Using class action waiver and arbitration clauses to mitigate cyber breach risk: Anticipating and responding to coming change after Justice Scalia

Daniel P. Shapiro, Partner, Katten Muchin Rosenman LLP, Chicago - Print  | 

The specter of a data breach, and the class action litigation that regularly follows, is a common worry in the health care space. Yet class action litigation arising out of a data breach is only the most recent focal point for the plaintiffs' class action bar.

Other industries have already had their turn in the class action cross hairs. In fact, the health care industry can benefit from the experience of other industries as it confronts this problem. There are ways to mitigate this class action risk, but it is necessary to account for recent changes and developments in the law and the courts.

Class action waiver and arbitration clauses are now widely used to mitigate the risk of class action litigation. These clauses were developed in response to a wave of class litigation that was perceived to be delivering little benefit to class members, while creating a substantial and unfair burden for defendants. Now, however, it seems that the pendulum is swinging in the other direction. Class action waiver and arbitration clauses are themselves being called unfair and abusive, and are under attack. In order to preserve this useful risk management tool, it may be necessary to modify the terms of these clauses. We discuss below the state of play regarding the enforceability of class action waiver and arbitration clauses, and the choices that businesses may need to consider.

Two years ago, we published an article for the health care industry on what was then a developing line of cases from the United States Supreme Court. The Court had provided, through a series of opinions between 2010 – 2013 (another opinion in this line came down in 2015), what was, in effect, an instruction manual on the proper use of class action waiver clauses and arbitration provisions in contracts. (An appendix listing and briefly describing these opinions is attached.) Virtually every business that had any meaningful number of customers, either business-to-consumer or business-to-business, had (and has) the opportunity to take a hard look at the benefits that might be realized through the use of these contract provisions, as outlined by the Court.

At the same time, however, there have been at least three significant developments that we believe now require modification of typical class action waiver clauses and arbitration provisions.

First, the Supreme Court's line of cases from 2010-2015, and the resultant increased use of class action waiver clauses and arbitration provisions, has attracted substantial, negative public attention. We believe that this will, as a practical matter, make it more difficult to enforce these contract provisions in the future.

Second, the lower courts have shown surprising and open resistance to the rulings of the Supreme Court in this area. Again, enforcement of these clauses in the future will, as a result, be less reliable.

Third, Justice Scalia was both the author and intellectual champion of the Supreme Court opinions that define this body of law. In his absence, it is doubtful that the broad use and enforcement of these contract provisions will have as able a defender as these contracts come under increasing pressure. As challenges to Justice Scalia's jurisprudence work their way through the courts, we believe that his original opinions supporting the enforceability of these clauses will be weakened.

Each of these factors calls for thoughtful and careful adjustment to contract language in order to anticipate change that we believe is on the way.

A. Public Scrutiny and Perceived Unfairness.
The impact of these key Supreme Court cases and the resultant use of class action waiver and arbitration clauses has attracted substantial, negative attention from the public. For example, in October and November 2015, just a few months ago, the New York Times ran a three-part, front-page (above the "fold") series focusing on the use of class action waiver clauses and arbitration provisions and their impact on consumers. In essence, the Times reported that these contract provisions, in operation, are leaving consumers without meaningful remedies and are creating substantial unfairness, insulating companies from having to answer for wrongful conduct.

At about the same time, on October 7, 2015, the Consumer Financial Protection Bureau ("CFPB") announced that it is considering proposing rules that would ban financial services companies "from using 'free pass' arbitration clauses" to block consumers from bringing class actions. The CFPB's announcement has also attracted significant public attention. If implemented, the CFPB rules will apply only to financial services companies, but that is a significant portion of the marketplace, and, as a "thought leader", one can expect the CFPB's stance to impact other decision makers, including the courts.

B. What the Rest of the Courts Have Been Doing.
In a survey we conducted of recent court activity by the federal Courts of Appeals, which are, among other things, supposed to follow and implement the rulings of the United States Supreme Court, we found a remarkably high incidence of those courts avoiding, and even flatly rejecting, the Supreme Court's directives. In other words, the lower courts seem to have decided, fairly often, to preserve class action rights, even in the face of waiver and arbitration clauses.

For example, of the 17 Courts of Appeals opinions for the last 6 months of 2015 that had substantive discussion of the key Supreme Court opinions from 2010 to 2013 – those cases that developed the new waiver and arbitration "rules", 14 of those found a way to preserve the plaintiff's class action claims.

