U.S.C. §1453(b).

Pursuant to 28 U.S.C. §1332(d)(11), mass actions also may be removed to federal court. A mass action is a civil action in which monetary relief claims of 100 or more persons are proposed to be tried jointly on the ground that the plaintiffs’ claims involve common questions of law or fact. Jurisdiction shall exist only over those plaintiffs whose claims in a mass action satisfy the $75,000 jurisdictional amount found in of §1332(a), and if the other requirements of CAFA removal are met, including minimal diversity and an aggregate amount in controversy in excess of $5 million.

Even thought CAFA expands diversity jurisdiction, the removing party still has the burden to establish the court’s jurisdiction by demonstrating that the requisite number of plaintiffs exist, that there is minimal diversity, and that the amount in controversy is sufficient to meet the statutory requirements.

II. Exceptions to CAFA Jurisdiction

Certain class actions are specifically excluded from CAFA’s reach. The exceptions to CAFA jurisdiction are fertile territory for plaintiffs trying to keep their class actions cases in state court. CAFA’s exceptions are found in 28 U.S.C. §1332(d)(3) through (5) and include the following:

·       the discretionary/interests of justice exception,

·       the local controversy exception,

·       the home state exception, and

·       the state action exception.

A. Discretionary/Interests of Justice Exception – 28 U.S.C. §1332(d)(3)

The discretionary/interests of justice exception allows a district court to decline jurisdiction in the interests of justice and looking a the totality of the circumstances if greater than one third but less than two-thirds of the members of all proposed plaintiff classes in the aggregate and the primary defendants are citizens of the State in which the action was originally filed. In exercising this discretion the court must consider: whether the claims asserted involve matters of national or interstate interest; whether the claims asserted will be governed by laws of the State in which the action was originally filed or by the laws of other States; whether the class action has been pleaded in a manner that seeks to avoid Federal jurisdiction; whether the action was brought in a forum with a distinct nexus with the class members, the alleged harm, or the defendants; whether the number of citizens of the State in which the action was originally filed in all proposed plaintiff classes in the aggregate is substantially larger than the number of citizens from any other State, and the citizenship of the other members of the proposed class is dispersed among a substantial number of States; and whether, during the 3-year period preceding the filing of that class action, 1 or more other class actions asserting the same or similar claims on behalf of the same or other persons have been filed.

B. Local Controversy Exception – 28 U.S.C. §1332(d)(4)(A)

Under the local controversy exception, a district court shall decline to exercise jurisdiction over a class action which meets the following three criteria. First, greater than two-thirds of the members of all proposed plaintiff classes in the aggregate are citizens of the State in which the action was originally filed. Second at least one defendant is a defendant from whom significant relief is sought by members of the plaintiff class; whose alleged conduct forms a significant basis for the claims asserted by the proposed plaintiff class; and who is a citizen of the State in which the action was originally filed; and principal injuries resulting from the alleged conduct or any related conduct of each defendant were incurred in the State in which the action was originally filed. Third, during the 3-year period preceding the filing of that class action, no other class action has been filed asserting the same or similar factual allegations against any of the defendants on behalf of the same or other persons.

C. Home State Exception – 28 U.S.C. §1332(d)(4)(B)

The home state exception applies when two-thirds or more of the members of all proposed plaintiff classes in the aggregate, and the primary defendants, are citizens of the State in which the action was originally filed.

D. State Action Exception – 28 U.S.C. §1332(d)(5)(A)

If the primary defendants are States, State officials, or other governmental entities against whom the district court may be foreclosed from ordering relief then the case falls within the state action exception to CAFA jurisdiction.

III. Arguments raised to defeat CAFA jurisdiction

A. Is this case a class action?

CAFA applies to class actions and a class action is defined in 28 U.S.C. §1332 (d)(1) (B) as an civil action filed under Rule 23 of the Federal Rules of Civil Procedure or similar State statute or rule of judicial procedure authorizing action to be brought by 1 or more representative persons as a class action. But does CAFA apply if the complaint does not specifically define a proposed class?

In College of Dental Surgeons of Puerto Rico v. Connecticut Gen. Life Ins. Co.,585 F. 3d 33 (1st Cir. 2009) the First Circuit grappled with this issue. The plaintiff, the College of Dental Surgeons of Puerto Rico, brought suit on behalf of its members, consisting of licensed dentists in Puerto Rico, against multiple defendants claiming that the defendants’ claims handling practices were questionable, fraudulent and economically detrimental to the members. Two defendants removed the case to federal court pursuant to CAFA. The district court remanded the case on the basis that the complaint did not sufficiently define the plaintiff class. On appeal, the remand order was vacated. The First Circuit noted that the complaint plausibly alleged claims for class-wide relief and consistently alleged harm to the members as a professional group. The appellate court rejected the argument that remand was appropriate because the case could never be certified since an association cannot be a member of a certifiable class. The Court found that the association met the standing requirements to sue on behalf of its members because the members had standing to sue in their own right, the interests the association sought to protect were germane to its purposes; and neither the claim asserted nor the declaratory relief requested required the participation of individual members in the suit. More importantly, the Court stated that class composition was not the issue at the inception of a class action. Review of the complaint alone typically is insufficient for determining if the class can be certified, so the district court’s ruling on the inadequacy of the class definition was premature.

B. Is this case a mass action under 28 U.S.C. §1332(d)(11)?

In a series of cases brought in California, the plaintiffs were able to avoid CAFA jurisdiction by pleading around both the jurisdictional amount and the number of persons necessary to satisfy a mass action under §1332(d)(11).

