© 2014 lathrop & gage llp 11. 22 michael a. clithero emily kiser

© 2014 Lathrop & Gage LLP

11


22

Michael A. Clithero Emily Kiser


33

CLASS ACTIONS IN ARBITRATION

Michael A. Clithero

ACC AMERICA Association of Corporate Counsel, St. Louis Chapter July 15, 2014


44

Class Action Litigation is Well-Established

Primary advantage of class litigation is the ability to pursue claims that may be too expensive to pursue individually.

From Plaintiffs’ perspective, the excessive costs necessary to defend encourage settlement.


55

Are Class Actions an Advantage?

As reported in the Wall Street Journal, the Mayer Brown law firm just released a study for the Chamber of Commerce Institute for Legal Reform finding that, in a vast majority of class actions, class members end up empty handed.

Out of 148 federal class actions reported by two major litigation publications in 2009, none of the cases had resulted in a judgment in favor of the plaintiffs.

In fairness, 21 (or 14%) of the cases remain pending.


66

Are Class Actions an Advantage?

Of the 127 cases that had been resolved by September 2013• 35% were voluntarily dismissed by the plaintiffs, • 31% were dismissed on the merits by the court, and • 33% were settled.

According to the study, only 33% of federal class actions settled compared with 67% for all federal cases.

Mayer Brown reported that of the 6 cases in their data set for which settlement distribution data was public, 5 delivered funds to only miniscule percentages of the class• 0.000006%• 0.33%• 1.5%• 9.66% • 12%


77

Arbitration As An Alternative to Litigation is Well-Established

Primary advantages are • Informality• Speed • Lower costs


88

The Prevalence of Arbitration Clauses

In a study released by the U.S. Consumer Financial Protection Bureau, the CFPB found that• More than 50% of credit card loans fall under arbitration clauses. • Around 8% of banks, covering 44% of insured deposits, have arbitration clauses in

checking account contracts. Among prepaid card contracts that the CFPB examined, 81% have arbitration

clauses. The CFPB stated that one of its “most notable findings” was that larger companies

are more likely to include arbitration clauses in these contracts than community banks or credit unions.


99

Collective or Class Arbitrations

Collective or class arbitrations are a relatively new development Inevitable collision between plaintiffs seeking cost effective pursuit of small claims

and their contractual requirement to arbitrate their claim The case law has taken some time to develop in this area and, as you can see, is

still not entirely clear


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Federal Arbitration Act

At the center of the dispute is the Federal Arbitration Act (“FAA”), which the U.S. Supreme Court has consistently supported since its enactment in 1925.

A written provision in any maritime transaction or a contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such Contract or transaction . . . shall be 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. § 2.

Courts have generally delineated those grounds as fraud, duress, or unconscionability.

Further, when there are doubts about the scope and enforceability of an arbitration agreement, the strong federal policy supporting arbitration directs courts to resolve such concerns in favor of arbitration.


1111

Class Actions Not Prohibited Unless Precluded in Arbitration Clause

In Green Tree Financial Corp. v. Bazzle, 539 U.S. 444 (2003), the United States Supreme Court ruled that the Federal Arbitration Act (“FAA”) does not foreclose class arbitration where the arbitration clause in question does not clearly preclude class arbitration. The court remanded the case for the arbitrator to decide whether the class action claims could be arbitrated.


1212

Prohibition of Class Arbitration Found to be Unconscionable

Upon challenge, many courts, including those in Missouri, held that the contractual prohibition of class arbitration is both procedurally and substantively unconscionable and thus unenforceable. See, e.g. Whitney v. Alltel Communications, Inc., 173 S.W.3d 300 (Mo.App. W.D. 2005).

The unconscionability of class action prohibitions in arbitration clauses became known as the Discover Bank rule. Discover Bank v. Superior Court, 113 P.3d 1100 (2005) (prohibition on class actions in arbitration clause is unconscionable).


1313

Parties Must Expressly Agree to Class Arbitration

The U.S. Supreme Court retreated from Bazzle in Stolt-Nielsen S.A. v. Animalfeeds International Corp., 559 U.S. 662 (2010). The arbitrators had followed the generally accepted post-Bazzle assumption that arbitrators could order class arbitration absent the parties’ express intent to preclude class arbitration. However, the Court ruled:• Arbitration is a matter of consent • The differences between bi-lateral arbitration and class arbitration are so great, including

the limited scope of judicial review, that mere silence on the issue of class arbitration cannot constitute a party’s consent to class arbitration.

