Insurance Litigation Law Blog | Regulatory Law | Bad Faith | California | Lawyer | Attorney | Barger & Wolen

By Richard B. Hopkins and John C. Holmes

On April 27, 2011, the United States Supreme Court issued an important decision in AT&T Mobility vs. Concepcion, No. 09-893, impacting the ability of defendants to move to compel arbitration in response to consumer class action complaints.

In a 5-4 decision, the Court overturned a Ninth Circuit ruling that had held an arbitration provision in AT&T Mobility contracts to be invalid. 

The arbitration provision in question required all disputes to be brought in the party’s

individual capacity, and not as a plaintiff or class member in any purported class or representative proceeding.

Plaintiffs originally filed an individual claim in federal district court alleging that AT&T improperly charged approximately $30 in sales taxes on mobile phones that AT&T advertised as free. The case was consolidated into a putative class action. 

The question presented in the case was whether §2 of the Federal Arbitration Act preempts California’s rule classifying most collective-arbitration waivers in consumer contracts as unconscionable. This rule is known as the Discover Bank rule, after the California Supreme Court’s decision in Discover Bank v. Superior Court, 36 Cal. 4th 148 (2005).

The majority of the Supreme Court held that requiring the availability of classwide arbitration interferes with fundamental attributes of arbitration and thus creates a scheme inconsistent with the FAA. The Court further held that class arbitration, to the extent it is mandated by Discover Bank rather than consensual, is inconsistent with the FAA.

The Court noted that arbitration is poorly suited to the higher stakes of class litigation. 

In litigation, a defendant may appeal a certification decision on an interlocutory basis and, if unsuccessful, may appeal from a final judgment as well. 

However, in arbitration, decisions are subject to very limited review. 

Moreover, the Court noted, arbitrators are seldom experienced in class action procedure and classwide arbitration consistently takes years to resolve. 

Indeed, the Court noted that as of September 2009, the American Arbitration Association had opened 283 class arbitrations. Of those, 121 remained active, and 162 had been settled, withdrawn, or dismissed. Not a single one, however, had resulted in a final award on the merits.

The Court also emphasized that the district court and Ninth Circuit found that the arbitration provision at issue was

sufficient to provide incentive for the individual prosecution of meritorious claims that are not immediately settled, and the Ninth Circuit admitted that aggrieved customers who filed claims would be ‘essentially guarantee[d]” to be made whole.’

At issue was an agreement which permitted customers to initiate a dispute by completing a form on AT&T’s website. Thereafter, AT&T was permitted under its agreement to offer to settle the claim. If it did not settle within 30 days, the customer was required to submit the claim to arbitration. 

The agreement required that in the event of arbitration, AT&T must pay all costs for nonfrivolous claims and that the arbitration must take place in the county in which the customer was billed. The agreement also provided, for claims under $10,000, that the customer could elect to conduct the arbitration via telephone, in-person or on written submissions only and that either party may bring a claim in small claims court in lieu of arbitration. The agreement also permitted the arbitrator to award any form of individual relief, including injunctions and presumably punitive damages. 

The agreement also denied AT&T any ability to seek reimbursement of its attorney’s fees, and, in the event that a customer receives an arbitration award greater than AT&T’s last written settlement offer, required AT&T to pay a $7,500 minimum recovery and twice the amount of the claimant’s attorney’s fees.

Justice Scalia delivered the opinion of the Court, in which Justices Robert, Kennedy, Thomas and Alito joined. Thomas filed a concurring opinion. Breyer filed a dissenting opinion, in which Justices Ginsburg, Sotomayor and Kagan joined.

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Over the course of two days at the end of March, the Ninth Circuit Court of Appeals and the Sonoma County Superior Court issued two separate decisions dismissing claims by air ambulance companies that sought to obtain medical provider benefits under workers’ compensation without following the dictates of the California workers’ compensation system. In both instances, the courts found that they did not have subject matter jurisdiction to consider the claims alleged by the air ambulance companies.

In early 2009, California Shock Trauma Air Rescue (“CALSTAR”) filed two virtually identical actions in federal court in Sacramento against more than 75 workers’ compensation insurers and self-insured employers. 

CALSTAR’s lead lawsuit in the consolidated actions, California Shock Trauma Air Rescue v. State Compensation Insurance Fund, et al., argued that, as a result of CALSTAR being certified by the Federal Aviation Administration to operate as an air carrier, any claims for payment it submitted to workers’ compensation insurers and self-insured employers in California should not be limited to those amounts set forth in the Official Medical Fee Schedule for ambulance services, California Code of Regulations, title 8, section 9789.70. 