In Tanoh v. Dow Chemical, Co, 561 F.3d 945 (9^th Cir. 2009), cert. denied, 130 S. Ct. 187, 175 L. Ed. 2d 236 (2009) the defendant removed seven state court actions involving over 600 foreign nationals who claimed that they had been injured by exposure to the chemical DBCP while working on banana and pineapple plantations in the Ivory Coast. In each case of the seven cases there were fewer than 100 plaintiffs. The cases were removed to federal court on the basis of diversity jurisdiction and the mass action provisions of CAFA. Dow Chemical argued that the seven actions, taken together, constituted a mass action and that the cases had been filed separately just to frustrate the purposes of CAFA jurisdiction.

The district court disagreed and remanded the actions. Specifically, the court looked at the language in 28 U.S.C. §1332(d)(11) which specifically states that a mass action shall not include claims that are joined upon the motion of a defendant. It found that Dow Chemical’s attempt to aggregate the actions for purposes of CAFA, was tantamount to doing an end-run around this limitation in the statute. On appeal, the Ninth Circuit upheld remand of the actions to state court. It rejected Dow Chemical’s argument that the plaintiffs should not be allowed to structure the complaints in order to defeat CAFA jurisdiction. The appellate court did not consider cases decided under provisions other than CAFA’s mass action provision to be persuasive. See also, Venegas v. Dole Food Co., Inc., 2009 U.S. Dist. LEXIS 22885 (C.D. Cal. Mar. 9, 2009), where approximately 2500 plaintiffs, banana plantation workers, filed multiple lawsuits against the same defendants alleging damages from exposure to a chemical used in banana farming operations in Costa Rica, Panama, Honduras and Guatemala. The plaintiffs were divided into groups alphabetically and by country so that each case had less than 100 plaintiffs. Defendants removed the cases to federal court on CAFA jurisdictional grounds asserting that all the actions should be considered one action because the plaintiffs divided their claims solely for purposes of avoiding federal court jurisdiction. The motion for remand was granted. Remand was granted, in part, because nothing in CAFA suggests that the plaintiffs, as the masters of their own complaint, may not file multiple actions each with fewer than 100 plaintiffs. The court also held that the defendant had not met its burden of demonstrating that amount in controversy exceeded $75,000 individually or $5 million in the aggregate.

C. Is there minimal diversity?

1. For purposes of federal diversity jurisdiction, a corporation is considered a citizen of the state where it is incorporated and of the state where it has its principal place of business. 28 U.S.C. §1332(c)(1). But what constitutes a corporation’s principal place of business?

In Hertz Corp. v. Friend, 130 S. Ct. 1181, 175 L. Ed. 2d 1029 (2010), the U.S. Supreme Court addressed the meaning of principal place of business (“PPB”) for diversity jurisdiction purposes. Plaintiffs, California citizens sued their employer, Hertz, in state court alleging California wage and hour law violations. They brought the suit on behalf of themselves and a class of California citizens suffering similar harms. Hertz removed the case to federal court on the basis of diversity jurisdiction, asserting that its PPB was in New Jersey. The plaintiffs moved for remand alleging that Hertz’s PPB was in California. Hertz submitted a declaration to establish that its PPB was in New Jersey. In the declaration, Hertz stated that it had facilities in 44 states, that its corporate headquarters was in New Jersey, and that its core executive and administrative functions were carried out in New Jersey. With respect to the state of California, Hertz stated that it had 273 of its 1606 car rental locations there, that about 2300 of its 11,230 full time employees were in California and that its business in California amounted to about $811 million of its $4.371 billion in annual revenue. Based on these facts, the district court found that Hertz’s PPB was in California under the Ninth’s Circuit’s test which required the court to examine Hertz’s business on a state-by-state basis. If the amount of activity in one state is significantly larger or substantially predominates, then that is the company’s PPB, but if there is no such state, then the PPB is the corporation’s nerve center, i.e., the place where the majority of its executive and administrative functions are performed. After examining the plurality of Hertz’s business activity in various states, the district court found that its activity in California was significant and so Hertz’s PPB was in California. The Ninth Circuit affirmed the remand order and Hertz appealed.

The United States Supreme Court reversed. Noting that there were many different ways in which the various circuit courts over the years had determined what constitutes a company’s PPB, the Supreme Court thought it necessary to find a single, more uniform interpretation of this statutory phrase. The Court adopted the nerve center test, holding that PPB is best read as referring to the place where a corporation’s officers direct control, and coordinate the corporation’s activities. In practice this should normally be the place where the corporation maintains its headquarters — provided that the headquarters is the actual center of direction, control, and coordination, i.e., the nerve center, and not simply an office where the corporation holds its board meetings.

2. What if the plaintiffs sue a limited liability company instead of a corporation. What is the citizenship of an LLC under CAFA?

In Ferrell v. Express Check Advance of SC LLC, 591 F. 3d 698, (4^th Cir. 2010), the plaintiffs filed a class action on behalf of South Carolina citizens against a payday lender for alleged violations of South Carolina law. The lender removed the case under CAFA. Following a long line of case law holding that the citizenship of an unincorporated association is determined based upon the citizenship of each of the association’s members, the lender argued that there was diversity based on the citizenship of its sole member, a Missouri corporation with its PPB in Kansas.

Alternatively, the lender argued that if it was deemed an unincorporated association within the meaning of 28 U.S.C. §1332(d)(10), it was a citizen of Tennessee, under whose laws it was organized, and of Kansas where it had its PPB.

