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Tuesday
Jul022013

The Pro-Business Stance of the Supreme Court Continues

The pro-business stance of the Supreme Court has long been evident and its decisions this term clearly confirm that position.  In a wide variety of cases the Court consistently favored corporate interests.  The cases discussed herein are not exhaustive of the pro-business decisions handed down this term, but taken together, clearly show the Court’s bent.

To start, the Court recently issued an opinion strongly supporting corporate arbitration and disfavoring class actions and in so doing limiting access to the courtroom for those seeking to sue corporations.   The Court’s preference for allowing companies to require arbitration of disputes is of long-standing—recall for example Shearson/American Express, Inc. v. McMahon, in which  the Supreme Court found that federal securities claims under the Securities Exchange Act of 1934 (1934 Act or Exchange Act) are arbitrable. 

The most recent case, American Express v. Italian Colors (available here) arose when merchants, including restaurants, retailers and others, sued in 2003 alleging that American Express violated antitrust law by forcing them to accept its credit cards as a condition of accepting its charge cards.  Led by a California restaurant Italian Colors, petitioners claimed that American Express used its monopoly power to force them to accept the cards at rates 30 percent higher than competing companies.   Sadly for the merchants, the standard contract with American Express requires that disputes be handled through individual arbitration. The merchants claimed that individual actions were economically infeasible because the cost to prove their case would be approximately $1 million, while the most an individual retailer could hope to recover was about $40,000. The appeals court hearing the claim agreed that the only way to enable the merchants to pursue their right to challenge antitrust actions was to allow them to band together.

The Supreme Court, in an opinion authored Justice Antonin Scalia disagreed.  Even though the petitioners presented evidence proving that individual arbitration would not be a realistic option the Court found that “antitrust laws do not guarantee an affordable procedural path to the vindication of every claim,” and that courts must “vigorously enforce” arbitration contracts according to their terms.  The mere fact “that it is not worth the expense involved” to pursue the claim doesn’t eliminate the right to sue.  For the majority, the bottom line is the contract.  If it requires arbitration the courts will not interfere with that contractual choice even if the result effectively is deny a remedy.

The dissent by Justice Kagan (concurred to by Justices Ginsburg and Breyer) points out the result of the majority’s decision. "So if the arbitration clause is enforceable, Amex has insulated itself from antitrust liability—even if it has in fact violated the law….the monopolist gets to use its monopoly power to insist on a contract effectively depriving its victims of all legal recourse.”

The decision greatly strengthens the hands of business and it comes as no surprise that the U.S. Chamber of Commerce praised the decision, saying that the “only people who lose under today’s decision are those in the plaintiffs’ bar who want to cash in by forcing disputes into already overburdened courts.”

The import of the American Express decision is even more striking when taken in conjunction with other recent Supreme Court decisions favoring business interests.  In Comcast Corp. v. Behrend cable television subscribers sued Comcast Corporation claiming that Comcast colluded with Time Warner Cable, Adelphia Communications, and other cable providers to apportion cable subscribers based on geographic location in violation of the Sherman Act. Comcast argued that class certification was inappropriate because the putative class of 2 million customers covered more than 600 franchise areas that faced different competitive conditions, and consequently, there could be no common methodology for awarding damages to the entire class.

The district court held an evidentiary hearing on the plaintiffs’ motion for class certification, at which the plaintiffs offered an expert witness to establish class-wide damages. Following that hearing, the district court certified the proposed class, holding that the plaintiffs’ theory of class-wide damages was “plausible” and “‘susceptible to proof at trial through available evidence common to the class.’”  On appeal, the Third Circuit held that it was only required to determine whether the plaintiffs’ theory was “capable of proof through evidence common to the class.”

The Supreme Court disagreed and refused to grant class certification finding that petitioners failed to demonstrate at the class certification stage that damages could be established on a class-wide basis at the class trial. Absent a method for establishing damages on a class-wide basis, "[q]uestions of individual damage calculations will inevitably overwhelm questions common to the class."

The Comcast decision was preceded by Wal-Mart Stores, Inc. v. Dukes in which the Supreme Court ruled that a proposed class of approximately 1.5 million Wal-Mart employees failed to provide “convincing proof of a companywide discriminatory pay and promotion policy,” and therefore had failed to establish the existence of a common question of law or fact as required by Rule 23(a).  This, despite testimony from sociological and statistical experts that the alleged discrimination at Wal-Mart stores in different regions of the country were sufficiently similar to satisfy the commonality requirement.  

