Consumer Class Actions and Mass Torts : Class Action Lawyer & Attorney : J. Russell Jackson : Skadden Law Firm : Complex Class Actions : Consumer Class Actions & Mass Torts Law Blog

As a kid, I was a huge fan of Carnac the Magnificent on Johnny Carson's Tonight Show.  In this first post of the new year, I thought I would channel my inner Carnac to make some predictions about what we can expect in the field of consumer class actions and mass torts in 2012.

1.  Wal-Mart v. Dukes will have tremendous impact on consumer class actions and mass torts.  Despite plaintiffs' attempts to limit the opinion solely to employment discrimination cases, the actual holdings in Dukes go to the fundamental core of class actions.  A unanimous Court said you can't deprive a defendant of its substantive right to challenge the elements of individual class members' claims just to make it easier to have a class.  Similarly, a unanimous Court strongly suggested -- even if the 8th Circuit didn't get it -- that Daubert rules matter at the class cert stage.  And a unanimous Court rejected the use of "trial by formula" rather than proof of actual damages.  These holdings are just as important -- if not moreso -- as the Court's articulation of the commonality standard, and you will begin to see the impact of these Dukes holdings in consumer class action cases this year.

2.  So many courts -- primarily in California -- have struggled to get around the clear preemption analysis in AT&T Mobility v. Concepcion that the U.S. Supreme Court is going to have to take up the issue of class arbitration waivers again.  It may not happen by the end of 2012, but too many courts have shot the bird to the Supremes since Concepcion.  Some argue that the decision does not apply to a particular cause of action under a state statute.  Others just find the whole arbitration provision containing a class action waiver void as against public policy.  But the simple fact is that it is nearly impossible to square these opinions with the very clear preemption analysis in Concepcion, and in the right case, the Court is going to have to issue certiorari to say that it really meant what it said.

3.  Courts may struggle for the right standard by which to judge personal jurisdiction, but plain ole stream-of-commerce theory is dead.  A majority of justices made that much plain in J. McIntyre Machinery, Ltd. v. Nicastro, 131 S. Ct. 2780 (2011).  They just couldn't agree on a new standard.  But we know there must be some purposeful availment in addition to mere awareness that the product might reach the forum.  I believe most courts that find jurisdiction will rely on web presence in the forum as the "plus" factor that shows purposeful availment of the forum's laws.

4.  Prescription medicine plaintiffs will continue to cast their plain old failure to warn claims as "design defect" claims to try to get around the clear bar of the learned intermediary doctrine.  Hopefully, most courts will continue to recognize that medicines are unavoidably unsafe products for which you cannot have a design defect claim.  Indeed, you can't even propose a feasible alternative design, because to do so is to change the product into something else!

5.  Global warming lawsuits seeking to foist on certain industries humanity's collective responsibility for climate change will continue, but the defenses of standing, remoteness, proximate cause and the political question doctrine will continue to be strong defenses.  Because the Supremes dealt only with federal law issues in American Electric Power Co. v. Connecticut, 131 S. Ct. 2527 (2011), courts will still have to work these issues out as matters of state law.  We can expect plaintiffs to win at least one of these cases at a trial court level.  But the sheer magnitude of how far they are attempting to stretch state law should cause appellate courts to be more circumspect.

6.  Product sellers from tobacco to telephones will continue to vigorously defend their commercial speech rights under the First Amendment.  Appellate courts will grapple with these sellers' rights to not be forced to convey government messages about their products where there are other, less intrusive means of achieving the government's purpose.

7.  Plaintiffs will attempt to circumvent the federal preemption for generic medicines recognized in Pliva, Inc. v. Mensing, 131 S. Ct. 2567 (2011), by trying to describe various claims -- such as express warranty claims -- as enforcing voluntarily adopted standards, rather than imposing state law requirements that conflict with federal law.  Plaintiffs will be hard-pressed to succeed on such dubious claims for at least two reasons.  First, the statements they point to will be consistent with what FDA has approved for the label, making plaintiffs' claims conflict with federal law.  And second, it will be very difficult to find statements that were actually material and became part of the basis of the bargain.

8.  The food and beverage industries are going to continue to be a primary target for consumer fraud claims.  Often these suits are fueled by health claims in advertising or on the label.  But increasingly such suits are being brought based on an ingredient in the product.  Although FDA has balked at issuing regulations that fully define when products may be labeled "natural," it has begun enforcement actions against products that use the term and contain synthetic preservatives or other synthetic ingredients.  Expect more of such consumer fraud class actions in 2012.