The plaintiff moved to remand, arguing that the defendant’s PPB really was South Carolina, the place where it made all its loans and where all of its employees, but for its top four officers were located. The district court held that the defendant, a limited liability company, was an unincorporated association under 28 U.S.C. §1332(d)(10). Consequently, it was a citizen of the state under whose laws it is organized and of the state where it has its PPB. The district court found that the lender’s PPB was in South Carolina, not Kansas, and therefore the case should be remanded.

On appeal, the Fourth Circuit affirmed. It examined the citizenship language in 28 U.S.C. §1332. Section 1332 (c)(1) provides that a corporation is a citizen of the state of its incorporation and the state of it PPB. Section 1332(d)(10) provides that the citizenship of an unincorporated association is determined by the state under whose laws it is organized and the state where it has it PPB. However, the court observed that the because the provisions relating to the citizenship of corporations and of unincorporated associations are found in different sections of the statute, the provision relating to unincorporated associations in §1332(d)(10) applies only to class actions covered by CAFA. The court concluded that the term “unincorporated association” found in §1332(d)(10) refers to all non-corporate business entities. The appellate court agreed with the district court’s analysis that the defendant’s PPB was in South Carolina so the case was remanded.

D. Is the amount in controversy greater than $5 million?

1. Has the plaintiff alleged any amount in controversy?

When a plaintiff does not allege an amount in controversy in the complaint, the defendant must prove by a preponderance of the evidence that CAFA’s in excess of $5 million amount in controversy has been met. As the following cases demonstrate, this is not always an easy task.

Berniard v. Dow Chemical Co., 2010 U.S. App. LEXIS 16515 (5^th Cir. 2010), involved the remand of seven class actions stemming from a single incident, the sudden accidental release of ethyl acrylate, a potentially noxious chemical. The release resulted in the evacuation of residents and businesses with a 2 mile area east of the facility where the release had occurred. On the day of the release, two class actions were filed in state court. Eventually, three more state court class actions were filed and two class actions were filed in federal court.

The district court examined the allegations in the pleadings to determine if it had jurisdiction under CAFA. It examined the geographical reach of the chemicals, the number of persons affected, the seriousness and extent of the injuries suffered, and the potential monetary value of the damages, including punitive damages. Upon removal, defendants had a choice to either sustain removal by: (1) adducing summary judgment evidence of the amount in controversy; or (2) demonstrating that it is facially apparent from the pleadings alone that the amount in controversy has been met. The defendants chose the latter approach.

To meet the amount in controversy requirement, the defendants offered census data of the geographical areas at issue, and compared the quantum recovery in previously reported cases involving similar incidents and injuries. This was held to be insufficient. The court noted that the defendants had improperly equated the geographic areas in which potential plaintiffs might reside with the population of the class itself. The comparison to damage recoveries in similar cases was found to be speculative. It did not matter that the plaintiffs were claiming compensatory damages, pain and suffering, psychological and long term future damages, and even punitive or exemplary damages.

In Pretka v. Kolter City Plaza II, Inc., 608 F. 3d 744, (11^th Cir. 2010), the court addressed what types of evidence the defendant could present to establish the jurisdictional amount in controversy. The seven plaintiffs brought a putative class action on behalf of themselves and all other similarly situated depositors who had placed deposits on the purchase of luxury condominiums in the defendant’s development in West Palm Beach, Florida. The complaint alleged breach of contract and violation of Florida’s Condominium Act, and sought rescission of the purchase contracts and return of the deposits, but did not state an amount in controversy. Attached to the complaint were the plaintiffs purchase contracts showing an average deposit amount of roughly $105,000. The complaint stated that the class was believed to consist of over 300 members.

The defendant removed the case under CAFA. In support of the removal, defendant attached a declaration of the CFO of its parent company indicating that the company had collected over $5 million in deposits from more than 100 prospective purchasers. The plaintiffs moved for remand arguing that the court could not consider the CFO’s declaration because it was not a paper received from the plaintiffs. In its opposition brief, the defendant attached another declaration from its parent company’s closing manager who had reviewed the closing contracts. She stated that those contracts showed that the defendant possessed purchase deposits totaling over $41 million.

The district court, relying on the 11^th Circuit’s decision in a prior case, Lowery, held that it could not consider either the declaration evidence in support of the amount in controversy, or the contracts of other putative class members because such documents had not been supplied by the plaintiffs. The district court also found that the first declaration impermissibly speculated as to the potential damage claim of all putative class members and the second declaration could not be considered because it had not been submitted with the notice of removal. The district court remanded the case.

The defendant appealed, and the 11^th Circuit held that district court had erred in rejecting the defendant’s evidence of the amount in controversy. In reaching this conclusion, it distinguished its holding in Lowery, and disavowed any statements in the dicta of Lowery that could be considered contradictory to its holding inPretka. The Circuit Court held that when a case is removed under the first paragraph of 28 U.S.C. §1446(b), i.e., within 30 days of receipt of an initial pleading setting forth a claim for relief, that statutory language does not restrict the type of evidence that a defendant may use to satisfy the jurisdictional requirements for removal. This is in contrast, however, to removal under the second paragraph of 28 U.S.C. §1446(b) i.e., within 30 days of receipt of an amended pleading, motion or other paper, upon which it may first be ascertained that the case is removable. In the latter instance, the evidence to be considered is limited to reliance on receipt of an “other paper” due to a voluntary act of the plaintiff.

Contrary to the district court’s ruling, the appellate court recognized that documents generated by a defendant do not necessarily involve impermissible speculation. In the instant case, the CFO’s declaration contained non-speculative knowledge of the amount of every putative class member’s claim which could be considered, since the claims of the individual class members could be aggregated to determine the amount in controversy. The court stated that evidence added post-removal also could be considered by the court. Consequently, upon consideration of all of the defendant’s amount in controversy evidence, the remand order was rescinded.

