Northwest Business Litigation

Class action prohibition in arbitration agreements: Be careful what you ask for

For years now, courts have enforced mandatory arbitration provisions in consumer and employment agreements.  The usual mandatory arbitration provision in a consumer or employment contract provides that all disputes of any kind shall be decided not in court, but by an arbitrator.  Early on, it was assumed that mandatory arbitration could only resolve individual suits.  More recently, however, plaintiffs have pursued class actions in arbitration, and many arbitration services today provide for class action arbitrations.  As a result, some companies and employers have responded by including within the arbitration clause a prohibition on class actions. 

According to plaintiffs' lawyers, combining the mandatory arbitral forum for dispute resolution with a prohibition on class actions, effectively eliminates the class action mechanism for mass resolution of, often, small-value claims that individual claimants would not otherwise pursue.  Some courts are beginning to agree, finding that a prohibition on class actions is "unconscionable" and, therefore, not enforceable.  See Riensche v. Cingular Wireless in which a Washington federal district court determined that the prohibition against class actions was "unconscionable" and denied the defendant's motion to compel arbitration.  An Oregon Court of Appeals case decided today similarly held that a prohibition on class actions, in part, rendered the otherwise mandatory arbitration agreement unenforceable.  See Vasquez-Lopez v. Beneficial Oregon, Inc. 

In both of these cases, the courts threw out the entire arbitration agreement, and the plaintiffs were allowed to litigate in court, an outcome the defendant had sought to avoid with the arbitration agreement in the first instance.  In other cases, the courts have struck the specific prohibition on  class actions, but otherwise upheld the arbitration agreement.  This leaves the defendant in the untenable position of facing a class action with a single arbitrator without the many procedural protections afforded to defendants in civil court. 

While it may be tempting to push the limits of mandatory arbitration as a way to rein in costly and protracted litigation, one should proceed with caution and seek competent counsel in defining the parameters of such agreements.

Labor Commissioner proposes change to Oregon’s employee non-competition law

House Bill 2257, proposed by Oregon’s Commissioner of Labor and currently under consideration by the state legislature, would change Oregon’s employee non-competition law by making non-competition agreements unenforceable in circumstances where the employee is “laid off.”  Under the proposed new law, a layoff is “the permanent termination of an employment relationship for reasons that are beyond the employee's control and that do not reflect discredit upon the employee.  Reasons for a layoff include, but are not limited to, the elimination of the employee's position, a lack of available funding or work, a reduction in the size of the workforce and changes in the workplace that affect staffing needs.”

To track HB 2257 and other legislative measures, go here.

Antitrust Modernization Commission's tentative recommendations endorse the status quo

In 2002 Congress authorized the creation of an Antitrust Modernization Commission to examine whether the need exists to "modernize" the antitrust laws.  This month the Commission issued its tentative recommendations, and by and large the Commission concludes that our existing laws are plenty modern.

Some have argued that antitrust law should be changed to address the "network effects" in markets such as that for computer operating systems, and to otherwise govern technologies not contemplated when the laws were written decades ago.  But the Commission's tentative conclusion is that "there is no need to revise the antitrust laws to apply different rules to industries where innovation, intellectual property, and technological change are central features."

The Commission similarly suggests no legislative changes to Sherman Act Section 2, which prohibits exclusionary conduct by single firms.  Instead the recommendations suggest that the courts continue to shape the law on what constitutes anticompetitive behavior. 

The Commission does recommend the repeal of the much-reviled Robinson-Patman Act, an arcane law that prohibits price discrimination.

Changes to copyright law survive First Amendment challenge, Ninth Circuit holds

The Ninth Circuit Court of Appeals has rejected a First Amendment challenge to recent statutes that allegedly changed the "traditional contour" of copyright law.  The court issued its opinion yesterday in Kahle v. Gonzales, a case brought by Professor Lawrence Lessig and the Center for Internet and Society at Stanford.

