Supreme Court Decides Class Arbitration Case: “Not With a Bang but a Whimper”

The Supreme Court decided one of the two class arbitration cases before it last week, and “not with a bang but a whimper.”  Oxford Health Plans LLC v. Sutter, dealt with the issue of whether an arbitrator exceeded his authority  under Section 10(a)(4) of the Federal Arbitration Act (“FAA”) in finding that the parties’ contract provided for class arbitration.  The Court decided simply that it had no basis to overturn the arbitrator’s construction of the contract.  It did not reach the weightier issue of whether the availability of class arbitration is a threshold question of “arbitrability,” which is a question for the courts to decide.

Oxford Health relied on the Court’s ruling in Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp., 559 U.S. 662 (2010), to argue that the arbitrator had misconstrued the contract, in effect, compelling arbitration in contravention of Stolt-Nielsen.   In a unanimous decision written by Justice Kagan, the Court held that this case did not present a difficult issue because the parties had agreed  that the arbitrator was to decide whether the contract called for class arbitration, which made the case different from Stolt-Nielsen.  In Stolt-Nielsen, the Court held that class arbitration cannot be compelled, but rather, must have been agreed upon:  “a party may not be compelled under the FAA to submit to class arbitration unless there is a contractual basis for concluding that the party agreed to do so.”  Here, in contrast, there was an agreement: ”Stolt-Nielsen made clear that this Court has not yet decided whether the availability of class arbitration is a question of arbitrability….But this case gives us no opportunity to do so because Oxford agreed that the arbitrator should determine whether its contract with Sutter authorized class procedures.”

In a concurring opinion by Justice Alito and joined by Justice Thomas, Justice Alito made clear that while review of the arbitrator’s decision was not appropriate, if that decision were reviewed, it would be found to be wrong:  “[i]f we were reviewing the arbitrator’s interpretation of the contract de novo, we would have little trouble concluding that he improperly inferred ‘[a]n implicit agreement to authorize class-action arbitration …from the fact of the parties’ agreement to arbitrate.’” Justice Alito’s point is simply that absent class members cannot agree to arbitrate, and the individual parties’ intent to arbitrate cannot bind absent class members.  Justice Alito points to a fundamental issue with the notion of class arbitration, because if absent class members cannot be bound by an individual party’s agreement, they will have an argument to collaterally attack an outcome that is not favorable to them.

The obvious lesson for defendants is that they should not agree to let an arbitrator decide whether a contract allows for class arbitration.  But, beyond that, the decision does little to advance the debate on class arbitration.  It does not address the more fundamental question of whether class arbitration should be allowed at all, as per Justice Alito’s concerns.  Nor does it address the related question of “arbitrability,” as Justice Kagan notes.  These more fundamental questions remain unanswered, and will not necessarily be answered in the Court’s anticipated decision in American Express Co. v. Italian Colors Restaurant, No. 12-133 (see my March 8, 2013 post).

 

Supreme Court to Consider Another CAFA Case

The U.S. Supreme Court recently decided The Standard Fire Insurance Co. v. Knowles , a case that dealt with the extent to which plaintiffs can avoid federal jurisdiction under the Class Action Fairness Act of 2005 (“CAFA”) by pleading around it.  (See my blog posts from January 7, 2013 and March 20, 2013.) On May 28, 2013, the Court granted review of State of Mississippi v. AU Optronics Corp., another CAFA case, this time dealing with the issue of federal jurisdiction over a suit brought by the State that involves claims for restitution for a discrete group of citizens.  While Knowles and AU Optronics have little in common, they are both cases that involve the boundary between federal and state court jurisdiction under CAFA.  AU Optronics’s importance also lies in the hard look the Supreme Court will have to give to the real party in interest analysis when a State brings causes of action for monetary relief.

The question presented is: “Whether a state’s parens patriae action is removable as a ‘mass action’ under the Class Action Fairness Act when the state is the sole plaintiff, the claims arise under state law, and the state attorney general possesses statutory and common-law authority to assert all claims in the complaint.”

In AU Optronics, the State of Mississippi brought a state court antitrust action, asserting claims under the Mississippi Antitrust Act  (“MAA”) and the Mississippi Consumer Protection Act (“MCPA”), for price fixing of liquid crystal display (“LCD”) panels.  The Attorney General sought penalties and injunctive relief, as well as restitution to the State on behalf of Mississippi citizens and punitive damages.  After defendants removed the action to federal court under CAFA, the district court remanded and the Fifth Circuit reversed.

