BUSINESS LAWSUIT BLOG

Consumer Class Actions: Have They Reached the Vanishing Point?

by Gary Nissenbaum | Nov 23, 2011

Have we just heard the death knell for class action lawsuits? Probably not, but the distant sounds of court decisions undermining the power and scope of class actions are coming from just over the horizon.

In April 2011, the United States Supreme Court issued a ruling which held that the Federal Arbitration Act (“FAA”) preempted the California Supreme Court ruling which outlawed class action bans in many consumer contracts “because it ‘stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress.’” AT&T Mobility LLC v Conception, 131 S.Ct. 1740, 1742 (U.S., 2011).

In that case, Conception brought this lawsuit in the federal court claiming that AT&T had engaged in false advertising and fraud by charging sales tax on “free” phones. Id. The cell phone contract between the parties provided for arbitration of all disputes in individual capacity but did not permit class action arbitration. Id. Although AT&T moved to compel arbitration, the District Court and the Ninth Circuit Court of Appeals denied AT&T’s motion on the grounds that the arbitration provision was unconscionable because it disallowed class actions. Id. In issuing this ruling, the District Court relied on the California State Supreme Court’s ruling in Discovery Bank v Superior Court, 36 Cal 4th 148 (Cal., 2005). The Ninth Circuit Court of Appeals also found that the ruling in Discovery Bank was not preempted by the Federal Arbitration Act because Section 2 of FAA permits arbitration agreements to be not enforced “upon such grounds as exist at law or in equity for the revocation of any contract.” Id.

However, the U.S. Supreme Court held that although Section 2’s “saving clause preserves generally applicable contract defenses”, it does not “preserve state-law rules that stand as an obstacle to the accomplishment of FAA’s objectives” of enforcing arbitration agreements according to their terms to facilitate an informal and streamlined proceeding. Id at 1743. Justice Breyer dissented stating that “a single class proceeding is surely more efficient than thousands of separate proceedings for identical claims. Thus, if speedy resolution of disputes were all that mattered, then the Discover Bank rule would reinforce, not obstruct, that objective of the Act.” Id. at 1759.

Following this lead, another Federal Circuit Court, the 11^th Circuit U.S. Court of Appeals, has ruled that a clause in AT&T’s user agreement compelling individual arbitration can be enforced despite a Florida law against such class-action bans. Cruz v. Cingular Wireless, LLC, 648 F.3d 1205 (C.A.11 (Fla.),2011). Once again, the Court held that the class action waiver in the plaintiff’s arbitration agreement is enforceable under FAA because FAA preempted Florida state law since the state law would “stand [ ] as an obstacle to the accomplishment and execution” of the FAA. Id. at 1207. These holdings are not favorable to the consumers and are in fact depriving the consumers of “class actions”, a powerful tool by which consumers can recover and also change some unlawful corporate practices.

Recently, Sony changed its terms and conditions of use for the PlayStation Network (PSN) to include class action waivers. Thus, under the new terms and conditions, users must now agree to forgo their right to join a class-action lawsuit against Sony. Sony’s new terms and conditions apply to the new as well as the existing customers and the existing customers may decline these new terms by sending a letter to Sony.

Thus, the day when the majority of companies will follow Sony’s footsteps in adding class action waivers to their arbitration contracts may be on the horizon. Change is coming.

Comments/Questions: gdn@gdnlaw.com

May Attorneys Fees Be Awarded to a Prevailing Party Even When a Case Doesn’t Reach Trial?

by Gary Nissenbaum | Sep 28, 2011

In a recent case, the Appellate Division of the Superior Court of New Jersey held that a plaintiff can be awarded fees even when a case does not reach trial if the suit itself helped encourage a defendant to correct an unlawful practice. Sika Corp. v. Hostler, 2011 N.J. Super. LEXIS 1202 (App. Div. May 11, 2011).

In 2004, the plaintiff, Sika Corporation (“Sika”), hired the defendant, Joseph Hostler (“Hostler”), as the national sales manager of its chemical manufacturing company. Upon being hired, Hostler signed a contract that included a non-compete clause preventing him from disclosing the company’s confidential information; soliciting Sika customers or employees on behalf of a different employer within a year of being terminated; or working, without consent, with a competitor anywhere Sika does business. Id. The agreement also stated that “[i]n the event of a breach… , [plaintiff] shall be entitled to such injunctive relief and damages and also shall be entitled to reimbursement…of [plaintiff’s] reasonable attorneys’ fees and costs incurred by [plaintiff] in enforcing” the agreement. Id. at 2, 3.

In April 2009, Hostler notified Sika that he was leaving the company in order to take a position at BASF Group (“BASF”). Shortly after, Sika filed a complaint against Hostler, alleging that he breached his contract with Sika by emailing a customer contact list to his private email address; soliciting Sika’s customers on behalf of BASF while still employed by Sika; and soliciting Sika employees to work with him at BASF.

The lower court entered a preliminary injunction against Hostler and BASF in June 2009 and the parties reached a settlement embodied in a final consent order in September 2009. Sika later applied for attorney’s fees, arguing “that there had been “certain breaches” of the confidentiality agreement that caused it to file suit to enforce the agreement. Finally, plaintiff argued that Hostler had violated his duty of good faith and loyalty, which caused plaintiff to incur costs to enforce the agreement.” Id. at 7. On that basis, Sika argued that Hostler should pay Sika’s attorney’s fees.

However, the Court denied the motion and a subsequent motion for reconsideration. The Court reasoned that it had been settled prior to moving past the preliminary injunction, and therefore, the Court had not made a final ruling on the merits of the case. On that basis, there was no finding that bad faith had occurred.

In a 2008 case, the New Jersey Supreme Court addressed the question of whether a litigant is entitled to exercise its right to attorneys fees on the basis of a contract that states attorneys fees will be paid to the “prevailing party.” The issue is how to determine who is the prevailing party if the case was settled before anyone could prevail in the conventional sense.

The test for determining whether someone is a prevailing party is whether the claimant can demonstrate:

1) a factual causal nexus between the plaintiff’s litigation and the relief ultimately achieved, and

2) that the relief ultimately secured by plaintiffs had a basis in law.

Mason v. City of Hoboken, 196 N.J. 51, 76 (2008). (“Put differently, a party prevails “when actual relief on the merits of [the] claim materially alters the relationship [*18] between the parties by modifying the defendant’s behavior in a way that directly benefits the plaintiff.” Id. at 73.)

In Sika, the Appellate Division decided that the lower court had raised the bar of the second prong too high. The Appellate Division agreed with Sika’s argument that the focus should be on whether the “plaintiff’s lawsuit acted as a catalyst that prompted defendant to take action and correct an unlawful practice.” Sika at 19. The Court held that

“[w]hether that resolution involves ‘a judicial decree, a quasi-judicial determination, or a settlement [is] not a factor.” Id.

The Court’s decision is significant because it allowed attorneys fees to a prevailing party that did not actually prevail in the conventional sense. In other words, it highlights the legal concept that a party can prevail (and be entitled to legal fees) even if it settles the case.

Comments/Questions: gdn@gdnlaw.com

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