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Class Actions & Arbitration

James R. Copland

On Wednesday, February 27, the Supreme Court will hear oral arguments in American Express v. Italian Colors, the latest in a string of recent cases in which the Court tackles arbitration and the class action device. To preview, react to, and assess the argument, we are happy to welcome Cardozo law professor Myriam Gilles alongside our own Ted Frank.

Italian Colors involves an asserted antitrust claim filed by a class of vendors against American Express, alleging that the AmEx "accept all cards" policy constitutes an illegal "tying arrangement" by linking the card company's less-desirable credit-card customers with its more desirable charge-card clientele. The Second Circuit determined that AmEx could not invoke its contractual arbitration clause because individual arbitrations would make the expert witness necessary to assert the antitrust claim cost-ineffective--in the court's view, denying the plaintiffs the ability to vindicate a federal statutory remedy. Five judges dissented from the denial of a rehearing in banc, led by Chief Judge Jacobs's blistering dissent, joined by Judges Cabranes and Livingston, which accused the panel of substituting its public-policy preferences for Supreme Court precedents on the enforceability of arbitration clauses' waiver of class-action remedies, most recently in AT&T Mobility v. Concepcion.

Professor Gilles--who teaches torts, advanced torts, class actions, and aggregate litigation--has criticized Concepcion, warning that "most class cases will not survive the impending tsunami of class action waivers" in the decision's wake. In contrast, Frank--the founder of the Center for Class Action Fairness as well as a Manhattan Institute adjunct fellow and editor of Point of Law--has argued that such concerns are "overwrought," and that post-Concepcion, "many forms of class action lawsuits will continue, and those that are replaced by individual arbitration will generally lead to greater consumer protection, not less." It is my pleasure to welcome Professor Gilles, and I trust that her discussion with Ted will prove illuminating.

By Myriam Gilles

After seven years of appellate litigation, including three rounds at the Second Circuit and two trips to the Supreme Court, in the final footnote of its Reply Brief, American Express has abandoned - stunningly - its primary policy argument. Amex has consistently argued that a ruling for the merchants would open the floodgates to a torrent of challenges to its and other companies' arbitration clauses, and that an "Amex exception" would swallow the "Concepcion rule." The merchants, meanwhile, have said "No, the floodgates are already slamming shut as companies enact liberal, vindication-enabling arbitration agreements - and especially, agreements that allow prevailing arbitral claimants to shift the cost of expert witnesses."

Now, in footnote 8 of Amex's Reply Brief on the merits, comes the bombshell: Amex has just recently promulgated a new version of its merchant agreement with an arbitration provision that shifts the costs of expert witnesses in favor of a prevailing arbitral claimant. Never again can a merchant complain (as the merchants here do) that the unavailability of both collective action and cost-shifting, combined with proscriptions against sharing information across arbitrations, precludes them from being able to vindicate their rights in arbitration. While footnote 8 makes clear that "Petitioners do not rely on this amendment in their challenge to the decision below," the fact is that in future cases the Amex clause will allow cost-shifting. The merchants' proffered test is whether the proven non-recoupable costs exceed the recovery sought. If all costs are recoupable, the inquiry is over before it starts. For this corporate defendant, the floodgate is closed.

Vindicating vindication

February 27, 2013 8:05 AM | No Comments

by Ted Frank

This might be a short debate! From the beginning, I've defended Concepcion because I believe nothing in Concepcion precluded consumers from vindicating their rights. American Express's briefing, however, has focused on a theory that they can do with an arbitration clause what it would be plainly impossible to do with any other contractual clause. AmEx couldn't have a "tying arrangement" waiver clause; it couldn't even have a procedural clause to agree to restrict the use of expert witnesses in antitrust disputes. And—theoretically at least—a monopolist would not face the market competition that would force it to pass along the savings from arbitration to consumers, making the argument for where to draw the line to force arbitration weaker in antitrust cases than other cases. The Federal Arbitration Act says that arbitration clauses are not to be disfavored, not that they get special treatment from the courts.

The Second Circuit, however, did disfavor AmEx's arbitration clause, and thus failed to correctly apply the Federal Arbitration Act. They did that by giving the record and the arbitration clause a cribbed reading to reach its preferred result. The Supreme Court should correct that kind of abuse, or judges will be able to undo the FAA with the sort of rulings that the Court criticized in Concepcion, but just classify them as "vindication" decisions rather than "unconscionability" decisions.

By Myriam Gilles

Ted Frank's posting starts off on an agreeable enough note: it turns out we concur that the vindication-of-rights doctrine does, in fact, exist, and that Amex's lead argument rejecting the doctrine is "extreme." Sad times that we celebrate agreement on such a basic concept. Assuming Frank acknowledges that the earth is round, there are now at least two things that we agree upon.