The Fifth Circuit reasoned that although the case does not qualify as a “class action” under CAFA, it does come under the “mass action” portion of that statute, because it is a civil action claiming monetary relief for 100 or more persons, and the amount in controversy exceeds $75,000.  After conducting a real party in interest analysis, the court held that Mississippi is not the sole real party in interest, but the more than 100 individuals for whom relief is sought are also real parties in interest.  Critical to the court’s reasoning was the restitution piece of the suit, because neither the MAA nor the MCPA authorizes anything but injunctive relief and penalties, not the “public collection for private damages.”  Thus, the Court held that “[e]ven assuming arguendo that the State has parens patriae standing to bring the claims here (an issue that we do not decide), that standing does not change the fact that Mississippi is acting, not in its parens patriae capacity, but essentially as a class representative.”  Because Mississippi law prohibits double recoveries, the State’s action would effectively extinguish the right of an injured consumer to bring her own suit.  The Fifth Circuit found this troubling:  “We think that consideration, coupled with the reasons provided above, is enough to find against the State having carte blanche to recover for others’ injuries under common law parens patriae authority.”

The Fifth Circuit next considered the “general public” exception to CAFA, which provides that a suit is not a mass action if “all of the claims in the action are asserted on behalf of the general public . . . pursuant to a State statute specifically authorizing such action.”  Because, as discussed above, not “all” of the claims fell under this exception, i.e., the claims for monetary relief, the action did not fall under this exception.

In its Petition for Writ of Certiorari, the State argued that there is a Circuit divide on whether federal jurisdiction exists under the circumstances presented.  The State further asserted that Fifth Circuit CAFA jurisprudence, which demands, under the test in Louisiana ex rel. Caldwell v. Allstate Ins. Co., 536 F.3d 418 (5th Cir. 2008), that a complaint be dissected claim by claim, is at odds with the case law of other Circuits, and that a claim-by-claim analysis of a complaint may swallow the general public exception.  The Fifth Circuit, too, cautioned that under its jurisprudence, finding a case to be mass action — precisely because the real parties in interest for restitution claims are a discrete group of citizens, as here — may “render such a statutory exception a dead letter.”

After years and years of class action jurisprudence, we find the Supreme Court grappling with very basic questions, from defining the commonality requirement in Wal-Mart, to articulating predominance in Comcast, and now, perhaps, answering the question of what makes a case a mass action under CAFA such that federal jurisdiction is warranted.

 

 

Data Breach Class Actions Today

When data breaches occur, they typically involve lots of people, making them prime targets for class actions.  The litigation usually involves allegations about the breach itself – was the breach the result of a company policy or due to negligence, for example?  In addition, the allegations go to what the company did after it detected the breach.  For instance, did it disclose the breach in a timely matter?  Claims may be brought under both common law and federal and state statutes.  For the past several years, most cases have not gotten to the class certification stage because they have been dismissed on standing grounds, and when they have reached the class phase, certification has been denied because of the predominance of individualized issues.  Two recent U. S. Supreme Court decisions, Clapper v. Amnesty International USA, 133 S. Ct. 1138 (2013), in which the Court held that actions based on speculative injury cannot proceed due to lack of standing, and Comcast Corp. v. Behrend, 133 S. Ct. 1426 (2013), an antitrust case out of the Third Circuit, in which the Court held that when damages are individualized, a class cannot be certified, continue these trends.  While neither case is a data breach class action, both have significant ramifications in the data breach context.

Standing Decisions Leading to Clapper

The initial issues for a defendant facing a data breach class action are whether the named plaintiff has standing, and relatedly, whether the named plaintiff has suffered any damages.  Under the Supreme Court’s standard enunciated in Lujan v. Defenders of Wildlife, 504 U.S. 555 (1992), to have Article III standing, a named plaintiff must have suffered an “injury in fact” that is “distinct and palpable,” and the injury must be fairly traceable to the challenged action and redressable by a favorable decision.

Many cases have been dismissed on standing grounds.  For example, in Hammond v. The Bank of New York Mellon, 2010 WL 2643307 (S.D.N.Y. June 25, 2010), plaintiffs alleged that Bank of New York lost a number of unencrypted back-up tapes containing sensitive personal information in transport.   Plaintiffs brought common law claims for negligence, breach of implied contract and breach of fiduciary duty, as well as statutory claims under the consumer protection statutes of various states.  As is true in many data breach class actions, the named plaintiffs did not sustain an injury and could not show an unauthorized charge on their credit cards, for example.  Thus, they lacked standing, because their own claims were based on a fear of future injury, which was too conjectural for there to be standing.

Similarly, in Randolph v. ING Life Insurance and Annuity Company, 486 F. Supp. 2d (D. D.C. 2007), the plaintiffs were insureds who filed a class action against ING alleging invasion of privacy and negligence after certain laptop computers containing personal information, including social security numbers, were stolen from the home of the ING’s representative.  The named plaintiffs could not show any actual injury stemming from the theft.  Rather, they alleged that they were at an increased risk of future harm in the form of identity theft.  The court held that such injury was merely speculative, and thus could not satisfy Article III standing.

