Silence Isn’t Always Golden: Class Arbitration in Recent Supreme Court of Alabama CaseAs this blog has previously discussed, the availability of class arbitration has been significantly restricted after a series of U.S. Supreme Court decisions. However, we have also noted that express preclusion of class arbitration remains advisable for companies because they eliminate the ability of state courts and arbitrators to read permission for class arbitration into an arbitration clause that was never intended to allow class arbitration.

A recent decision in the Supreme Court of Alabama highlights the continuing wisdom of including a class waiver even following the U.S. Supreme Court’s rulings. In Alabama Psychiatric Services, P.C. v. Lazenby, et al., several laid-off employees filed a class action complaint against their employer, APS. APS successfully moved for a circuit court order that compelled arbitration under the employment agreements.

The arbitration clauses in the employment agreements were silent on the topic of whether class arbitration was available. At the same time that the parties argued the motion to compel arbitration, APS asked the circuit court to decide whether class arbitration was available. The circuit court concluded that that question was itself reserved for the arbitrator.

Arbitration began. Early on, the arbitrator issued a “clause-construction award”—which is allowed under the rules of the American Arbitration Association—ruling that class arbitration was available under the parties’ agreements. APS appealed this clause-construction award to the circuit court, which denied the appeal. The appeal then went to the Supreme Court of Alabama.

APS sought to challenge the circuit court’s earlier decision to send the question of class arbitrability to the arbitrator, arguing that the circuit court should have decided that question itself. The Alabama Supreme Court disagreed, noting that this decision was a part of the order compelling arbitration, and APS failed to appeal that order within the 42-day deadline to appeal under Ala. R. App. P. 4(d).

As an aside, this is a reminder for arbitration defendants that in a state court, the state’s rules of civil procedure govern when and how an order compelling arbitration must be appealed. In Alabama, such an order is immediately appealable, and so APS had to appeal within 42 days; the deadline was not tolled by the arbitration.

At this point, APS’s chances of success became very low. Having blown its deadline to appeal the circuit court’s order, APS now had to overturn the arbitrator’s clause-construction award under the very limited standards of review in the Federal Arbitration Act (FAA). Winning an appeal on one of these grounds is notoriously difficult. As you might have guessed by now, APS was unable to persuade the court that any available ground to have the award overturned under the FAA had been satisfied. The Alabama Supreme Court found the parties’ agreement distinguishable from those in recent U.S. Supreme Court cases that had restricted the availability of class arbitration. APS was therefore required to proceed with a class arbitration.

Class arbitration raises the specter of a “heads you win, tails I lose” situation for companies. A class arbitration victory for plaintiffs will be extremely difficult for the company to challenge in court, as it will rarely present grounds for overturning an arbitration award. Meanwhile, a victory for the company can more easily be set aside if class members who were not participants in the arbitration raise a due process challenge to the decision.

This decision should serve as a reminder to companies to review their arbitration agreements and ensure that class arbitration is expressly disallowed. Best practice is likely to specify that, while all claims of the contracting parties’ must be submitted to binding arbitration, the arbitrator “shall not have jurisdiction to determine any claims on a class, collective, or representative basis or to join the claims of more than one claimant for adjudication in a single arbitration proceeding,” or words to that effect. Why? Because one of the very few grounds for vacating an arbitration award under the FAA is that the arbitrator exceeded his or her jurisdiction under the written arbitration agreement  (9. U.S.C. § 10(a)(4)).

The bottom line: Despite the U.S. Supreme Court cases minimizing the possibility of unintended agreement to class arbitration, your own failure to expressly preclude class arbitration can still cause your next arbitrable dispute to take a detour down the dangerous road of class arbitration.

“Any” Doesn’t Mean “All”: In Home Depot, SCOTUS Says “Any Defendant” Doesn’t Include Third-party Defendants Facing Class ClaimsTo the surprise of many observers (including us), the Supreme Court held last week in Home Depot USA Inc. v. George Jackson that a third-party defendant could not remove class action claims – under either the general removal statute, 28 U.S.C. § 1441(a), or the Class Action Fairness Act (CAFA), 28 U.S.C. § 1453(b).   Setting aside § 1441 (for the moment), we will remind the reader at the outset that CAFA broadly states that “any defendant” may remove a covered class action. Nevertheless, in Home Depot, a 5-to-4 majority ruled that only the “original defendant” sued by the “original plaintiff” can remove class action claims – and not a third-party defendant or a counterclaim defendant.

Here’s a quick refresher on how we got here. (The facts of Home Depot are discussed in more detail in a previous blog post.) A defendant to a collection action filed a third-party class action claim against Home Depot, which had not been a party to the original collection action. Based on CAFA, Home Depot removed the case to federal court.