In McGee v. Sentinel Offender Services LLC, 2010 U.S. Dist. LEXIS 126842 (S.D. Ga. Nov. 30, 2010), the plaintiff challenged the defendant’s CAFA removal on several grounds, including whether the amount in controversy requirement had been met. The Plaintiff filed a putative class action on behalf of all individuals previously convicted of a misdemeanor or ordinance violation in Georgia who were under probation supervised by Sentinel, a private probation company. The plaintiff sued for alleged violation of Georgia’s RICO statute and sought reimbursement in an amount equal to times the amount paid to Sentinel for supervision of the class members in private probation.

Sentinel supported its CAFA removal with a declaration from its COO and Vice President, who stated that there were 35,753 individuals convicted of misdemeanors or ordinance violations in the State of Georgia under probation supervised by Sentinel, and that Sentinel had collected $5,675,639.20 from these individuals in supervision fees. Plaintiff challenged the declaration because it did not specify when the fees were collected, whether they were collected within the statute of limitations period, or if they had been paid by persons who were class members. The court rejected this challenge and retained jurisdiction. The court noted that the declaration set forth an amount reflective of the damages sought by the plaintiff in the complaint. The RICO claim sought the divestiture of any interest in the enterprise or personal property, including all fees collected by Sentinel. As for plaintiff’s statute of limitations argument, the court noted that when determining the amount in controversy for jurisdictional purposes, it could not look past the complaint to the merits of a defense that had not yet been established.

2. Has the plaintiff alleged an amount in controversy less than $5 million?

While some plaintiffs may allege no amount in controversy in the complaint, other plaintiffs may disavow an amount that meets the jurisdictional requisite. For instance, in Freeman v. Blue Ridge Paper Products, Inc., 551 F. 3d 405 (6^th Cir. 2008), the plaintiffs made every effort to avoid CAFA jurisdiction.

The claims involved 300 landowners who sued a paper mill for nuisance created by water pollution. In their first class action suit filed in 2005 in Tennessee state court, the plaintiffs asserted claims covering a 6-year period from 6/1/99 to 8/17/05. At trial in that case, they recovered an aggregate award of $2 million.

Thereafter, plaintiffs filed an additional class action lawsuit in state court, in which they sought damages accruing after 8/17/05 until the date of trial. The name plaintiff disavowed individual damages above $74,000 or aggregate damages above $4.9 million. The defendant removed the suit to federal court, but it was remanded for failure to satisfy the jurisdictional amount.

After remand, the plaintiffs amended the complaint to seek damages from 8/17/05 to 2/17/06. The state court orally granted the motion to amend in December of 2007, but the written order was not entered until February of 2008. In the interim, the plaintiffs filed four more lawsuits in state court , each suit covering a different six month time period. Each complaint was essentially identical and pled the same damage limitations as the initial complaint. On February 4, 2008, the defendant removed all five cases to federal court where they were consolidated and subsequently remanded. Defendant appealed.

On appeal, the Sixth Circuit found that the CAFA threshold had been met because the $4.9 million sought in each complaint had to be aggregated. In so holding, the court noted that the complaints were identical, except for the artificially broken up time periods, and the plaintiffs offered no colorable reason for breaking up the lawsuits other than to avoid CAFA jurisdiction. The court limited its holding to the situation where no colorable basis exists for dividing up the sought-for retrospective relief into separate time periods, other than to frustrate the purposes of CAFA. The Sixth Circuit recognized that generally a plaintiff could avoid CAFA jurisdiction by seeking amounts less than the threshold, “but where recovery is expanded, rather than limited, by virtue of splintering of lawsuits for no colorable reason, the total of such identical splintered lawsuits may be aggregated.” Id. at 409.

E. Arguments for exceptions to CAFA jurisdiction

While the party removing a case has the burden to establish that the federal court has jurisdiction under CAFA, once that burden has been met, the burden then shifts to the party seeking to remand the case to establish that a CAFA exception applies.

1. The Home State Exception.

In Jackson v. Sprint Nextel Corp., 2011 U.S. Dist. LEXIS 7005, (N.D. Ill. Jan. 21, 2011) the plaintiffs sued Sprint, a Kansas Corporation alleging that Sprint conspired with other cell phone providers to impose artificially high prices for text messaging. The action was brought on behalf of a putative class of all individuals who purchased texting from Sprint or an alleged co-conspirator from 1/1/05 to the present, had a Kansas cell phone number, received their cell phone bill at a Kansas mailing address, and paid a Kansas USF fee. Sprint removed based on CAFA jurisdiction and the plaintiffs sought remand on the basis of the home state exception.

The lower court granted remand, finding that the plaintiffs had met their burden of establishing the existence of the home state exception because Sprint was a resident of Kansas and at least two thirds of the members of the proposed class were citizens of Kansas since the class only included members with Kansas billing addresses and cell phone numbers. Sprint appealed.

On appeal the Seventh Circuit reversed, finding that the lower court could not draw conclusions about the citizenship of the class members based on information like the class members cell phone numbers and mailing addresses. Instead, the district court could have relied on evidence of citizenship obtained through affidavits or survey responses in which putative class members revealed whether they intended to remain in Kansas or were a Kansas business. Using statistical principles, the plaintiffs could then establish the two thirds number required under the home state exception. Alternatively, the court noted that the plaintiffs could have defined their class as “all Kansas citizens who purchased text messaging from Sprint Nextel or an alleged co-conspirator. The case was remanded for further proceedings.