A number of Circuit courts have recognized  standing.  In one of the earliest cases, the Seventh Circuit recognized standing, but nevertheless dismissed the action for lack of a compensable injury.  Pisciotta v. Old National Bancorp, 499 F.3d 629, 634 (7th Cir. 2007), involved allegations that, through its website, the defendant bank had solicited personal information on applicants for banking services and failed to adequately secure that information.  The named plaintiffs alleged negligence and breach of implied contract – an implied contract to safeguard the solicited personal information.  Rejecting cases that failed to find standing where there was no actual injury, the Seventh Circuit held:  “the injury-in-fact requirement can be satisfied by a threat of future harm or by an act which harms the plaintiff only by increasing the risk of future harm…”  Nevertheless, while the court found standing to exist, the court affirmed dismissal because the injury alleged was not compensable under Indiana law.

Similarly, the Ninth Circuit has recognized standing, but has dismissed for failure to state a claim because of a lack of damages.  In Ruiz v. GAP, Inc., 380 F. App’x 689 (9th Cir. 2010), a job applicant brought a putative class action against the GAP based on the theft of a laptop computer that contained social security numbers.  The Ninth Circuit held that “’a credible threat of harm is sufficient to constitute actual injury for standing purposes.”  Nevertheless, the court affirmed dismissal based on a lack of damages.

In 2011, the First Circuit allowed a case to proceed, finding standing.  In Anderson v. Hannaford Bros.Co., 659 F.3d 151 (1st Cir. 2011), the Hannaford Brothers supermarket chain was sued in putative class actions after hackers had stolen more than 4 million credit and debit card numbers.  The district court had dismissed the claims of all parties except those that had not been reimbursed for actual fraudulent charges, holding that a merchant is not liable for speculative harm.  On appeal, the First Circuit reversed, holding that reasonable out-of-pocket expenses necessary to mitigate future harm are recoverable, holding that such steps are a reasonably foreseeable consequence of a data breach.  As discussed below, class certification was recently denied in this case.

And in 2012, the Eleventh Circuit held that the named plaintiffs in a data breach class action had standing, reversing the district court.  Resnick v. Avmed, Inc., No. 11-13694 (11th Cir. Sept. 5, 2012), involved the theft of two unencrypted laptop computers containing personally identifiable information.  The complaint alleged that Avmed had failed to secure the laptops.  Importantly, two of the named plaintiffs alleged actual financial injury. They were able to show that they took steps to protect themselves from identity theft and that there was no other conceivable way that their identities could have been stolen but for the Avmed theft.  In particular, the named plaintiffs alleged that the same information that was on the laptops was stolen to open a bank account.  The injury was traceable to the theft.

In addition to common law claims, plaintiffs often bring statutory claims.  But, like common law claims, there is a question on whether there is standing or damages for these claims.

FAA v. Cooper, 132 S. Ct. 1441 (2012), involved a pilot who was suing for emotional distress damages after the government revealed his HIV positive status.  The Privacy Act only allows for actual damages, so the question was whether emotional distress damages constitute actual damages, something the statute was silent on. The Court held that such damages were not actual damages under the Act. Justice Sotomayor’s dissent points up the split in the Court:  “Today the Court holds that ‘actual damages’ are limited to pecuniary loss.  Consequently, individuals can no longer recover … the primary, and often only, damages sustained as a result of an invasion of privacy, namely mental or emotional distress.”

Similarly, First American Financial Corp. v. Denise P. Edwards, 610 F.3d 514 (9th Cir. 2010), is an important case which involved a RESPA claim.  The case went up to the Supreme Court, but the Court declined to decide it after granting review.  The case is significant because the Ninth Circuit held in this case that actual damages are not required for RESPA standing.  Rather, “[t]he injury required by Article III can exist solely by virtue of a statute’s creating legal rights, the invasion of which creates standing.”

Similarly, in Gaos v. Google, Case No. 5:10-cv-4809 (EJD) (N.D. Cal. 2012), the District Court for the Northern District of California found standing for a statutory claim based on the violation of the Stored Communications Act.  The named plaintiff had alleged actual harm “in the form of Google’s unauthorized and unlawful disclosure of Plaintiff’s search queries, which contained sensitive personal information, to third parties.”  While the common law claims were dismissed for lack of standing, the Stored Communications Act was adequately pled as violated, providing the named plaintiff with standing to proceed.

Meanwhile, in a recent decision from the Eastern District of Illinois, the court went in the opposite direction.  In Sterk v. Best Buy Stores, No. 11 C 1894 (N.D. Ill. Oct. 17, 2012), the named plaintiff alleged that Best Buy disclosed information about the named plaintiff’s movie history purchases, including the credit card number used to rent a movie, in violation of the Video Privacy Protection Act.  Plaintiff could not show actual injury stemming from the transaction. The District Court held that “Congress cannot erase Article III’s standing requirement by statutorily granting the right to sue to a plaintiff who would not otherwise have standing.”