Home Depot argued that removal was proper under CAFA, which allows “any defendant” to remove a covered class action. As Home Depot reasoned, it never had asserted a claim in the action and, consequently, it never had been anything but a “defendant.” The district court disagreed and remanded the action back to state court, and the Fourth Circuit affirmed.

Both lower courts followed Shamrock Oil, a more than 70-year-old decision holding that an original plaintiff cannot remove counterclaims filed by the original defendant, as well as decisions from the Fourth, Sixth, Seventh and Ninth Circuits extending Shamrock Oil to bar third-party defendants from removing class action claims.

The fact that the Supreme Court granted cert in Home Depot despite the absence of a circuit split seemed to suggest (to many, again including us) that the Court intended to broaden the right to removal and to overturn those rulings. Oral argument only reinforced such thinking. Questions from Chief Justice Roberts and Justices Alito, Gorsuch and Kavanaugh seemed to indicate their willingness to read CAFA to allow the removal of covered class action counterclaims and third-party claims, while the commentary from Justices Ginsburg, Breyer, Sotomayor and Kagan seemed to favor the opposite. Justice Thomas asked no questions, as is his custom, and thus gave no indication that he intended to break from the justices generally considered to be “conservative.”

Yet, ultimately, Justice Thomas did exactly that. Writing for a majority that included Justices Ginsburg, Breyer, Sotomayor and Kagan, Justice Thomas reasoned that the general removal statute (§ 1441(a)) does not allow removal of class action third-party claims because it allows “the defendant” to remove only “civil action[s],” not “claims.” A third-party defendant is a defendant only to a claim, not a civil action.  As a result, according to the majority, the operative defendant for removal purposes under the general removal statute is the original defendant to the original plaintiff’s complaint, not a third-party counterclaim defendant.

A closer question for the majority was whether CAFA (§ 1453(b)) allowed for removal. The removal right under CAFA – which, again, states that “any defendant” can remove a covered class action – is seemingly broader than that under the general removal statute. Home Depot argued that, as a third-party defendant, it certainly should qualify as “any defendant” under CAFA and, consequently, it was entitled to remove the case.

The majority again disagreed. According to Justice Thomas, nothing in CAFA was intended to alter the meaning of “defendant” for purposes of removal. Because the majority had already concluded that “defendant” in the general removal statute refers to the original defendant, it applied that same meaning to the use of “defendant” in CAFA. Under the majority’s logic, then, CAFA’s references to “any defendant” would really mean “any [original] defendant.” In concluding that CAFA was not intended to expand the general removal statute’s limitation on who may remove, however, Justice Thomas did not even mention Congress’s expressed purpose in enacting CAFA:  to broaden the right to remove covered class actions to federal court.

The dissenting opinion was robust – more than twice as long as the majority opinion. In dissent, Justice Alito, joined by Chief Justice Roberts and Justices Gorsuch and Kavanagh, urged a plain text reading of “any defendant” in CAFA. And using “all the resources of statutory interpretation,” the dissenters concluded that third-party defendants are defendants and are entitled to remove.

As Justice Alito explained, according to both legal and standard definitions, a “defendant” is a party sued in a civil proceeding.  That definition encompasses an original defendant, a counterclaim defendant (that is, an original plaintiff) and a third-party defendant. Therefore, the words “any defendant” in CAFA must mean all of these types of defendants/parties. That is particularly true because Congress could have borrowed the general removal statute’s existing construction – “the defendant or defendants” – but chose for CAFA the broader terms “any defendant.” So, Justice Alito quipped, “third-party defendants are, well, defendants,” “just as a ‘critical habitat’ is a habitat and ‘full costs’ are costs [and] zebra finches are finches.” Because a third-party defendant is included in the universe defined as “any defendant,” a third-party class action defendant should not be blocked from removing a case under CAFA.

The dissenters also argued that a third-party defendant could remove a case under the general removal statute. Blocking a third-party defendant from removing under the general removal statute, Justice Alito wrote, is based on a misreading of Shamrock Oil. Justice Alito reasoned that Shamrock Oil held only that an original plaintiff that filed suit in state court cannot change its mind about the chosen forum once it has become a defendant to a counterclaim (filed by the original defendant). Shamrock Oil said nothing about third-party defendants, and Justice Alito emphasized that none of the rationales underlying Shamrock Oil’s holding “would support a bar on removal by parties other than original plaintiffs.”

We conclude with a few takeaways. First, before Home Depot, a third-party defendant in a circuit other than the Fourth, Sixth, Seventh and Ninth had a good faith basis to remove – and at least a few district courts in those other circuits had sustained such removals. But after Home Depot, it will take creative thinking and likely advanced procedural maneuvering for third-party defendants to eventually find a way to remove class action claims.

