Enforceability of Arbitration Clauses & e

© 2014 Lathrop & Gage LLP
Michael A. Clithero
Emily Kiser
© 2014 Lathrop & Gage LLP
Association of Corporate Counsel, St. Louis Chapter
July 15, 2014
Michael A. Clithero
© 2014 Lathrop & Gage LLP
Class Action Litigation is Well-Established
 Primary advantage of class litigation is the ability to pursue claims that may be too
expensive to pursue individually.
 From Plaintiffs’ perspective, the excessive costs necessary to defend encourage
© 2014 Lathrop & Gage LLP
Are Class Actions an Advantage?
 As reported in the Wall Street Journal, the Mayer Brown law firm just released a
study for the Chamber of Commerce Institute for Legal Reform finding that, in a
vast majority of class actions, class members end up empty handed.
 Out of 148 federal class actions reported by two major litigation publications in
2009, none of the cases had resulted in a judgment in favor of the plaintiffs.
 In fairness, 21 (or 14%) of the cases remain pending.
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Are Class Actions an Advantage?
 Of the 127 cases that had been resolved by September 2013
35% were voluntarily dismissed by the plaintiffs,
31% were dismissed on the merits by the court, and
33% were settled.
 According to the study, only 33% of federal class actions settled compared with
67% for all federal cases.
 Mayer Brown reported that of the 6 cases in their data set for which settlement
distribution data was public, 5 delivered funds to only miniscule percentages of the
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Arbitration As An Alternative to Litigation is Well-Established
 Primary advantages are
Lower costs
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The Prevalence of Arbitration Clauses
 In a study released by the U.S. Consumer Financial Protection Bureau, the CFPB
found that
More than 50% of credit card loans fall under arbitration clauses.
Around 8% of banks, covering 44% of insured deposits, have arbitration clauses in
checking account contracts.
 Among prepaid card contracts that the CFPB examined, 81% have arbitration
 The CFPB stated that one of its “most notable findings” was that larger companies
are more likely to include arbitration clauses in these contracts than community
banks or credit unions.
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Collective or Class Arbitrations
 Collective or class arbitrations are a relatively new development
 Inevitable collision between plaintiffs seeking cost effective pursuit of small claims
and their contractual requirement to arbitrate their claim
 The case law has taken some time to develop in this area and, as you can see, is
still not entirely clear
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Federal Arbitration Act
At the center of the dispute is the Federal Arbitration Act (“FAA”), which the U.S.
Supreme Court has consistently supported since its enactment in 1925.
A written provision in any maritime transaction or a contract evidencing a
transaction involving commerce to settle by arbitration a controversy thereafter
arising out of such Contract or transaction . . . shall be valid, irrevocable, and
enforceable save upon such grounds as exist at law or in equity for the
revocation of any contract. 9 U.S.C. § 2.
Courts have generally delineated those grounds as fraud, duress, or unconscionability.
Further, when there are doubts about the scope and enforceability of an arbitration
agreement, the strong federal policy supporting arbitration directs courts to resolve
such concerns in favor of arbitration.
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Class Actions Not Prohibited Unless Precluded in Arbitration Clause
In Green Tree Financial Corp. v. Bazzle, 539 U.S. 444 (2003), the United States
Supreme Court ruled that the Federal Arbitration Act (“FAA”) does not foreclose class
arbitration where the arbitration clause in question does not clearly preclude class
arbitration. The court remanded the case for the arbitrator to decide whether the class
action claims could be arbitrated.
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Prohibition of Class Arbitration Found to be Unconscionable
Upon challenge, many courts, including those in Missouri, held that the contractual
prohibition of class arbitration is both procedurally and substantively unconscionable
and thus unenforceable. See, e.g. Whitney v. Alltel Communications, Inc., 173 S.W.3d
300 (Mo.App. W.D. 2005).
The unconscionability of class action prohibitions in arbitration clauses became known
as the Discover Bank rule. Discover Bank v. Superior Court, 113 P.3d 1100 (2005)
(prohibition on class actions in arbitration clause is unconscionable).