The Supreme Court’s Clapper decision now makes it clear that actual injury is required for a plaintiff to proceed under Article III – in any context, including the data breach context.  Clapper was brought under the Foreign Intelligence Surveillance Act (“FISA”).  Plaintiffs alleged that an amendment to FISA that permitted the government to intercept their foreign transmissions without probable cause was unconstitutional, and that they had been harmed by having to take measures to protect their communications from surveillance.  The Supreme Court held that Article III standing — and not standing under FISA in particular– requires actual injury, and that speculative injury is insufficient to create standing:  “we have repeatedly reiterated that ‘threatened injury must be certainly impending to constitute injury in fact,’ and ‘[a]llegations of possible future injury’ are not sufficient.”  The Court further cautioned against standing based on self-inflicted injury:  a plaintiff “cannot manufacture standing merely by inflicting harm based on fears of hypothetical future harm that is not certainly impending.”  Indeed, “[i]f the law were otherwise, an enterprising plaintiff would be able to secure a lower standard for Article III standing simply by making an expenditure based on a nonparnoid fear.”

Class Certification of Federal Court Data Breach Class Actions Leading toComcast

Because of the standing issues that plaintiffs have faced, not many cases have proceeded to the class certification stage.  Cases that have gone to the class certification stage have tended to be dismissed because of the predominance of individualized issues.

For example, in Stollenwerk v. TriWest Healthcare Alliance, No. 2:03-cv-00185-SRB, slip op. (D. Ariz. June 10, 2008), the court denied the named plaintiffs’ motion for class certification.  That case stemmed from a burglary at TriWest, a contractor who handled the healthcare program for the military.  Plaintiff alleged that after the burglary, his personal information was used on six separate occasions in unauthorized attempts by others to open credit accounts.  While two accounts were opened and there were unauthorized charges, he was not liable for any of them.  While that amount of specificity gave the named plaintiffs standing to proceed, it operated against them when it came to class certification because it highlighted the individualized nature of the facts as to each putative class member, some of whom may not have been injured at all.

And, in In re Hannaford  Bros. Co. Customer Data Security Breach Litig., No. 2:08-MD-1954-DBH (D. Me. Mar. 20. 2013), discussed above, in which the First Circuit affirmed standing, class certification was denied because of the predominance of individualized issues.  The Hannaford Court recognized that damages would differ among class members, depending on whether they had incurred fraudulent charges and took steps to mitigate harm.  The case was decided before Comcast, and recognized that in the First Circuit, individualized damages were not enough to prevent class certification, but that the individualized nature of the “proof of causation of damages” was enough to decline certification.  For that reason, taking the trial plan into consideration, the court held that class certification had to be denied because plaintiffs could not sustain their burden to show that common issues would predominate over individualized ones.

The Supreme Court’s Comcast decision, decided shortly after Hannaford, makes it clear that, indeed, the existence of individualized damages precludes class certification. Comcast  was brought by Philadelphia cable subscribers alleging that Comcast had violated the Sherman Act by monopolizing Philadelphia’s cable market.  In a decision authored by Justic Scalia, the Court ruled that when damages are so individualized that they outweigh any common elements of the case, a class may not be certified under the predominance requirement of Rule 23(b)(3): “By refusing to entertain arguments against respondents’ damages model that bore on the propriety of class certification, simply because those arguments would also be pertinent to the merits determination, the Court of Appeals ran afoul of our precedents requiring precisely that inquiry.  And it is clear that, under the proper standard for evaluating certification, respondents’ model falls short of establishing that damages are capable of measurement on a classwide basis…. respondents cannot show Rule 23(b)(3) predominance:  Questions of individual damage calculations will inevitably overwhelm questions common to the class.”

Conclusion

What to make of all of this?  Clapper  was not decided in the data breach context, and plaintiffs are attempting to cabin its effects to the FISA context.  However, the Clapper opinion itself provides no reasoning that would support only a limited application of its holding.  Plaintiffs, similarly, will try to confine Comcast to the antitrust context (as the dissent attempted to do in that case), but the decision itself is not so limited.  Thus, the battles continue, and the predominance of  individualized issues, including damages issues, can still be expected to be the battleground for most data breach class actions that manage to proceed to class certification.

The Dialogue Continues: Predominance Strengthened Under Comcast Decision

On March 27, 2013, the U.S. Supreme Court handed down its much awaited decision in Comcast Corp. v. Behrend, No. 11-864, an antitrust case out of the Third Circuit.  Comcast  makes it clear, building on the Court’s seminal decision in Wal-Mart Stores, Inc. v. Dukes, that class certification cannot rest on the pleadings, but must be based on evidence, even when that evidence would lead a court to consider the merits of a case.  Further — in what appears to be a continuing battle within the Court on the predominance requirement – the Court determined that the lack of a classwide methodology to demonstrate damages meant that the predominance criterion of Rule 23(b)(3) could not be met, and reversed the certification of the class.

