Consumer Class Action Blog

News, analysis and commentary on state and federal consumer class action litigation

Archive for August, 2009

Issue du Jour: Forced Arbitration

Posted by Philip Kay on August 27, 2009

The issue du jour in consumer law has to be the enforcement of mandatory arbitration clauses in consumer contracts.

Last month, the Minnesota Attorney General settled its suit against the National Arbitration Forum (NAF), one of the largest arbitration companies in the country.  The suit alleged that NAF concealed its ties to the credit card industry despite arbitrating a large number of credit card disputes as a third party “neutral.”  NAF allegedly recruited credit card companies as clients and helped draft mandatory arbitration clauses in an effort to steer business its way.  As part of the settlement, NAF agreed to stop handling all consumer credit arbitrations.

Two days after the NAF settlement, the American Arbitration Association announced that it would no longer handle consumer debt-related arbitration “until new [national] guidelines are established.”

Large companies have reacted to the NAF settlement and AAA’s decision in very different ways.  Earlier this month, Bank of America announced that it was abandoning mandatory arbitration in all consumer disputes.  AT&T, on the other hand, has dug in its heels and amended its terms of service to preclude consumers from participating in class actions, whether handled via litigation or arbitration.  The service agreement already precludes any litigation outside of small claims court.

This all serves as a backdrop for yesterday’s decision out of the California Court of Appeals.  In Parada v. Superior Court, 2009 WL 2603093 (Cal. App., 4 Dist., Aug. 26, 2009), plaintiff-investors filed suit against Monex Deposit Company based on investments gone bad.  Monex filed a motion to compel arbitration based on the mandatory arbitration provisions in their contacts with the plaintiffs. The arbitration provisions required arbitration before a panel of three arbitrators from JAMS and prohibited consolidation or joinder of claims.  The trial court granted Monex’s motion and compelled arbitration, and the plaintiffs appealed.

The California Court of Appeals reversed the trial court and found that the arbitration provisions were unconscionable and therefore unenforceable.  The court further found that because the unconscionable paragraphs could not be severed from the rest of the arbitration provisions, the plaintiffs could not be compelled to arbitrate their claims despite the contract’s “severability” clause.

In a well-written opinion, the court made several findings.  First, it found that the court and not the arbitrator had the power to decide whether the arbitration provisions were unconscionable and therefore unenforceable.  The court held that if the party resisting arbitration is claiming the arbitration clause is unconscionable, a court and not the arbitrator must decide the issue. While declining to decide the issue of whether parties to a contract can agree to have the arbitrator decide unconscionability, the court very correctly pointed out in dicta the arbitrator’s clear conflict of interest when he gets to decide the issue of arbitrability.

The court then engaged in a lengthy analysis of the doctrine of unconscionability and found that Monex’s arbitration provisions were both procedurally and substantively unconscionable.  The major factor leading to the court’s finding was that the arbitration provisions called for a panel of three arbitrators, the cost of which was to be borne equally between the parties. The court noted that three JAMS arbitrators would cost $9,600 for an eight-hour day. A four-day arbitration would cost $38,400. Each plaintiff would have to pay half that amount, which would be $19,200 – plus $1,600 in case management fees per party – for a total of $20,800. Since the Monex agreements did not permit consolidation or joinder of claims, each plaintiff would have to initiate a separate arbitration and pay $20,800 minimum in fees for a four-day arbitration, regardless of the amount in controversy.  The court found these costs unconscionably prohibitive.

Another factor leading to the court’s unconscionability finding was that Monex offered no explanation or justification for the prohibition on consolidation or joinder of claims.  The prohibition on consolidation or joinder merely drove up the cost per party of arbitration. The court observed:  “The primary, if not only, reason for requiring arbitration of disputes before a panel of three arbitrators from JAMS, for prohibiting consolidation or joinder of claims, and for splitting the costs of arbitration, must be to discourage or prevent Monex customers from vindicating their rights.”

Finally, the court found that since Monex drafted its unconscionable arbitration provisions “deliberately for the improper purpose of discouraging or preventing its customers from vindicating their rights,” the unconscionable provisions were not severable from the rest of the arbitration provisions.  Therefore, the entire arbitration clause was void and the plaintiffs could proceed in court with their claims.

Me, I’ve never liked arbitration.  Even back in my defense days when I would routinely file (and win) motions to compel arbitration, I always found arbitration to be disconcerting.  The rules are never clear, you never know your (or your opponent’s) boundaries, and often the arbitrator is afraid to really put his foot down and seems more concerned with being liked than with being right.  Nah, I prefer to litigate in real court with established procedures, clear precedent and professional judges who aren’t worried where their next case will come from.

By the way, when will Apple stop breastfeeding AT&T and allow other carriers to provide service for my iPhone?  AT&T’s new “anti-class action” amendment to their service agreement is just another reason (not that I needed another) to dump them as soon as Apple says I can.

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Class (Sort of) Certified in Predatory Lending Action

Posted by Philip Kay on August 22, 2009

In a TILA class action brought by the victims (predatees?) of a complicated mortgage scheme, the Northern District of California denied TILA class certification but only for as long as it takes plaintiffs’ counsel to find a better class representative.

