Opposing Class Arbitration Where the Arbitration Agreement is Entirely Silent on the Issue

This was an appeal from a federal District Court decision upholding an arbitrator’s ruling that a pre-dispute arbitration agreement permitted class arbitration, even though the agreement was undisputedly silent with respect to class proceedings.

The United States Supreme Court’s held in Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp., 130 S.Ct. 1758 (2010), that “a party may not be compelled under the [Federal Arbitration Act (“FAA”)] to submit to class arbitration unless there is a contractual basis for concluding that the party agreed to do so.” (Emphasis in original.)  The issue on appeal therefore was whether an arbitration agreement that makes no reference whatsoever to class arbitration can ever be interpreted as authorizing class arbitration.

In the case four servers at a Smith & Wollensky (“S&W”) restaurant, who were parties to an S&W arbitration agreement, asked the arbitrator (retired Massachusetts Superior Court judge Allan van Gestel), to allow them to proceed on a class basis.  Deciding the issue in 2008 (before the Stolt-Nielsen decision by the Supreme Court),  Judge van Gestel, while acknowledging that the arbitration provision was silent on the issue of class arbitration, nonetheless concluded that the agreement allowed a class proceeding. He imposed a purported default rule of contract construction, which NELF argued had been subsequently invalidated by the Stolt-Nielsen decision, that the right to class action is an implied term in an arbitration agreement because, in his view, the term is essential to a determination of the parties’ rights.   Further, again taking a position firmly rejected by Stolt-Nielsen, Judge van Gestel espoused the view that the implied right to class arbitration could only be overcome by an express class-action waiver. 

After Stolt-Nielsen, S&W moved for reconsideration of the arbitrator’s 2008 decision.  Judge van Gestel, while paying lip-service to Stolt-Nielsen, affirmed his earlier ruling, purporting to find consent to class arbitration in the facts that, first, the scope of the arbitration provision embraced all claims, including claims for wages, compensation, or benefits and, second, that the provision gave the arbitrator the power to award “any remedy and relieve” available to a court under the same claim.

S&W moved to vacate the arbitrator’s revised class arbitration decision in federal District Court. The District Court (Harrington, J.) upheld the arbitrator’s decision, distinguishing the case from Stolt-Nielsen on the ground that in Stolt-Nielsen, in addition to the arbitration agreement silence on the class-action question the parties to that case had also stipulated that they had not agreed to a class proceeding.  Because there was no such stipulation in this case, the District Court took the position that the arbitrator was free to interpret the agreement, despite its silence, to determine whether there was a “contractual basis” supporting class arbitration. The arbitrator “reasoned” that these two contract provisions incorporated by reference the broad statutory class action provisions contained in both the FLSA and Massachusetts wage-hour laws, and that class actions are a form of a “remedy or relief.”.

S&W appealed the District Court’s decision to the First Circuit and NELF filed an amicus brief in support of S&W on the important question of whether, in the absence of a stipulation by the parties, Stolt-Nielsen nevertheless precluded class arbitration where there was no express agreement to proceed on that basis in the arbitration agreement. NELF argued, inter alia, that, as the Supreme Court has described in subsequent decisions (e.g., AT&T Mobility LLC v. Concepcion, 131 S.Ct 1740 (2011), proceeding on a class basis so fundamentally changes the nature of arbitration as originally envisioned by the FAA that some indication of an express agreement by the parties should be required under Stolt-Nielsen before a class proceeding can be imposed on the parties.

Shortly after NELF filed its brief, we were informed that the parties had settled their dispute.  Apparently the settlement followed Judge van Gestel’s refusal to stay the class arbitration pending the First Circuit’s decision on S&W’s appeal.  Apparently, in the arbitral as well as the judicial forum, class certification increases the pressure on the defendant to settle.  The upshot is that the important question that NELF addressed in its brief remains undecided.

Opposing Eligibility for Unemployment Assistance of an Employee Who Voluntarily Quit in Return for an Incentive Package

In this case, although Connolly volunteered to quit her job in return for a separation package, she nevertheless claimed that she was entitled to unemployment benefits on the ground that, in accepting her offer to quit, her employer, Verizon, had, as a legal matter, terminated her involuntarily. 