On remand, the parties conducted jurisdictional discovery. Following the evidentiary roadmap set forth in the Seventh Circuit’s opinion, the plaintiffs obtained updated customer information from Sprint and its alleged co-conspirators. The plaintiffs conducted a telephone survey of a random sample of putative class members. They searched voter registration, driver license and secretary of state records and collected Internet information to determine the citizenship of those individuals and businesses who had not answered the survey. Using this new data, the Plaintiffs renewed their motion for remand. While Sprint challenged the survey results on various grounds, in the end the court found that the plaintiffs had met their burden of establishing the elements of the home state exception. Hence the case was remanded.

2. The Local Controversy Exception.

Under the local controversy exception, plaintiffs may name a local defendant from whom significant relief is sought and whose alleged conduct forms a significant basis for the claims asserted by the class, and who has not been sued in a class action in the previous three years.

Case in point, LaFalier v. State Farm Fire & Cas. Co., 2010 U.S. App. LEXIS 17588 (10^th Cir. 2010), where the plaintiffs owned properties located in an environmentally contaminated town in Oklahoma. The state established a Trust to purchase the properties and assist the homeowners in relocating. During the purchase/relocation process, many homes were damaged by a tornado. The Trust then offset any amounts the plaintiffs might receive from insurance against the amounts the plaintiffs would receive under the Trust. The plaintiffs eventually brought suit against two individuals responsible for administering the Trust, and two appraisal companies, alleging that the defendants deliberately used appraisals that undervalued the properties, and conducted secret proceedings concerning the appraisals. The plaintiffs also sued ten insurance companies, three from Oklahoma and ten from out of state, alleging that the insurers paid only cash value for the tornado damage because they knew the properties would not be repaired or replaced, failed to reveal all coverage available, and improperly leveraged Trust offsets to urge the insureds to accept lower payments.

State Farm removed the case pursuant to CAFA. The plaintiffs moved for remand under the local controversy exception and the case was remanded. The insurers appealed, but remand was upheld. The insurers argued that the claims against the Trust defendants had been misjoined with the claims against the insurers, consequently, the Trust defendant claims should have been ignored for purposes of analyzing the local controversy exception. The district court disagreed. Every plaintiff had a claim against the Trust defendants, but not every plaintiff had a claim against each named defendant insurer. The Trust defendants were local defendants from whom significant relief was sought and whose conduct formed a significant basis for the claims asserted. The doctrine of procedural misjoinder had not been adopted in the Tenth Circuit, and even if it had, it was not clear that the severed claims against the insurers would meet CAFA’s jurisdictional requirements of over 100 class members and in excess of $5,000,0000.

The lower court also rejected the insurers’ contention that an earlier lawsuit filed by these plaintiffs against the Trust itself, and not against the current named Trust defendants, meant that the plaintiffs could not satisfy the last prong of the local controversy exception. On appeal the Tenth Circuit agreed with the district court, noting that the plain language of 28 U.S.C. §1332(d)(4)(A(ii) says there must be a prior action “against any of the defendants” and not “against any of the defendantsor parties in privity with them” as the insurers would have had the court interpret the statute. The Tenth Circuit also noted that State Farm had admitted that not every plaintiff had a claim against an insurer, and there was nothing before the court to demonstrate that at least 100 plaintiffs had claims against the insurers.

3. The Discretionary/Interests of Justice exception

If greater than one third but less than two-thirds of the members of all proposed plaintiff classes in the aggregate and the primary defendants are citizens of the State in which the action was originally filed the discretionary exception may apply. One of the difficulties in addressing this exception is that the term “primary defendant” is not defined in CAFA. The definition is important because the statute requires that “all” of the primary defendants be residents of the state where the suit was filed.

In Powell v. Tosh, 40 Envtl. L. Rep. 20251, 2009 U.S. Dist. LEXIS 98564 (W.D. Ky. Oct. 21, 2009), the plaintiffs sought to remand their case to state court based, in part, on CAFA’s discretionary exception. The plaintiffs, 28 Kentucky landowners, brought a class action nuisance lawsuit against nine defendants alleging that noxious fumes from the defendants’ hog farm operations were negatively impacting the value of the plaintiffs’ property and causing personal injuries. Among the defendants were the local operators of the hog farms as well as some diverse defendants who were the owners of the hogs on those farms.

While it was undisputed that the CAFA’s jurisdictional requirements had been met, the plaintiffs argued that the case should be remanded pursuant to two of CAFA’s mandatory exceptions, the local controversy exception and the discretionary exception. With respect to the discretionary exception, the plaintiffs argued that greater than one third but less than two-thirds of the members of the proposed class were citizens of Kentucky and the court agreed. Next, the plaintiffs argued that the primary defendants were citizens of Kentucky. The court disagreed.

The court looked at the language of the exception and determined that the requirement that the primary defendants be citizens of the state where the suit was filed, meant “all” of the primary defendants. Next, the court examined the complaint and noted that all members of the plaintiff class had claims against the diverse defendants. Accordingly, those defendants appeared to be the real targets of the class action. Also indicative of their status as primary defendants was the fact that the diverse defendants had been sued directly and were the subject of a significant portion of the claims asserted by the plaintiffs.

4. The State Action Exception

One of the least argued exceptions to CAFA jurisdiction is the state action exception which applies if the primary defendants are States, State officials, or other governmental entities against whom the district court may be foreclosed from ordering relief. Like the discretionary exception, the state action exception also contains the language “primary defendants” which has been interpreted to mean “all” the primary defendants must be state actors.

