Blawgletter®

Annals of Arbitration: Cutting Class

The Fifth Circuit seldom affirms class certification orders. Can it stand class actions?

The court's ruling last week in Reed v. Florida Metro. Univ., No. 11-50509 (5th Cir. May 18, 2012), suggests not. The case dealt with the near-worthless degrees that Everest College sold -- awarded -- online and from store-front "campuses", where (per Everest's introductory video) aspiring students meet first with a "Director of First Impressions".

Jeffrey H. Reed, a Texan, spent $51,000 for an online bachelor's degree in "paralegal studies" only to find that law schools and the local police deemed the Everest degree no degree. Mr. Reed sued under the Texas Education Code, which sets basic rules for degree-awarding outfits, on behalf of himself and a class of the other Everest victims -- graduates -- who lived in the Lone Star state.

The district court enforced an arbitration clause in Mr. Reed's Enrollment Agreement with Everest. The court left to the arbitrator whether to handle the arbitration on a class basis.

The arbitrator ruled that, because the arbitration clause gave him the power to award any "remedy", it therefore authorized him to certify an arbitration class. The district court confirmed what Blawgletter will call the certification award, which seems not to have dealt at all with the merits.

The Fifth Circuit reversed. The panel held that the arbitrator "exceeded his powers when he concluded that the parties' agreement permitted class arbitration." Id. at 12. The court leaned mainly on Stolt-Nielsen S.A. v. AnimalFeeds Int'l Corp., 130 S. Ct. 1758 (2010), which we thought when it came out meant "that arbitrators will have no choice but to deny almost all class certification requests." Although the panel said "the agreement to submit to class arbitration may be implicit", it added that such an agreement "should not be lightly inferred." Id. at 16 (footnote omitted). It went on to say that the arbitrator inferred way too much from his express power under the parties' contract to award "[a]ny remedy available from a court under the law". "[A] class action cannot properly be considered a 'remedy' under state or federal law", the panel averred. Id. at 21 (emphasis added).

The Second and Third Circuits do not agree with that outcome, as the panel noted. Id. at 22 & n.13 (rejecting Sutter v. Oxford Health Plans LLC, 675 F.3d 215 (3d Cir. 2012) (post here), and Jock v. Sterling Jewelers Inc., 646 F.3d 113 (2d Cir. 2011), cert. denied, 132 S. Ct. 1742 (2012)). The panel pointed to "the Supreme Court's lengthy discussion of the significant disadvantages of class arbitration". Id. at 25 (citing Stolt-Nielsen, 130 S. Ct. at 1776) (emphasis added).

We wish to highlight Judge Dennis's concurring opinion, at least the part where he says "in different kinds of future cases" -- ones that involve such small stakes that "bilateral arbitration would . . . offer claimants . . . no practicable or realistic remedy" -- "an arbitrator can properly find an implicit agreement to class arbitration procedures". Id. at 33 (citing In re Am. Express Merchants' Litig., 667 F.3d 204, 214) (2d Cir. 2012)).

We wish also to aim a pinky at the panel's spin on the phrase "any remedy available from a court under the law". The court seems to have added "substantive" before "remedy" and "law". But why? The Securities Litigation Uniform Standards Act, for instance, describes "Class action limitations" as "Limitations on remedies". 15 U.S.C. 78bb(f)(1) (emphasis added). And courts often refer to class treatment as a "remedy" instead of merely a "procedure". E.g., Quilloin v. Tenet HealthSystem Philadelphia, Inc., 673 F.3d 221, 233 (3d Cir. 2012) (quoting Thibodeau v. Comcast Corp., 912 A.2d 874, 884 (Pa. Super. 2006)); In re Am. Express Merchants' Litig., 634 F.3d 187, 196 (2d Cir. 2011), on rehearing, 667 F.3d 204 (2d Cir. 2012).