In Plascencia v. Lending 1st Mortg., 2009 WL 2569732 (N.D.Cal., Aug. 21, 2009), the court ruled that the plaintiffs failed to satisfy the typicality requirement of F.R.C.P. 23(a)(3) because their claim was brought after TILA’s one-year limitations period had expired. The plaintiffs knew their claim was barred by limitations but were relying on a class-wide equitable tolling argument.  The court rejected the argument. The court reasoned that to adjudicate the equitable tolling issue would require the type of individualized evidence that is inappropriate in the liability phase of a class action, and it refused to arbitrarily select a specific number of days beyond the normal limitations period to toll the statute for all class members.  The court did certify the plaintiffs’ state-law fraud and UCL classes, but refused class certification on the TILA claim.

The only question remaining is how fast it takes plaintiffs’ counsel to find a class representative whose claim isn’t barred by the one-year TILA limitations period.  The Court practically invited plaintiffs’ counsel to do so and even went so far as to analyze and answer in the affirmative the moot question of whether Plaintiffs’ TILA claim passes muster under F.R.C.P. 23(b)(3)’s predominance requirement.  The court engaged in this analysis “because counsel may move to substitute a new class representative whose TILA claim satisfies the typicality requirement.”   May?

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Interesting FDCPA decision

Posted by Philip Kay on August 19, 2009

Interesting FDCPA decision out of the 7th Circuit a couple days ago. In Ruth v. Triumph Partnerships, 2009 WL 2487092 (7th Cir., Aug 17, 2009),  the court decided an issue of first impression in the federal appellate courts:  whether the “in connection with” element of 15 U.S.C. §1692e is subject to the “unsophisticated consumer” test.

A little background: Section § 1692e provides that “[a] debt collector may not use any false, deceptive, or misleading representation or means in connection with the collection of any debt.”  Its pretty well settled that whether a statement is “false, deceptive, or misleading” is based on whether the statement would mislead or deceive the “unsophisticated consumer” (one who is “uninformed, naive, and trusting, but also assumed to possess rudimentary knowledge about the financial world and capable of making basic logical deductions and inferences”).  Under this standard, even a patently false statement isn’t “false” in the FDCPA sense of the word unless an unsophisticated consumer would find it misleading.

What wasn’t so clear was whether the “unsophisticated consumer” test applied when the question wasn’t whether the statement was false or misleading but whether the statement was made “in connection with” the collection of a debt.  In Ruth, consumers brought an FDCPA class action against a debt collection agency and a company which purchased defaulted debts. The debt collection agency included in the same envelope with its collection notice a second letter from the company which purchased the defaulted debt that falsely informed the debtor that his or her personal, non-public information could legally be shared with marketers, retailers, and other third parties unless the debtor “opted out.”  Was this letter sent “in connection with” the collection of the debt such that the FDCPA applied to it?  The district court ruled that the answer turns on whether an unsophisticated consumer would consider the letter as sent “in connection with” the collection of the debt.

The 7th Circuit reversed and ruled that whether a communication was sent in connection with an attempt to collect a debt is a question of objective fact to be proven like any other fact and it need not be established by extrinsic evidence of what the unsophisticated consumer might think.  Since in this case any reasonable trier of fact would conclude that the letter was sent in connection with an attempt to collect a debt, the FDCPA applied to the letter as a matter of law.   (However, whether the letter was false or misleading still had to be determined using the unsophisticated consumer test, the only exception being when the statement is so clearly misleading on its face that the court deems extrinsic evidence unnecessary.  Lucky for the plaintiffs in Ruth, the 7th Circuit found the letter in question to fall into this “clearly misleading” category).

This is a good case for consumers but there’s an easy out for the debt collectors.  Until now, the debtor who received misleading extraneous material usually had to arm himself with extrinsic evidence (such as consumer surveys) and an expert or two to show that (1) an unsophisticated consumer would consider the extraneous material as sent “in connection with” the debt collection notice such that the FDCPA applies to the extraneous material, and (2) an unsophisticated consumer would consider the extraneous material misleading.  Now, any material included in the same envelope with the collection notice will be considered as sent “in connection with” collecting the debt so the debtor needs only to satisfy element (2).   Not so clear is whether a separate mailing of the extraneous material would yield the same result.  I think in that case we’re probably back to square one.  It may cost the debt collector an extra postage stamp but consumers can expect separate mailings of extraneous material from this point forward.

A side note:  the Ruth court declined to address whether the FDCPA’s bona fide error provision applies to legal errors as opposed to just procedural or clerical errors (such as stating incorrectly the amount owed).  The courts of appeals are divided on this question and the Supreme Court recently granted certiorari on the issue in Jerman v. Carlisle, McNellie, Rini, Kramer & Ulrich LPA, 538 F.3d 469, 476 (6th Cir.2008) (holding that the defense applies to legal errors), cert. granted, 557 U.S. —- (June 29, 2009).

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