A few years earlier (in 2010) the Supreme Court ruled in Stolt-Nielsen v. AnimalFeeds Int’l Corp. that parties to a commercial contract that provides for mandatory arbitration of all disputes but says nothing about class procedures cannot be compelled to engage in class arbitration because “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.”  This ruling seemed to limit the availability of class arbitration, once again strengthening businesses hand.  However, the circuit courts quickly split on the proper interpretation of the case.

The Fifth Circuit read Stolt-Nielsen to say that “arbitrators should not find implied agreements to submit to class arbitration” where the arbitration clause is silent on this topic. (See Reed v. Florida Metro. Univ., Inc., 681 F.3d 630, 646 (5th Cir. 2012)). The Second and Third Circuits, on the other hand, interpreted Stolt-Nielsen  to mean that when the parties’ agreement is silent on the class arbitration issue, an arbitrator can permit class-wide arbitration if it is determined that the parties implicitly agreed to that procedure. (See Jock v. Sterling Jewelers Inc., 646 F.3d 113, 123 (2d Cir. 2011) cert. denied, 132 S. Ct. 1742 (2012); Sutter v. Oxford Health Plans LLC, 675 F.3d 215, 222-23 (3d Cir.)

When Oxford Health was decided in 2013 the Supreme Court sided with the Second and Third Circuits position.  Once again, the Court stressed the importance of contractual terms.  The contract between the parties included a provision stating that “[n]o 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. . . .” and the parties agreed that the arbitrator should decide whether their contract authorized class arbitration, and the arbitrator determined that, based on the terms of the clause quoted above, it did.

Based on these facts the Supreme Court stated that where the parties bargained for the arbitrator’s construction of their agreement, an arbitral decision construing the agreement must stand, regardless of a court’s view of the correctness of that decision.  The Court therefore refused to vacate the arbitrator’s decision despite not-so-subtle hints that the Court disagreed with the arbitrator’s underlying construction of the contract.  A small victory for non-business interests, but a limited one given the Courts clear distaste for class arbitration.

Another 2013 case  Standard Fire Insurance Co. v. Knowles considered whether a precertification stipulation purporting to limit damages to less than the federal jurisdictional amount could work to keep a case out of federal court (typically viewed as more business friendly).  In the case, Knowles filed a class action complaint in Arkansas state court alleging that Standard Fire underpaid homeowners’ property loss claims by refusing to pay general contractor fees.  The complaint specifically limited the class to Arkansas residents, alleged only Arkansas state-law claims, and stipulated that the class would seek less than $5 million in damages, the threshold amount for federal jurisdiction under the Class Action Fairness Act (CAFA).  Standard Fire sought removal to a federal court but was rebuffed on various appeals by courts relying on the precertification stipulation as to damages.

When the case reached the Supreme Court, Justice Breyer, writing for the majority found in favor of Standard Fire.  The Court dismissed the precertification damages stipulation, finding that it was only contingent and not binding because a class representative cannot legally bind unnamed class members until the class is certified.   At the time of filing, no class had not been certified and thus Knowles’s stipulation could not bind absent class members.  Accordingly, the Court held that only Knowles himself was bound by his stipulation.

Not every Supreme Court decision regarding class actions has been so business friendly.  In Amgen Inc. v. Connecticut Retirement Plans the court considered whether plaintiffs in a federal securities class actions who invoke the fraud-on-the-market theory of reliance must prove the "materiality" of the defendant's alleged misrepresentations at the class certification stage. Justice Ruth Bader Ginsburg, writing for the majority in the 6-to-3 decision, said the plaintiffs’ assertion that Amgen Inc. and several of its officers made false and misleading statements about two of its anti-anemia drugs in violation of Section 10(b) of the Securities Exchange Act of 1934 (and Rule 10b-5 promulgated thereunder), which "artificially inflated the price of Amgen's stock" was enough for purposes of class certification.  Justice Ginsburg stated that the question of materiality, whatever its final answer, was a common one and “questions of law or fact common to class members predominate over any questions affecting only individual members.” “The class is entirely cohesive: it will prevail or fail in unison,” she wrote. “In no event will the individual circumstances of particular class members bear on the inquiry.”

Amgen thus permitted the plaintiff class to be certified without proof of materiality, seemingly strengthening the hand of individuals seeking class certification.  However, in light of the subsequent cases discussed earlier, the case clearly did not signal a broader retreat from the court's trend towards disfavoring class actions. The case involved issues unique to federal securities class actions and may have little application to class action issues outside that arena.