The question then turns on whether the defendants can be considered States, State officials or other governmental entities against whom the district court may be foreclosed from ordering relief. The purpose behind the enactment of 28 U.S.C. §1332(d)(5)(A) was to prevent states, state officials or governmental entities from removing a case to federal court, and then arguing that due to immunity the federal court would be prohibited from ordering the relief requested by the plaintiff.

The issue was addressed in Frazier v. Pioneer Americas LLC, 455 F.3d 542 (5^thCir. 2006) where the plaintiffs brought a class action against the operator of hydrogen processing equipment and the Louisiana Department of Environmental Quality (“DEQ”) for damages allegedly caused by seeping mercury. Pioneer removed the case pursuant to CAFA. The plaintiffs moved for remand on multiple grounds including that CAFA’s state action exception applied. The district court denied remand and the plaintiffs appealed. On appeal, the plaintiffs argued that the DEQ was both a primary defendant and a state entity so remand was appropriate. The Fifth Circuit disagreed because the statute requires “all” primary defendants to be States, State Officials or other governmental entities and Pioneer also was a primary defendant. The court rejected the plaintiffs’ argument that such a result violated the 11^th Amendment and the principles of state sovereign immunity. The appellate court noted that unless the state joins in the removal, which it is not required to do so under CAFA, it does not waive its right to assert sovereign immunity. Furthermore, the court may ignore sovereign immunity until the state asserts it. The fact that absent waiver of the immunity, the court may not be able to order relief against the state, does not mean the court cannot assume jurisdiction over a case involving a state.

CONCLUSION
In the six years since CAFA’s enactment, the courts have seen many arguments against CAFA jurisdiction. Several of these arguments could not have been foreseen by the drafters of the legislation. In the coming year, we should expect to see more arguments relating to calculation of the amount in controversy, interpretation of the “mass action” provisions, and interpretation of CAFA exceptions containing undefined phrases such as “primary defendant” and “significant relief.”

Class Action Defense Cases–American Honda v. Allen: Seventh Circuit Court Reverses Class Action Certification Order Holding District Court’s Daubert Analysis Inadequate And Expert Testimony Inadmissible

National Law Review’s featured blogger Michael J. Hassen of Jeffer, Mangels, Butler & Mitchell LLP provides some insight on a recent 7th Circuit class action case which addresses expert testimony:

District Court Erred in Granting Class Action Certification because Expert Testimony Establishing Rule 23(b)(3)’s Predominance Prong was Unreliable and District Court’s Daubert Analysis Inadequate Seventh Circuit Holds

Plaintiffs filed a putative class action against American Honda and Honda of America (collectively “Honda”) alleging product defect liability concerning Honda’s Gold Wing GL1800 motorcycle; specifically, the class action complaint alleged that a design defect in the steering assembly causes the motorcycle to “wobble.” American Honda Motor Co., Inc. v. Allen, 600 F.3d 813, 814 (7th Cir. 2010). Plaintiffs moved the district court to certify the litigation as a class action under Rule 23(b)(3), relying heavily on an expert’s opinion that common issues predominate; Honda opposed class action treatment and challenged the expert opinion relied upon by plaintiffs in their motion. Id. Defense attorneys moved under Daubert v. Merrell Dow Pharms., Inc., 509 U.S. 579 (1993), to strike plaintiffs’ expert report on the grounds that the expert’s “wobble decay standard was unreliable because it was not supported by empirical testing, was not developed through a recognized standard-setting procedure, was not generally accepted in the relevant scientific, technical, or professional community, and was not the product of independent research.” Id. The district court agreed to rule on the admissibility of the report prior to ruling on class certification because the report was central to the motion, id. But while the court announced “definite reservations about the reliability of [the expert’s] wobble decay standard,” it refused to exclude the report entirely “at this early stage of the proceedings.” Id., at 814-15. The district court granted class action certification, id., at 815, and Honda sought leave to appeal, id., at 814. The Seventh Circuit granted Honda’s request and reversed.

The Circuit Court explained that the issue before it was “whether the district court must conclusively rule on the admissibility of an expert opinion prior to class certification in this case because that opinion is essential to the certification decision.” American Honda, at 814. The Court summarized the expert’s “wobble decay” opinion, which was based on a standard the expert himself had devised and that he himself characterized as “reasonable.” Id. The expert opinion was important because “most of Plaintiffs’ predominance arguments rest upon the theories advanced by [their expert].” Id. (quoting Allen v. Am. Honda Motor Co., 264 F.R.D. 412, 425 (N.D. Ill. 2009)). In response to Honda’s objections and following the Daubert hearing, the district court “noted that it was concerned that, among other things, [the expert’s] wobble decay standard may not be supported by empirical evidence, the standard has not been generally accepted by the engineering community, and [his] test sample of one may be inadequate to conclude that the entire fleet of GL1800s is defective.” Id., at 814-15. Nevertheless, the lower court believed it was too early in the litigation to dismiss the expert’s opinion in its entirety, and so it granted class action treatment without prejudice to Honda moving to exclude the expert’s opinion. Id., at 815.

As a matter of first impression in the Seventh Circuit, the Court “specifically addressed whether a district court must resolve a Daubert challenge prior to ruling on class certification if the testimony challenged is integral to the plaintiffs’ satisfaction of Rule 23’s requirements.” American Honda, at 815. The Circuit Court held “that when an expert’s report or testimony is critical to class certification, as it is here…, a district court must conclusively rule on any challenge to the expert’s qualifications or submissions prior to ruling on a class certification motion.” Id., at 815-16. Thus, in the Seventh Circuit’s view, “the district court must perform a full Daubert analysis before certifying the class if the situation warrants.” Id., at 816. This includes not only the expert’s qualifications, but “any challenge to the reliability of information provided by an expert if that information is relevant to establishing any of the Rule 23 requirements for class certification.” Id.