• Accordingly, “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.”


1414

Preclusion of Class Actions in Arbitration Clause Not Unconscionable

In AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011), the U.S. Supreme Court ruled that the California Discover Bank Rule is preempted by the FAA. The court espoused three primary reasons for its ruling.

1. The switch from bi-lateral 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.

2. Class arbitration requires procedural formality in order to bind those not present for the arbitration.

3. Class arbitration greatly increases risk to defendants. The absence of multi-layer review makes it more likely that errors will go uncorrected because review focuses on misconduct rather than mistake and parties may not contractually expand the grounds or nature of judicial review.


1515

Arbitration Clause Enforced As Written Unless Preempted

On June 20, 2013, the U.S. Supreme Court held that courts cannot invalidate arbitration agreements which waive class actions unless there is an express congressional statement that class action proceedings are so necessary to a federal claim as to preempt the Federal Arbitration Act. American Express Company v. Italian Colors Restaurant, 133 S.Ct. 2304 (2013).

Neither Rule 23 on class actions nor the Sherman and Clayton Acts constituted such an express Congressional statement of entitlement to class proceedings.


1616

Additional Attempts to End Run Concepcion

The NLRB ruled that homebuilder D.R. Horton had violated “concerted activity”, Section 8(a)(1) of the Act, by requiring employees to sign arbitration agreements forbidding them to file a class action or collective claims over wages and benefits.

In reversing the NLRB ruling, Fifth Circuit noted that no court had ever found that protected concerted activity “prohibited class action waivers and arbitration agreements”. The majority added that the NLRB “did not give a proper weight” to an equally important statute, the Federal Arbitration Act, which says that arbitration agreements are valid and enforceable.

D.R. Horton, Inc. v. National Labor Relations Board, 737 F.3d 344 (Fifth Circuit 2013)


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Class Arbitration May Still Be Ordered

In July 2013, the United States Supreme Court affirmed an arbitrator’s decision to accept an arbitration brought by 20,000 doctors against an insurance company even in the absence of clear language indicating consent to class arbitration.• Based their decision on the fact that the arbitrator had interpreted the contract to include

consent for the arbitration• The Court refused to examine whether that decision was wrong in light of limited judicial

review of arbitration rulings

Oxford Health Plans v. Sutter, 133 S.Ct. 2064 (2013)


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Missouri Decisions at Odds With Concepcion

The Concepcion opinion was addressed by the Supreme Court of Missouri in two opinions issued on March 6, 2012.

In Robinson v. Title Lenders, Inc., 364 S.W.3d 505 (Mo. 2012), the Court followed the holding in Concepcion and held that an arbitration agreement was not unenforceable based merely on its class waiver provision. However, the Court remanded the case for determination of borrower’s unconscionability claims that were not related to the arbitration agreement’s class waiver.


1919

Arbitration Clause Found Unconscionable By Missouri

In Brewer v. Missouri Title Loans, 364 S.W.3d 486 (Mo. 2012), the Missouri Supreme Court held that a class arbitration waiver was unconscionable and invalidated the arbitration clause in the agreement. The Court interpreted Concepcion to dictate a review that limits the discussion to whether state law defenses such as unconscionability impact the formation of a contract.

“[T]he analysis in this Court’s ruling today . . . no longer focuses on a discussion of procedural unconscionability or substantive unconscionability, but instead is limited to a discussion of facts relating to unconscionability impacting the formation of the contract. Future decisions by Missouri’s courts addressing unconscionability likewise shall limit review of the defense of unconscionability to the context of its relevance to contract formation”.


2020

Arbitration Clause Found Unconscionable By Missouri

In finding the arbitration clause unconscionable, the Court highlighted• the title company’s superior bargaining position• that the entire agreement was non-negotiable• that the terms were one-sided in that the parties were to bear their own costs• that the title company did not waive its right to seek attorney’s fees and reserved its right

to forego arbitration to seek possession of the collateral in the event of default by judicial or other process and

• that it was unlikely that consumers could retain counsel to pursue individual claims given the size of the claims

The Missouri Supreme Court thus embraced the concept already rejected by the U.S. Supreme Court – that when bringing a claim is cost prohibitive, class actions are allowed regardless of the contractual waiver.