Comcast was brought by Philadelphia cable subscribers alleging that Comcast had violated the Sherman Act by monopolizing Philadelphia’s cable market. The district court certified a class of 2 million current and former Comcast subscribers in the Philadelphia area, holding “that the element of antitrust impact is capable of proof at trial through evidence that is common to the class . . ., and  . . . there is a common methodology available to measure and quantify damages on a class-wide basis.”  A divided panel of the Third Circuit affirmed on July 11, 2011, after Wal-Mart, and distinguished Wal-Mart, holding that it was inapplicable:  “The factual and legal underpinnings of Wal-Mart—which involved a massive discrimination class action and different sections of Rule 23—are clearly distinct from those of this case.  Wal-Mart  therefore neither guides nor governs the dispute before us.”

The question before the Supreme Court, as recast by the Court, was “whether a district court may certify a class action without resolving whether the plaintiff class has introduced admissible evidence, including expert testimony, to show that the case is susceptible to awarding damages on a class-wide basis.”

On the Wal-Mart merits issue, the Court was very clear that: “Repeatedly, we have emphasized that it ‘may be necessary for the court to probe behind the pleadings before coming to rest on the certification question,’ and that certification is proper only if ‘the trial court is satisfied, after a rigorous analysis, that the prerequisites of Rule 23(a) have been satisfied.’”  As to predominance, Justice Scalia held:  “The same analytical principles govern Rule 23(b).  If anything, Rule 23(b)(3)’s predominance criterion is even more demanding than Rule 23(a)” precisely because money damages class actions were considered to be “adventuresome” unlike injunctive and declararatory relief class actions.

On the predominance requirement, there is a not-so-subtle dialogue taking place on the Court betweeen the liberal and conservative justices.  Recall that in Wal-Mart, Justice Scalia announced a much more stringent commonality requirement under Rule 23(a): there must be a claim that is based on a “common contention, and that common contention must drive the resolution of the classwide issue that is central to the claims at stake.”  In Amgen Inc. v. Connecticut Retirement Plans and Trust Funds, No. 11-1085, a securities class action,  Justice Ginsburg reasoned that materiality was a merits question, and that the only issue for class certification was whether the question of materiality was a predominant one, or an individualized one.  She emphasized that predominance is to viewed in terms of whether common questions predominate.  She then reasoned that materiality is an objective question that can be proved through evidence common to the class, and that individual questions can never predominate as to materiality because even if down the road that common proof fails, the case simply would end.  As I have previously blogged about, Amgen arguably lowered the predominance requirement, at least in the securities context.

The Amgen decision was met with strong dissents from Justices Thomas and Scalia.  And in Comcast, we see Justice Scalia coming back to say that the predominance criterion is a difficult one to meet. Accordingly, the Court rules that when damages are so individualized that they outweigh any common elements of the case, a class may not be certified under the predominance requirement of Rule 23(b)(3): “By refusing to entertain arguments against respondents’ damages model that bore on the propriety of class certification, simply because those arguments would also be pertinent to the merits determination, the Court of Appeals ran afoul of our precedents requiring precisely that inquiry.  And it is clear that, under the proper standard for evaluating certification, respondents’ model falls short of establishing that damages are capable of measurement on a classwide basis…. respondents cannot show Rule 23(b)(3) predominance:  Questions of individual damage calculations will inevitably overwhelm questions common to the class.”

The Comcast dissent, led by Justice Ginsburg, argues that individualized damages have not historically meant that class treatment was not available, and then tries to cabin the opinion to the antitrust context.  As Justice Scalia counters:  “This case … turns on the straighforward application of class-certification principle; it provides no occasion for the dissent’s extended discussion… of substantive antitrust law.”

Notwithstanding the dissent’s best efforts, there is no reason why Comcast should be confined to the antitrust context, and the dissent fails to provide any real reason.  Thus, predominance is strengthened again… at least for now.

Supreme Court Closes CAFA Loophole

In The Standard Fire Insurance Co.v. Knowles, No. 11-1450, a unanimous decision yesterday written by Justice Breyer, the Supreme Court held that a plaintiff cannot stipulate to an amount of damages for a putative class in order to avoid federal jurisdiction under the Class Action Fairness Act of 2005 (“CAFA”).

CAFA was enacted, in part, to ensure that class actions were filed in federal court unless they met a limited number of exceptions, thus avoiding often pro-plaintiff state courts.  As previously described on this blog, in Knowles, plaintiff’s counsel tried to avoid the federal jurisdiction mandated by CAFA — in favor of Arkansas state court — by stipulating that the damages sought by the putative class would be less than the $5 million CAFA threshold.