But these are sad times at the Supreme Court. Having sat through the rough and nasty argument in the Voting Rights Act case - where the conservative Justices seemed flummoxed by the suggestion that egregious acts of discrimination in voting were still an especial problem in the South, and where Justice Scalia characterized legislative protection of the franchise "a racial entitlement in perpetuity" - I was prepared for just about anything. So I rejoiced that the Justices appeared to agree that the vindication-of-rights doctrine is alive and well - Justice Breyer described the doctrine as "well-established," and no other Justice seemed to question is basic premises. Whew! The earth is round.

Beyond that basic agreement, however, the argument was a mess. Justices Kennedy and Breyer wondered why it would be prohibitively expensive for small merchants to engage economic experts to opine on issues such as relevant market definition or anticompetitive effects - despite the fact that this Court's own antitrust jurisprudence has exponentially increased the costs of lodging antitrust claims. When the merchants' lawyer, Paul Clement, observed that antitrust guru Herbert Hovenkamp submitted an amicus brief arguing that expensive expert testimony is indispensable, Justice Breyer countered that if Professor Hovenkamp or Justice Breyer were the arbitrator, then no experts at all would be required. (I wonder what Justice Breyer's day rate would be).

But the biggest source of confusion - and the issue that might ultimately cause the Court to dismiss certiorari as improvidently granted or possibly remand for further elucidation - involved Amex's late-in-the-game assertion that its air-tight confidentiality clause did not actually bar Respondents from freely sharing information across arbitral proceedings, such that merchants could "share an expert between multiple plaintiffs." Justice Kagan specifically and repeatedly asked Mr. Kellogg, Amex's lawyer, whether Respondents would "violate the confidentiality agreement of this clause" if they all decided to "get together and produce one report." And each time, Kellogg answered that Amex's confidentiality clause did not bar Respondents from doing so.

This is new, and possibly changes things. It's new because when the confidentiality clause came up at the Second Circuit, Amex did not make this concession. Rather, the company stood by its clause, which broadly provides that "all testimony, filings, documents and any information relating to or presented during the arbitration proceedings shall be deemed to be confidential information not to be disclosed to any other party." Based on this, the panel below correctly ruled that Amex's "confidentiality provision effectively block[ed]" claimants from sharing information such that they could develop (and informally pass the hat to pay for) one, single expert report that could be used in multiple arbitrations.

And this late-breaking concession that the confidentiality clause doesn't mean what it says possibly changes things because perhaps Respondents can now seek to vindicate their rights via individual arbitrations of their antitrust claims - hundreds and hundreds of individual arbitrations, using the same expert report, that over time, create a momentum that might match or surpass traditional notions of collateral estoppel in the arbitral fora.

It may be a while before we get to witness any such activity, though, because my guess is the Court will remand the case, as it seems awfully late in the day for Amex to suddenly make this important concession. As Malcolm Stewart of the Solicitor General's office argued on Respondents' behalf, Amex seems to have engaged in certiorari bait-and-switch, seeking Supreme Court review "on the important legal question whether the inefficacy of arbitration procedures is a basis for invalidating the agreement," but then once before the Court, arguing that "it would, in fact, have been feasible to pursue these claims through individualized arbitration." These facts about the violability of the confidentiality provision were simply not in the record, and for that reason alone, the case may prove difficult to decide.

[And, to be clear, Frank and I agree on little else. I think it begs reality to assert Amex's arbitration clause doesn't completely preclude the vindication of federal antitrust claims. If Respondents cannot share information, shift the extremely high costs of an expert report, or do both via a class action in court, they simply cannot bring their Sherman Act claims. Even less rooted in reality is Frank's floodgates argument - i.e., that droves of displaced class claimants will scale the arbitration barricades and overwhelm the citadel proclaiming their inability to vindicate statutory rights. If the only question is whether non-recoupable costs exceed the recovery sought, it should be clear that few camels will make it through the eye of this needle.
And I won't take the time to address the uninformed views on the underlying antitrust claim. After all, the Amex case hasn't even gotten to the merits stage because of 8 years of litigation over the arbitration clause. But it should suffice to note that the Justice Department has filed suit against Amex on similar grounds, and that Visa/Mastercard recently settled a related antitrust case for $7.25 billion dollars (a settlement in which Frank and his cohort have not lodged their typical objections).]

by Ted Frank

Professor Gilles's last parenthetical confuses me. What is my "typical" objection? For that matter, who is my cohort? I always thought of myself as sui generis.

I honestly haven't paid a lot of attention to the Visa/Mastercard settlement because (1) no class member has asked for my help and (2) there are several competing class-action attorneys who have already (if clumsily) objected, and, thus, there doesn't seem to be a need for my non-profit to get involved to vindicate class members' interests, because for-profit entities with the proper incentives seem to already be on the case. But if one side or another wants to offer me a suitcase of money to consult on the litigation and possible objections as a private attorney, I'll be happy to consider the possibility and try and get permission from CCAF to do so.