The majority’s apparent conclusion that only an “original defendant” can remove under both the general removal statute (§ 1441) and CAFA (§ 1453) is somewhat stunning in breadth and could arguably block removal even if the third-party class action claims were severed from the original civil action. In some sense, the third-party defendant still would not be an “original defendant.” Recall that, at the time of removal in the case at issue, Home Depot and the original defendant (i.e., the third-party plaintiff) were the only parties in the action. Nevertheless, attempts to remove despite the decision in Home Depot­ – e.g., after severance – will surely be made.

Second, companies that initiate litigation against individuals should strongly consider bringing those cases in federal court, if a jurisdictional hook exists. Home Depot will likely embolden the plaintiffs’ bar to use the class device in counterclaims brought by original individual defendants and to add additional defendants to those counterclaims without worry that doing so might risk losing the state forum.

Third, business interests need to flex their lobbying muscle when it comes to mending the results of decisions like this. There is no sound policy reason for preventing defendants who were never plaintiffs from removing class actions, and there is no sound reason to allow plaintiffs to circumvent CAFA’s strong federal policy favoring a federal forum for class actions by holding their complaints until an opportunity to file it as a counterclaim in an unrelated case comes along.

Congress has the power to fix this. The squeaky wheel eventually gets the grease, and this is one squeak that Congress needs to hear.  Loudly and often. Until they hear it, you may be defending (for example) seven- and eight-figure TCPA class action counterclaims for uncapped statutory damages in state court. Ad nauseum.

Finally, Home Depot provides yet another example of why attempting to “read the tea leaves” with the Supreme Court is often challenging. Few, if any, could have predicted that Justice Thomas would have broken ranks so dramatically from his “conservative” colleagues in a case that turned on whether a third-party defendant is included in the plain text of the words “any defendant.”

In a 5-4 split decision, the U.S. Supreme Court appears to have reworked a longstanding precedent that has been a foundation of antitrust litigation for more than 40 years—the “direct SCOTUS Blows Down Apple’s House Made of Illinois Brickpurchaser” rule of Illinois Brick, which generally forecloses “downstream” purchasers from suing for alleged violations of the Sherman Act. Apple Inc. v. Pepper addressed a “market” that almost certainly is familiar to the reader: Apple’s iPhone “App Store.” The Supreme Court allowed a putative class action of iPhone application consumers to proceed against Apple, even though the “sting” of Apple’s allegedly monopolistic 30% commission on each app sale first was felt by app developers, not the consumers.

Apple invoked the so-called Illinois Brick defense, which is derived from a 1977 Supreme Court case by the same name. There, the defendant (the Illinois Brick Company) manufactured concrete blocks and sold those blocks to masonry contractors; those masonry contractors sold masonry structures to general contractors; those general contractors sold their services for construction projects to the State of Illinois. The state sued Illinois Brick, alleging that Illinois Brick had engaged in a conspiracy to fix the price of concrete blocks, and that the state consequently paid more for the concrete blocks than it otherwise would have. According to the state, that alleged “overcharge” was “passed on” through the distribution chain from Illinois Brick (the manufacturer), to the masonry contractors, to the general contractors, and finally to the state (as the ultimate consumer).

In Illinois Brick, the Supreme Court ruled that because the state was an “indirect purchaser,” which did not purchase concrete blocks directly from Illinois Brick, the state was not a proper antitrust plaintiff. According to the Supreme Court, it was not clear that all or even some of the alleged overcharge was “passed on” to the state, and allowing the state to bring suit would result in unnecessarily complicated damages calculations about the extent to which the overcharge was “passed on” through the distribution chain, or even duplicative damages. The proper plaintiff, the Supreme Court surmised, would be an entity that had purchased concrete blocks directly from Illinois Brick; any such “direct purchaser” necessarily would have paid the alleged overcharge.

For more than 40 years, Illinois Brick has operated as a bright-line, prudential “standing” rule in antitrust class actions, barring indirect-purchaser plaintiffs from bringing antitrust claims because any alleged overcharge may not have been “passed on” through the distribution chain. Under Illinois Brick, only direct purchasers could sue. But the Supreme Court’s new decision in Apple arguably has disrupted the long-settled understanding of what it means to be a “direct purchaser.”

In Apple, four iPhone owners alleged that Apple unlawfully monopolized the market for iPhone apps and took an anticompetitive 30% commission on each app sale. Consequently, according to the plaintiffs, app consumers have paid higher prices for apps in the App Store. Apple argued that Illinois Brick barred the app consumers’ antitrust claims, even though—in the App Store—consumers pay Apple directly in return for Apple’s granting them access to download the desired apps. According to Apple, even though it transacted directly with the app consumers, it was merely serving as “agent” for the app developers, who set the price of each app, and who, according to Apple, should be considered the real “sellers” of the apps. Plus, the alleged anticompetitive overcharge—Apple’s 30% commission—was levied directly on the developers (who received only 70% of each app sale), not the consumers. It was not clear that any of the 30% commission was passed on to consumers in the form of higher app prices.