The Supreme Court held that stipulations must be binding to be effective and that the “stipulation Knowles proffered to the District Court . . . . does not speak for those he purports to represent.  Relying on its recent decision in Smith v. Bayer Corp., 131 S. Ct. 2368 (2011), the Court held that “a plaintiff who files a proposed class action cannot legally bind members of the proposed class before the class is certified.”  Significantly, this is in contrast to individual actions in which stipulations are binding and thus can affect the jurisdictional analysis.  The Court spoke loudly and definitively — named plaintiffs in uncertified classes cannot speak for the class because they do not represent the class.

The Court squarely rejected the argument that any issues with the validity or binding nature of the stipulation would be considered in the class certification process:  “We do not agree that CAFA forbids the federal court to consider, for purposes of determining the amount in controversy, the very real possibility that a nonbinding, amount-limiting, stipulation may not survive the class certification process… To hold otherwise would, for CAFA jurisdictional purposes, treat a nonbinding stipulation as if it were binding, exalt form over substance, and run directly counter to CAFA’s primary objective: ensuring ‘Federal court consideration of interstate cases of national importance.’”  In addition, the Court rejected a similar plaintiff’s tactic — dividing up a class into smaller classes to avoid CAFA jurisdiction through the use of non-binding stipulations.

Knowles is  significant not just in its limitations on plaintiff’s tactics to avoid federal jurisdiction, but because it clearly holds that pre-certification representations purportedly made on behalf of a class are not valid or binding.  The decision thus could have broader ramifications.

 

Class Action Waivers Revisited: Supreme Court Argument on American Express Case

Last week, the Supreme Court heard argument in American Express Co. v. Italian Colors Restaurant, No. 12-133.  The case stems from the Second Circuit’s February 1, 2012 decision that American Express (“AMEX”) could not compel a putative class of merchants to arbitrate their antitrust claims. In re Am. Express Merchants Litig., 667 F.3d 204 (2d Cir. Feb. 1, 2012) (“Amex III“).   The Second Circuit had held that the class action waiver contained in AMEX’s Card Acceptance Agreement—which tied the acceptance of its credit card to its charge card, which charged a higher rate—was unenforceable because it “would effectively preclude any action seeking to vindicate the statutory rights asserted by the plaintiffs.” The Second Circuit’s decision was based on an affidavit from plaintiffs’ expert showing that the cost of individual litigation far exceeded any potential individual recovery.

The Supreme Court heard argument on the following question:  “Whether the Federal Arbitration Act permits courts, invoking the ‘federal substantive law of arbitrability,’ to invalidate arbitration agreements on the ground that they do not permit class arbitration of a federal-law claim.”

At argument, the Court appeared divided.  Justice Kagan was concerned, as was the Second Circuit, with a plaintiff’s ability to vindicate a federal statutory right, repeatedly asking Petitioners’ counsel about how far an arbitration agreement can go to preclude a plaintiff from bring a Sherman Act claim.  For example, she asked:  “Do you think that if in your arbitration agreement you had a clause which just said, I hereby agree not to bring any Sherman Act claim against American Express…could your arbitration agreement do that?”  At the other end of the spectrum, Justice Scalia asked questions which focused on the fact that the Sherman Act existed before the class actions rules, from which one could infer that there was no right to bring such claims in a class action at all, let alone to make them possible if otherwise costly:  “I don’t see how a Federal statute is frustrated or is unable to be vindicated if it’s too expensive to bring a federal suit.  That happened for years before there was such a thing as a class action in Federal courts.  Nobody thought the Sherman Act was a dead letter, that it couldn’t be vindicated.”

Meanwhile, the other Justices (except Justice Sotomayor, who recused herself given her involvement with the case when she sat on the Second Circuit), focused their questions on the costliness of the arbitration procedure, with the questioning led by Justice Breyer.  Justice Breyer also expressed concern with the erosion of the law of arbitrability:  “You are saying the thing that keeps him out is his own theory of wrong, which will involve hiring a lot of experts and others.  Now, once that’s adopted, it seems to me in practice we reversed in many, many cases the proposition that you can in fact require Federal causes of action to be arbitrated, because all you have to do to get out of the arbitration is to allege a theory of your case which is hard and complicated to prove.  Now you are back in court.”

The Supreme Court’s recent jurisprudence in this area has been defendant friendly, enforcing class action arbitration waivers and standing for the proposition that class arbitration cannot be imposed on a party.  Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp., 130 S. Ct. 1758 (2010); AT&T Mobility v. Concepcion, 131 S. Ct. 1740 (2011).  However, this case may carve out an exception, or at least provide further guidance for companies to know how to draft such waivers.  Significantly, the Court is slated to hear another class arbitration case, Oxford Health Plans LLC v. Sutter, shortly, on the related issue of whether class arbitration can be imposed without express contractual language which permits it.