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Where Does That Leave the Drafter of an Arbitration Clause?

Federal courts are likely to enforce your arbitration clause as written, even in Missouri

In Davis v. Sprint Nextel Corp., 2012 WL 5904327 (W.D. MO. Nov. 26, 2012), the Federal District Court for the Western District of Missouri followed Brewer’s direction to analyze enforcement of an arbitration clause based on unconscionability impacting the formation of the agreement rather than through the lens of procedural and substantive unconscionability. The Davis court then summarily rejected a claim by plaintiff that the arbitration agreement was unconscionable because it barred class wide action. The district court further noted that the contract presented to plaintiff was a standardized non-negotiable form and that Sprint wields greater bargaining power than plaintiff, but found that those facts do not establish unconscionability under Missouri law. The district court noted that the arbitration agreement was not hidden and that plaintiff did not allege Sprint used any high-pressure sale tactics to coerce her into signing the subscriber agreement. Accordingly, the district court enforced the arbitration provision.


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In Bush v. AT&T Corp., 2012 WL 6016719 (W.D. Mo. Dec. 3, 2012), the Federal District Court for the Western District of Missouri rejected plaintiff’s arguments that the mandatory arbitration provision was inherently unconscionable, that the defendant misrepresented the agreement’s cancellation provision, and that the arbitration provision should not be enforced in light of Brewer and Robinson. • First, the district court noted that mandatory arbitration agreements are permissible

except in insurance contracts. • Second, the district court noted that it may only consider fraud in the inducement of the

arbitration clause itself and allegations that there was fraud or misrepresentation in the inducement of the contract as a whole must be considered by an arbitrator, because the arbitration provision is enforceable apart from the remainder of the contract.

• Finally, the district court stated that Brewer and Robinson have “arguably already been superseded” by the U.S. Supreme Court’s decision in Concepcion.


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• Issue still as to whether court or arbitrator decides whether agreed to class action• Plaintiff can assert a statute that guaranties his right to class proceedings for a particular

claim.


2424

Missouri State Courts Do Not Favor Arbitration

Missouri courts have found the class waiver arbitration provisions to be unconscionable even after Concepcion. (Brewer)

Another way around Concepcion is to find that there was no actual agreement to arbitrate.• This ruling is found in Jay Wolfe Used Cars of Blue Springs LLC v. Jackson, 428 S.W.3d

683 (Mo.App. W.D. 2014).


2525

Buyer Seller Arbitration ClauseCash Sale Agreement Tyrell and Liane Jackson Jay Wolfe Yes

Wolfe – No Agreement to Arbitrate

The court found that the individual car buyers had not agreed to arbitration based upon the review of the two (2) documents associated with purchase of a car.

The court refused to read the two documents together to find an agreement to arbitrate.• Cash sale agreement”

• Retail Installment Contract

• Jay Wolfe LLC does business as Jay Wolfe Auto Outlet• Jay Wolfe is registered to Saturn of Kansas City, Inc.

Buyer Seller Arbitration ClauseRetail Installment Contract Tyrell and Liane Jackson Jay Wolfe Auto Outlet No


2626

Practice Pointers

Brewer also reopens some issues which had been relatively established prior to that decision.

• For instance, Concepcion directed courts to enforce arbitration agreements according to their own terms and ruled that states cannot require a procedure that is inconsistent with the FAA, even if it is desirable for unrelated reasons. To the contrary, Brewer finds unrelated reasons, including the unavailability of counsel given the de minimis size of the claims, to avoid enforcement of the arbitration agreement.

• In addition, Brewer seems to challenge the validity of contracts of adhesion whereas on the same day the same Supreme Court of Missouri recognized such contracts as hallmarks of modern consumer contracts. (Robinson)

• Further, Brewer seems to require the substantive rights afforded to each party under the contract to be even-handed in order to avoid a finding of unconscionability.


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• Drafters and litigants must be diligent in their research and knowledge of recent decisions and the analysis of those facts to their particular arbitration clause.