Briefly stated, the factual background was as follows.  In October 2008, Verizon determined that there was a surplus of employees in a customer-service department located one floor above Connolly’s department.  In an effort to rebalance personnel and workload, the company transferred twelve of these employees to Connolly’s department.  In another measure aimed at the same goal, Verizon offered customer-service representatives in Connolly’s department the opportunity to put in for a voluntary separation package.  Under the terms of this package, employees would receive compensation to which they would otherwise not have been entitled, in return for agreeing to leave Verizon’s employ.  Connolly was one of two employees who applied for the separation package, and Verizon approved them both.  There is no evidence in the record that, absent these two offers, Verizon planned to lay anyone off.  Pursuant to the terms of her separation package, Verizon removed Connolly from its payroll as of November 1, 2008, and paid her a total of $27,600. 

Shortly thereafter, Connelly applied to the Division of Unemployment Assistance (“DUA”) for unemployment benefits.  Her claim was rejected by the DUA, a decision upheld by the trial court, and the Supreme Judicial Court then granted direct appellate review.  On appeal, Connolly argued that her termination was involuntary as a matter of law.  She contended that under Morillo v. Director of the Division of Employment Security, 394 Mass. 765 (1985), an employee is terminated involuntarily whenever the employer takes the last step in the termination process, as Verizon supposedly did here when it exercised its discretion and accepted her offer to quit. 

Believing that this proposed bright-line test was not justified by anything in Morillo and would sweep far too broadly, NELF filed an amicus brief in support of Verizon.  As an initial matter, NELF argued that, because she conceded that her termination was voluntary before the DUA, Connolly had waived any argument on appeal that she was terminated involuntarily.  NELF then contended that, even if Connolly had not waived her present argument, Morillo did not apply because the circumstances of that case were fundamentally different from the facts of this case and justified a different result. When Morillo volunteered to be laid off, a specific number of involuntary layoffs were imminent, so that he merely stepped into the shoes of a co-worker who would have been laid off involuntarily and would thereby have created a charge to the employer’s DUA account. Moreover, Morillo, unlike Connolly, received no separation package.  The Morillo court clearly relied on these two key facts in deciding that an award of benefits to Morillo would be “equitable” because it would be economically neutral in its effects on the employer while providing needed economic protection to Morillo. 

NELF urged the Court to rule that Connolly could not share Morillo’s outcome because she did not share the key facts.  NELF concluded by urging the Court not to abandon the fact-sensitive approach used by the courts up to now when deciding when a termination should be deemed involuntary.

On June 16, 2011, the Supreme Judicial Court issued its opinion in this case (460 Mass. 24).  Agreeing with NELF, and for the reasons urged by NELF in its amicus brief, the Court rejected Connolly’s claim for unemployment benefits based on her voluntary decision to leave her employment at Verizon.

Arguing Against an Expansive Definition of “Oppression” Under Maine’s Business Corporation Act

This was an appeal to the First Circuit of a decision by the federal District Court in Maine.  The plaintiff, who prevailed below, had sued First Hartford Corp. (a small, publicly-held Maine Corporation) under the provisions of Maine’s Business Corporation Act (“MBCA”) that permit an “oppressed” shareholder to bring a direct action against the corporation to obtain, inter alia, a buyout of his shares, the relief ordered in this case. 

The issue on appeal was whether the plaintiff had the right to bring an oppression claim in the first place when virtually all of his claims concern alleged injuries to the corporation’s assets, and not to him personally. In other words, the plaintiff’s claims were indistinguishable from classic shareholder derivative claims, yet they had been brought under a different section of the MBCA, the oppression provisions.

Because the distinction between a shareholder derivative claim and a shareholder direct oppression claim is of great importance to principles of corporate governance, and most courts have firmly upheld that distinction, NELF filed an amicus brief in support of First Harford, arguing that a shareholder who alleges only harm to the corporation should be restricted to the MBCA’s derivative action requirements and should not be permitted to evade these requirements by invoking the oppression provision.  NELF argued that the oppression provision should only be available to the shareholder who has alleged direct harm, i.e., a loss separate and distinct from that of the corporation and, indirectly, all of its shareholders.  Where, as here, the claim actually relates entirely to the corporation, the corporation’s board of directors, and not the complaining shareholder, should have the opportunity and autonomy to decide in good faith whether pursuing the claim is in the corporation’s best interests.  Moreover, even assuming a meritorious claim, any relief awarded should go the corporation, which is the injured party, and not to the complaining shareholder.

