Monthly Archives: March 2016

Fourth Circuit Holds that Court, Not Arbitrators, Decides Whether Arbitration Agreement Provides for Class Arbitration

View David Wright's Complete Bio at robinsonbradshaw.comCharacterizing an unpublished 2007 decision to the contrary as a “thin reed” displaced by later Supreme Court guidance, the Fourth Circuit held that the question of whether an arbitration agreement permits class proceedings is a “gateway” issue for the court, and not a procedural question left to the arbitrator to decide. Del Webb Communities, Inc. v. Carlson, No. 15-1385 (4th Cir. March 28, 2016). The case was filed after a builder – facing numerous construction defect claims and an arbitrator’s decision whether to certify those claims as a class proceeding – filed a petition to compel “bilateral arbitration” under the Federal Arbitration Act. The district court found that the decision whether to conduct class arbitration was a threshold question for the arbitrator. A unanimous Fourth Circuit panel disagreed.

After dealing with some jurisdictional issues – including CAFA jurisdiction and the Rooker-Feldman doctrine – the Court found that, although the Supreme Court had not decided the question, the high court’s adumbrations provided strong guidance on the subject. Writing for the panel, Judge Diaz concluded that a decision concerning “class arbitration” was tantamount to a question concerning arbitrability, which placed the issue squarely within the province of the judiciary under prevailing authority. In Stolt-Nielsen S.A. v. AnimalFeeds International Corp., 559 U.S. 662 (2010), the Supreme Court had held that a party cannot be forced to arbitrate on a class-wide basis absent “a contractual basis for concluding that the party agreed to do so.” But the Court didn’t decide in that case who (the Court or the arbitrator) determined whether this “contractual basis” existed. The Fourth Circuit, agreeing with other Circuits on the question, observed that there was a world of difference between assuming the risk of an error in a bilateral arbitration agreement and accepting such a risk in a class arbitration proceeding. The Court viewed this question as tantamount to a decision on the scope of arbitration, which is a question reserved for the court unless the parties have clearly and unmistakably provided to the contrary.

Never mentioned by the Court in its decision is a line of cases holding that when the parties adopt the AAA rules in their contract, they have “clearly and unmistakably” committed the issue of arbitrability to the arbitrator. In Del Webb, the parties had selected the AAA Construction Arbitration Rules, and Rule R-9 of those rules expressly provides that “The arbitrator shall have the power to rule on his or her own jurisdiction, including any objections with respect to the existence, scope or validity of the arbitration agreement.” In a recent North Carolina Business Court decision, Judge Bledsoe – citing numerous federal district and circuit court opinions on the subject – held that the adoption of the AAA rules in the parties’ contract “clearly and unmistakably” committed the issue of the arbitrability of a claim to the arbitrator. But Judge Bledsoe’s case did not involve class arbitration, and it is clear that the Fourth Circuit was not about to give final say to an arbitrator concerning certification of a putative class unless every party to the contract had clearly signed off on that proposition.

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Supreme Court Rebuffs Predominance Challenge to “Donning and Doffing Class”

View David Wright's Complete Bio at robinsonbradshaw.comYesterday, the Supreme Court issued its opinion in Tyson Foods, Inc. v. Bouaphakeo, voting 6 – 2 to uphold a jury verdict in favor of employees in a donning and doffing action. The class of employees, certified under Iowa Wage and Hour law pursuant to Rule 23, and as a collective action under the Fair Labor Standards Act, worked in the kill, cut and retrim departments of a pork processing plant. They were required to use protective gear and complained that they weren’t paid for the time spent to put on and take off the necessary protection equipment. Because Tyson didn’t keep records regarding this “donning and doffing” time, the employees (a 3,344 member class) relied on a study performed by an industrial relations expert to prove the average time spent on that activity.

A jury found Tyson liable for failure to pay the employees and awarded damages of $2.9 million, significantly less than the amount provided for in the expert’s study. The Eighth Circuit, over a dissent, affirmed the verdict in a decision we previously commented on in this post.