Plaintiffs characterized the copyright system as historically an "opt-in" system, meaning that copyright protections were available only to those who acted affirmatively to secure them.  In the 1990's Congress changed the system to one plaintiffs called "opt-out," meaning that copyright is granted automatically unless disclaimed. Plaintiffs in Kahle claimed that this change will radically decrease the number of works entering the public domain, altering the "traditional contours" of copyright and violating of the free speech protections of the First Amendment. 

Plaintiffs further argued that the current copyright term is too long, violating the provision in the Copyright Clause of the Constitution that copyright be secured "for limited Times."

Plaintiffs sought to frame their arguments in such a way as to avoid the 2003 U.S. Supreme Court holding in Eldred v.Ashcroft that statutory extensions of existing copyrights did not violate the Constitution.  But the Ninth Circuit concluded that both the "opt-in/opt-out" argument and the "limited Times" argument were disposed of by Eldred, and that plaintiffs' claims must be dismissed.

Appeals Court holds that ERISA preempts Maryland's effort to expand health coverage

In a ruling that could have a broad impact on states' efforts to expand health care coverage, the Fourth Circuit has struck down Maryland's "Fair Share" law.  In July we posted our summary of the Maryland Fair Share Act that required employers with more than 10,000 employees (i.e., Wal-Mart) to provide health benefits that cost at least 8% of payroll, or pay the difference to the state.  Wal-Mart challenged the statute, claiming ERISA preempted it.  The trial court agreed, finding that the statute mandated a Maryland-specific level of benefits that conflicted with the Wal-Mart benefit plan.  The court held that  ERISA prohibits states from enacting such statutes.  Otherwise, national employers like Wal-Mart would have to provide 50 or more different benefit plans to their employees, with the resulting costs and complexity.

Maryland appealed, and argued that the Act did not have an impermissible "connection with" ERISA plans because it did not directly impose any actual benefit or coverage requirements on an employer's health benefits plan. Rather, it gave employers two alternatives to increasing benefits to employees: (1) paying to the state the difference between actual health care expenses and 8%; or (2) increasing health care spending in ways that did not qualify as an ERISA plan.

Rejecting this argument, the Fourth Circuit held this week that the Act violated ERISA's preemption clause by effectively mandating the structure of health benefits to meet the Act's minimum spending threshold.  Also, the court stated, the Act would disrupt employers' administration of plans on a uniform, nationwide basis by requiring them "to segregate a separate pool of expenditures for Maryland employees."

The Fourth Circuit points out that other states and local governments have adopted or are considering similar laws, so the Maryland law would require Wal-Mart to tailor its health plans to each state--the very thing ERISA is designed to avoid.  In fact, last week California's Governor Schwarzenegger proposed a similar minimum benefit/tax program to provide universal health care in California. 

Although this decision renders Maryland's Fair Share Act unenforceable, similar laws already adopted or under consideration by other states or local governments may be sufficiently different to avoid ERISA preemption.  However, observers expect challenges to those laws, as well as greater Congressional interest in ERISA and its effects.

U.S. Supreme Court to consider Fair Credit Reporting Act case from Oregon

On Tuesday the U.S. Supreme Court hears arguments in cases addressing how insurance companies interpret the Fair Credit Reporting Act.  If an insurance company raises a customer's rates based on the customer's credit score, the FCRA requires the insurer to give an "adverse action" notice to the customer.  The insurers claim that, when they issue policies to new customers, the setting of the premium does not constitute an increase triggering the FCRA notice requirement. But the Ninth Circuit held that FCRA requires the insurer to give such notice any time it considers a new customer's credit rating and then sets a premium higher than the company's lowest possible rate. 

Also on review in the Supreme Court is whether the failure to give an adverse action notice amounts to a "willful" violation entitling the customer to a remedy under the FCRA.

For more on Geico v. Edo and Safeco v. Burr, see here , here , and here.  These cases were filed in federal District Court in Oregon, marking the third time this session that the U.S. Supreme Court has considered cases originating in local courts.  See the Oregon Business Litigation coverage of the other two cases here and here.

