Tire Company Can’t Compel Arbitration in China Under Expired Contract

Yesterday, in Linglong Americas, Inc. v. Horizon Tire, Inc., a unanimous panel of the Sixth Circuit rejected a tire manufacturer’s attempt to compel arbitration of claims in China under a contract that had already expired.  The manufacturer and its distributor had a “Collaboration Agreement” with an arbitration clause. The agreement expired in 2011 and was not renewed, but the parties continued to collaborate until, in 2014, a series of events led to the parties suing each other in federal court.  The manufacturer sought to compel arbitration of the distributor’s claims pursuant to the arbitration clause in the agreement—which specified China as the forum for any disputes.

In affirming the district court’s denial of the manufacturer’s motion to dismiss, the Sixth Circuit explained that “[a]n arbitration clause survives the expiration of a contract only when the dispute at issue ‘arises under the contract.’”  Because the “vast majority” of events underlying the distributor’s claims had occurred after the expiration of the contract and the distributor had “unequivocally and irrevocably” waived any reliance on the agreement as a basis for its claims, the court held that the arbitration clause did not apply to the distributor’s claims.

This case underscores the importance of keeping written agreements current in a business relationship.  One should not assume that the conditions in a contract will survive simply because the relationship between the parties continues beyond the contract’s expiration.

Sixth Circuit Issues Split FCA Decision in Fracking Case

In United States ex rel. Harper v. Muskingum Watershed Conservancy District, a divided panel of the Sixth Circuit interpreted the 2010 amendments to the False Claims Act (FCA) and affirmed the district court’s dismissal of relators’ qui tam action filed under the FCA’s reverse-false-claim and conversion provisions.  Relators alleged that Muskingum Watershed Conservatory District (MWCD), by selling fracking rights to certain land and retaining the land, violated a 1949 deed, providing that the land would revert to the United States if MWCD stopped using the land for recreation, conservation, or reservoir-development purposes or if MWCD alienated or attempted to alienate any part of the land.

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Sixth Circuit, Enforcing Notice of Appeal Rule, Denies Challenge to $225M Auto Part Price Fixing Settlement

On Friday, the Sixth Circuit refused to overturn a $225 million settlement deal reached between end-payor plaintiffs and auto parts makers accused of price fixing. Two objectors to the deal had asked the court to review a June order by U.S. District Judge Marianne O. Battani granting final approval to settlement in 19 cases that were part of a sprawling multidistrict litigation. But they had filed an appeal in only one of those cases, pertaining to wire harnesses, which totaled $119 million. The panel held that the challenge could not proceed in the other 18 cases where no appeal had actually been filed, and thus dismissed the appeal to the extent that it raised issues related to the unappealed orders.

The objectors asserted it would amount to a denial of due process to require appeals in all 19 cases, which would have included fees totaling near $10,000. But the court noted that the appellants had offered no proof that paying those fees would impose an undue burden. There was no violation of due process, held the panel, where a party is required to pay a fee, or move for pauper status.

Similarly, the panel declared ineffective, and thus dismissed for lack for jurisdiction, an appeal filed in the master docket for the multidistrict litigation. Each case in the MDL, held the court, retains its individual identity, even if for efficiency purposes they are handled in a consolidated manner. In short, pay attention to the requirements for notices of appeal.

The cases arose out of an expansive MDL, which itself followed the U.S. Department of Justice’s launch of an ongoing investigation into the auto parts industry. The DOJ investigation has produced more than $2 billion in fines already. The government, and, in turn, private plaintiffs, have alleged that auto part makers and marketers conspired to raise prices charged to automakers, which in turn has increased the price of vehicles downstream to consumers.

 

 

Flint Water Controversy Provides Civil Procedure Lesson Under CAFA Exception

In Mason v. Lockwood, Andrews & Neuman, a split panel of the Sixth Circuit affirmed a district court’s decision to remand a class action to state court under the “local controversy” exception to the Class Action Fairness Act.  CAFA requires a court to “decline” jurisdiction over a class action that otherwise qualifies for federal court if the class action meets three requirements. One of these is that more than two thirds of the class members must be “citizens of the State in which the action was originally filed.”

In Mason, the plaintiff class consisted of “residents and property owners in the City of Flint,” Michigan, who used water from the Flint River from April 25, 2014 and onward. The district court relied largely on the principle that an allegation of residency creates a rebuttable presumption of domicile, and therefore citizenship.  The Sixth Circuit acknowledged that—rebuttable presumption notwithstanding—alleging residence is insufficient to establish citizenship for the purpose of creating federal subject matter jurisdiction, but distinguished the “local controversy” exception as “not jurisdictional.”  Thus, the court explained, a party seeking to establish citizenship for purposes of the local controversy exception did not face “the unrelenting headwinds of limited federal jurisdiction,” and could rely on the rebuttable residency-domicile presumption to establish citizenship.  The court declined to follow contrary decisions from other circuits because they “extended the ‘mere averment of residency’ principle without accounting for its underlying rationale.”