Rather, as a federally certified air carrier, CALSTAR asserted that the Fee Schedule is preempted by the Federal Aviation Act of 1958, as amended by the Airline Deregulation Act (“FAA/ADA”).

In other words, CALSTAR sought to avoid the limitations on payment that would apply to all other medical providers and even ground-based ambulances set forth in the Fee Schedule. CALSTAR’s complaint alleged causes of action for declaratory relief and a number of state law claims.

As reported in this blog, the federal district court dismissed CALSTAR’s lawsuits on July 24, 2009, finding, on a number of grounds, that it lacked federal subject matter jurisdiction to consider CALSTAR’s claims. CALSTAR appealed the dismissal of its two actions to the Ninth Circuit.

On March 31, 2011, the Ninth Circuit published its opinion in the two consolidated appeals, affirming the decision of the trial court and concluding that the well-pleaded complaint rule precluded the federal court’s exercise of federal subject matter jurisdiction with respect to purely state law claims.

More specifically, the three-judge panel found that CALSTAR’s claims did not “arise under” the laws of the United States, and its attempt to obtain a determination as to federal preemption of the Fee Schedule was, at most, in anticipation of its response to the defense that would be posited by the defendants – and this is not adequate to create federal court jurisdiction. 

The Ninth Circuit further dismissed CALSTAR’s attempt to fall within the case law that allows federal court jurisdiction over state law claims that “implicate significant federal issues,” since, once again, CALSTAR could not satisfy the well-pleaded complaint rule, and its state law claims do not turn on a federal issue.

Finally, the Court concluded that the mere fact that CALSTAR had alleged claims for declaratory relief in addition to its state law claims did not allow the “procedural” device of such a declaratory relief claim to confer “arising under” jurisdiction. This is especially true here, since CALSTAR’s actions did not sue any state official, which the Supreme Court and other federal circuits had found to be a prerequisite to allowing any such Supremacy Clause claims to proceed in federal court.

One of the defenses raised by the insurers and self-insured employers in CALSTAR, but never addressed by the federal trial and appellate courts was that, even if there were federal subject matter jurisdiction, the air ambulance company’s action must still be dismissed because the claims are subject to the exclusive jurisdiction of the Workers’ Compensation Appeals Board (“WCAB”) and fall within the exclusive remedies of the Workers’ Compensation Act. 

The day before the Ninth Circuit issued its decision, a California state trial court in Sonoma County had the occasion to address that precise issue, dismissing claims by another air ambulance company due to the exclusive jurisdiction of the WCAB and the exclusive remedy the Act.

REACH Air Medical Services LLC sued many of the same defendant insurers and self-insured employers as did CALSTAR, and the defendants demurred to REACH’s state court complaint on the grounds of exclusive jurisdiction/exclusive remedy. On March 30, Sonoma County Superior Court Judge Elliot Daum issued his Order sustaining the demurrers and dismissing the action without leave to amend. If REACH wanted to pursue its claims for additional benefits beyond those paid by the Fee Schedule under worker’s compensation, it could only do so within the exclusive remedies provided by the Act and before the exclusive jurisdiction of the WCAB.

One final note. In October 2010, CALSTAR filed its own state court action in Solano County Superior Court against many of the same defendant insurers and self-insured employers. That action seeks further payment of medical provider benefits for services rendered after the time CALSTAR filed its federal court action. The defendants have demurred to that state court complaint, and a hearing on their demurrers is set for April 21.

Larry Golub of Barger & Wolen has represented a number of the defendants in all three lawsuits.

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In a decision issued March 25, 2011, The Housing Group v. PMA Capital Insurance Co., the California Court of Appeal held that an insurer who is not actually defending its insured cannot pursue its rights under California Civil Code section 2860, and specifically the right to arbitrate the issue as to the hourly rate for “independent counsel” chosen by the insured when there is a conflict of interest between the insured and the insurer.

Under section 2860(c), an insurer’s obligation to pay such independent counsel “is limited to the rates which are actually paid by the insurer to attorneys retained by it in the ordinary course of business in the defense of similar actions in the community where the claim arose or is being defended.” 

Since substantial evidence supports the trial court’s finding that the insurer failed to provide a defense in the underlying litigation, the insurer was precluded from invoking the arbitration remedy for Cumis fee disputes in section 2860(c).

This recent decision was discussed in more length in a blog posted by David McMahon in Barger & Wolen’s Litigation Management & Attorney Fee Analysis blog.

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