In this case, the district court “started off on the right foot by beginning to undertake what might have become a fairly extensive Daubert analysis,” and both acknowledged “and largely agreed with” Honda’s concerns about the reliability of the testimony of plaintiff’s expert, “[y]et the district court ultimately declined, without further explanation, ‘to exclude the report in its entirety at this early stage of the proceedings.’” American Honda, at 816. The Circuit Court explained at page 816 that the district court’s analysis (or lack thereof) constituted an abuse of discretion: “The court’s effective statement of admissibility here is not even conclusory; it leaves open the questions of what portions of [the expert’s] testimony it may have decided (or will decide) to exclude, whether [the expert] reliably applied the standard to the facts of the case, and, ultimately, whether Plaintiffs have satisfied Rule 23(b)(3)’s predominance requirement. As a result, the district court never actually reached a conclusion about whether [the] expert report was reliable enough to support Plaintiffs’ class certification request. Instead it denied Honda’s motion to exclude without prejudice and noted that the case was in an ‘early stage of the proceedings.’”

Reviewing the expert’s report on the merits, the Seventh Circuit held that “our examination of the record reveals that exclusion is the inescapable result when the Daubert analysis is carried to its conclusion.” American Honda, at 817. The issue here was one of reliability rather than qualifications, but the Circuit Court noted that “even the most ‘supremely qualified expert cannot waltz into the courtroom and render opinions unless those opinions are based upon some recognized scientific method and are reliable and relevant under the test set forth by the Supreme Court in Daubert.’” Id. (citing Clark v. Takata Corp., 192 F.3d 750, 759 n.5 (7th Cir.1999)). Based on the Court’s analysis, the expert’s testimony was unreliable, see id., at 817-18, and “expert testimony that is not scientifically reliable should not be admitted, even ‘at this early stage of the proceedings,’” id., at 819 (citation omitted). Because the expert’s testimony formed the foundation for Rule 23(b)(3)’s predominance test, class action certification could not stand. Id. Accordingly, the Seventh Circuit granted Honda’s petition for leave to appeal and vacated the denial of Honda’s motion to strike and the district court’s order grant of class action treatment. Id.

NOTE: In response to plaintiffs’ request that the Circuit Court deny leave to appeal, the Seventh Circuit explained, “Given the uncertainty surrounding the propriety of conducting a Daubert analysis at the class certification stage, and the frequency with which this issue arises, we find the question to be one appropriate for resolution under Rule 23(f).” American Honda, at 815 (citation omitted).

About the Author:

Michael J. Hassen is a Litigation Partner at Jeffer Mangels Butler & Mitchell LLP with more than 23 years experience in general business and commercial litigation, including class action defense and matters involving intellectual property, securities and unfair competition. 415-984-9666 / www.jmbm.com

Class Action Defense Cases–Donovan v. Philip Morris: Massachusetts Federal Court Certifies Class Action Seeking Medical Monitoring For Lung Cancer Of 20-Year Marlboro Smokers

This week’s featured blogger at the National Law Review is Michael J. Hassen of Jeffer, Mangels, Butler & Mitchell LLP who writes for the Class Action Defense Blog.

Class Action Against Tobacco Company Alleging Unfair Trade Practices and Breach of Implied Warranty and Seeking Medical Monitoring for Lung Cancer on Behalf of Class of Smokers who have not been Diagnosed with Lung Cancer and who are Asymptomatic Warranted Class Action Certification under both Rule 23(b)(2) and (b)(3) Massachusetts Federal Court Holds

Plaintiffs filed a putative class action against Philip Morris alleging “unfair or deceptive” trade practices in violation of Massachusetts state law, breach of implied warranty, and negligence; specifically, the class action complaint “allege[d] that Philip Morris designed, marketed, and sold Marlboro cigarettes that delivered an excessive and dangerous level of carcinogens.” Donovan v. Philip Morris USA, Inc., ___ F.Supp.2d ___ (D.Mass. June 24, 2010) [Slip Opn., at 1]. According to the allegations underlying the class action complaint, “plaintiffs have no apparent symptoms of lung cancer, and as such, are not seeking damages.” Id. Thus, this class action “diverges from a typical tobacco suit,” id. Instead of seeking damages, the class action sought to compel Philip Morris to pay for medical monitoring – “that is, regular screenings to determine whether they have early signs of the disease” based on the argument that “if [class members] do eventually develop lung cancer, these screenings will increase their likelihood of survival almost six-fold.” Id., at 1-2. Plaintiffs sought certification of a class action “on behalf of Massachusetts residents, age fifty and older, who have smoked Marlboro cigarettes for at least twenty pack-years.” Id., at 1. Further, “No class member may be diagnosed with lung cancer or be under a physician’s care for suspected lung cancer, and all must have smoked Marlboro cigarettes within the Commonwealth of Massachusetts.” Id., at 2. Defense attorneys opposed class action treatment. In a 56-page order, the district court granted plaintiffs’ motion for class action certification.