• You may want to consider including certain provisions in your arbitration agreement for the purpose of increasing the chance of enforceability

Create a stand alone agreement signed by each party Create an informal resolution process prior to initiation of arbitration Choose venue for arbitration in county of consumer’s residence Cover some of consumer’s arbitration costs Don’t reserve remedies to the company not available to the consumer Include in the arbitration agreement a statement of basis for coverage under the FAA will help

keep the Concepcion analysis in the discussion


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Businesses interested in continuing or beginning the use of arbitration agreements should work with counsel and take the time to evaluate whether inclusion of a class action waiver is desirable in view of the risk and benefits. Arbitration agreements can no longer be “one size fits all” in nature. In addition, companies will need keep in mind the likelihood of having to revise their agreements, or implement substantially different ones, as the law in this area continues to evolve.


2929

UPDATE TO E-DISCOVERY

FOR 2014 Emily Kiser


3030

Update to E-Discovery 2014

Fed. R. Civ. Pro. 26 et seq.

Rule 26(b) Discovery Scope and Limits.

(1) Scope in General. Unless otherwise limited by court order, the scope of discovery is as follows: Parties may obtain discovery regarding any nonprivileged matter that is relevant to any party's claim or defense--including the existence, description, nature, custody, condition, and location of any documents or other tangible things and the identity and location of persons who know of any discoverable matter. For good cause, the court may order discovery of any matter relevant to the subject matter involved in the action. Relevant information need not be admissible at the trial if the discovery appears reasonably calculated to lead to the discovery of admissible evidence. All discovery is subject to the limitations imposed by Rule 26(b)(2)(C).


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December 1, 2013 Updates to Rule 37 and to Rule 45 Rule 37

• Failure to Make Disclosures or to Cooperate in Discovery; Sanctions The motion must include a certification that the movant has in good faith conferred or

attempted to confer with the person or party failing to make disclosure or discovery in an effort to obtain it without court action.

This motion may be made if: (i) a deponent fails to answer a question asked under Rule 30 or 31; (ii) a corporation or other entity fails to make a designation under Rule 30(b)(6) or 31(a)(4); (iii) a party fails to answer an interrogatory submitted under Rule 33; or (iv) a party fails to respond that inspection will be permitted--or fails to permit inspection--as

requested under Rule 34. An evasive or incomplete disclosure, answer, or response must be treated as a failure to

disclose, answer, or respond.


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Rule 37• Relief sought under Rule 37 can include:

directing that the matters embraced in the order or other designated facts be taken as established for purposes of the action, as the prevailing party claims;

(ii) prohibiting the disobedient party from supporting or opposing designated claims or defenses, or from introducing designated matters in evidence;

(iii) striking pleadings in whole or in part; (iv) staying further proceedings until the order is obeyed; (v) dismissing the action or proceeding in whole or in part; (vi) rendering a default judgment against the disobedient party; or (vii) treating as contempt of court the failure to obey any order except an order to submit to a

physical or mental examination.


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Rule 45 General Information • Subpoenas

Command to Attend a Deposition--Notice of the Recording Method. A subpoena commanding attendance at a deposition must state the method for recording the testimony.

Combining or Separating a Command to Produce or to Permit Inspection; Specifying the Form for Electronically Stored Information. A command to produce documents, electronically stored information, or tangible things or to permit the inspection of premises may be included in a subpoena commanding attendance at a deposition, hearing, or trial, or may be set out in a separate subpoena. A subpoena may specify the form or forms in which electronically stored information is to be produced.

Command to Produce; Included Obligations. A command in a subpoena to produce documents, electronically stored information, or tangible things requires the responding person to permit inspection, copying, testing, or sampling of the materials.


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Rule 45—All Subpoenas Issue from the Trial District: • Under the old Rule 45, trial subpoenas had to issue from the district where the trial

would be held, deposition subpoenas had to issue from the district where the deposition would be taken, and document subpoenas had to issue from the district where the production would be made.

• The new Rule 45(a)(2) simplifies the whole process by providing that all subpoenas “must issue from the court where the action is pending.”

• Can be served anywhere in the United States


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Place of Compliance: The new Rule 45(c) clarifies that a non-party subpoena (whether a trial,

deposition or document subpoena) is only returnable “within 100 miles of where the person resides, is employed, or regularly transacts business in person.”

The only exception is that the 100-mile limit can be expanded to include the entire state if the non-party is commanded to attend a trial in the state and “would not incur substantial expense.”