9.  Although class action suits over head injuries in professional football players may capture the imagination of sports writers and the public, the fact remains that class actions for personal injuries are almost never certified because the individualized issues regarding each class member's alleged injury, causation, and damages predominate over any common issues.  Don't expect 2012 to bring a big class action payday for professional footballers who allege concussion-related harm.

10.  The U.S. Supreme Court's majority and dissenting opinions in Kiobel v. Royal Dutch Petroleum, No. 10-1491, are going to be fascinating reading.  Kiobel, of course, raises the issue of whether legally fictitious entities -- corporations, rather than individuals or Nation-States -- can be sued under the Alien Tort Statute, which dates back to 1789.  The Second Circuit -- looking around the globe to foreign legal precedents -- held that corporations were not subject to ATS suits.  One may imagine that certain Justices who might concur in that result might bristle at relying on foreign legal precedents to get there.  While I'm willing to bet that the result in Kiobel is affirmed, I'll honestly admit that I can't predict what the opinion(s) will look like in reaching that result.

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What is it about the People's Republic of California that makes one feel as if everything he learned in law school is exactly wrong? 

Get this:  a guy walks into a car dealership.  He buys a used car -- A USED MERCEDES BENZ WORTH NEARLY $50,000 -- AND HE DOESN'T READ THE CONTRACT!!!!!  The contract has an arbitration provision.  It's at the end of the contract -- where you'd expect an arbitration provision to be, since you'd logically discuss all of the contract terms and required performances first, before discussing what happens if the whole deal breaks down.  It isn't in 16-point type, but it's in a box entitled "ARBITRATION CLAUSE" and captioned with the admonition to "PLEASE REVIEW -- IMPORTANT -- AFFECTS YOUR LEGAL RIGHTS."  And remember, it's a guy who doesn't care enough about his $50,000 purchase to even read the contract.  Absent something extraordinarily awful in the substance of the arbitration provision, those of you who didn't sleep through first year contracts class would assume that the arbitration provision would be enforceable, right?

Not in the PRC, my friend!  California's Second District Court of Appeal just issued an opinion holding that such an arbitration provision was procedurally unconscionable.  Why?  Well, first because it was a contract of adhesion:  the poor fellow spending $50,000 wasn't allowed to negotiate the terms of the clause he didn't read, and it wasn't clear that he could go elsewhere and spend $50,000 on a used (er, "pre-owned") car with a dealer who wouldn't also insist on an arbitration clause.  (No, I'm not twisted enough to make this stuff up.)  Second, the clause's location on the back page of the contract made it unnoticeable to the guy who didn't bother reading the contract in the first place.  See Sanchez v. Valencia Holding Company, 2011 WL 5027488 (Cal. App. 2d Dist. Oct. 24, 2011).

I suppose if you're a used (er, "pre-owned") car dealer in California after Sanchez, you should put your arbitration provision on the front page of the contract, hold a gun to your customer's head while he reads it, and then offer him the option of paying $10,000 more for the car if he wants it without an arbitration provision.

Was Sanchez really just a nutty opinion, or was there something else going on?  Well, earlier this year the US Supreme Court decided AT&T Mobility v. Concepcion, 131 S. Ct. 1740 (2011), in which it held that the PRC could not invalidate class action waivers as a condition to enforcing arbitration provisions.  The Supreme Court stressed enforcing the parties' agreement as written, and if the defendant had not agreed to arbitrate a class action, the PRC could not force it to.

The arbitration clause at issue in Sanchez had a class action waiver provision.  In fact, that provision said that if the class action waiver was held to be unenforceable, the whole arbitration provision was unenforceable.  That's hardly unreasonable for a defendant that wanted to make clear it was not consenting to adjudicating class actions through the arbitration process.

The trial court had held that the class action waiver was unenforceable under California law and, based on this "poison pill" provision, refused to enforce the arbitration clause.  Subsequently, Concepcion came down, making the class action waiver enforceable.  

The Court of Appeal in Sanchez refused to consider whether the class action waiver was enforceable.  Instead, it skinned the cat a different way, by declaring the entire arbitration provision to be unconscionable, thus allowing for a potential class action to proceed in state court.

Aside from "procedural unconscionability," the court in Sanchez also identified four ways in which the arbitration provision was purportedly "substantively unconscionable."

