Misrepresentations by Defendant and Defense Counsel in Connection with Discovery and Court Proceedings Surrounding Proposed Settlement of Class Action Supported Trial Court Ruling that Defense Waived Right to Compel Arbitration California Court Holds
Plaintiffs filed a class action California state court against American Express Travel Related Services (Amex) alleging violations of the state’s unfair competition law arising out of the manner in which it charged for flight and baggage insurance. Aviation Data v. American Express Travel Related Services Co., Inc., ___ Cal.App.4th __, 62 Cal.Rptr.3d 396, Slip Opn., at 2 (Cal.App. 2007). A proposed settlement fell apart due to misrepresentations made by defense counsel, and Amex moved to compel arbitration. The Court of Appeal defined the issue as, “May a party lose its contractual right to compel arbitration if, when negotiating and seeking approval of a class action settlement, it misrepresents the benefits of the proposed settlement to the court, opposing counsel and others?” Id., at 1. The court summarized the trial court order and its holding at page 1 as follows: “Here the trial court refused to approve a class action settlement when it concluded that counsel for [Amex] misled plaintiffs in the course of negotiations by offering to make significant modifications to its travel insurance program that, unbeknownst to the plaintiffs, it had already made for reasons unrelated to the lawsuit. We hold the court did not err in ruling that due to its misleading conduct, Amex lost its right to compel arbitration.”
The class action complaint alleged that Amex offered cardholders flight and baggage insurance programs at a cost of $4-$14 per flight automatically charged to their American Express card. The class action alleged that cardholders believed Amex would charge them for this insurance only if they actually flew, and would receive refunds if flights were canceled or the airline tickets were not used. Instead, “Amex engaged in a scheme to cheat and defraud its cardholders by assessing premiums for trips it knew were never taken; intentionally designed its billing practices, procedures and computer programs to bill customers for services they did not receive or use and to double-bill for the same service; and intentionally failed to issue refunds or credits on cancelled flights or unused tickets.” Aviation, at 2.
Central to the lawsuit was the “key issue” of “whether it was technically possible for Amex to modify or reprogram its computer system to prevent many of the improper premium charges.” Aviation, at 2. Amex testified, and defense counsel represented, that its computer system did not use the Transaction Advice Addendum Record (TAA code), a travel industry code that would have assisted Amex in determining whether the cardholder made the flight, and maintained that Amex’s computer system could not be programmed to use TAA codes or otherwise automatically refund charges for unused flights. Id., at 2-3. “Their denials were false because the weekend before the deposition, after considerable planning, Amex started using the TAA code to identify improper charges on the insurance programs that were the subject of the lawsuit.” Id., at 3. As part of the class action settlement negotiations, Amex agreed to research whether its computer system could be programmed to use TAA codes, and “a principal anticipated benefit” to the class of the subsequently negotiated class action settlement was Amex’s agreement to use TAA codes, id. Moreover, because discovery provided by Amex also suggested that it would not be possible to “identify past improper charges,” the settlement did not include any monetary relief for the class. Id., at 3-4. Instead, the terms proposed for settling the class action included “Amex’s prospective agreement to use the TAA code to screen improper charges” and a promise to “make the necessary modifications to its computer systems by the later of June 30, 2004, or 210 days after the settlement became a final and binding judgment.” Id., at 4. In truth, however, despite Amex’s sworn testimony, “Amex had been using the TAA code in its flight insurance program since November 2002” and its attorneys learned this fact prior to July 6, 2003, before the terms of the settlement were finalized, but did not share it with plaintiff’s counsel, id.
The parties executed a settlement stipulation on August 4, 2003, and the court held a preliminary approval hearing on August 7, 2003. Aviation, at 4. The trial court specifically focused on the benefits afforded under the settlement, stating that “It seems that this settlement contemplates some substantive changes in the way that American Express operates … this insurance program. It also seems that the advantage and benefit that is conferred upon this class is in the form of those changes prospectively in the operation of its program and that there’s no refund or monetary benefit that would be directly disbursed to the class; is that a fair statement?” Id., at 4-5. Amex’s counsel agreed, id., at 5. The trial court gave preliminary approval to the class action settlement, which provided that if the settlement did not obtain final approval for any reason, then “the Settling Parties shall be restored to their respective positions in the Litigation as of March 1, 2003,” and expressly reserved Amex’s right to seek to compel arbitration. Id., at 5-6.