 

Supreme Court Rules That Materiality Is a Merits Question in Securities Class Actions

Last week the Supreme Court decided Amgen Inc. v. Connecticut Retirement Plans and Trust Funds, No. 11-1085.  As previously discussed on this blog, Amgen is an extremely important case dealing with the divide between what is appropriately decided at class certification versus on the merits.  The Supreme Court, in a 6-3 decision authored by Justice Ginsburg, held that in a Rule 10(b) securities fraud class action, materiality is a merits question and that plaintiffs need not show at the class ceritifcation stage that the misprepresentation or omission on which they allegedly relied was material to their decision to purchase or sell the security at issue.  The import of the decision is that classes that could never meet the materiality standard can nevertheless proceed.  In some ways, the decision is consistent with the Court’s decision last year in Erica P. John Fund, Inc. v. Halliburton Co., 131 S. Ct. 2179 (2011), in which the Court held that a plaintiff need not prove loss causation at the certification stage.  But, the decision in Amgen is different from Halliburton because of the way in which the Court discusses the Rule 23 predominance requirement generally, and plaintiffs’ counsel will no doubt argue that Amgen’s meaning goes beyond the securities context.

Amgen is best viewed as a continuation of the “Eisen”  debate as to whether merits issues can be reviewed at the class certification stage.  In Wal-Mart Stores, Inc. v. Dukes, 131 S. Ct. 2541 (2011), the Court noted that Eisen v. Carlisle & Jacquelin, 417 U.S. 156 (1974), had been misread to mean that courts could not consider the merits when determining whether to certify a class.  Instead, the Court held, in conducting a rigorous class certification anlysis, courts could and should, when necessary, consider the merits of the underlying claim:  a rigourous anlaysis will “[f]requently . . . entail some overlap with the merits of the plaintiff’s underlying claim.”  Dukes, 131 S. Ct. at 2551.  In Amgen, Justice Ginsburg added the following gloss:  “… the office of a Rule 23(b)(3) certification ruling is not to adjudicate the case; rather, it is to select the ‘metho[d]‘ best suited to adjudicate the controversy ‘fairly and efficiently.’”  Further, she reasoned:  “Rule 23 grants courts no license to engage in free-ranging merits inquiries at the certification stage.  Merits questions may be considered to the extent — but only to the extent — that they are relevant to determining whether the Rule 23 prerequisites for class certification are satisfied.”

Echoing the views that she and Justice Kagan expressed at oral agument, Justice Ginsburg reasoned that materiality was a merits question, and that the only issue for class certification was whether the question of materiality was a predominant one, or an individualized one:  “Because materiality is judged according to an objective standard, the materiality of Amgen’s alleged misrepresentations and omissions is a question common to all members of the class…. The alleged misrepresentations and omissions, whether material or immaterial, would be equally so for all investors composing the class.”  Justice Ginsburg emphasized that predominance is to viewed in terms of whether common questions predominate.  She then reasoned that materiality is an objective question that can be proved through evidence common to the class, and that individual questions can never predominate as to materiality because even if down the road that common proof fails, the case simply would end.

In dissent, Justices Scalia and Thomas go back to the ”basics,” discussing the meaning of the decision in Basic  Inc. v. Levinson, 485 U.S. 224 (1988), which invented the presumption of reliance in fraud-on-the-market securities cases. Under Basic, plaintiffs in securities class actions are entitled to a presumption of reliance (which is virtually always an individualized inquiry otherwise) if they could meet certain factors, including showing that the alleged misrepresentation or omission was material.  In dissent, Justice Scalia reasoned that Basic itself applies not only to the merits, but to the certification decision.  Moreover, he reasoned, that reading is consistent with the notion, expressed most recently in Wal-Mart, that “‘Rule 23 does not set forth a mere pleading standard.’”  Similarly, Justice Thomas reasoned that the plaintiff should not get the benefit of the presumption of reliance at the certification stage unless it can show that it meets the criteria for the presumption.  And without the presumption, questions of reliance remain individualized: “Without materiality, there is no fraud-on-the-market presumption, questions of reliance remain individualized, and Rule 23(b)(3) certification is impossible.”

The Court admittedly has come out differently on different aspects of the Basic  factors, e.g., whether a named plaintiff must establish that he or she executed trades at the relevant time.  Justice Ginsburg argues that that aspect of the Basic presumption goes to the Rule 23(a)(3) and (4) criteria of typicality and adequacy of representation, making them preliminary inquiries appropriate for the certification decision.  The dissent sees this as a meaningless distinction.  Meanwhile, Justice Alito, in a concurring opinion, asks whether the Basic presumption needs to be re-examined, an issue which was not raised to the Court.