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Parties Must Expressly Agree to Class Arbitration
 The U.S. Supreme Court retreated from Bazzle in Stolt-Nielsen S.A. v. Animalfeeds
International Corp., 559 U.S. 662 (2010). The arbitrators had followed the generally
accepted post-Bazzle assumption that arbitrators could order class arbitration
absent the parties’ express intent to preclude class arbitration. However, the Court
Arbitration is a matter of consent
The differences between bi-lateral arbitration and class arbitration are so great,
including the limited scope of judicial review, that mere silence on the issue of class
arbitration cannot constitute a party’s consent to class arbitration.
Accordingly, “a party may not be compelled under the FAA to submit to class arbitration
unless there is a contractual basis for concluding that the party agreed to do so.”
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Preclusion of Class Actions in Arbitration Clause Not Unconscionable
 In AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011), the U.S. Supreme
Court ruled that the California Discover Bank Rule is preempted by the FAA. The
court espoused three primary reasons for its ruling.
1. The switch from bi-lateral to class arbitration sacrifices the principal advantage of
arbitration – its informality – and makes the process slower, more costly, and more
likely to generate procedural morass than final judgment.
2. Class arbitration requires procedural formality in order to bind those not present for the
3. Class arbitration greatly increases risk to defendants. The absence of multi-layer
review makes it more likely that errors will go uncorrected because review focuses on
misconduct rather than mistake and parties may not contractually expand the grounds
or nature of judicial review.
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Arbitration Clause Enforced As Written Unless Preempted
On June 20, 2013, the U.S. Supreme Court held that courts cannot invalidate
arbitration agreements which waive class actions unless there is an express
congressional statement that class action proceedings are so necessary to a federal
claim as to preempt the Federal Arbitration Act. American Express Company v. Italian
Colors Restaurant, 133 S.Ct. 2304 (2013).
Neither Rule 23 on class actions nor the Sherman and Clayton Acts constituted such
an express Congressional statement of entitlement to class proceedings.
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Additional Attempts to End Run Concepcion
 The NLRB ruled that homebuilder D.R. Horton had violated “concerted activity”,
Section 8(a)(1) of the Act, by requiring employees to sign arbitration agreements
forbidding them to file a class action or collective claims over wages and benefits.
 In reversing the NLRB ruling, Fifth Circuit noted that no court had ever found that
protected concerted activity “prohibited class action waivers and arbitration
agreements”. The majority added that the NLRB “did not give a proper weight” to
an equally important statute, the Federal Arbitration Act, which says that arbitration
agreements are valid and enforceable.
D.R. Horton, Inc. v. National Labor Relations Board, 737 F.3d 344 (Fifth Circuit
© 2014 Lathrop & Gage LLP
Class Arbitration May Still Be Ordered
 In July 2013, the United States Supreme Court affirmed an arbitrator’s decision to
accept an arbitration brought by 20,000 doctors against an insurance company
even in the absence of clear language indicating consent to class arbitration.
Based their decision on the fact that the arbitrator had interpreted the contract to
include consent for the arbitration
The Court refused to examine whether that decision was wrong in light of limited judicial
review of arbitration rulings
 Oxford Health Plans v. Sutter, 133 S.Ct. 2064 (2013)
© 2014 Lathrop & Gage LLP
Missouri Decisions at Odds With Concepcion
 The Concepcion opinion was addressed by the Supreme Court of Missouri in two
opinions issued on March 6, 2012.
 In Robinson v. Title Lenders, Inc., 364 S.W.3d 505 (Mo. 2012), the Court followed
the holding in Concepcion and held that an arbitration agreement was not
unenforceable based merely on its class waiver provision. However, the Court
remanded the case for determination of borrower’s unconscionability claims that
were not related to the arbitration agreement’s class waiver.