So why didn't the arbitrator have the power to construe "remedy" in the sense of a "procedural remedy"? Don't arbitrators have broad authority? The Second and Third Circuits based their holdings on that precept. Why not the Fifth Circuit?

Court Orders Trial in Cable Antitrust Case

U.S. Senior District Judge John Padova today granted in part and denied in part the motion of Comcast for summary judgment on claims that it violated sections 1 and 2 of the Sherman Act by entering into market-allocation agreements with competitors and monopolizing the market for cable services in the Philadelphia area.

Judge Padova's 72-page Memorandum dismisses the section 1 per se claim and parts of the section 2 claims but finds triable issues of fact on the section 1 rule of reason claim and the balance of the section 2 claims.

[Blawgletter has the honor to serve as co-lead counsel for the class.]

U.S. E-Book Complaint Lays Out "Agency" Pact with Apple

You've likely heard by now that the Antitrust Division of the U.S. Department of Justice sued Apple and a bunch of e-book publishers for fixing prices on, well, e-books.

You can see the complaint here.

The key part comes in paragraph 7, which explains Apple's "agency" plan for thwarting Amazon's effort to cut all e-book prices to $9.99 thus:

The plan -- what Apple proudly described as an "aikido move" -- worked. Over three days in January 2010, each Publisher Defendant [and Apple] entered into a functionally identical agency contract . . . that would go into effect simultaneously in April 2010 and "chang[e] the industry permanently." These "Apple Agency Agreements" conferred on the Publisher Defendants the power to set Apple's retail prices for e-books, while granting Apple the assurance that the Publisher Defendants would raise retail e-book prices at all other e-book outlets, too. Instead of $9.99, electronic versions of bestsellers and newly released titles would be priced according to a set of price tiers contained in each of the Apple Agency Agreements that determined de facto retail e-book prices as a function of the title's hardcover list price. All bestselling and newly released titles bearing a hardcover list price between $25.01 and $35.00, for example, would be priced at $12.99, $14.99, or $16.99, with the retail e-book price increaasing in relation to the hardcover list price.

The tying of the e-book price to the hardcover list price had the effect of letting the publishers leverage their power over list prices in the hardcover realm into the e-book space. So the theory goes.

The DOJ doesn't ask for damages, just declaratory and equitable relief that would get rid of the Apple Agency Agreements.

The move comes months after private parties filed a slew of cases alleging the same section 1 violation of the Sherman Act. And they for sure DO seek damages. Lots of them. Three times lots of them even.

Second Circuit Roundup

Blawgletter hasn't hidden our liking for the cut of the Second Circuit's jib. We admire lots of things about the court. This week, three panels confirmed our High Opinion.

Let's see . . . one involved whether an antitrust complaint met the Twombly/Iqbal standard for pleading a "plausible" conspiracy, the second dealt with the use of video that belongs to others on YouTube, and the third concerned Texas lawyers who used hardball tactics to pre-empt a New York arbitration.

In Anderson News, L.L.C. v. Am. Media, Inc., No. 10-4591-cv (2d Cir. Apr. 3, 2012), Their Honors ruled that the district court erred in holding that the complaint failed to allege a "plausible" conspiracy among magazine publishers to punish a wholesaler for asking them to pay a "surcharge" for handling the magazines that didn't sell. "The question at the pleading stage is not whether there is a plausible alternative to the plaintiff's theory; the question is whether there are suficient factual allegations to make the complaint's claim plausible." Id. at 37.

The panel in Viacom Int'l, Inc. v. YouTube, Inc., No. 10-3270-cv (2d Cir. Apr. 5, 2012), revived a class action complaint against YouTube under the Digital Millennium Copyright Act. Unlike the district court, the appeals court held that YouTube didn't prove its right to a "safe harbor" under section 512(c) of the DMCA. It sent the case back for more attention to, among other things, evidence of (a) actual awareness by YouTube's founders of infringing clips and (b) YouTube's "willful blindness" to the posting of such clips on YouTube.