Further, in 2013, just after the Supreme Court decided Comcast Corp. v. Behrend, a key case that expanded the commonality requirements of the class action rules in order to make class actions more difficult to bring, Judge Posner, generally thought to be one of, if not the leading and most influential judge in the United States today, all but rejected the Comcast ruling. In Butler v. Sears Roebuck, 727 F-3d 796 (7th Cir. 2013), Judge Posner upheld a class action where the damages portion of the case would require different treatment among class members. This result was clearly contrary to the limitations imposed by Comcast. In Judge Posner's view, however, this "commonality" issue could be readily managed by the trial court through the use of sub-classes and other administrative tools. In reference to the Comcast decision, Judge Posner said the following:

It would drive a stake through the heart of the class action device... to require that every member of the class have identical damages.

This was more a flat-out rejection of Comcast than a nuanced effort to find an exception to the Comcast rule requiring a very high degree of commonality among class members.

Judge Posner was not alone. Also in 2013, the Ninth Circuit Court of Appeals, based in San Francisco, issued a ruling directly challenging the Supreme Court's 2011 ruling in AT&T Mobility LLC v. Concepcion, another of the Court's opinions that established the "new rules" governing class action waivers. Concepcion is, in some ways, the cornerstone of the Supreme Court's line of cases because it holds that even if a waiver or arbitration clause works an "unconscionable" result on the consumer, the clause will be enforced nonetheless. But in Chavarria v. Ralphs Grocery Co., 733 F.3d 916, 927 (9th Cir. 2013), the court decided that it simply would not apply Concepcion in all instances:

Concepcion cannot be read to immunize all arbitration agreements from invalidation no matter how unconscionable they may be....

In other words, the Ninth Circuit was saying that, notwithstanding Concepcion, if they think that applying Concepcion is really unfair, they are not going to follow the Supreme Court's instruction.

Not to be outdone, or undone, on December 14, 2015, the Supreme Court issued another opinion, slapping down another Ninth Circuit opinion which, like Chavarria, directly challenged the Supreme Court's ruling in Concepcion. In Direct TV, Inc. v. Inburgia, the Court went so far as to insist on obedience by the lower courts, reminding them of the Supremacy Clause of the United States Constitution, making the rulings of the Supreme Court, well, supreme.

One is reminded of the admonition from the captain of a pirate ship to his crew, "The beatings will continue until morale improves." Neither the lower courts, nor the New York Times, will likely ever accept the notion that class action waiver and arbitration clauses should be applied without considerations of fairness.

C. The Impact of Justice Scalia's Absence.

Justice Scalia authored all of the Supreme Court decisions that really created this body of jurisprudence, those four opinions mentioned above written between 2011 and 2013. As the lower courts continue to resist the weight of those opinions, as the CFPB advances its rules cutting directly against the objectives of what Justice Scalia engineered, and, as the public becomes increasingly aware of the impact of this law, it is doubtful that there will be anyone on the Supreme Court who will bring the intellectual vigor to the debate that Justice Scalia would have. Nor is it likely that any other justice will be as motivated, or as able, to defend the law as it presently sits. In other words, as Justice Scalia's doctrine in this area continues to be exposed to challenges we should anticipate change in the law.

Anticipating Change

The objective of class action waiver clauses and arbitration provisions (in this context) is to eliminate, or at least mitigate, the risk of being sued in a class action. Nothing mentioned above necessarily prevents that result, but everything mentioned should be taken into account in designing a strategy. First, it seems clear that the battle line in the debate over these contract provisions is, and will increasingly be, whether they are unfair to the contracting party whose remedies are being reduced, or even eliminated. In fact, in the Concepcion case, AT&T went to great lengths to assure that its waiver and arbitration clause was drafted so that it was explicit about leaving the potential plaintiff with practical, real remedies, short of a class action. Because the position staked out by Justice Scalia in that case, however, was more absolute than incremental and did not depend on the presence or absence of efforts by AT&T to be "fair," fairness has largely dropped out of the discussion, at least in the Supreme Court's articulation of the law. We believe, however, that an assessment of fairness is going to return to a position of prominence as these clauses continue to be tested.