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Arbitration Clause Found Unconscionable By Missouri
 In Brewer v. Missouri Title Loans, 364 S.W.3d 486 (Mo. 2012), the Missouri
Supreme Court held that a class arbitration waiver was unconscionable and
invalidated the arbitration clause in the agreement. The Court interpreted
Concepcion to dictate a review that limits the discussion to whether state law
defenses such as unconscionability impact the formation of a contract.
“[T]he analysis in this Court’s ruling today . . . no longer focuses on a
discussion of procedural unconscionability or substantive unconscionability,
but instead is limited to a discussion of facts relating to unconscionability
impacting the formation of the contract. Future decisions by Missouri’s
courts addressing unconscionability likewise shall limit review of the
defense of unconscionability to the context of its relevance to contract
© 2014 Lathrop & Gage LLP
Arbitration Clause Found Unconscionable By Missouri
 In finding the arbitration clause unconscionable, the Court highlighted
the title company’s superior bargaining position
that the entire agreement was non-negotiable
that the terms were one-sided in that the parties were to bear their own costs
that the title company did not waive its right to seek attorney’s fees and reserved its
right to forego arbitration to seek possession of the collateral in the event of default by
judicial or other process and
that it was unlikely that consumers could retain counsel to pursue individual claims
given the size of the claims
 The Missouri Supreme Court thus embraced the concept already rejected by the
U.S. Supreme Court – that when bringing a claim is cost prohibitive, class actions
are allowed regardless of the contractual waiver.
© 2014 Lathrop & Gage LLP
Where Does That Leave the Drafter of an Arbitration Clause?
 Federal courts are likely to enforce your arbitration clause as written, even in
In Davis v. Sprint Nextel Corp., 2012 WL 5904327 (W.D. MO. Nov. 26, 2012), the Federal
District Court for the Western District of Missouri followed Brewer’s direction to analyze
enforcement of an arbitration clause based on unconscionability impacting the formation of
the agreement rather than through the lens of procedural and substantive
unconscionability. The Davis court then summarily rejected a claim by plaintiff that the
arbitration agreement was unconscionable because it barred class wide action. The district
court further noted that the contract presented to plaintiff was a standardized nonnegotiable form and that Sprint wields greater bargaining power than plaintiff, but found
that those facts do not establish unconscionability under Missouri law. The district court
noted that the arbitration agreement was not hidden and that plaintiff did not allege Sprint
used any high-pressure sale tactics to coerce her into signing the subscriber agreement.
Accordingly, the district court enforced the arbitration provision.
© 2014 Lathrop & Gage LLP
Where Does That Leave the Drafter of an Arbitration Clause?
 In Bush v. AT&T Corp., 2012 WL 6016719 (W.D. Mo. Dec. 3, 2012), the Federal
District Court for the Western District of Missouri rejected plaintiff’s arguments that
the mandatory arbitration provision was inherently unconscionable, that the
defendant misrepresented the agreement’s cancellation provision, and that the
arbitration provision should not be enforced in light of Brewer and Robinson.
First, the district court noted that mandatory arbitration agreements are permissible
except in insurance contracts.
Second, the district court noted that it may only consider fraud in the inducement of the
arbitration clause itself and allegations that there was fraud or misrepresentation in the
inducement of the contract as a whole must be considered by an arbitrator, because
the arbitration provision is enforceable apart from the remainder of the contract.
Finally, the district court stated that Brewer and Robinson have “arguably already been
superseded” by the U.S. Supreme Court’s decision in Concepcion.
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Where Does That Leave the Drafter of an Arbitration Clause?
Issue still as to whether court or arbitrator decides whether agreed to class action
Plaintiff can assert a statute that guaranties his right to class proceedings for a
particular claim.
© 2014 Lathrop & Gage LLP
Missouri State Courts Do Not Favor Arbitration
 Missouri courts have found the class waiver arbitration provisions to be
unconscionable even after Concepcion. (Brewer)
 Another way around Concepcion is to find that there was no actual agreement to
This ruling is found in Jay Wolfe Used Cars of Blue Springs LLC v. Jackson, 428
S.W.3d 683 (Mo.App. W.D. 2014).