And Enmon v. Prospect Capital Corp., No. 10-2811-cv (2d Cir. Apr. 6, 2012), upheld sanctions (including more than $350,000 in fees) against a law firm in Houston, Arnold & Itkin, for over-the-top efforts to thwart an arbitration in New York by means of a temporary restraining order from a Texas state court and what the court deemed meritless challenges to the arbitral award against the firm's client.

Third Circuit Okays Side-Step of Stolt-Nielsen; Class Arbitration Order Stands

Blawgletter thinks we can all agree that the U.S. Supreme Court has done few favors in the last decade or two for what the folks at the American Law Institute call "aggregate litigation" -- mainly class actions. What with Dukes (no class for women who work at Wal-Mart) and Concepcion (no class for AT&T wireless customers) in the last term, the chances for getting and keeping a class just keep on dwindling.

The term before that gave us a judicial jab at class arbitration in Stolt-Nielsen S.A. v. AnimalFeeds Int'l Corp., 130 S. Ct. 1758 (2010). The Court there ruled that arbitrators can't order arbitration on a class basis unless the parties agree to arbitrate on a class basis. We said at the time that after Stolt-Nielsen arbitrators "will have no choice but to deny almost all class certification requests."

Today, the Third Circuit begged to differ. The panel held that an arbitrator did not exceed his powers when he found a contractual basis for making the parties arbitrate on a class basis. (The dispute concerned how much pay a health plan owed doctors.) He saw the grounding for class arbitration in these words:

No civil action concerning any dispute arising under this Agreement shall be instituted before any court, and all such disputes shall be submitted to final and binding arbitration in New Jersey, pursuant to the Rules of the American Aabitration Association with one arbitrator.

Sutter v. Oxford Health Plans LLC, No. 11-1773 (3d Cir. Apr. 3, 2012). We'll let you read the opinion for the thought process that went into the arbitrator's ruling and the panel's upholding of it. But it has a lot to do with the vast leeway arbitrators have in deciding cases.

Fifth Circuit Allows Common Fund Fee as Percent in Dell Case

The Fifth Circuit for a long time has seemed to insist on paying class counsel on a pure lodestar basis -- hours x hourly rates. It looked to have stuck itself to the old-style lodestar method under Johnson v. Ga. Highway Express, Inc., 488 F.2d 714 (5th Cir. 1974).

That contrasts with other circuits' belief in letting district courts have the option of basing fee awards in common fund cases on a percentage of the common fund instead of a strict lodestar method.

But the Fifth Circuit's seeming view largely went away this week.

In Union Asset Mgmt. Holding A.G. v. Dell Inc., No. 08-51163 (5th Cir. Feb. 7, 2012), the court upheld a $40 million class action settlement of claims that Dell inflated its share price by making false statements about revenues and other things. The panel ruled that the district court didn't abuse its discretion when it granted class counsel a $7.2 million fee, which came to 18 percent of the common fund. It said:

The objectors argue that the lodestar method is the only way to calculate attorneys’ fees in this Circuit. They understandably point to the following sentence from a 2008 case: “This circuit requires district courts to use the ‘lodestar method’ to ‘assess attorneys’ fees in class action suits.’” But that sentence overstates the case it quotes, which said that the Circuit “uses” the lodestar method rather than “requires” it, did not involve a traditional common fund, and implied that the percentage method might be proper in other circumstances. Moreover, the 2008 case, which was not a securities case, only addressed how to allocate a lump-sum attorneys’ fee award among the plaintiffs’ multiple attorneys rather than how to allocate a common fund between class counsel and the class itself, as here. The fact is that the Fifth Circuit has never reversed a district court's decision to use the percentage method, and none of our cases preclude its use.

