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The California Court of Appeal has affirmed a lower court finding that a class action defendant waived its right to arbitrate by misleading the trial court in connection with its effort to obtain court approval of a “no cash” class action settlement. The party’s attempt to mislead the court removed this case from the general rule that settlement efforts do not constitute waiver of the right to arbitrate.
In Aviation Data, Inc. v. American Express Travel Related Services Co., 62 Cal. Rptr. 3d 396 (Cal. Ct. App. July 6, 2007), some American Express cardholders brought a class action against American Express, alleging that American Express sometimes charged its cardholders for travel insurance even though the cardholder had not traveled.
At mediation, the parties reached a “no cash” settlement on the premise that there would be no feasible way of determining which cardholders were subject to improper charges. Under the settlement, in lieu of any cash payments to the class members, American Express agreed to use travel industry codes to prevent any future occurrence of the improper charges.
The parties sought court approval of the class action settlement. In support of that request, American Express claimed that the settlement would entail “modifications” to the software that ran American Express’ billing system. There were outside objections to the “no cash” settlement, which paved the way for further discovery.
Subsequent discovery revealed that the proposed settlement would not require the supposed “modifications” because travel industry codes had been added to the billing software several months prior to mediation. In the wake of this revelation, the class members withdrew their support for the settlement, thus precluding court approval.
With the proposed settlement no longer tenable, American Express filed a motion to compel arbitration. The trial court denied the motion on the ground that American Express had waived its right to compel arbitration. In issuing its ruling, the court explained that “a party generally does not waive its right to arbitrate by invoking the judicial forum to pursue settlement.” However, the misleading statements regarding the use of travel industry codes “gave rise to unique considerations.”
On appeal, the Court analyzed the waiver issue under the federal law of arbitrability because “it is federal law, not state law, that governs the inquiry into whether a party has waived its right to arbitration.” In analyzing this issue, the Court reiterated the principle that “settlement efforts generally are not interpreted as waiving the right to arbitrate,” partly because of the policy favoring settlement.
There was a competing policy at issue, however. Specifically, the Court explained: “[C]ompeting here against the public policy favoring settlement is the equally important value that settlement – and most certainly one that may affect thousands, perhaps millions of absent class members – should not be achieved through deceit upon the court and parties.”
In light of this competing policy interest, the Court refused to extend the general rule (i.e., that settlement efforts do not constitute waiver of the right to arbitrate) “to encompass attempts to secure judicial imprimatur and finality on settlements obtained through misleading or deceptive tactics.” The Court thus affirmed the trial court’s ruling that American Express “actions constituted an attempt at ‘judicial resolution’ that was incompatible with its right to arbitrate.”
A common type of “no cash” settlement is the so-called “coupon settlement” in which members of the class receive a promotional coupon in lieu of monetary damages. Members of Congress have questioned the propriety of coupon settlements, noting that the monetary benefits of such settlements go to class counsel rather than the members of the injured class. See S. Rep. No. 109-014 (2005). Those concerns would apply in this case because even though there was no monetary benefit to the absent class members, the proposed settlement would have allowed class counsel to seek $2.99 million in attorney fees without opposition from American Express.
The Class Action Fairness Act of 2005 addresses the rising incidence of coupon settlements by subjecting them to heightened judicial scrutiny and tying the attorney fee award to the value of the coupons actually redeemed. See 28 U.S.C.A. § 171.
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