Court of Appeals Addresses Class-wide Arbitration Issue

Our loyal readers know that the decision whether a matter gets sent to arbitration, as opposed to being adjudicated through traditional litigation, can have profound impact, including on timing and costs to the litigants. Even more so, when the case is a proposed class action. A few weeks ago, the Third Circuit weighed in on the issue of the availability of class-wide arbitration, holding that it is generally a question for the court, not an arbitrator, to decide.  See Opalinski v. Robert Half Int'l Inc., No. 12-4444 (3d Cir., July 30, 2014). This week, the petition for rehearing was denied by the panel and the en banc court. See Opalinski v. Robert Half Int'l Inc., No. 12-4444 (3d Cir.) (petition for rehearing denied, 8/27/14).

The plaintiffs brought claims under the Fair Labor Standards Act.  The court noted that the issue was whether a district court, rather than an arbitrator, should decide if an agreement to arbitrate disputes
between the parties to that agreement also authorizes class-wide arbitration. Because of the fundamental differences between class-wide and individual arbitration, and the consequences of proceeding with one rather than the other, the court of appeals concluded that the availability of class-wide arbitration is a substantive “question of arbitrability” to be decided by a court, absent clear agreement otherwise. The only other Circuit Court of Appeals to have squarely resolved the “who decides” issue is the Sixth, which has also held that “whether an arbitration agreement permits
class-wide arbitration is a gateway matter” that is presumptively “for judicial determination.” Reed Elsevier, Inc. v. Crockett, 734 F.3d 594, 599 (6th Cir. 2013).

Plaintiffs had signed employment agreements that contained arbitration provisions. They provided that “[a]ny dispute or claim arising out of or relating to Employee’s employment, termination of employment or any provision of this Agreement” shall be submitted to arbitration. Neither agreement mentioned class-wide arbitration.  Defendant moved to compel arbitration of plaintiffs' claims on an individual basis. The District Court granted the motion in part, thus compelling arbitration but holding that the propriety of individual (also known as bilateral) versus class-wide arbitration was for the arbitrator to decide.

The first part of the analysis was whether the availability of class-wide arbitration is a “question of arbitrability.” See Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79, 83 (2002).  If yes, it is presumed that the issue is “for judicial determination unless the parties clearly and unmistakably provide otherwise.” Id.  If the availability of class-wide arbitration is not a “question of arbitrability,” it is presumptively for the arbitrator to resolve. See First Options of Chi., Inc. v. Kaplan, 514 U.S. 938, 944-45 (1994). “Questions of arbitrability” are limited to a narrow range of gateway issues. They may include, for example, whether the parties are bound by a given arbitration clause or whether an arbitration clause in a concededly binding contract applies to a particular type of controversy. On the other hand, questions that the parties would likely expect the arbitrator to decide are not “questions of arbitrability.”  The Third Circuit has explained that questions of arbitrability generally fall into two categories – (1) when the parties dispute whether they have a valid arbitration agreement at all (whose claims the arbitrator may adjudicate); and (2) when the parties are in dispute as to whether a concededly binding arbitration clause applies to a certain type of
controversy (what types of controversies the arbitrator may decide). Puleo v. Chase Bank USA, N.A., 605 F.3d 172, 178 (3d Cir. 2010).

By seeking class-wide arbitration, plaintiffs contended that their arbitration agreements empower the arbitrator to resolve not only their personal claims but the claims of additional individuals not currently parties to this action. The determination whether defendant must include absent individuals in its arbitrations with named plaintiffs affects whose claims may be arbitrated and is thus a question of arbitrability to be decided by the court. Second, while plaintiffs argued that, because class actions in the context of traditional litigation are a procedural construct, the availability of class-wide arbitration is also a procedural question, the Supreme Court, in Stolt-Nielsen, SA v. Animal Feeds Int'l Corp., had expressly disclaimed class-wide arbitration as simply procedural. 559 U.S. at 687 (the differences between class and individual arbitration cannot be characterized as a question of “merely what ‘procedural mode’ [i]s available to present [a party’s] claims”). The Court stated that class action arbitration changes the nature of arbitration to such a degree that it cannot be presumed the parties consented to it by simply agreeing to submit their disputes to an arbitrator.

Moreover, it is presumed that courts must decide questions of arbitrability unless the parties clearly and unmistakably provide otherwise, said the court. The burden of overcoming the presumption is onerous, as it requires express contractual language unambiguously delegating the question of arbitrability to the arbitrator. Here, the plaintiffs' employment agreements provided for arbitration of any dispute or claim arising out of or relating to their employment but are silent as to the availability of class-wide arbitration or whether the question should be submitted to the arbitrator. Nothing else in the agreements or record suggests that the parties agreed to submit questions of arbitrability to the arbitrator.