Given the Fifth Circuit's stance on choice of method, the district court did not abuse its discretion by using the percentage method with a meticulous Johnson analysis. To be clear, we endorse the district courts' continued use of the percentage method cross checked with the Johnson factors. We join the majority of circuits in allowing our district courts the flexibility to choose between the percentage and lodestar methods in common fund cases, with their analyses under either approach informed by the Johnson considerations.

Id. at 13-14 (omitting footnotes).

Some may say the court limits the percentage method to cases under the Private Securities Litigation Reform Act, but the language doesn't support that view.

Second Circuit Explains Why It Lifted Order Barring Efforts to Enforce Ecuadoran Judgment in New York

Last September, a panel of the Second Circuit tossed a preliminary injunction that barred any action, anywhere, to collect on an Ecuardoran court's $17.2 billion judgment against Chevron for polluting part of the Amazon. Last week, the court got around to saying why.

[Blawgletter describes some of the dispute's facts, claims, and decades-long history here.]

The court grounded its ruling on the fact that the basis for the injunction -- New York’s Uniform Foreign Country Money-Judgments Recognition Act, N.Y. C.P.L.R. §§ 5301-5309 -- "does not authorize affirmative relief of this kind, but only recognizes a defense available when a would-be judgment-creditor first attempts enforcement in New York." Chevron Corp. v. Naranjo, No. 11-1150-cv(L), slip op. at 2 (2d Cir. Jan. 26, 2012). The panel went on:

Judgment-debtors can challenge a foreign judgment’s validity under the Recognition Act only defensively, in response to an attempted enforcement – an effort that the defendants-appellees have not yet undertaken anywhere, and might never undertake in New York.

Id. at 4. Got that? The Recognition Act recognizes foreign judgments except when it doesn't, in which case you have to invoke the exception by way of defense and not through an action for a pre-emptive injunction.

We suspect that the outcome in Naranjo won't mean a huge change in your law practice, but we all must marvel at the great lengths to which people who seek or want to keep large amounts of money will go to get or retain them.

 

Enemy of the Good: Class Cert Doesn't Require Perfect Proof, Seventh Circuit Says

The Seventh Circuit held last week that a district court set too high a standard for class certification in an antitrust case.

"In essence," the panel ruled, it is important not to let a quest for perfect evidence become the enemy of good evidence." Messner v. Northshore University HealthSystem, No. 10-2514, slip op. 3 (7th Cir. Jan. 13, 2012).

The district court had refused to certify a class of suburban Chicago hospital patients who claimed that a merger hurt competition for their healthcare dollars and raised prices. The court thought that common issues didn't "predominate" under Rule 23(b)(3) unless the class could prove uniform increases in hospital prices for all services after the merger. But not all prices went up at the same rate.

The Seventh Circuit vacated the order denying certification. The panel concluded:

[T]he evidence shows that [plaintiffs' economics expert] Dranove can use common evidence and his difference-in-differences methodology to estimate the antitrust impact, if any, of Northshore’s merger on the members of that class. Together with the common questions and evidence on other liability issues, this was sufficient to show predominance under Rule 23(b)(3).

Id. at 45.

The defendants, by the way, had lost at trial before an administrative law judge on the Federal Trade Commission's claim that the merger created an unlawful monopoly under section 2 of the Sherman Act.

Waiver Ban Skips "Right to Sue" in Credit Repair Notice, Supreme Court Holds

A federal law says firms that offer "credit repair" have to tell customers about their "right to sue a credit repair organization that violates" the law. The statute also voids "[a]ny waiver by any consumer of any protection provided by or any right of the consumer under this subchapter".

May a consumer still waive the "right to sue", such as by agreeing to arbitrate a claim that the credit repair outfit violated the statute?