First, the court found unconscionable the provision that allowed for either party to appeal if the award was $0 or over $100,000.  Despite the fact that this provision, as drafted, would benefit a customer who recovered nothing, the court held that it really benefitted the seller unfairly.  Remember, of course, that the used (er, "pre-owned") car was worth a little less than $50,000.  So the $100,000 threshold was more than two times the value of the car.  Nevertheless, the court (citing cases that had thresholds of $25,000 and $50,000) held that the clause was unconscionable because the dealer's obligations under various consumer laws could lead to awards well in excess of $100,000.  "A truly bilateral clause would allow a buyer to appeal an award below $100,000," the court concluded.

Second, the court held that it was unconscionably one-sided to allow an appeal if the arbitrator issued an award containing injunctive relief, since injunctive relief likely would only be issued against the dealer. 

Of course, the third independent reason the court held the arbitration provision substantively unconscionable was that it preserved and exempted from arbitration the dealer's -- and only the dealer's -- self-help remedies, such as repossessing the car.  "As several courts have held, arbitration provisions are unconscionable if they provide for the arbitration of claims most likely to be brought by the weaker party but exempt from arbitration claims most likely to be filed by the stronger party," the court reasoned.

Reasons two and three, however, leave the dealer on the horns of a dilemma.  If it can't use self-help to preserve the status quo (and the car itself), then it may well need to seek preliminary injunctive relief in arbitration to do so.  That, of course, would make the appeal rights truly two-sided.  But the court did not consider this, and was unwilling to invalidate just one provision, like the self-help provision.

Fourth, the court found the fee clauses in the appeal provision to unfairly benefit the dealer.  The arbitration provision allowed either party to seek an appeal to a three-arbitrator panel if it recovered nothing.  "The appealing party requesting a new arbitration shall be responsible for the filing fee and other arbitration costs subject to a final determination by the arbitrators of a fair apportionment of costs."  The Sanchez court noted that under California's Consumer Legal Remedies Act, a consumer does not have to pay arbitration costs or fees that she cannot afford or that are prohibitively high.  It held that having the appealing party -- who may be the consumer -- advance both side's costs violated this provision, in part because there was no procedure in place for the party to challenge his ability to pay.

The court refused to simply strike those clauses it found unconscionable; rather, it held the entire arbitration agreement to be unconscionable.  In doing so, it achieved the same result as the trial court, which had been effectively overruled by the US Supreme Court in Concepcion.

After Concepcion, many journalists and commentators questioned whether that decision spelled the end of consumer class actions.  Sanchez suggests that -- at least in California -- it may not.

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The Supreme Court issued an interesting decision today holding that the Federal Arbitration Act ("FAA") preempts any state law that would require consumer contracts including arbitration provisions to make class arbitration available.  The Court's analysis of the FAA's Savings Clause -- which broadly interpreted Congress's purposes and objectives in passing the FAA -- just goes to show that the Court continues to be all over the lot when it comes to preemption analysis.  Perhaps what is most interesting about the opinion is what it portends for Wal-Mart v. Dukes, which should be decided later this term.

In AT&T Mobility LLC v. Concepcion, No. 09-893 (U.S. Apr. 27, 2011), the plaintiff claimed AT&T should not have charged him sales tax on a phone it marketed as "free."  The mobile phone contract between the parties precluded class arbitration, providing instead that the plaintiff could proceed in arbitration only on an individual basis (or in small claims court).  It also required AT&T to make an initial settlement offer, pay the costs of all nonfrivolous claims submitted to arbitration, forego attorneys fees for itself, and pay a $7,500 minimum recovery and two times the plaintiff's attorneys fees if the plaintiff received an arbitration award that was more than AT&T's last settlement offer.

California's Supreme Court previously had held that including class action waivers in consumer arbitration contracts was unconscionable as a matter of California law. 

Section 2 of the FAA, however, provides that agreements to arbitrate are "valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract."  9 U.S.C. sec. 2 (emphasis added).  In a 5-justice majority opinion (Roberts, Scalia, Kennedy, Thomas, and Alito) written by Justice Scalia, the court held that California's common law rule was preempted by the FAA because California's rule "'stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress.'"  Slip op. at 18 (citation omitted).  Specifically, "[r]equiring the availability of classwide arbitration interferes with the fundamental attributes of arbitration and thus creates a scheme inconsistent with the FAA."  Slip op. at 9.

As Justice Scalia explained, "The point of affording parties discretion in designing arbitration processes is to allow for efficient, streamlined procedures tailored to the type of dispute."  Slip op. at 10.  But the California rule -- which would operate in consumer disputes where there is a "contract of adhesion" -- operated directly contrary to the goal of streamlining the resolution of disputes.  Indeed, by creating a mandatory right to class arbitration, that rule provided a disincentive to product suppliers to provide for arbitration at all.  Slip op. at 13. 