In analyzing whether to grant class action treatment, the district court noted that “the motion was not easily resolved because it raised threshold issues of Massachusetts products liability law.” Donovan, at 2. First, the class action certification motion presented a set of issues tied to “the unusual remedy plaintiffs seek, a supervised medical monitoring program using Low-Dose Computed Tomography (‘LDCT’) scans.” Id. Plaintiffs argued that unlike x-rays, which could only detect lung cancer “when it had reached an advanced stage,” the new LDCT-scanning technology allowed for much earlier detection “significantly increasing survival rates from about fifteen percent to eighty-five percent.” Id. (Plaintiffs argued that monetary damages would not adequately compensate class members for the cost of medical monitoring, id., at 3.) Second, the class action certification motion presented the question of whether the named plaintiffs had standing to prosecute the class action because “[b]y definition, plaintiffs who seek medical monitoring to determine whether they have cancer are asymptomatic.” Id. And third, the class action presents a “novel issue [that] pertains to the timing of plaintiffs’ claims and the related issue of claim preclusion.” Id. “Typically, toxic tort exposure cases put the plaintiffs on the horns of a dilemma. If they bring a claim when they are aware of their exposure – assuming the standing issues are resolved – they take the risk that they cannot recover if they develop cancer in the future under the ‘single controversy rule.’ If they wait until they develop cancer to bring a claim, the statute of limitations will have expired because they knew of the risks at an earlier time.” Id. Here, plaintiffs argued that this dilemma was avoided because “The statute of limitations should run from the date that plaintiffs develop subcellular changes that substantially increase their risk of cancer and where that increase triggers a medically-accepted form of screening.” Id., at 4.

The district court noted that, in light of these novel issues, it certified two questions to the Supreme Judicial Court of Massachusetts: “(1) Does the plaintiffs’ suit for medical monitoring, based on the subclinical effects of exposure to cigarette smoke and increased risk of lung cancer, state a cognizable claim and/or permit a remedy under Massachusetts state law? (2) If the plaintiffs have successfully stated a claim or claims, has the statute of limitations governing those claims expired?” Donovan, at 4. In a unanimous opinion, the Supreme Judicial Court answered “yes” to the first question, and “no” to the second. Id.; see Donovan v. Philip Morris, 914 N.E.2d 891, 894-95 (Mass. 2009). The federal court summarized that opinion at pages 4 and 5 as follows:

On the first question, the court held that subclinical effects on lung tissue constituted a legally cognizable injury on which plaintiffs’ medical monitoring claim could be based and outlined what comprised proof of such a claim. On the second question, the court held that the statute of limitations began to run only after the plaintiffs suffered “physiological change[s] resulting in a substantial increase in the risk of cancer” due to their smoking and “that increase, under the standard of care, triggers the need for available diagnostic testing . . .” Id. at 903. Finally, the Supreme Judicial Court held that there would be no claim preclusion under the “single controversy rule.” Litigation of the plaintiffs’ medical monitoring claim in this action would not preclude a future action for damages if plaintiffs eventually contract lung cancer.

Armed with the Supreme Judicial Court’s decision on the novel issues presented by the class action certification motion, the federal court granted class action treatment under both Rule 23(b)(2) and Rule 23(b)(3) to plaintiffs’ unfair trade practices and implied warranty claims, but denied class action treatment as to plaintiffs’ negligence claim. Donovan, at 6. Moreover, in light of Seventh Amendment concerns, the federal court held that the class action would proceed as a jury trial. Id.

About the Author:

Michael J. Hassen is a Litigation Partner at Jeffer Mangels Butler & Mitchell LLP with more than 23 years experience in general business and commercial litigation, including class action defense and matters involving intellectual property, securities and unfair competition. 415-984-9666 / www.jmbm.com

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Plaintiff Seeks Discovery Identifying Putative Class Members

Plaintiff, Without Counsel Involvement, Settles Directly With Defendant

Plaintiff’s Counsel Files Motion for Order Providing Notice to Putative Class Members; Defendant Files Motion to Dismiss

Superior Court Denies Both Motions

Plaintiff’s Counsel Moves to Compel Discovery to Identify New Class Representative, Which Superior Court Denies

Court of Appeal Denies Petition, Deciding Superior Court Did Not Abuse Discretion

With respect to notice, the Court stated:

Lessons for Class Action Defendants

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Facts of Bayer

The Supreme Court’s Decision

Implications of Bayer

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Introduction

I. Background and Context of Civil Rights Arbitration

A. Statutory History of 42 USC § 1981

B. Statutory History of the Federal Arbitration Act

C. Common Criticisms of Modern Arbitration

II. The Preemptive Reach of the Federal Arbitration Act

A. Basic Principles of Federal Preemption in Arbitration

B. Federal Preemption of the FAA and Substantive Law Under Erie

C. Restrictions to Separability

III. Judicial Review of Arbitration Awards Post-Rent-A-Center

A. Lack of Guidance on Judicial Review of Civil Rights Arbitration

B. The Doctrine of Manifest Disregard

C. Post-Award Judicial Review after Rent-A-Center

Conclusion

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A. Discretionary/Interests of Justice Exception – 28 U.S.C. §1332(d)(3)

B. Local Controversy Exception – 28 U.S.C. §1332(d)(4)(A)

C. Home State Exception – 28 U.S.C. §1332(d)(4)(B)

D. State Action Exception – 28 U.S.C. §1332(d)(5)(A)

III. Arguments raised to defeat CAFA jurisdiction

A. Is this case a class action?

B. Is this case a mass action under 28 U.S.C. §1332(d)(11)?

C. Is there minimal diversity?

D. Is the amount in controversy greater than $5 million?

2. Has the plaintiff alleged an amount in controversy less than $5 million?

E. Arguments for exceptions to CAFA jurisdiction

1. The Home State Exception.

2. The Local Controversy Exception.

3. The Discretionary/Interests of Justice exception

4. The State Action Exception

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