Of course, the Supreme Court ruled in CompuCredit Corp. v. Greenwood, No. 10-948 (U.S. Jan. 10, 2012) (per Scalia, J.). Mr. Greenwood did waive any right to sue by agreeing to arbitrate disputes relating to the Visa card account he got through CompuCredit. The anti-waiver part of the Credit Repair Organization Act didn't trump the arbitration clause, the Court held, because the CROA itself simply made violators "liable" and didn't specify a "right to sue". And CROA's notice requirement didn't "provide[] consumers with a right to bring an action in a court of law" and Mr. Greenwood's waiver of his right to sue therefore didn't waive a "right of the consumer under this subchapter".

If that leaves you scratching your head, don't feel like the Lone Ranger. CROA does create a private cause of action by making violators "liable", and the disclosure CROA calls for does deem that right a "right to sue" in court. But that doesn't amount to a "right" that CROA created?

We think the two concurring justices did better with their reasons for ruling against Mr. Greenwood. Justice Sotoymayor, whom Justice Kagan joined, said Congress didn't make its desire to ban arbitration quite clear enough in CROA to beat the strong presumption in favor of arbitration under the federal Arbitration Act. Which seems about right.

The broader -- and, to us, hard-to-grasp -- rationale that Justice Scalia and the majority offered, we fear, signals a long and ugly Term ahead for consumers and other plaintiffs.

The status quo almost always favors the wealthy and powerful -- the haves. With this Court, God help the have-nots. Because a majority of the Court surely won't.

Third Circuit Restores Global Diamond Class

Remember the antitrust settlement class that a Third Circuit panel struck down last year? The one that went en banc a few weeks later? The one whose oral argument Blawgletter saw and wrote a post about?

Today, the en banc Third Circuit ruled 7-2 in favor of class certification. Judge Rendell, who wrote the dissent from the panel ruling, authored the full court's majority opinion. As she summarized:

At issue on appeal in this class action litigation is the propriety of the District Court's certification of two nationwide settlement classes comprising purchasers of diamonds from De Beers S.A. and related entities ("De Beers").  The settlement provided for a fund of $295 million to be distributed to both the direct and indirect purchasers:  the direct purchasers were to receive $22.5 million of the fund, while the indirect purchasers would receive $272.5 million.  A panel of our Court held that the District Court‘s ruling was inconsistent with the predominance inquiry mandated by Federal Rule of Civil Procedure 23(b)(3), and remanded the matter for further proceedings.  See Sullivan v. DB Investments, Inc., 613 F.3d 134 (3d Cir. 2010), reh’g en banc granted and vacated by Sullivan v. DB Investments, Inc., 619 F.3d 287 (3d Cir. 2010).  We then granted the plaintiffs‘ petition for rehearing en banc and vacated the prior order. Accordingly, we address anew the propriety of the District Court‘s certification of the direct and indirect purchaser classes pursuant to Federal Rule of Civil Procedure 23(b)(2) and 23(b)(3), and also consider for the first time the objections raised to the fairness of the class settlement.2 

We believe that the predominance inquiry should be easily resolved here based on De Beers‘s conduct and the injury it caused to each and every class member, and that the straightforward application of Rule 23 and our precedent should result in affirming the District Court‘s order certifying the class.  But the objectors to the class certification and our dissenting colleagues insist that, when deciding whether to certify a class, a district court must ensure that each class member possesses a viable claim or "some colorable legal claim," (Dissenting Op. at 10).  We disagree, and accordingly, we will reason through our analysis in a more deliberate manner in order to explain why the addition of this new requirement into the Rule 23 certification process is unwarranted.

Sullivan v. DB Invesments, Inc., No. 08-2784, slip op. at 10-11 (3d Cir. Dec. 20, 2011) (en banc) (foonotes omitted).

The court went on to okay the district court's plan for doling out the money to members of the two subclasses of direct and indirect buyers and its award of about $73 million in fees and expenses to class counsel. The panel hadn't reached either issue because it ruled that the case didn't qualify for class treatment.

[Hat tip to the ever-alert William Hoese, whose membership in Phi Beta Kappa will come as no surprise to those who know him.]