The geographical compliance rules also apply to document subpoenas that include requests for electronic data.


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Enhanced Notice: Under the old Rule 45, notice had to be served on each party to a lawsuit before a document subpoena could be served. • It has been clarified to require that, prior to the service of the subpoena, each party to

the lawsuit not only be given notice of the subpoena, but also be provided with a copy of the subpoena so that the subpoena can be timely challenged if necessary.

Transfer to the Trial Court: Under the old Rule 45, subpoena-related motions were generally heard in the district where the subpoena was issued. • Under the new Rule 45(f), subpoena motions can be transferred to the trial district if the

person subject to the subpoena consents or if there are exceptional circumstances


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Sanctions—Amendment Combines Rule 37 and 45: • Rule 37(b)(1) has been amended to accommodate the transfer of subpoena-related

motions under new Rule 45(f). • Now, if a deposition-related motion is transferred to the trial district, a subsequent

violation by the deponent of the trial court’s decision will be treated as contempt of court in both districts


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Preservation Issues • Preservation shall trigger when “litigation is triggered or reasonably pending…”

Failure to preserve can be deemed gross negligence Gross negligence can almost assure sanctions

• Litigation hold, triggering preservation, needs to come from senior management Due to privilege issues

• Only a fraction of what is preserved is ever used Microsoft, in light of proposed rule changes, has reported that for every 1 page of preserved

documentation used in litigation, it saves 673,693

• Sanctions drive over-preservation and exceedingly high cost to do same


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Collection of Electronic Data• Self Collection versus Third Party Collection?

Jurisdictions are split Some courts have found self collection fulfills duties set forth in Rules, others have found that

third parties need to collect, to assist in quality control, cooperation with opposing counsel, etc.

• Green v. Blitz USA Inc.; U.S. District of Texas “Self collection is like the fox guarding the hen house”


4040


Self Collection versus Third Party Collection • Self Collection Pros

Cheaper Sometimes, quicker More (perceived) control held by client

If court does not believe self collection was appropriate or competently done—any perceived control might be lost to a sharp discovery order/sanctions

• Self Collection Cons Lost metadata Not uniform Difficult to transfer information Counsel may not be certain of accuracy

No quality control Different custodians require different criteria for information transfer


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Spoliation of Evidence • The failure to preserve what should reasonably have been preserved in light of litigation,

pending litigation, or likely litigation Rule 37

Court may permit additional discovery, costs associated by failure, require party to undertake curative measures

Sanctions Only when: willful or in bad faith; and Caused substantial prejudice; and Failure irreparably deprived a party of any meaningful opportunity to present a claim or

defense


4242


Spoliation of Evidence—Social Media Example • Lester v. Allied Concrete

Wife is killed in automobile accident Husband brings suit

Attorney tells Husband to clean up his Facebook page—and Husband deletes certain photos with him wearing a T Shirt that says, “I (heart) Hot Moms” while drinking a beer.

16 photos ultimately deleted Jury awards husband $10.6 Million Court sanctions husband, and attorney, $722,000 and cuts jury award nearly in half Attorney?

Sanctioned for five years Was principal in Virginia’s most powerful personal injury firm No longer practicing law


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Who has to pay for e-discovery?• Can get very costly, very fast. • Proposed rules that now are looking to shift the burden of payment for discovery

Proposed Rule 26(c)(1)(B) Still in the works…stay tuned


4444


All Together Now… Cooperation has become paramount in Judge’s decisions regarding e-discovery,

and proposed amendments to the Federal Rules echo the same:• Proposed Rule change to Rule 1 of the Federal Rules:

Current Rule— “These rules govern the procedure in all civil actions and proceedings in the United States district courts, except as stated in Rule 81. They should be construed and administered to secure the just, speedy, and inexpensive determination of every action and proceeding.”

Rule change would include litigants, not just the courts, responsible for “speedy and inexpensive determination of every action and proceeding”

Proposed Change in Discovery Rules Reflect this Cooperation:• Rule 16—Pre trial Orders may contain non-waiver agreements to protect privilege• Rule 26—Would permit parties to exchange document requests early, before Rule 16

conference


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QUESTIONS?


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Mike [email protected]

Emily [email protected]

© 2014 lathrop & gage llp 11. 22 michael a. clithero emily kiser

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