The majority had some interesting things to say about the difference between individual and class proceedings -- things that may portend a reversal in Wal-Mart v. Dukes.  Most notable is that the majority recognized that when a class is involved, more formal structural protections are necessary to preserve the due process rights of absent class members and defendants:

This is obvious as a structural matter:  Classwide arbitration includes absent parties, necessitating additional and different procedures and involving higher stakes.  Confidentiality becomes more difficult.  And . . . arbitrators are not generally knowledgeable in the often-dominant procedural aspects of certification, such as the protection of absent parties.  The conclusion follows that class arbitration, to the extent it is manufactured by [the California rule] rather than consensual, is inconsistent with the FAA.

First, the switch from bilateral to class arbitration sacrifices the principal advantage of arbitration -- its informality -- and makes the process slower, more costly, and more likely to generate procedural morass than final judgment. . . . [B]efore an arbitrator may decide the merits of a claim in classwide procedures, he must first decide, for example, whether the named parties are sufficiently representative and typical, and how discovery for the class should be conducted. . . .

Second, class arbitration requires formality.  If procedures are too informal, absent class members would not be bound by the arbitration.  For a class-action money judgment to bind absentees in litigation, class representatives must at all times adequately represent class members, and absent members must be afforded notice, an opportunity to be heard, and a right to opt out of the class. . . .

Third, class arbitration greatly increases the risk to defendants. . . .  Defendants are willing to accept the costs of . . . errors in arbitration, since their impact is limited to the size of individual disputes, and presumably outweighed by savings from avoiding the courts. . . . We find it hard to believe that defendants would bet the company with no effective means of review, and even harder to believe that Congress would have intended to allow state courts to force such a decision.

Slip op. at 13-17.

None of these statements are particularly groundbreaking.  And yet, as I've noted at Point of Law, these are issues -- adequacy of representation, opt-out rights where money damages are involved, predominance and the due process rights of defendants -- that are front and center in the Wal-Mart v. Dukes case that is expected to be decided later this year.  The opinion in Concepcion suggests that there are at least five Justices who may be willing to take some of these issues head-on in the Dukes opinion.

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One of the favorite arguments of plaintiffs' counsel is that choice of law problems can be solved by simply applying one law -- the law of the manufacturer's residence -- to the entire class of purchasers.  Typically, that argument is made in support of class certification.  And typically -- unless you happen to be in Oklahoma state court -- that argument is flatly rejected.  Using the factors of the Restatement (Second) Conflicts of Law, it simply makes no sense to apply the law of, say, Michigan to a transaction that occurred in, say, Texas involving a Texas resident and the alleged failure of the product in Texas.  The Texas consumer's legitimate expectations are that the law of her state will govern in such a transaction.

A recent decision out of the Central District of California follows the trend of rejecting the law of the manufacturer's residence as the sole law governing a nationwide consumer class action, but does so in a somewhat unique context:  deciding whether to enforce an arbitration provision.  See In re DirecTV Early Cancellation Fee Litigation, 2009 WL 2912656 (C.D. Cal. Sept. 9, 2009).

In DirecTV, plaintiffs alleged that the defendant's policy of requiring a minimum commitment period and imposing early cancellation fees on those who stopped their service before the end of the commitment period violated California's Unfair Competition Law and the consumer protection laws of various states.  They also pled counts for unjust enrichment, money had and received, and declaratory relief.

The Customer Agreement provided to every subscriber included an arbitration clause.  It adopted the rules of JAMS, waived anyone's right to a class action, and chose the law of the customer's home state to govern the "interpretation and enforcement" of the agreement.  The named plaintiffs were residents of Florida and Virginia.  DirecTV is a California resident.

The court was faced with the question whether to enforce the arbitration agreement.  Although it noted a trend toward not enforcing such agreements -- particularly where they contain class action waivers -- the court noted that the language of the Federal Arbitration Act is mandatory, and the exceptions to it are narrow.  Thus, unless the arbitration provision was unconscionable, the court was required to enforce it.  Unconscionability, the court noted, is governed by the appropriate state law.