By direct contrast to the Supreme Court’s 2011 decision in Dukes v. Wal-Mart Stores, Inc., the parties in Tyson did “not dispute that there are important questions common to all class members, the most significant of which is whether time spent donning and doffing the required protective gear is compensable work under the FLSA.” (Wal-Mart held that the absence of a common question doomed the class). But the difficulty arose from the fact that each person in the class needed to establish that the amount of time spent donnng and doffing, when added to his regular hours, amounted to more than 40 hours in a given week, so that overtime was owed. How can this be resolved, Tyson suggested, on a class-wide basis?

The key question, as Justice Kennedy framed it, was whether it could be inferred – based on the evidence – that “each employee donned and doffed for the same average time observed in the [expert’s] sample.” Six justices held that it could, and rejected the notion that so-called “representative evidence” was always impermissible to establish liability in favor of a class. Instead, the court determined that “in many cases, a representative sample is ‘the only practicable means to collect and present relevant data’ establishing a defendant’s liability.”

Distinguishing Wal-Mart, the Court emphasized that representative evidence could not be used as a “means to overcoming [the] absence of a common policy.” In Wal-Mart, the “employees were not similarly situated,” and the evidence submitted in favor of one employee’s claim was not probative of another’s. In Tyson, by contrast to Wal-Mart (where “the experiences of the employees . . . bore little relationship to one another”), each employee “worked in the same facility, did similar work and was paid under the same policy.”

The Court gave short shrift to the second question upon which it had accepted certiorari, namely whether a class may be certified if it contains “members who were not injured and have no legal right to any damages.” In its brief, Tyson had reframed its argument and, in the Court’s estimation, abandoned the argument from its petition. The Court acknowledged that “whether uninjured class members may recover is one of great importance,” but found it was not fairly presented in the case before it, principally because the “damages award has not yet been disbursed nor does the record indicate how it will be disbursed.” In a concurrence, Chief Justice Roberts – who observed that “hundreds of class members suffered no injury” – expressed skepticism that the District Court could devise any means to distribute the aggregate award only to injured class members.

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Merger Litigation Continues in North Carolina

View Adam Doerr's Complete Bio at robinsonbradshaw.comLast month, we previewed the challenge to a settlement of litigation involving the Reynolds-Lorillard merger. The Business Court has helpfully made available the transcript of the hearing on approval of the settlement, which took place on February 12. At the hearing, the Court made clear that it was quite familiar with recent changes in merger litigation in Delaware, including the Trulia case, and stated that it was reviewing the settlement under “strict scrutiny,” not a “rubber stamp standard.” Notwithstanding a shareholder objection supported by Professor Sean Griffith, a Fordham professor who has been involved in the recent Delaware cases, the Court approved the settlement.

During the hearing, the Court also raised an interesting issue regarding the risk that plaintiffs’ counsel face in bringing merger cases in North Carolina. As we have previously discussed,  North Carolina does not recognize the common benefit doctrine, meaning that plaintiffs’ counsel in a class action can only receive attorneys’ fees by obtaining a monetary award for the class or entering into a settlement agreement. The Court indicated that this distinction from Delaware law might create a higher contingent risk in bringing such cases in North Carolina. The Court did not rely on this point because the negotiated fee in Reynolds was equivalent to an hourly rate of $325, well within the range the Court has previously approved, but it will be interesting to see whether the Business Court takes an approach similar to the Delaware Chancery Court, which appears inclined to award significant fees for meritorious claims while cutting down or eliminating fees for routine merger challenges.

Merger cases continue to be filed in North Carolina. Just last week, a shareholder sued PowerSecure, an electric and utility technology company incorporated in Delaware and headquartered in Wake Forest, over its proposed merger with Southern Company. See Michael Morris v. PowerSecure International Inc. et al. We will continue to keep you posted on new developments in this interesting and rapidly changing area.

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