© 2014 Lathrop & Gage LLP
Wolfe – No Agreement to Arbitrate
 The court found that the individual car buyers had not agreed to arbitration based
upon the review of the two (2) documents associated with purchase of a car.
 The court refused to read the two documents together to find an agreement to
Cash sale agreement”
Cash Sale Agreement
Jay Wolfe
Arbitration Clause
Retail Installment Contract
Retail Installment Contract
Tyrell and Liane Jackson
Tyrell and Liane Jackson
Arbitration Clause
Jay Wolfe Auto Outlet
Jay Wolfe LLC does business as Jay Wolfe Auto Outlet
Jay Wolfe is registered to Saturn of Kansas City, Inc.
© 2014 Lathrop & Gage LLP
Practice Pointers
Brewer also reopens some issues which had been relatively established prior to that
For instance, Concepcion directed courts to enforce arbitration agreements according
to their own terms and ruled that states cannot require a procedure that is inconsistent
with the FAA, even if it is desirable for unrelated reasons. To the contrary, Brewer finds
unrelated reasons, including the unavailability of counsel given the de minimis size of
the claims, to avoid enforcement of the arbitration agreement.
In addition, Brewer seems to challenge the validity of contracts of adhesion whereas on
the same day the same Supreme Court of Missouri recognized such contracts as
hallmarks of modern consumer contracts. (Robinson)
Further, Brewer seems to require the substantive rights afforded to each party under
the contract to be even-handed in order to avoid a finding of unconscionability.
© 2014 Lathrop & Gage LLP
Drafters and litigants must be diligent in their research and knowledge of recent
decisions and the analysis of those facts to their particular arbitration clause.
You may want to consider including certain provisions in your arbitration agreement for
the purpose of increasing the chance of enforceability
Create a stand alone agreement signed by each party
Create an informal resolution process prior to initiation of arbitration
Choose venue for arbitration in county of consumer’s residence
Cover some of consumer’s arbitration costs
Don’t reserve remedies to the company not available to the consumer
Include in the arbitration agreement a statement of basis for coverage under the FAA will help
keep the Concepcion analysis in the discussion
© 2014 Lathrop & Gage LLP
Businesses interested in continuing or beginning the use of arbitration agreements
should work with counsel and take the time to evaluate whether inclusion of a class
action waiver is desirable in view of the risk and benefits. Arbitration agreements can
no longer be “one size fits all” in nature. In addition, companies will need keep in mind
the likelihood of having to revise their agreements, or implement substantially different
ones, as the law in this area continues to evolve.
© 2014 Lathrop & Gage LLP
FOR 2014
Emily Kiser
© 2014 Lathrop & Gage LLP
Update to E-Discovery 2014
 Fed. R. Civ. Pro. 26 et seq.
 Rule 26(b) Discovery Scope and Limits.
 (1) Scope in General. Unless otherwise limited by court order, the scope of
discovery is as follows: Parties may obtain discovery regarding any
nonprivileged matter that is relevant to any party's claim or defense--including
the existence, description, nature, custody, condition, and location of any
documents or other tangible things and the identity and location of persons who
know of any discoverable matter. For good cause, the court may order
discovery of any matter relevant to the subject matter involved in the action.
Relevant information need not be admissible at the trial if the discovery appears
reasonably calculated to lead to the discovery of admissible evidence. All discovery
is subject to the limitations imposed by Rule 26(b)(2)(C).
© 2014 Lathrop & Gage LLP
Update to E-Discovery 2014
 December 1, 2013 Updates to Rule 37 and to Rule 45
 Rule 37
Failure to Make Disclosures or to Cooperate in Discovery; Sanctions
 The motion must include a certification that the movant has in good faith conferred or
attempted to confer with the person or party failing to make disclosure or discovery in an effort
to obtain it without court action.
