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HASSETT'S OBJECTIONS - Supreme Court Roundup

08.22.2013

After last year’s decision on the constitutionality of the Patient Protection and Affordable Care Act, the Supreme Court’s most recent term was mostly uneventful for the insurance industry. However, important decisions regarding arbitration and class actions will have an impact on the insurance industry, particularly in states that allow insurance disputes to be arbitrated.  See Am. Bankers Ins. Co. of Fla. v. Inman, 436 F.3d. 490 (5th Cir. 2006) (based upon McCarran-Ferguson, state statute barring forced arbitration of insurance contract trumped Federal Arbitration Act).  McKnight v. Chicago Title Ins. Co., 358 F.3d 854 (11th Cir. 2004) (same).

In Comcast v. Behrend, No. 11-864 (March 27, 2013), the Supreme Court held that an individualized inquiry into damages precludes class certification.  The Court of Appeals had held that it need not decide the viability of plaintiffs’ damage model at the class certification stage because the question went to the merits.  The Supreme Court reversed, holding that questions on the merits necessarily are intertwined with questions of class certification, but the viability of a class-wide measure of damages must be adjudicated at class certification. 

The Comcast decision is favorable to businesses by requiring the measurability of damages on a class-wide basis to be decided at the class certification stage.  Once the class is certified, few businesses have the fortitude to continue litigating rather than settling. 

In Standard Fire Ins. Co. v. Knowles, No. 11-1450 (March 19, 2013), the plaintiff brought a putative class action in state court and expressly stated that class damages would not exceed $5 million.  The purpose of that admission was to avoid removal to federal court under the Class Action Fairness Act.  The Supreme Court rejected such attempts to manipulate federal jurisdiction.  The Court reasoned that, while it was fine for the named plaintiff to limit his own recovery, he could not do so on behalf of a class.  This is an important decision because class action plaintiffs’ counsel often will waive rights and remedies to avoid federal jurisdiction. 

In Genesis Healthcare Corp. v. Symczyk, No. 11-1059 (April 16, 2013), the plaintiff brought a collective action under the Fair Labor Standards Act.  The employer extended an offer of judgment equal to the named plaintiff’s damages and argued that her claim became moot as a result of the offer.  The Supreme Court agreed, holding that because the named plaintiff was made whole, the case could not proceed. 

In reality, this decision may have little impact outside the labor area.  While class actions and collective actions are distinguishable, many rules applying to the latter have been applied to the former.  However, the Supreme Court noted the distinction between class actions and collective actions.  Subsequent cases have confirmed that an offer of judgment “pickoff” strategy does not apply to class actions.  See Craftwood II, Inc. v. Tomy Int’l, Inc., No. SA-CV-12-1710-DOC (C.D. Cal. July 15, 2013); Canada v. Meracord, LLC, No. C12-5657-BHS (W.D. Wash. June 6, 2013). 

Turning to the Supreme Court’s arbitration decisions, in American Express Co. v. Italian Colors Restaurant, No. 12-133 (June 20, 2013), the Court held that a class action waiver in an arbitration clause could not be rendered unenforceable under state law just because the cost of vindicating an individual claim in arbitration outweighed the potential recovery.  This is a major decision in favor of arbitration.  Notwithstanding the Supreme Court’s decision in AT&T Mobility, LLC v. Concepcion, 131 S.Ct. 1740 (2011) that class action waivers were enforceable, some courts continued to invalidate them as unconscionable because the cost of pursuing an individual claim outweighed the benefit. 

Oxford Health Plans, LLC v. Sutter, No. 12-135 (June 10, 2013), was the most pro-arbitration/anti-business decision in recent memory.  This case was discussed in my column in the Fall 2012 edition of this newsletter.  See “It’s Baaaack!! Imaginary Consent to Class Arbitrations.”  In Stolt-Nielsen S.A. v. AnimalFeeds Int’l. Corp., 559 U.S. 662, 130 S.Ct. 1758 (2010), the Court held that class arbitration could not be mandated absent an express agreement to do so.  If the contract was silent as to class arbitration, the Court could not direct it.

My “Imaginary Consent to Class Arbitrations” article noted that some lower courts had upheld arbitrator decisions requiring class arbitrations under quite flimsy language.  See Jock v. Sterling Jewelers, Inc., 646 F.3d 113 (2nd Cir. 2011); Sutter v. Oxford Health Plans, LLC, 675 F.3d 215 (3rd Cir. 2012); Fantastic Sam’s Franchise Corp. v. FSRO Ass’n Ltd,. 683 F.3d 18 (1st Cir. 2012); Contra Reid v. Florida Metro. Univ., Inc., 681 F.3d 630 (5th Cir. 2012).  For example, the arbitration clause at issue in Oxford Health stated as follows: 

No 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 in New Jersey, pursuant to the Rules of the American Arbitration Association with one arbitrator. 

Oxford Health, 675 F.3d at 223.

As is evident, nothing in that arbitration clause refers to class arbitration.  Instead, the arbitrator inferred an intent to allow a class arbitration because, otherwise, a class proceeding could not be brought in any forum.  Of course, avoiding a class adjudication in any forum was part of the business’ objectives in choosing arbitration.

The Supreme Court granted certiorari in the Oxford Health case and recently held that a court cannot overrule an arbitrator’s decision that the parties intended to allow class arbitration.  The parties had agreed that the arbitrator would decide all such issues and, while the Court expressly disavowed any endorsement of the arbitrator’s decision on the merits, it ruled that the parties were bound.

The Oxford Health decision illustrates the old adage of “be careful what you wish for.”  A theoretically pro-arbitration Supreme Court has rendered arbitration a potential trap for businesses.  Arbitrators carry the same preconceptions as jurors or judges.  That is the reason we have appellate courts, but arbitration precludes any appellate review.

Expect to see arbitration clauses that allow courts to determine class arbitrability. A remaining question is whether an arbitration clause can allow the arbitrator to determine arbitrability but restrict questions of class arbitrability to a court. 

Lew Hassett is Co-Chairman of the firm's Insurance and Reinsurance Practice and Chair of the firm's Litigation Practice.  His focus is complex civil litigation, including insurance and reinsurance matters, business torts and insurer insolvencies.  Mr. Hassett received his bachelor's degree from the University of Miami and his law degree from the University of Virginia. 

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