Why should business lawyers care about procedural matters such as class certification and mandatory arbitration?  After all, arbitration supposedly offers the potential for a faster and less-costly dispute resolution process than litigation. Discovery and motion practice can be limited lowering costs and increasing speed. It is these very reasons that companies use to justify the inclusion of mandatory arbitration provisions in consumer and commercial contracts.  Accepting the above as true (a position that is not entirely free from debate) the problem arises because it is now customary for companies to include a requirement that any potential plaintiff must pursue all claims against the company individually, rather than as a member or representative of a class.  This, coupled with the dis-taste the Court has expressed towards certifying class actions in the absence of a mandatory individual arbitration clause, means that plaintiffs face a high bar to bring a class action even if it is proven that individual actions are not economically viable.

Class actions and arbitration are not the only areas in which the Supreme Court is proving to be very pro-business.  The court blocked attempts to hold Royal Dutch Shell accountable for human rights violations in that it was complicit in a violent crackdown on protesters by Nigeria’s military ruler Sani Abacha between 1992 and 1995.  The case Kiobel v. Royal Dutch Shell involved the applicability of the 1789 law known as the Alien Tort Statute which had been used to bring international human rights cases in US courts. While all the justices agreed that the Nigerians claims could not go forward, the Court split sharply over whether the ATS could be used to sue over claimed human rights abuses in another country. Chief Justice John Roberts, writing for five justices, said that it could not, flatly stating that the law does not allow claims "seeking relief for violations of the law of nations occurring outside the United States."

In Marx v. General Revenue Corp. plaintiff Olivia Marx sued General Revenue Corporation (GRC) claiming the company violated the Fair Debt Collections Practices Act (FDCPA ) by harassing and threatening her in order to collect on a student loan.   The case was tried without a jury and the district court ruled in favor of the debt collection company and dismissed the case. The trial court found that Marx failed to prove a violation of the FDCPA and awarded GRC approximately $4,500 in court and litigation costs pursuant to Rule 54 of the Federal Rules of Civil Procedure. Marx appealed and the Tenth Circuit was forced to reconcile a provision of the providing that “[o]n a finding by the court that an action under this section was brought in bad faith and for the purpose of harassment, the court may award to the defendant attorney’s fees reasonable in relation to the work expended and costs’ with  Rule 54(d)(1) of the Federal Rules of Civil Procedure that  provides that “[u]nless a federal statute, these rules, or a court order provides otherwise, costs—other than attorney’s fees—should be allowed to the prevailing party.” The 10th Circuit upheld the award of costs.

On appeal, the Supreme Court agreed with the Tenth Circuit.  In a 7-2 majority decision by Justice Clarence Thomas, the Court ruled that the FDCPA “does not displace the background rule that a court has discretion to award costs.” Accordingly, the Court ruled that the award of costs to the prevailing party in an FDCPA action is within the discretion of the trial court under Rule 54.  The ruling ultimately means that plaintiffs who lose lawsuits involving violations of the FDCPA may be liable for costs even if the case was not brought in bad faith a fact which will certainly deter FDCPA claims.

Two more recent victories for businesses were just handed down.  In Vance v. Ball State University the Court threw out a case filed by a black catering worker who said a colleague slapped her and used racial epithets. In a 5-4 decision written by Justice Alito the Court narrowed the definition of "supervisor" in the workplace, making it so that supervisor means only those with the ability to hire and fire. As Justice Samuel Alito wrote in the majority's opinion, someone is only a supervisor "if he or she is empowered by the employer to take tangible employment actions against the victim."  The definition of supervisor is critical because Title VII of the 1964 Civil Rights Act makes it easier to hold a company accountable for workplace harassment if the harasser is considered a supervisor. By limiting the definition of supervisor the Court made it much harder for plaintiffs to prevail on harassment claims.

In University of Texas Southwestern Medical Center v. Nassar Justice Kennedy writing for the majority stated that in cases involving claims that an employer retaliated against an employee for complaining about discrimination in the workplace the employee must show that retaliation was the but for reason the employer took action, not merely one of several reasons.

Taken together, these cases show the continued slant of Court decisions towards favoring business.  It has long been acknowledged that the Roberts court has such a slant although some have tried to dispute it.  The Court’s actions this term make any argument to the contrary hard to swallow.

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