This motion may be made if:
 (i) a deponent fails to answer a question asked under Rule 30 or 31;
 (ii) a corporation or other entity fails to make a designation under Rule 30(b)(6) or 31(a)(4);
 (iii) a party fails to answer an interrogatory submitted under Rule 33; or
 (iv) a party fails to respond that inspection will be permitted--or fails to permit inspection--as
requested under Rule 34.
 An evasive or incomplete disclosure, answer, or response must be treated as a failure to
disclose, answer, or respond.
© 2014 Lathrop & Gage LLP
Update to E-Discovery 2014
 Rule 37
Relief sought under Rule 37 can include:
 directing that the matters embraced in the order or other designated facts be taken as
established for purposes of the action, as the prevailing party claims;
 (ii) prohibiting the disobedient party from supporting or opposing designated claims or
defenses, or from introducing designated matters in evidence;
 (iii) striking pleadings in whole or in part;
 (iv) staying further proceedings until the order is obeyed;
 (v) dismissing the action or proceeding in whole or in part;
 (vi) rendering a default judgment against the disobedient party; or
 (vii) treating as contempt of court the failure to obey any order except an order to submit to a
physical or mental examination.
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Update to E-Discovery 2014
 Rule 45 General Information
 Command to Attend a Deposition--Notice of the Recording Method. A subpoena commanding
attendance at a deposition must state the method for recording the testimony.
 Combining or Separating a Command to Produce or to Permit Inspection; Specifying the
Form for Electronically Stored Information. A command to produce documents, electronically
stored information, or tangible things or to permit the inspection of premises may be included
in a subpoena commanding attendance at a deposition, hearing, or trial, or may be set out in
a separate subpoena. A subpoena may specify the form or forms in which electronically
stored information is to be produced.
 Command to Produce; Included Obligations. A command in a subpoena to produce
documents, electronically stored information, or tangible things requires the responding
person to permit inspection, copying, testing, or sampling of the materials.
© 2014 Lathrop & Gage LLP
Update to E-Discovery 2014
 Rule 45—All Subpoenas Issue from the Trial District:
Under the old Rule 45, trial subpoenas had to issue from the district where the trial
would be held, deposition subpoenas had to issue from the district where the deposition
would be taken, and document subpoenas had to issue from the district where the
production would be made.
The new Rule 45(a)(2) simplifies the whole process by providing that all
subpoenas “must issue from the court where the action is pending.”
Can be served anywhere in the United States
© 2014 Lathrop & Gage LLP
Update to E-Discovery 2014
 Place of Compliance:
 The new Rule 45(c) clarifies that a non-party subpoena (whether a trial,
deposition or document subpoena) is only returnable “within 100 miles
of where the person resides, is employed, or regularly transacts
business in person.”
 The only exception is that the 100-mile limit can be expanded to include
the entire state if the non-party is commanded to attend a trial in the
state and “would not incur substantial expense.”
 The geographical compliance rules also apply to document
subpoenas that include requests for electronic data.
© 2014 Lathrop & Gage LLP
Update to E-Discovery 2014
 Enhanced Notice: Under the old Rule 45, notice had to be served on each party to
a lawsuit before a document subpoena could be served.
It has been clarified to require that, prior to the service of the subpoena, each party to
the lawsuit not only be given notice of the subpoena, but also be provided with a copy
of the subpoena so that the subpoena can be timely challenged if necessary.
 Transfer to the Trial Court: Under the old Rule 45, subpoena-related motions
were generally heard in the district where the subpoena was issued.
Under the new Rule 45(f), subpoena motions can be transferred to the trial district if the
person subject to the subpoena consents or if there are exceptional circumstances
© 2014 Lathrop & Gage LLP
Update to E-Discovery 2014
 Sanctions—Amendment Combines Rule 37 and 45:
Rule 37(b)(1) has been amended to accommodate the transfer of subpoena-related
motions under new Rule 45(f).