Judge Kethledge dissented, pointing out, among other things, that “every circuit to have considered the issue—five so far—has held that ‘there must ordinarily be at least some facts in evidence from which the district court may make findings regarding the class members’ citizenship for purposes of CAFA’s local-controversy exception.’”  He also characterized the case as presenting a question of “abstention,” which is only permitted with the “clearest of justifications.”

It is important to note that the majority in this case did not rely exclusively on “the presumptive force of residency,” but also noted “other attributes . . . that bolster the inference.”  The court noted that the class definition required members to “have continuously resided in Flint . . . for several years,” that there were no circumstances that suggested a large number of the class members would be transient (students, vacationers, etc.), that property ownership is a strong indicator of domicile, and that Flint is “nowhere near a state line.”  It will be interesting to see how future panels applying Mason will use these additional “attributes” in their analyses.  And, of course, given that Mason appears to create a circuit split, we will be looking out for a cert petition.

THE ELECTION’S IMPACT ON THE SIXTH CIRCUIT

While many people are evaluating the election’s impact on the Supreme Court, closer to home, President-Elect Trump will have a seat to fill at the Sixth Circuit. As we reported, President Obama nominated Kentucky Supreme Court Justice Lisabeth T. Hughes for the Sixth Circuit vacancy created by Judge Martin’s retirement. The Sixth Circuit seats are typically distributed geographically, and that means that the open slot belongs to Kentucky by tradition.  So the question becomes, who might President-Elect Trump tap for the open seat, assuming (as is almost certain) that Justice Hughes will not get confirmed before the changeover in administration?  We suspect that the odds favor current Eastern District of Kentucky Judge Amul Thapar.

In the list of potential Supreme Court nominees that Mr. Trump circulated prior to the election, Judge Thapar was identified as one of the only district judges to make the cut. That means he has attracted the attention of someone in the Trump inner circle.  If he does not get the nod for the Supreme Court, it seems quite possible that he would be the front runner to be nominated to the Sixth Circuit.  It remains to be seen whether this will happen, or if so how quickly.  The new administration will have a lot of work on its hands come January, and it is not clear how quickly they will move on open judicial vacancies.  But we will be focused on this and keep readers apprised of any developments.

Upcoming Amendments to the Federal Rules of Appellate Procedure

As a friendly reminder, the new amendments to the Federal Rules of Appellate Procedure will go into effect on December 1, 2016.  The most important changes are that principle briefs are limited to 13,000 words and the three-day service period for electronic filing has been eliminated.  There are also new word limits for motions and petitions for extraordinary writs, and other assorted changes.  The Fourth Circuit has posted a nice summary of these amendments, including a useful blackline showing the changes to the rules.   Many circuits, including the Second, Fifth, Seventh, Ninth, and Federal Circuits, have decided that they will not be following all of the new rule changes.  Other circuits have announced they will be following the new rules.   These differences reflect the well-known disagreements about these changes—which were resolved by explicitly allowing each circuit to decide what to do about word limits.

The Sixth Circuit has not yet posted anything regarding the new rules, and we fully expect that the court will not opt out of the rules.  Therefore, sharpen your pencils and get ready for 13,000 word briefs!

Sixth Circuit: Standard For Sealing Judicial Records “Vastly More Demanding” Than For Rule 26 Protective Order

In Shane Group, Inc. v. Blue Cross Blue Shield of Mich., a unanimous panel of the Sixth Circuit vacated the district court’s orders sealing “most of the parties’ substantive filings” and approving a class action settlement in a price-fixing action against an insurer. In vacating the orders placing documents under seal and the settlement approval, the court explained that “the district court plainly conflated the standards for entering a protective order under [Federal Rule of Civil Procedure] 26 with the vastly more demanding standards for sealing off judicial records from public view.”  The court explained that the “obligation to explain the basis for sealing court records is independent of whether anyone objects to it,” that a court must “set forth specific findings and conclusions” to justify sealing, and that any sealing must be “narrowly tailored” to the “compelling reason” offered.