Not that I think Visa/Mastercard tells us a lot about AmEx. I can think of exactly one American brick & mortar merchant with more than $100,000 in annual sales that I dealt with in the last five years that wouldn't take my Visa card, and it just went out of business. The case for Visa monopoly power is a different one than that for AmEx, where enough merchants don't do business with AmEx to show that when AmEx makes a take-it-or-leave-it offer that the merchant doesn't like, AmEx doesn't get the business. And DOJ has cried wolf often enough in the antitrust context in the Clinton and Obama administrations that a complaint over a tying arrangement doesn't have a lot of credibility with me: it's at least as likely to be the result of special-interest rent-seeking as consumer protection. In any event, that the Justice Department sued AmEx sort of undercuts the idea that we need a private class action to bring AmEx to heel.

Separately, since I've been critical of the AmEx Italian Colors litigation strategy through now, let me give credit where credit is due to Mr. Kellogg's excellent oral argument--which as Professor Gilles suggests, performed as I hoped and retreated to AmEx's stronger arguments. At oral argument, AmEx disputed the claim that it had not challenged certain factual contentions in the record. I'll note that the dispute exists without attempting to resolve the quibble, since the underlying public-policy question that I'm interested in doesn't turn on how well AmEx litigated its case in the lower courts. I do note that I've certainly been the victim of court opinions that chose to assert that I had not made an argument that I made rather than reach the questions my argument raised.

It's not clear to me why Professor Gilles is upset that a possible consequence of this argument would be dismissal of certiorari as improvidently granted; that result would very much be perceived as a victory by the array of special interests opposing the freedom to contract for arbitration clauses, leaving the broad Second Circuit exception to Concepcion intact.

Does it beg "reality to assert AmEx's arbitration clause doesn't completely preclude vindication of federal antitrust claims"? The Andy Pincus's amicus brief for the Chamber and other business entities suggests numerous ways arbitration proceedings could be aggregated to spread the costs of an expert witness (though I think their reliance on the Honda small-claims-court movement is overstated). It's just that the resulting aggregate litigation would be opt-in rather than opt-out--as it was in American courts during the first several decades of the Sherman Act. And, as Justice Breyer notes, why do we assume that the streamlined and informal procedures of arbitration require the same disastrous litigation expenses of court proceedings? There's certainly nothing in the record about that.

Professor Gilles complains that my floodgates argument isn't "rooted in reality," but my contention is hardly hypothetical: we see it in the Italian Colors case itself. As Justice Breyer noted at oral argument, plaintiffs' expert report about vindication was perfunctory, and didn't even mention arbitration. Yet it was sufficient to put American Express through what must be to date seven digits of litigation expenses, and may even eventually be successful in nullifying AmEx's contractual rights. Anyone who doesn't think it won't be easy to invest a few thousand dollars in a hired-gun expert to create a factual dispute over whether an arbitration clause makes vindication of a cause of action possible hasn't seen how little adverse consequence attaches to attorneys and parties who hire experts to make fantastic claims.

Speaking of vindication, I find it fascinating how often class action advocates speak of the importance of the class action in vindicating rights but how little they speak of vindication when it comes to the class actions themselves. Friday, I was in court watching class counsel argue that it was okay to freeze small shareholders out of a securities settlement because of the administrative expense in paying their claims; in the pending Fraley v. Facebook settlement, I expect to see class counsel argue that it is fair, reasonable, and adequate to pay the class zero cash because there are too many class members who want to be compensated. I find these arguments remarkable: if the class action has such high administrative expenses that after paying for notice and attorneys' fees, the class cannot be paid at all, why are these classes being certified under Rule 23(b)(3) in the first place? Doesn't that rule require a demonstration "that a class action is superior to other available methods for fairly and efficiently adjudicating the controversy"? What makes a class action "superior" in the (b)(3) sense, much less the "vindication" sense, when class counsel takes the position that the class can't be compensated?






Obamacare Decision: Reactions, July 2012
Law School Faculty Diversity, May-June 2012
Class Actions, May 2012
Constitutionality of Individual Mandate, March 2012
Human Rights and International Law, February-March 2012
The constitutionality of President Obama's recess appointments, January 2012
Do caps on medical malpractice damages hurt consumers?, December 2011
Trial Lawyers Inc.: State Attorneys General, October 2011
Wal-Mart v. Dukes, April 2011
Kagan Supreme Court nomination, May-June 2010
Election roundtable, November-December 2006
Who's the boss, September 2006
Medical judgement, July 2006
Lawyer Licensing, May 2006
Contingent claims, April 2006
Smoking guns, July 2004

Rafael Mangual
Project Manager,
Legal Policy

Manhattan Institute

Published by the Manhattan Institute

The Manhattan Insitute's Center for Legal Policy.