While Amgen is a securities case, it likely will have a broader impact. Fraud class actions generally fail because of the question of the individualized nature of reliance, and plaintiffs’ counsel will now argue that reliance need not be shown until the merits phase of a case.  Defendants will argue that Amgen should be confined to the securities context given that it involves a presumption of reliance that itself is confined to that context.  The Eisen debate thus will continue to be played out in the courts.

 

 

Supreme Court to Hear SLUSA Case

On January 18, 2013, the U.S. Supreme Court granted certiorari in Chadbourne & Parke LLP v. Troice, No. 12-79. The case arises from the Stanford Ponzi scheme. The Court of Appeals for the Fifth Circuit had held that the Securities Litigation Uniform Standards Act (“SLUSA”) did not preclude the plaintiffs from proceeding with their action. SLUSA precludes certain class actions that sound in state law and allege “a misrepresentation … in connection with the purchase or sale of a covered security.” 15 U.S.C. Section 78bb(f)(1). At issue before the Supreme Court is the meaning of SLUSA’s “in connection with” language.

The question presented is as follows:

“Whether SLUSA precludes a state-law class action alleging a scheme of fraud that involves misrepresentations about transactions in SLUSA-covered securities.”

In their Petition, Chadbourne & Parke argued that “the circuits … are divided over the standard for determining whether an alleged misrepresentation is sufficiently related to the purchase or sale of a covered security to satisfy the ‘in connection with’ requirement.”

This case provides the Supreme Court with an opportunity to clarify the SLUSA standard it articulated in Merrill Lynch, Pierce, Fenner & Smith Inc. v. Dabit, 547 U.S. 71 (2006), and the decision likely will have a significant impact on the viability of state-law class actions that involve securities.

Supreme Court Hears Argument on CAFA Evasion

On January 7, 2013, the U.S. Supreme Court heard argument in The Standard Fire Insurance Company v. Knowles, No. 11-1450. The case is important because it pits a named plaintiff’s right to be “master of the complaint” against an absent class member’s right to due process and also tests whether the Court will allow creative plaintiffs’ lawyers to circumvent Congress’ mandate that federal jurisdiction is required in cases exceeding the $5 million threshold set forth in the Class Action Fairness Act of 2005 (“CAFA”). (See my post from Sept. 7, 2012.)

At argument, most of the Justices expressed concern with a plaintiff’s ability to avoid federal jurisdiction through stipulations and other tactics. As Justice Breyer put it when speaking about plaintiff’s reliance on the master of the complaint argument to avoid federal jurisdiction: “this is just a loophole because it swallows up all of Congress’s statute, which is what their problem is, all you have to do, . . . you file a complaint, you say it is for $4,900,00; in fact, it’s worth 10 million.”

While the ways plaintiffs circumvent CAFA was clear to the Court, there was concern on where to draw the line between what a named plaintiff could and could not do prior to class certification. As Justice Kagan stated: “… you really are asking us to blow up the whole world. . . . Because you are saying: Next time we will be back and tell you that the named plaintiff can’t define the class. Next time we are going to be back and tell you that they can’t name the defendants.” Justic Kagan was also adamant that CAFA did not get rid of the master of complaint rule. Counsel for Petitioner pointed out that “[t]he master of the complaint doctrine has never been applied by this Court where an unappointed named plaintiff . . . seeks to try to alter claims and judgments of other people and the rights of them to recover.”

Other members of the Court, too, questioned why the class certification process itself, as well as later removal under CAFA, could not address plaintiffs’ efforts to do an end-run around CAFA’s mandate for federal jurisdiction. Justice Sotomayor, for example, asked: “… why doesn’t the normal class certification process protect adequately the absent class members? First of all, counsel has to prove he or she is adequate. So doesn’t that mean that if they enter a stipulation that is grossly unfair to the class that the judge is not going to certify the case?” As Justice Ginsburg understood the problem posed by Petitioner, it would be the state court that would make the determination of adequacy, not a federal court. As counsel for Petitioner stated: “… that’s what Congress was concerned about, too…” Justice Roberts then commented: “Well, you’re assuming that it’s a bad thing for class members to have their claims limited. but it may well be a good thing for them to have their claims limited if that gets them into what would reasonably be regarded as a more sympathetic forum.” As for removal, while removal is possible at any time under CAFA, counsel for Petitioner pointed to the discovery that would have been had to that point, from which one could infer a reward to the plaintiff who had successfully gamed the system.

The Court’s decision, expected by June, likely will define the limits of a named plaintiff’s ability to circumvent CAFA, at least in the context of a stipulation as to damages, but potentially with respect to other tactics, too, such as breaking a class up into smaller classes to avoid federal jurisdiction.  In any event, it is likely to be an important decision which could impact the number of cases in federal as opposed to state court.