Disappointingly, on August 17, 2011, the First Circuit summarily affirmed the District Court’s decision in this case, without an opinion.

Opposing Retroactive Application of the Mandatory Treble Damages Provision of the Massachusetts Wage Act

The issue in this case, which was before the Supreme Judicial Court on direct appellate review, was whether the 2008 amendment to G. L. c. 149, § 150 (“§ 150”) making treble damages mandatory for any violation of certain employment laws (even where the violation is the result of an unintentional error) should apply retroactively to conduct that occurred before the amendment became effective.  Prior to the amendment, the SJC had construed the language of § 150 as making treble damages discretionary, available only on a showing that the defendant’s conduct had been outrageous. 

The trial court’s rationale for applying the amended version of § 150 retroactively in this case was that defendants “have always been subject to treble damages” under the statute and therefore retroactive application of the amendment would not “substantially change[] [the] parties[’] rights and expectations.”  (There was no finding of outrageousness here, so that, absent the retroactive application of the amendment, there could be no treble damages.) 

Disagreeing strongly with the trial court’s decision, NELF filed an amicus brief in support of the defendant Molloy, pointing out that an analysis of § 150 before and after amendment shows that the amendment simply did not restate in clearer terms the Legislature’s intention that treble damages should be mandatory, as Rosnov claims, but rather substantively changed the law on damages.  In addition, NELF provided legal authority to bolster Molloy’s argument that language indicating that the amendment was intended merely to clarify existing law, but which was deleted from the amendment prior to its passage by the Legislature, should not be read back into the amendment by courts.  NELF also argued that retroactive application is improper because it would alter Molloy’s substantive rights by significantly enlarging the legal grounds on which he may be held liable for treble damages.  Such an adverse, after-the-fact change in the principle determining this form of liability clearly implicates a defendant’s substantive rights and therefore, under established Massachusetts law, cannot be applied retroactively. 

In this connection, NELF pointed out the fallacy in the trial court’s reasoning, namely that it obscured the great difference, recognized in SJC precedent, between possible liability for multiple damages and legally certain liability for such damages.  Because the amendment to § 150 made mandatory a liability for treble damages that was previously only possible, it worked a great change in the defendant’s substantive rights and therefore should not be applied retroactively.  Finally, NELF decisively rebutted the plaintiff’s use of a U.S. Supreme Court case (Bradley v. School Board of The City of Richmond, 416 U.S. 696 (1974)) to justify the judge’s decision to apply the amended version of § 150.  NELF showed that the Supreme Court had stated expressly that Bradley does not state the general federal rule on retroactivity, and NELF demonstrated that under the correct federal rule retroactivity would not be allowed in this case.

On August 31, 2011 the Massachusetts Court issued its decision in the case (460 Mass. 474).  The Court agreed in all essentials with NELF’s analysis and ruled that the 2008 amendments to § 150 were not retroactive and, therefore, were not applicable in this case.

Supporting Businesses’ First Amendment Rights to Buy and Sell Information for Commercial Purposes

This Vermont case was one of three cases brought in the New England federal courts challenging state laws restricting the transfer and use for commercial purposes of information regarding individual physicians’ medication prescribing practices, so-called “prescriber-identifiable information.”  This data is sold by pharmacies to data-mining companies like plaintiff IMS Health, which organize and compile the data and sell it to pharmaceutical companies for use in “detailing,” or marketing their drugs to doctors. Laws restricting pharmacies from selling this data and pharmaceutical companies from using it for commercial purposes were enacted in New Hampshire, Maine, and Vermont.  While these cases most immediately affect the rights of pharmacies and pharmaceutical companies, they raise more generally questions regarding the level of protection to be afforded the sale or other voluntary transfer of information (e.g., marketing lists) by and between businesses.  