This case was remanded for the District Court to determine whether appellees’ employment agreements call for class-wide arbitration.

 

 

Amicus Weighs In On Daubert Issue in Court of Appeals

The Product Liability Advisory Council weighed in as amicus earlier this month, asking the Eleventh Circuit to reverse a district court ruling that had allowed unreliable expert testimony in a case involving Jet Skis. See Megan Sands v. Kawasaki Motors Corp. U.S.A. et al., No.12-14667 (11th Cir.).

The PLAC brief  is part of the litigation arising from a complaint originally filed in Florida in 2007 by Georgia college student Megan Sands, who was riding as a passenger on a Kawasaki 2003 Ultra 150 Jet Ski in the Bahamas when she was thrown backward from her seat into the water.  She alleged this caused her to suffer severe, extensive and permanent damage to her lower extremities. Sands alleged that the device was defective because it did not have either a raised seat back or a “sissy bar” to prevent passengers from falling backward, or a kill switch that would allow an ejected passenger to cut off the engine.The case went to trial, resulting in a favorable verdict for Kawasaki on strict liability and negligent failure to warn claims but a finding in favor of Sands on design defect claims. Defendant appealed.

The amicus brief focused on the trial court's gate-keeping obligations under the Daubert standard, and the testimony of plaintiff's expert Burleson concerning an alternative seat design for the jet ski. PLAC argued that he presented no testing or engineering analysis to show that the alternative design would have improved the overall safety and utility of the product. Instead, his opinion rested
solely on an unsupported, conclusory statement in his report, which was precisely the kind of "analytical leap" and ipse dixit condemned in prior cases.  Kawasaki did not challenge the
admissibility of Burleson's assertion that his seat back concept, if used, might have eliminated or reduced the risk of injury to this plaintiff. Rather, as Kawasaki had argued below, Burleson had not tested whether a seatback would pose other dangers of equal or greater magnitude to the danger it would supposedly address.

The trial court appeared to describe the issue merely as whether "adequate testing" was conducted, but the testing evidence was not responsive to the specific objection that Kawasaki had raised. Neither the Plaintiff nor the trial court, said PLAC, ever identified any test or other engineering data supporting Burleson's conclusory assertion about the overall safety of the alternative design.

PLAC also focused on the trial court's statement that it was "unable to say that Mr. Burleson's testimony regarding a fixed seatback is unreliable," which sounded like the court switched the burden to show unreliability to Kawasaki. The absence of an admission by Burleson that the
alternative design would introduce a risk of other hazards should not have permitted the jury to
conclude that the alternative design was reasonable. Substantive tort law places the burden on the plaintiff to establish that the proposed alternative design would have greater overall safety than the existing design, and procedural law  imposes the burden on the proponent of expert testimony to establish its reliability. PLAC argued that a trial court does not have discretion to switch the burden under Rule 702 from the proponent of expert evidence to the opponent of such evidence. 

One to keep an eye on.

 

Court of Appeals Compels Arbitration, Not Class Litigation

The role of alternative dispute resolution mechanisms in alleged consumer product defect cases continues to be a hotly disputed issue.  Plaintiff lawyers prefer the class action device, with its ability to pressure blackmail settlements, while product makers continue to require in product literature that consumers go the quicker and cheaper route of ADR.

The Third Circuit held last week that a putative class of computer customers should arbitrate, not litigate, their product defect claims against Dell Inc., even though the arbitration forum originally named in the computer purchase "terms and conditions" was no longer available. See Raheel Ahmad Khan, et al. v. Dell Inc., No.10-3655 (3d Cir.).

This appeal involved a matter of first impression for this court– whether Section 5 of the Federal Arbitration Act (FAA) required the appointment of a substitute arbitrator when the arbitrator designated by the parties was unavailable.  The district court denied Dell's Motion to Compel Arbitration, based on the belief that the arbitration provision was rendered unenforceable because it provided for the parties to arbitrate exclusively before a forum that was unavailable when plaintiff commenced suit. The district court also refused to appoint a substitute arbitrator, finding that it could not compel the parties to submit to an arbitral forum to which they had not agreed.

