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Developments in Consumer Class Actions, Part 2

By Mark L. Weyman and Gail M. Eckstein

Several recent developments have changed the landscape of consumer class action law and policy. In part one of this article, we discussed the Class Action Fairness Act of 2005, which introduced new jurisdictional requirements that will shift many class action lawsuits from state to federal courts. In part two, we will explore the U.S. Supreme Court’s recent decision which resolved a circuit split by determining that diversity jurisdiction extends to all members of a class in a federal action as long as the lead plaintiff in the class meets the statutory threshold for monetary damages. Finally, we will examine the Judicial Arbitration and Mediation Services (JAMS), a large private alternative dispute resolution (ADR) company, that recently changed its policy regarding the enforcement of provisions in consumer contracts that prohibit class action arbitration. Shortly after announcing that it would no longer necessarily enforce such provisions, JAMS did a complete turnaround and withdrew its “new” policy. Instead, JAMS will now apply the law on a case by case basis in each jurisdiction. The Class Action Fairness Act, the Supreme Court decision concerning diversity jurisdiction, and the JAMS flip-flop in policy will have interesting and far-reaching implications on class action lawsuits brought in the future.

Federal Class Action Claims: Can Federal Courts Exercise Jurisdiction Over All Class Members?

On June 23, 2005, the Supreme Court resolved a circuit split by determining that diversity jurisdiction over potential class action claims applies to all members of the class so long as the lead plaintiff meets the statutory requirement for monetary damages. In Exxon Mobil Corp. v. Allapattah Services, Inc.,1 the Supreme Court held that the supplemental jurisdiction statute, 28 U.S.C. § 1367, permits the exercise of diversity jurisdiction by federal courts over additional class members who fail to satisfy the minimum amount-in-controversy requirement as long as at least the named plaintiff meets the $75,000 statutory requirement.

The circuits had been split as to the correct statutory interpretation of 28 U.S.C. § 1367, which provides for federal supplemental jurisdiction over related claims. In Exxon Mobil, the Supreme Court decided two cases in one opinion, both affirming a decision by the 11th Circuit Court of Appeals holding that federal courts may exercise supplemental jurisdiction over potential class members who claim damages below the statutory threshold, and at the same time reversing a 1st Circuit decision that removed such class members from the potential pool due to their failure to meet the statutory minimum. The Supreme Court decision in Exxon Mobil concluded that so long as the district court has original jurisdiction over one claim in the complaint, “the presence of other claims in the complaint, over which the district court may lack original jurisdiction, is of no moment.”2 Thus, if the federal court has original jurisdiction over one claim, “it has original jurisdiction over a ‘civil action’ within the meaning of 1367(a), even if the civil action over which it has jurisdiction comprises fewer claims than were included in the complaint.”3

Similar to the Class Action Fairness Act of 2005, this decision further expands the ability of federal courts to hear class action cases. Now, as long as one plaintiff meets the $75,000 threshold, the claims of the entire class may be heard in federal court even if, unlike claims under the act, the aggregate amount in controversy does not exceed $5 million or there are fewer than 100 class members.

JAMS’ “About-Face”: Will Consumer Contract Provisions Prohibiting Class Action Arbitration be Enforced?

Unlike the federal courts, one class action docket that will not grow so dramatically is that of JAMS, although things looked quite different a short time ago. JAMS, a large private alternative dispute resolution company, announced on November 12, 2004, that it would no longer necessarily enforce provisions in consumer contracts that prohibit class action arbitration. Specifically, JAMS announced its new policy saying that it is “inappropriate for a company to restrict the right of a consumer to be a member of a class action arbitration or to initiate a class action arbitration.” Accordingly, JAMS stated that it would “not enforce these clauses in class action arbitrations and will require that they be waived in individual cases.” JAMS called on companies to remove provisions precluding class action arbitrations from their contracts, “understanding that the inclusion of such clauses is an unfair restriction on the rights of the consumer.” As described below, however, JAMS has since performed an about-face and rescinded the new policy.

Speculation as to what motivated JAMS to announce this policy change ranged from business reasons to image concerns. Several observers commented that JAMS caved in after months of loud complaints from the defense bar that JAMS was favoring the plaintiffs’ bar. However, JAMS had always disputed that perception, stating that both plaintiffs and defendants have always misrepresented its position.

Several legal challenges arose in response to JAMS’ first policy change. Prevailing law at the time of the announcement was articulated in the Supreme Court case of Green Tree Fin’l Corp. v. Bazzle.4 In this plurality opinion, the Supreme Court had determined that decisions concerning class actions in arbitration shall be made by the arbitrator, unless the parties specifically provided otherwise in their agreement. In Bazzle, the Supreme Court declined to rule that class actions were inconsistent with arbitration unless expressly authorized by the parties. Following JAMS’ announcement that it may possibly disregard these class action-waivers, confusion and uncertainty set in as to how this new policy would hold up in court.