IMS raised its First Amendment challenge to the Vermont statute in an action filed in the Vermont federal District Court against Vermont’s Attorney General. NELF filed an amicus brief in the District Court action on behalf of itself and co-amicus National Association of Chain Drug Stores (“NACDS”) arguing, in support of IMS Health, that Vermont’s version of the statute restricting the transfer or sale of prescriber identifiable information restricted speech and was in violation of the First Amendment. In addition to its legal arguments demonstrating that the statute did not pass Constitutional muster, NELF noted that in our “information age,” sales and other voluntary transfers of data by and between businesses are fundamental to the free enterprise system and often serve, as in this instance, societal interests as well as the interests of individual businesses. NELF argued further that, since market forces provide the incentives and resources for dissemination of most information in our society, restricting the transfer and use of data for commercial purposes can be expected to have consequences far beyond that intended focus to the detriment of the public interest.  

In his 2009 decision, U.S. District Judge Murtha agreed with NELF that the Vermont statute restricted speech, as opposed to just conduct, but concluded that the regulated speech qualifies as “commercial speech” and that the Vermont statute survives the intermediate level of scrutiny applicable to that category of speech under the First Amendment. Whereas NELF had argued that only speech proposing a commercial transaction should be considered commercial speech, the court disagreed and appeared to consider “commercial speech” as encompassing any information that is put to a commercial use, a definition that NELF had argued was in conflict with both Supreme Court and Second Circuit precedent.  

IMS appealed to the Second Circuit and NELF again  filed an amicus brief in support of IMS in the appeal. In a decision issued on November 23, 2010, while agreeing with the lower court that the speech at issue is commercial speech, the Second Circuit nevertheless reversed, consistent with NELF’s position that the Vermont statute violated the First Amendment, although for different reasons.  The Second Circuit viewed the restriction as unconstitutional because it unduly restricts commercial speech under the Supreme Court’s Central Hudson balancing test.  

The Supreme Court granted the Attorney General of Vermont’s petition for certiorari, and NELF again filed an amicus brief on the merits in support of IMS Health in the Supreme Court, making arguments similar to those in its Second Circuit brief. NELF argued essentially, that the information in question should be accorded full First Amendment protection because, since it is indeed speech and does not propose a transaction, it is not commercial speech. Therefore, Vermont’s Prescription Restraint Law restricts noncommercial speech and is subject to, but cannot survive, strict scrutiny under the First Amendment.  The Court has consistently held that speech is commercial under the First Amendment only if it proposes a commercial transaction.  In applying this clear, content-based test for commercial speech, the Court has consistently found speech to be commercial only when it has advertised or promoted a product or service.  No such content is provided by the information at issue.

NELF also argued that the Supreme Court’s content-based test for commercial speech best serves the primary rationale for according less First Amendment protection to commercial speech--namely, the prevention of economic harm that can arise from false or misleading advertising to promote the sale of a product or service.  Commercial speech therefore implicates the well-established governmental interest in regulating the underlying transaction by ensuring the accuracy and clarity of its promotional “pitch” to consumers. Under this precedent, the prescriber-identifiable information at issue is clearly noncommercial speech because it does not advertise a product or service or otherwise propose any commercial transaction whatsoever.  Instead, the prescriber-identifiable information simply provides the names of drug prescribers and related accurate information concerning their prescribing patterns.  This unadorned information cannot satisfy the definition of commercial speech and should be accorded full First Amendment protection. 

While the prescriber-identifiable information may ultimately be used by pharmaceutical company representatives as a tool in the marketing of their companies’ products, such use of the information is irrelevant to determining whether the content of the information proposes a commercial transaction.  The incidental or indirect commercial use of the information cannot transform it into commercial speech for First Amendment purposes, when the information on its face simply does not propose a commercial transaction. Accordingly, Vermont’s Prescription Restraint Law warrants strict scrutiny and, as forcefully argued by IMS in its brief, cannot survive this standard of review and should be declared invalid under the First Amendment.

