Antitrust Law Daily Wrap Up, STATE UNFAIR TRADE PRACTICES—6th Cir.: Classwide arbitration of New York consumer protection claim was issue for judicial resolution, (Nov 6, 2013)

By Tobias J. Gillett, J.D., LL.M.

The availability of classwide arbitration was an issue for resolution by the court, rather than the arbitrator, unless the parties clearly provided otherwise, and an attorney’s claims, including those under the New York Consumer Protection Act, against legal research company LexisNexis over certain fees were not subject to classwide arbitration under the arbitration clause in the attorney’s subscription agreement, the U.S. Court of Appeals in Cincinnati has ruled (Reed Elsevier, Inc. v. Crockett, November 5, 2013, Kethledge, R.). Moreover, pursuant to the Supreme Court’s decision in American Express Co. v. Italian Colors Restaurant, 133 S.Ct. 2304 (2013), the clause was not unconscionable, despite rendering individual claims “economically unfeasible” and not permitting classwide resolution.

In 2007, Craig Crockett and his law firm, Dehart & Crockett, P.C., subscribed to an online legal research service offered by LexisNexis, a division of Reed Elsevier, Inc. According to Crockett, LexisNexis charged his firm additional fees for the use of services outside his subscription plan without providing prior notice that the use of the services would incur additional fees, even though it told customers that a warning would be provided if a subscriber was about to use a database outside of the subscriber’s plan. Dehart & Crockett, P.C. later dissolved, and Crockett formed the Crockett Firm, which entered into a subscription agreement with LexisNexis that was materially identical to the former firm’s plan.

In 2010, Crockett filed an arbitration demand with the American Arbitration Association, pursuant to the arbitration clause in the subscription agreement, on behalf of himself and two putative classes, one of law firms charged additional fees by LexisNexis and the other of their clients. The demand asserted claims for fraud, negligent misrepresentation, breach of contract, negligence, gross negligence, unjust enrichment, and violation of the New York Consumer Protection Act, and sought damages in excess of $500 million. LexisNexis filed suit in a federal district court in Ohio, seeking an injunction preventing Crockett from pursuing classwide arbitration. The court granted summary judgment to LexisNexis, and Crockett appealed.

Classwide arbitration. The appellate court upheld the district court’s decision, finding that the district court correctly decided whether the subscription agreement’s arbitration clause authorized classwide arbitration rather than leaving that decision to the arbitrator. The court observed that “the showing necessary for a court to decide that the parties have authorized an arbitrator to determine class wide arbitrability” was not entirely clear.

The court explained that gateway disputes, such as whether the parties have a valid arbitration agreement or whether a binding arbitration clause applies to a certain type of controversy, were “for judicial determination unless the parties clearly and unmistakably provide otherwise.” However, subsidiary questions, such as waiver, delay, or whether a condition precedent to arbitrability had been fulfilled, were presumptively to be decided by the arbitrator.

In Green Tree Fin. Corp. v. Bazzle, 539 U.S. 444 (2003), a plurality of the Supreme Court concluded that classwide arbitrability was a subsidiary question for the arbitrator to resolve. However, the court noted that more recent opinions had made clear that the Supreme Court “had not yet decided whether the availability of class arbitration” was a gateway question. Moreover, the court observed that “recently the Court has given every indication, short of an outright holding, that classwide arbitrability is a gateway question rather than a subsidiary one.”

The court set forth several reasons for the Supreme Court’s characterization of the differences between classwide and bilateral arbitration as “fundamental,” including the lack of assurance that arbitration would provide its usual benefits, such as lower costs, greater efficiency, and speed, on a classwide basis; the greater difficulty of maintaining confidentiality in classwide proceedings; the reduced scope of judicial review despite the higher stakes in classwide arbitration; and the due process concerns presented by an arbitrator’s award that purported to bind absent parties. The court noted that absent parties “must be afforded notice, an opportunity to be heard, and a right to opt out of the class,” and that “where absent class members have not been required to opt in, it is difficult to see how an arbitrator’s decision to conduct class proceedings could bind absent class members who have not authorized the arbitrator to decide on a classwide basis which arbitration procedures are to be used.”

Therefore, the court held that the question whether an arbitration agreement permits classwide arbitration was a gateway matter that was “reserved for judicial determination unless the parties clearly and unmistakably provide otherwise.” Here, the arbitration clause provided that “any controversy” that arose “out of or in connection with this Order” would be resolved by binding arbitration, but did not mention classwide arbitration. Although the language could be interpreted as assigning the question of classwide arbitrability to the arbitrator, the court found the agreement could “just as easily be read to speak only to bilateral arbitration.” Moreover, the clause limited its scope to issues arising out of “this Order,” as opposed to issues arising out of the orders of other customers. Thus, the agreement did not provide for classwide arbitration, in the court’s view.

Unconscionability. Finally, the court addressed Crockett’s argument that the arbitration clause would be unconscionable if it were not read to permit classwide arbitration. The court agreed that the clause was “one-sided,” and “as a practical matter makes it economically unfeasible for Crockett or any other customer to assert the individual claims that Crockett” sought to assert. The clause required arbitration to occur in Dayton, Ohio, where LexisNexis was headquartered; the customer had to pay his or her own legal fees, even if LexisNexis’s charges were found to be improper; and the customer would have to split the arbitrator’s fee with LexisNexis. However, the court observed that the Supreme Court, in a case addressing an antitrust action brought by merchants against American Express, had found a similarly one-sided and adhesive arbitration clause to be enforceable, despite the absence of a class-action right (American Express Co. v. Italian Colors Restaurant, 133 S.Ct. 2304, 2013-1 Trade Cases ¶78,432). Therefore, the agreement was not unconscionable.

The case is No. 12-3574.

Attorneys: Blair C. Fensterstock (Fensterstock & Partners LLP) for Craig Crockett. Charles J. Faruki (Faruki, Ireland & Cox, P.L.L.) for Reed Elsevier, Inc.

Companies: Craig M. Crockett, P.C.; Reed Elsevier, Inc.

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