Now, if a deposition-related motion is transferred to the trial district, a subsequent
violation by the deponent of the trial court’s decision will be treated as contempt of
court in both districts
© 2014 Lathrop & Gage LLP
Update to E-Discovery 2014
 Preservation Issues
Preservation shall trigger when “litigation is triggered or reasonably pending…”
 Failure to preserve can be deemed gross negligence
Gross negligence can almost assure sanctions
Litigation hold, triggering preservation, needs to come from senior management
 Due to privilege issues
Only a fraction of what is preserved is ever used
 Microsoft, in light of proposed rule changes, has reported that for every 1 page of preserved
documentation used in litigation, it saves 673,693
Sanctions drive over-preservation and exceedingly high cost to do same
© 2014 Lathrop & Gage LLP
Update to E-Discovery 2014
 Collection of Electronic Data
Self Collection versus Third Party Collection?
 Jurisdictions are split
 Some courts have found self collection fulfills duties set forth in Rules, others have found that
third parties need to collect, to assist in quality control, cooperation with opposing counsel,
Green v. Blitz USA Inc.; U.S. District of Texas
 “Self collection is like the fox guarding the hen house”
© 2014 Lathrop & Gage LLP
Update to E-Discovery 2014
 Self Collection versus Third Party Collection
Self Collection Pros
 Cheaper
 Sometimes, quicker
 More (perceived) control held by client
If court does not believe self collection was appropriate or competently done—any perceived
control might be lost to a sharp discovery order/sanctions
Self Collection Cons
Lost metadata
Not uniform
Difficult to transfer information
Counsel may not be certain of accuracy
No quality control
 Different custodians require different criteria for information transfer
© 2014 Lathrop & Gage LLP
Update to E-Discovery 2014
 Spoliation of Evidence
The failure to preserve what should reasonably have been preserved in light of
litigation, pending litigation, or likely litigation
 Rule 37
 Court may permit additional discovery, costs associated by failure, require party to
undertake curative measures
 Sanctions
 Only when: willful or in bad faith; and
 Caused substantial prejudice; and
 Failure irreparably deprived a party of any meaningful opportunity to present a claim or
© 2014 Lathrop & Gage LLP
Update to E-Discovery 2014
 Spoliation of Evidence—Social Media Example
Lester v. Allied Concrete
 Wife is killed in automobile accident
 Husband brings suit
 Attorney tells Husband to clean up his Facebook page—and Husband deletes certain
photos with him wearing a T Shirt that says, “I (heart) Hot Moms” while drinking a beer.
 16 photos ultimately deleted
 Jury awards husband $10.6 Million
 Court sanctions husband, and attorney, $722,000 and cuts jury award nearly in half
 Attorney?
 Sanctioned for five years
 Was principal in Virginia’s most powerful personal injury firm
 No longer practicing law
© 2014 Lathrop & Gage LLP
Update to E-Discovery 2014
 Who has to pay for e-discovery?
Can get very costly, very fast.
Proposed rules that now are looking to shift the burden of payment for discovery
 Proposed Rule 26(c)(1)(B)
 Still in the works…stay tuned
© 2014 Lathrop & Gage LLP
Update to E-Discovery 2014
 All Together Now…
 Cooperation has become paramount in Judge’s decisions regarding e-discovery,
and proposed amendments to the Federal Rules echo the same:
Proposed Rule change to Rule 1 of the Federal Rules:
 Current Rule— “These rules govern the procedure in all civil actions and proceedings in the
United States district courts, except as stated in Rule 81. They should be construed and
administered to secure the just, speedy, and inexpensive determination of every action and
 Rule change would include litigants, not just the courts, responsible for “speedy and
inexpensive determination of every action and proceeding”
 Proposed Change in Discovery Rules Reflect this Cooperation:
Rule 16—Pre trial Orders may contain non-waiver agreements to protect privilege
Rule 26—Would permit parties to exchange document requests early, before Rule 16
© 2014 Lathrop & Gage LLP
© 2014 Lathrop & Gage LLP
Mike Clithero
Emily Kiser
[email protected]
[email protected]
© 2014 Lathrop & Gage LLP

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