Finally, NELF argued that, because market forces fuel the compilation and publication of most information in modern society, efforts to restrict the transfer of information that serves a business purpose could have significant, unintended consequences to the detriment of the public interest.  It is therefore critical that legislative measures restricting transfers of information that does not propose a commercial transaction receive strict First Amendment scrutiny, even if the restricted information does serve a business’s economic interests.  Vermont’s Prescription Restraint Law should accordingly be subject to strict scrutiny and should be invalidated as an unconstitutional suppression of speech under the First Amendment.

On June 23, 2011, the Supreme Court affirmed, by a 6-3 majority , the Second Circuit’s decision, agreeing that Vermont’s statute had to be stricken because it violated the First Amendment.  See Sorrell v. IMS Health, et al., 131 S.Ct. 2653 (2011).  Like the Second Circuit, the Supreme Court ruled that the Vermont statute in fact regulated speech.  Further, in his majority opinion, Justice Kennedy pointed out that the regulation imposed “more than an incidental burden on protected expression,” and noted (importantly in light of the concerns expressed by NELF in its brief), “[w]hile the burdened speech results from an economic motive, so too does a great deal of vital expression.”  131 S.Ct. at 2665 (citations omitted). 

Opposing Certification of a Class Based on Potentially Unreliable Expert Testimony

Widely considered to be one of the most important business and employment cases before the Supreme Court in the October 2010 term, Wal-Mart v. Dukes was a class-action sex-discrimination lawsuit brought against Wal-Mart alleging discriminatory employment practices by Wal-Mart with respect to its female employees.  At issue in the case was Wal-Mart’s challenge to the California federal district court’s certification of a plaintiff class consisting of approximately 1.5 million women employed by Wal-Mart at its 3,400 stores throughout the United States. Although most of the decision-making called into question by the plaintiffs took place at the store level and involved the discretion of local managers and supervisors acting largely on the basis of local, individualized factors, the Ninth Circuit, in a sharply divided en banc decision, upheld the district court’s certification order, although it reduced the size of the class to approximately 500,000.  

The Supreme Court granted Wal-Mart’s petition for certiorari to determine two questions: (1) whether the certification was consistent with the requirements of Fed. R. Civ. P. 23(a) (i.e., whether the California courts erred in finding sufficient commonality amongst the putative class members to warrant certification under Fed.R.Civ.P. 23(a)(2)) and (2) whether the monetary awards sought by the plaintiffs precluded the action from being brought under Fed. R. Civ. P. 23(b)(2), which explicitly provides only for declaratory and injunctive relief. 

NELF, with co-amicus Atlantic Legal Foundation, filed an amicus brief in support of Wal-Mart on the first question, specifically focusing on the district court’s refusal (affirmed by the Ninth Circuit) to entertain Wal-Mart’s Daubert objection to the testimony of an expert that plaintiffs proffered to show commonality.  The district court had ruled that because a Daubert inquiry might impinge on the merits, it was not the proper standard for the reliability of expert testimony at the certification stage. In their brief, NELF and ALF argued that Federal Rule of Evidence 702 and the Court’s holding in Daubert v. Merrell Dow Pharmaceuticals, 509 U.S. 579 (1993) create a single standard for evaluating the reliability of expert testimony in federal courts and that use of the standard at the certification stage is no less important than at the trial stage—indeed, it would seem to be required by the Supreme Court’s mandate that, before certifying a class, courts must conduct a “rigorous analysis” of how plaintiffs propose to satisfy Rule 23(a)’s requirements.  

On June 20, 2011, the Supreme Court reversed the Ninth Circuit, ruling unanimously that the plaintiffs had brought their class action under the wrong section of Fed. R. Civ. P. 23 (all of the Justices agreed that the monetary relief sought by the plaintiffs was not merely incidental to any injunctive or declaratory relief that might be available) and ruling 5-4 that the plaintiffs had failed to satisfy the commonality requirement for a class action under Rule 23.  Wal-Mart v. Dukes, 131 S.Ct. 2541 (2011).  While the Court did not decide the issue briefed by NELF and ALF, in his opinion for the majority on the commonality issue, Justice Scalia stated that the majority “doubted” that the District Court had been correct when it concluded that Daubert did not apply to expert testimony at the class-action certification stage.  See 131 S.Ct. at 2553-54.