Because the court sat in California, it had to use California's conflicts of law rules to determine whether to enforce the Customer Agreement's choice of law provision.  California courts have a strong policy favoring enforcement of choice of law provisions, and only refuse to enforce such provisions where the chosen state has no relationship to the parties or transaction and there is no reasonable basis for the parties' choice, or where applying the law of the chosen state would be contrary to a fundamental policy of California law where California has a materially greater interest in the determination of the issue than the chosen state.  2009 WL 2912656 at *4 (citing Restatement (Second) sec. 187(2)).

Obviously, the states where the plaintiffs lived had a relationship to the contract.  So plaintiffs argued that California, as the home of the manufacturer, had a materially greater interest in applying its law.  The court disagreed, citing Klussman v. Cross Country Bank, 134 Cal. App. 4th 1283, 1299 (2005) for the proposition that a state's interest in general matters of corporate regulation were materially outweighed by a state with a number of significant contacts to a consumer transaction.  Accordingly, the court chose to apply the law of Virginia and Florida to determine whether the Customer Agreement was unconscionable.  Not surprisingly, the court concluded that it was not.  Florida law only voids contracts for unconscionability where there is proof of both procedural and substantive unconscionability.  And in Virginia "unconscionability is 'a narrow doctrine' that invalidates only the most inequitable of contracts."  Id. at *6.

This decision illustrates once again that conflicts of law principles matter in class action litigation, and different states have different rules that impact the claims of their citizens.  Lawyers would be wise to pay close attention to conflicts of law issues in class action cases.

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There has been lots of commentary -- academic and not-so-scholarly -- about the enforceability of class action waivers.  Particularly in California, the law seems to be that such waivers typically are held unenforceable as against public policy.

On Friday, the Ninth Circuit issued an opinion in a consumer class action interpreting a forum selection clause.  The contract at issue did not contain a class action waiver, and the defendant was not arguing that class actions were barred under the agreement; it simply wanted the benefit of its Virginia forum.  Thus, class action waiver law should not come up in the opinion, right? Ah, if only the law were that easy.

In Doe1 v. AOL LLC, 2009 WL 103657 (9th Cir. Jan. 16, 2009), plaintiffs were members of an on-line service provider that was alleged to have made roughly 658,000 members' personal data (including addresses, phone numbers, credit card numbers, and internet search terms) available to the public.  Plaintiffs sued for violation of the federal Electronic Communications Privacy Act, federal common law unjust enrichment, and a subclass of California residents sued for violations of California's Consumer Legal Remedies Act, False Advertising Act, Unfair Competition Law, Customer Records Act, and for the California common law tort of public disclosure of private facts.

The Members Agreement governing the class members' claims did not seek to bar class actions.  Rather, it provided that Virginia law governed members' claims, and it had a forum selection clause providing that "exclusive jurisdiction resides in the courts of Virginia."  The defendant moved to dismiss for improper venue under Fed. R. Civ. P. 12(b)(3), and the trial court granted the motion.

The Ninth Circuit, however, chose to parse prepositions.  The forum selection clause says "courts of Virginia," not "courts in Virginia."  Accordingly, the Ninth Circuit concluded, despite the protestations of the defendant that presumably authored the Members Agreement, the forum selection clause only allows for actions to be brought in the state courts of Virginia, not those federal courts that exist within Virginia's borders.

This presents a problem, the Ninth Circuit concluded, because Virginia state courts do not allow for consumer class actions.  The court then used the test set forth in M/S Bremen v. Zapata Off-Shore Co., 407 U.S. 1 (1972) to determine whether the forum selection clause is unenforceable:  "'if enforcement would contravene a strong public policy of the forum in which suit is brought, whether declared by statute or judicial decision.'"

The analysis was hardly difficult.  The California Court of Appeal already had concluded that the exact same forum selection clause was unenforceable because it violated public policy favoring class actions, and it amounted to a disfavored waiver of rights under the Consumer Legal Remedies Act.  See America Online, Inc. v. Superior Ct. of Alameda County, 108 Cal. Rptr. 2d 699 (Cal. App. 2001).

Thus, the Ninth Circuit concluded that the Bremen test had been met, and the "forum selection clause in the instant member agreement is unenforceable as to California resident plaintiffs bringing class action claims under California consumer law."  Accordingly, it reversed and remanded the trial court's decision.

Judge Bea filed a concurrence arguing that on remand, the plaintiff class representatives should have to plead and prove that they "really are California consumers by stating facts which make California substantive law applicable to them, pursuant to the well-known rules of federal choice of law, set forth in the Restatement."  According to Judge Bea, "it doesn't really require one to be 'imaginative and creative' to suspect the class representatives may not have become California residents for reasons other than class action litigation and are not really California consumers entitled to California protection."

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