The district court agreed with Apple, dismissing the case, but the Ninth Circuit reversed. A divided Supreme Court affirmed the Ninth Circuit, disagreeing with Apple’s characterization of the transaction. Writing for the majority, Justice Kavanaugh (joined by Justices Ginsburg, Breyer, Sotomayor, and Kagan) focused literally on the concept of a “direct purchaser,” not the “pass on” of any alleged overcharge. The Supreme Court’s reasoning was simple: Because app consumers transact directly with Apple, and there is no “intermediary” between them and Apple, the plaintiff-consumers in the case are “direct purchasers,” so Illinois Brick does not bar the antitrust claim. Based on the fact that Apple transacted directly with the consumers, the Supreme Court rejected Apple’s attempt to characterize itself as “agent” for the developers. The Supreme Court also was unmoved by the fact that app developers, not consumers, feel the brunt of the alleged overcharge, and completely dismissed concerns about the difficulty of allocating damages between consumers and developers, and the possibility of duplicative recoveries. Instead, the majority reasoned that, because there was no distribution chain, the alleged overcharge—i.e., the 30% commission—“has not been passed on by anyone to anyone.”

Justice Gorsuch (joined by Chief Justice Roberts and Justices Alito and Thomas) wrote a blistering dissent. He accused the majority of reducing Illinois Brick to a “blind formalism” by focusing exclusively on the fact that app consumers purchase “directly” from Apple, while ignoring the economic relationship among the parties and the fact that app developers, not the consumers, “first felt the sting of the alleged overcharge.” As Justice Gorsuch explained, by allowing app consumers to sue, the majority had opened the door to “unduly complicated” damages computations and “conflicting” claims about allocating the alleged overcharge between consumers and developers—precisely what the Illinois Brick rule was intended to prevent.

The majority’s decision to allow consumers to sue even though they did not “first feel the sting of the alleged overcharge”—and may never have felt that sting—arguably does amount to a formalistic reworking of the Illinois Brick doctrine. But questions remain. For example, the majority, at least implicitly, conceptualized the App Store as a two-sided market, where developers pay for the ability to distribute apps and where consumers buy apps. The majority seemed to bless the possibility that both consumers and developers could recover from Apple. Yet the majority (and the dissent) failed even to mention the Supreme Court’s decision last year in Ohio v. American Express Co., where the Supreme Court rejected an antitrust challenge to a different two-sided market: Amex’s credit card platform, which connects cardholder-buyers to merchant-sellers. In Amex, the Supreme Court held that plaintiffs challenging anticompetitive conduct in a two-sided market must establish that the overall effect of the challenged conduct on both sides of the market is anticompetitive, and affirmed judgment for the defendant credit card companies because the plaintiffs’ analysis of anticompetitive effects focused only on the merchant side of the relevant market. Perhaps the Supreme Court’s failure to mention Amex in the Apple opinion was simply a product of the majority’s express refusal to “assess the merits of the plaintiffs’ antitrust claims” or “any other defenses Apple might have.” Or perhaps it indicates a desire by the Apple majority, which included all four Justices who dissented in Amex, to limit Amex’s holding to the specific two-sided market at issue in that case.

More broadly, what will be Apple’s long-term impact on antitrust jurisprudence? At a minimum, we would expect consumer plaintiffs to attempt to use Apple to bring class actions against other  internet platform companies—e.g., Amazon, Alibaba, eBay—as well as any other retailer who operates on a commission basis but allows a given manufacturer or distributor to set the sale price.  Because of the Supreme Court’s formalistic focus on the identity of the “direct purchaser,” we would not be surprised to see Apple and other tech companies restructure their distribution models in response to this decision.

Finally, does Apple mean the Illinois Brick doctrine is on solid ground for the foreseeable future?  Many commentators, and several amici (including 31 state attorneys general), had argued that the Supreme Court in Apple should reverse Illinois Brick. None of the parties argued for that change in the law, and the Supreme Court did not take up that issue. But in a sense, the Supreme Court did just the opposite, reaffirming Illinois Brick as a bright-line rule that permits only “direct purchasers” to bring antitrust claims. Nevertheless, Justice Kavanaugh’s majority opinion notably downplayed the core rationale of the Illinois Brick doctrine—to avoid the complications, expense, and uncertainty associated with calculating and allocating overcharge damages among participants at different levels of a distribution chain. That could signal the majority’s willingness to revisit, and possibly even to overrule, Illinois Brick down the road.