Khan purchased a Dell computer through Dell's website; he alleged that his unit suffered from design defects, causing his computer to overheat and thereby destroy the computer's motherboard. Khan allegedly replaced the motherboard multiple times. Eventually, the  warranty expired. In 2009, Khan filed a putative consumer class action on behalf of himself and other similarly situated purchasers and lessees of the allegedly defectively designed computers.

But to complete the purchase, plaintiff had been required to click a box stating “I AGREE to Dell's Terms and Conditions of Sale.” Just beneath was a box requiring "BINDING ARBITRATION ADMINISTERED BY THE NATIONAL ARBITRATION FORUM (NAF)."  However, at the time the lawsuit was filed, the NAF had gotten out of the business of conducting consumer arbitrations pursuant to a Consent Judgment, which resolved litigation brought by the Attorney General of Minnesota.  Although Khan suggested that Dell must have chosen the NAF based on its alleged corporate-friendly disposition, the record did not show that Dell was aware of the practices challenged by the state AG at the time that it selected the NAF as the arbitral forum governing Khan's purchase, or that Dell selected the NAF for any improper reason.

The arbitration provision did not designate a replacement forum in the event that NAF was unavailable for any reason. But, the product Terms and Conditions did incorporate the Federal Arbitration Act.  The court of appeals noted that, because this was a question of arbitrability, it was governed by the FAA. Congress passed the FAA in response to widespread judicial hostility to arbitration agreements. The FAA reflects a liberal federal policy favoring arbitration. The federal courts have regularly noted that questions of arbitrability must be addressed with a healthy regard for this federal policy favoring arbitration.

The particular problem presented in this case – the unavailability of the NAF – was addressed in section 5 of the FAA, which provides a mechanism for substituting an arbitrator when the designated arbitrator is unavailable. In determining the applicability of Section 5 of the FAA when an arbitrator is unavailable, courts have focused on whether the designation of the arbitrator was “integral” to the arbitration provision or was merely an ancillary consideration. Only if the choice of forum is an integral part of the agreement to arbitrate, rather than an ancillary logistical concern, will the failure of the chosen forum preclude arbitration. In other words, a court will decline to appoint a substitute arbitrator, as provided in the FAA, only if the parties' choice of forum is so central to the arbitration agreement that the unavailability of that arbitrator brings the agreement essentially to an end. In this light, said the court, the parties must unambiguously express their intent not to arbitrate their disputes in the event that the designated forum became unavailable.

Plaintiff stressed that the NAF's rules were incorporated into the contract, and that these rules provide that all arbitrations must be conducted by the NAF or an entity having an agreement with it.  The court found this requirement ambiguous as to what should happen in the event that the NAF was unavailable. The NAF's rules provided that they shall be interpreted in a manner consistent with the FAA and that, if any portion of the NAF rules were found to be unenforceable, that portion shall be severed and the remainder of the rules shall continue to apply.  This suggested the possibility of substitutions.

The dissent argued that it was important why the NAF was not available to arbitrate. But, the terms and conditions clearly contained an agreement to resolve disputes through arbitration, rather than through litigation. And the reason the forum was not available was not dispositive.

 

Proof of Feasible Alternative Design Does Not Prove Defect

Readers know that most jurisdictions require that a plaintiff alleging a design defect in a product must produce sufficient evidence of a feasible alternative design that would have avoided the plaintiff's injury had it been adopted.  But a Texas appeals court reminded us recently that evidence of a safer alternative design, while necessary, is not sufficient to show a design defect. Zavala v. Burlington Northern Santa Fe Corp., No. 08-10-00169-CV (Tex. App., 8th Dist., 8/24/11).

Plaintiff filed suit against the railroad, alleging personal injuries sustained while attempting to open an allegedly defective railcar hopper door to unload sugar. Defendant filed a motion for summary judgment, which the trial court granted, and Zavala appealed.

Plaintiff alleged a manufacturing defect, but he could not identify the exact car which injured him or pinpoint any specific defect on that car. He did not see the hopper car again, but he identified the opening mechanism on a BNSF model 450 car as the “same or substantially similar hopper loading mechanism I was injured on.”  The court concluded that since he could not identify the specific car which caused his injuries, he must show more than a scintilla of evidence that all BNSF model 450 cars possess a manufacturing defect. That he could not do.