Second, there is risk mitigation value in breaking from the pack and using a waiver clause that is crafted to address these recent opinions, for two reasons. Certainly, a clause that has these newer rules of the road in mind is more likely to survive a challenge. Perhaps as importantly, though, note that class actions are almost always filed by plaintiffs' lawyers who are paid on a contingency fee arrangement. That is, the plaintiff's lawyer has to make a careful assessment of whether the facts before her present a litigation opportunity that warrants the investment of her time and money. We believe that a significant part of risk management in this area is to make your fact pattern unattractive to plaintiff's lawyers. The easiest target for a plaintiff's lawyer is a vanilla class action waiver clause that looks a lot like other such clauses that have already been litigated. The next generation of class action waiver and arbitration clauses, taking these recent developments into account, will not only be substantively better, they will create uncertainty for a potential challenger simply because they are updated.

When all is considered, the choices may be (1) to abandon the idea of class action waiver clauses because they have reached such a point of public awareness and unpopularity that using them in any form presents an unacceptable public relations problem; (2) to use a class action waiver clause in its present "vanilla" form and take the heightened risk that, at some point down the road, that clause will be found to be ineffective; or, (3) to use an updated class action waiver clause that has a lower likelihood of attracting litigation, that addresses fairness issues, and that has an enhanced chance of surviving a challenge if litigation comes.

APPENDIX

A Brief Review of the 2010-2015 Supreme Court Rulings.

The following is a very brief recap of the important Supreme Court opinions regarding the enforceability of class action waivers and arbitration provisions:

1. Stoldt-Nielsen S.A. v. Animalfeeds Int'l Corp.,
(559 U.S. 662) (Stevens, J.):

Here, the Court held that an arbitration clause that is ordinarily enforceable in general will also be enforced to include class action disputes, but only if the arbitration provision specifically states that class action disputes are covered. If the arbitration clause is silent on this point, class actions will not be presumed to be included. The court reasoned that class actions are sufficiently different from ordinary bi-lateral litigation that it will not be presumed that the parties had class litigation in mind.

2. AT&T Mobility LLC v. Concepcion,
131 S. Ct. 1740 (2011) (Scalia, J.):

The lower court held that the effect of a class action waiver on a consumer was unconscionable, and refused to enforce the clause. But the Supreme Court decided that employing an unconscionability defense to defeat the enforcement of a class action waiver and arbitration clause conflicts with and impedes the implementation of the objectives of the Federal Arbitration Act. The Court found that the objectives of the FAA may not be frustrated in this way, and set aside unconscionability as a defense to enforcement. This is a significant development because unconscionability was, until that time, an often and successfully used defense to the enforcement of class action waiver clauses.

3. Wal-Mart Stores, Inc. v. Dukes,
131 S. Ct. 2541 (2011) (Scalia, J.):

The court here tightened the definition of "commonality," one of the required elements of a class action. As a result, class litigation would be harder for plaintiffs to maintain.

4. Comcast Corp. v. Behrend,
133 S. Ct. 1426 (2013) (Scalia, J.):
In this case, the Court further refined, and expanded, the definition of "commonality" to make class actions more difficult to bring, and, indirectly, more expensive and burdensome for plaintiffs lawyers.

5 American Express Co. v. Italian Colors,
133 S. Ct. 2304 (2013) (Scalia, J.):

Here, the Court acknowledged that a class action waiver may leave potential plaintiffs with, in effect, no remedy for small damage claims where individual losses are too small to warrant individual lawsuits. But the Court ruled that there is no guarantee of an available remedy for such wrongs, again rejecting what is, in essence, a "fairness" challenge to class action waivers.

6. Direct TV, Inc. v. Imburgia,
136 S. Ct. 463 (2015) (Breyer, J.):

In this case the Court revisited this same subject of fairness and issued what is, in effect, a decision that reiterates the Italian Colors ruling. In the words of the dissent in Direct TV, which clearly articulates the fault line in the debate,

It has become routine, in a large part due to this Court's decisions, for powerful economic enterprises to write into their form contracts with consumers and employees no-class-action arbitration clauses.... These decisions have predictably resulted in the deprivation of consumers' rights to seek redress for losses, and, turning the coin, they have insulated powerful economic interests from liability for violations of consumer-protection laws. See N.Y. Times, Nov. 1, 2015, p. A1, col.5.

The views, opinions and positions expressed within these guest posts are those of the author alone and do not represent those of Becker's Hospital Review/Becker's Healthcare. The accuracy, completeness and validity of any statements made within this article are not guaranteed. We accept no liability for any errors, omissions or representations. The copyright of this content belongs to the author and any liability with regards to infringement of intellectual property rights remains with them.​

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