The case of Gipson v. Cross Country Bank 5 arose as the first judicial challenge to the JAMS’ original policy. Gipson had sued in 2003 on behalf of a class of cardholders, alleging that the delay in application of her payments to her Visa card was a violation of the Fair Credit Billing Act. In accordance with the terms of the cardholder agreement that required arbitration and contained a waiver of class claims, Cross Country Bank moved to compel arbitration pursuant to JAMS’ rules. The Court granted the motion and compelled non-class arbitration of Gipson’s claims. Shortly prior to JAMS’ announcement, the arbitrator issued an order stating that “since the question of enforceability of the class prohibition, as well as any other questions which do not go to the issue of validity of the arbitration clause are mine to determine, the prior determination of those issues by the District Court is of no moment.”

Cross Country Bank then moved for enforcement of the court’s prior non-class arbitration order, and that plaintiff be enjoined from the pursuit of class claims in arbitration. In addition, Cross Country requested that JAMS’ new policy (which had since been announced) not be applied. The court determined that the class-action waiver in the agreement was “enforceable as a matter of law, without a need for arbitrator interpretation,” since Gipson had expressly waived class claims by signing the cardholder agreement. Harshly criticizing JAMS’ new policy, the judge concluded that the authority of arbitrators cannot go beyond the boundaries of the court’s order since arbitrators derive their authority from court orders. The court subsequently enjoined Gipson from pursuing her claims on a classwide basis, and expressly rejected her efforts to enforce JAMS’ new policy.

Within several months of this first policy change, JAMS began a complete turnaround and issued an addendum in December 2004 to clarify how the new policy would be implemented. In March 2005, JAMS officially revoked its new policy by issuing a press release withdrawing its November 2004 class action arbitration waiver policy. JAMS purportedly reversed its policy in response to decisions such as Gipson, and widespread criticism from the defense bar that JAMS had departed from its “core value of neutrality.” In its December addendum, JAMS noted that the claimant is “free to argue the invalidity of the preclusion clause to the arbitrator and, under Bazzle, the arbitrator has the authority to determine whether the arbitration can proceed as a class action.” In February 2005, JAMS issued new class action procedures. They provide, in pertinent part, as follows:

Rule 2. Construction of the Arbitration Clause Once appointed, the Arbitrator shall determine as a threshold matter whether the applicable arbitration clause permits the arbitration to proceed on behalf of or against a class. In construing the applicable arbitration clause, the Arbitrator shall not consider the existence of these Supplementary Rules to be a factor either in favor of or against permitting the arbitration to proceed on a class basis.

The Arbitrator may set forth his or her determination in a partial final award subject to immediate court review.

The parties are free, of course, to seek judicial intervention concerning whether waivers of class actions in arbitration clauses will be enforced.

The consequences of JAMS’ turnaround remain to be seen, as the policy flip-flop still leaves many unanswered questions on both sides of the class action equation. Most importantly, will a JAMS arbitrator enforce provisions waiving class action arbitrations in situations where neither party seeks judicial intervention? If not, much of the advantage of arbitration will be lost as every defendant will likely also go to court to enforce its contract provisions before an arbitration can proceed. Only time will tell whether JAMS’ turnaround will promote or impede the arbitration process.

Class actions continue to be a hot button topic in the field of litigation. The Class Action Fairness Act, the Supreme Court’s Exxon Mobil decision regarding diversity jurisdiction, as well as the pressure to enforce waivers of class action in the arbitration context, constitute three important focuses of that reform.

Notes
1 Exxon Mobil Corp. v. Allapattah Services, Inc., 125 S. Ct. 2611 (2005).
2 Exxon Mobil, 125 S. Ct. at 2620.
3 Id. at 2620-21.
4 Green Tree Fin’l Corp. v. Bazzle, 539 U.S. 444 (2003).
5 Gipson v. Cross Country Bank, 354 F. Supp.2d 1278 (M.D. Ala. 2005).

ABOUT THE AUTHORS

Mark L. Weyman and Gail M. Eckstein are attorneys in Anderson Kill’s New York office and members of the firm’s Commercial Litigation Group. Mr. Weyman and Ms. Eckstein frequently represent defendants in class actions. Mr. Weyman can be reached at 212-278-1852 or mweyman@andersonkill.com. Ms. Eckstein can be reached at 212-278-1527 or geckstein@andersonkill.com.

This article originally appeared in the Spring 2006 issue of AKO Commercial Litigation Advisor, published bi-annually by Anderson Kill & Olick, P.C.

Read Developments in Consumer Class Actions (Part 1)

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May 2006