The court then turned to the alleged design defect. The defect was the alleged unreasonably
dangerous condition of the hopper car opening mechanism. Texas courts apply a risk-utility analysis to design defects that requires consideration of the following factors: (1) the utility of the product to the user and to the public as a whole weighed against the gravity and likelihood of injury from its use; (2) the availability of a substitute product design which would meet the same need and not be unsafe or unreasonably expensive; (3) the manufacturer’s ability to eliminate the unsafe character of the product without seriously impairing its usefulness or significantly increasing its costs; (4) the user’s anticipated awareness of the dangers inherent in the product and their avoidability because of general public knowledge of the obvious condition of the product, or of the existence of suitable warnings or instructions; and (5) the expectations of the ordinary consumer.  The risk-utility analysis operates in the context of the product’s intended use and its intended users.

The court of appeals reasoned that global assertions that all model 450 doors were defective because they were all hard to open does not create more than a mere suspicion of a defect. It refused to hold that a hard-to-open door is necessarily a malfunction, or that circumstantial proof of a hard-to-open door suffices to demonstrate a design defect.

Plaintiff pointed to his expert evidence of an alleged feasible alternative design for the hopper door. Although evidence of an alternative safer design may assist in proving a design defect, proof of an alleged safer alternative design is not enough to sustain a defective design claim, concluded the court of appeals. See also Hernandez v. Tokai Corp., 2 S.W.3d 251, 256 (Tex. 1999)(proof of an alternative safer design does not negate the common law requirement that the alleged defect renders the product unreasonably dangerous).  A design defect claim arises if a safer alternative design existed and there is a defect that was a producing cause of the personal injury, property damage, or death for which the claimant seeks recovery.

Here, plaintiff failed to produce sufficient evidence to create an issue of fact on defect, even if he did have evidence of a feasible alternative design.  In essence, the court recognized that there can be more than one non-defective way to design a product. There may be different pluses and minuses in each design, and the existence of an alternative does not render all other alternatives necessarily defective.

 

State Supreme Court Adopts Risk Utility Test for Defect

The South Carolina Supreme Court last week vacated a $31 million verdict for a minor injured in a Ford Bronco rollover accident.  Branham v. Ford Motor Co., 2010 WL 3219499 (S.C. 8/16/10).  The case raises a number of interesting points for our readers.

This was a product liability action involving a Ford Bronco II.   Hale was driving the vehicle with several children as passengers, including her daughter seated in the front passenger seat.  No one was wearing a seat belt.  Hale admittedly took her eyes off the road and turned to the backseat to ask the children to quiet down. When she took her eyes off the road, the Bronco veered towards the shoulder of the road, and the rear right wheel left the roadway. She responded by over-correcting to the left, which allegedly led the vehicle to roll over.

Plaintiff, the parent of one of the injured passengers, sued. The case against Ford was based on two product liability claims, one a defective seat belt sleeve claim, and the other, a “handling and stability” design defect claim related to the vehicle's alleged tendency to rollover.  The jury returned a verdict of $16,000,000 in actual damages and $15,000,000 in punitive damages.

The trial court had dismissed the strict liability claim regarding the seat belt on the basis that the sleeve was not defective as a matter of law. But the negligence claim shared with the strict liability claim the element that the product be in a dangerous condition unreasonably dangerous. The trial court should thus have dismissed it too, the supreme court said.

The court also found that the closing argument of Branham's counsel was designed to and likely did inflame and prejudice the jury. The closing argument relied heavily on inadmissible evidence to pump up the punitives claim in requesting that the jury punish Ford.  This closing argument invited the jury to base its verdict on passion rather than reason, and the supreme court found that it denied Ford a fair trial.

But the more interesting part of the case related to Ford's two-fold argument that: (1) Branham failed to prove a reasonable alternative design pursuant to the risk-utility test; and (2) South Carolina law requires a risk-utility test in design defect cases to the exclusion of the consumer expectations test. 

The court found that plaintiff had produced sufficient evidence of a feasible alternative design to get to a jury.  But, while the consumer expectations test may fit well in manufacturing defect cases, the court agreed with Ford that the test is ill-suited in design defect cases. It thus held that the exclusive test in a products liability design case is the risk-utility test, with its requirement of showing a feasible alternative design.

The very nature of feasible alternative design evidence entails the manufacturer's decision to employ one design over another. This weighing of costs and benefits attendant to that decision is the essence of the risk-utility test.  The court noted that this approach is in accord with the current Restatement (Third) of Torts.  The court noted that the Third Restatement effectively moved away from the consumer expectations test for design defects, and towards a risk-utility test.  While the feasible alternative design inquiry is the core of the risk-utility balancing test in design defect cases, the court went out of its way to note that a jury question is NOT created merely because a product can be made safer. There is a longstanding principle that a product is not in a defective condition unreasonably dangerous merely because it “can be made more safe.” 

 The court sent the case back for a new trial.