After the class action complaint was amended to define a nationwide class and a final approval hearing on the settlement was set for January 27, 2004, parties in a putative nationwide class action filed in New York federal court that contained virtually identical allegations objected to the proposed California settlement and expressed concern that no monetary relief was afforded to the class. Aviation, at 6. Amex filed a response that included additional representations of its promise to “make extensive modifications to its data processing systems related to the assessment and refunds of Insurance Program premiums” by using TAA codes, and that these modifications to its computer systems would be of significant benefit to the class. Id. Amex also submitted two declarations – one by an employee and one by its counsel – containing similar representations, id., at 7. The January 27, 2004 hearing resulted in a court order permitting discovery “on all aspects of the proposed settlement and objections thereto.” Id., at 7. That discovery disclosed that Amex’s representations had been materially and knowingly false, id., at 7-8. Plaintiffs accordingly withdrew their support for the settlement, id., at 8.
In conjunction with plaintiffs’ subsequent motion for sanctions, the trial court that Amex’s representations were “misleading” and that its sworn statements were “inaccurate and untrue.” Aviation, at 9. Nonetheless, the trial court “denied plaintiffs’ motions to preclude Amex from contesting liability, shift the burden of proof to Amex to show premium charges were proper, and bar Amex from objecting to certification of a nationwide class.” Id., at 10.
Following the filing of a fourth amended class action complaint, and the trial court order certifying a nationwide class consisting of cardholders enrolled in Amex’s fee-based travel-related insurance plans from September 6, 1995, to the present, Aviation, at 10. Amex moved to compel arbitration as to all non-California class members, id., at 11. The trial court denied the motion, ruling that Amex had waived its right to compel arbitration based on its misrepresentations, id. As quoted at pages 11 and 12 of the opinion, the trial court explained,
“[T]he Court is deeply troubled at the notion that a party could appear before the Court, seek and obtain Court approval for a class settlement, mislead the Court, send out a misleading class notice, and then, when the settlement fails, assert a contractual right to arbitration that would take the claims out of the judicial system and require each putative class member to arbitrate his or her own claims individually. The Court’s unease is rooted in the maxim of California jurisprudence that ‘No one can take advantage of his own wrong.’ [Citation.] Both federal and New York courts also recognize this basic principle. [Citations.] In this case, Amex made an effort to misuse the Court’s authority to obtain a broad release of claims without fully disclosing what benefits the proposed settlement would confer on the absent class members. [Citation.] Although [Amex] did not actually obtain a broad release of claims because the settlement fell apart, [Amex] tried to benefit from a Court supervised settlement and would have benefited had the settlement been finally approved. This fact . . . leads the Court to find that [Amex] waived its right to seek arbitration whenit sought to resolve the claims on a classwide basis. It would simply be unfair to permit [Amex] to engage the judicial process, mislead the absent class members and the Court, and then assert a right to arbitrate and opt into private dispute resolution.”
The appellate court affirmed. After noting that the arbitration clause was governed by the Fderal Arbitration Act (FAA) and holding that, pursuant to the terms of the contract, New York law applied, Aviation, at 12-14, the Court of Appeal held that “the ‘bad faith’ or ‘willful misconduct’ of a party may constitute a waiver” of the right to compel arbitration, id., at 16-17 (citation omitted). Under the appellate court’s extensive analysis, see id., at 17-23, the trial court’s ruling found ample support in the record. It summarized at pages 22 and 23,
In summary, the court’s denial of the motions to compel arbitration is supported by the record and consistent with the law. The dearth of cases construing such deceptive settlement tactics as a waiver or abandonment of the right to arbitrate is, we hope, a testament to rarity of such behavior. It is not, however, a signal that in addressing these unusual circumstances the court did anything other than apply the pertinent legal principles to the circumstances before it in a manner consistent with sound public policy and well-settled equitable principles. We find no error.