Parties can't be forced to mediate disputes, according to the California Court of Appeals

A court can't require a litigant to participate in mediation and pay the mediator's hourly fee, according to a case issued last week by the California Court of Appeals.  California has adopted laws allowing courts to order certain cases into mediation, and courts also commonly allow parties voluntarily to attempt to settle cases with the assistance of a mediator.  In  Jeld-Wen, Inc. v. Superior Court, the trial court in a multi-party construction defect case issued a case management order requiring that the parties participate in settlement conferences with a mediator, for a maximum of 100 hours.  The parties were ordered to pay the mediators' fee of $500 per hour.  When Jeld-Wen, which denied liability in the case, refused to attend a mediation session, the court issued an order compelling its participation and imposing monetary sanctions.

On review, the California Court of Appeals held that mediation is always voluntary, and a trial court has no authority to force a party to attend and pay for mediation.  "While trial courts may try to cajole the parties in complex actions into stipulating to private mediation, [the parties] cannot be forced or coerced over the threat of sanctions into attending and paying for private mediation, as this is antithetical to the entire concept of mediation."

When is a delivery not a delivery?: Risk of loss and the UCC

Consider these facts:  A seller of manufactured homes delivers a home to the buyer's lot, but a month later, before the seller completes the finishing work inside the home and before it's ready for occupancy, a storm causes extensive damage.  Who is responsible to pay for repairs - the seller or the buyer?

In Lucas v. Berry, the Oregon Court of Appeals decided last week that the seller had to pay to repair the manufactured home because the risk of loss had not yet passed to the buyer at the time of the storm.  The parties' contract required the seller to deliver and set up the home, but didn't address when the buyer would become responsible for damage to it.  The court turned to Article 2 of the Uniform Commercial Code, governing sale of goods, for the answer.  ORS 72.5090(1)(b) states that the risk of loss passes to the buyer when the goods are duly tendered so as to enable the buyer to take delivery.  Even though the home had been delivered to the buyer's lot, it had not yet been "delivered" as that term is used in the UCC.  The seller had contracted to provide a home fully ready for occupancy, and until that happened there was no delivery to the buyer and the risk of loss remained with the seller.

2007 Benefit Plan Limits

The Internal Revenue Code places limits on most employee benefit plans that restrict the amount of employer and employee plan contributions.  Many of these limits adjust each year based on inflation.  The IRS usually issues a press release in mid-October that announces the coming year's limits.  Some of the 2007 limits are:

• Elective deferral limit for 401(k), 403(b) and 457(b) plans:            $  15,500
• "Catch-up" (age 50+) deferrals (same for all plans above)               $   5,000
• Total Contributions (sum of employer and employee contributions) $  45,000
• Annual Compensation limit                                                           $225,000
• Highly Compensated Employee threshold                                       $100,000
• SIMPLE plan deferral limit                                                             $ 10,500
• SIMPLE plan "catch up" limit                                                          $  2,500
• High Deductible Health Plan minimum deductible (individual)          $  1,100
• High Deductible Health Plan minimum deductible (family)               $   2,200
• Maximum Health Savings Account contribution (individual)             $   2,850
• Maximum Health Savings Account contribution (family)                  $   5,650

Plan administrators should ensure that their participant communications and payroll processing reflect the updated amounts. 

Employers in San Francisco Must Provide Paid Sick Leave

Companies that have employees working in San Francisco need to be aware of Proposition F, which requires employers to provide paid sick leave to employees working in San Francisco, whether or not the company maintains an office there.  Paid leave accrues at the rate of one hour for every 30 hours worked, up to designated maximums that depend on the size of the employer.  Unused leave carries over from year to year, limited to the stated maximums.  Leave may be used for the employee's illness or that of a family member, domestic partner, or designated person.  The ordinance, which goes into effect on February 5, 2007, requires employers to post information about the paid leave law.  Obtain a copy of the required poster here.