The court rejected the argument that “the discovery . . . in this case . . . required [parties] to submit competitively-sensitive financial and negotiating information, as well as confidential patient health information,” by (1)  distinguishing between “discovery materials” and “materials that the parties have chosen to place in the court record,” and (2) pointing out that there had been no “clearly defined and serious injury” or “trade secret” identified.  While the court recognized the privacy interests of “innocent third parties,” it noted that the third parties in this case—hospitals—were not protected by any “statutory or regulatory privilege” and had a “lesser privacy interest” than individual bank customers (referencing another case).  Thus, the court held that, on remand, the hospitals would have to demonstrate “on a document-by-document, line-by-line basis” that they met the requirements for sealing.  The court found that the district court’s abuse of discretion was “most acute[]” with regard to an expert report purporting to calculate class damages because class members could not “assess for themselves the likelihood of success on their claims” without access to the report. Because the sealing of the documents prevented class members from “participat[ing] meaningfully” in the settlement approval process, the court vacated settlement approval as well.

Although Shane Group was decided only a few months ago, the Sixth Circuit has already relied on it twice in the sealing context.  See Rudd Equip. Co. v. John Deere Constr. & Forestry Co., 834 F.3d 589 (6th Cir. 2016) (affirming vacatur of sealing order); Klingenberg v. Fed. Home Loan Mortg. Corp., 2016 U.S. App. LEXIS 12884 (6th Cir. July 11, 2016) (vacating sealing order sua sponte).  And because sealing and unsealing orders are reviewable immediately under the “collateral order doctrine,” see Rudd, the Sixth Circuit will likely have many more opportunities to clarify its standard for sealing.  Litigants should take heed: sealing documents—and keeping them sealed—will require dotting all i’s and crossing all t’s, even if all parties are agreeable, because the district court’s reasoning will be thoroughly scrutinized on appeal.

SIXTH CIRCUIT REVERSES PUNITIVE AWARD IN FCRA CASE

In Smith v. LexisNexis Screening Solutions, Inc., the Sixth Circuit reversed a $150,000 punitive award in a suit under the Fair Credit Reporting Act. The case arose when LexisNexis was conducting a criminal background check for a potential employee named David Smith.  The check returned a fraud conviction for a different David Smith, but not the applicant.  The aggrieved applicant sued, largely challenging LexisNexis’s alleged negligence in the course of conducting the background check.

Although LexisNexis offered evidence of a 99.8 percent accuracy rate for its background reports, the Sixth Circuit concluded that the evidence introduced at trial, viewed in the light most favorable to the plaintiff, sufficed to establish negligence, although it noted that the issue was a “close call.” But when it turned to the punitive award, the Sixth Circuit had no hesitation in reversing.  Although a jury could find LexisNexis negligent, according to the Court, “that is a far cry from being willful.”  In light of the evidence produced by LexisNexis regarding its efforts to combat inaccuracies, the Court simply could not find a willful of the FCRA necessary to support a punitive damages award.  This was particularly true in light of the fact that LexisNexis corrected the mistake not long after the Plaintiff raised the issue.

Standing and Data Breach Suits in the Sixth Circuit

A divided panel of the Sixth Circuit recently overturned a district court’s dismissal of claims against Nationwide Mutual Insurance Company involving the theft of data, as hackers breached Nationwide’s computer network to steal the plaintiffs’ personal information.  The plaintiffs In Galaria et al. v. Nationwide Mutual Insurance Co., asserted claims against Nationwide under the Fair Credit Reporting Act (FCRA) in addition to a number of common law claims (including negligence and bailment).  The district court dismissed the common law claims for lack of Article III standing, and dismissed the FCRA claims for lack of “statutory standing,” and as an issue of subject matter jurisdiction, because the plaintiffs alleged that Nationwide violated the FCRA’s statement of purpose rather than any substantive provision.   The panel reversed the district court on both fronts.

With respect to the plaintiffs’ FCRA claims and “statutory standing,” the panel explained that “statutory standing” is an inquiry that goes to whether or not the plaintiff has a cause of action under the statute (i.e., whether the plaintiff falls within the class of plaintiffs authorized to sue under the statute) and is analytically distinct from whether federal courts have the power to adjudicate a dispute (compare with Article III standing and the Constitution’s limitation that the federal judicial “power” extends to “cases” and “controversies”).  Therefore, the proper course for dismissing a claim where there is a lack of “statutory standing” is to dismiss it for failure to state a claim rather than a lack of subject matter jurisdiction, and the Court returned that question to the district court for further consideration.  In a footnote, the Court mentioned the Supreme Court’s recent decision in Spokeo, Inc. v. Robins and noted that FCRA claims may present Article III standing issues where alleged violations of the statute are procedural in nature but, in any event, the plaintiffs here had satisfied the Article III injury requirement.  Specifically, the Court found that Article III injury was satisfied at the pleading stage by “allegations of a substantial risk of harm, coupled with reasonably incurred mitigation costs.”  Regarding mitigation costs, the Court noted allegations that “[p]laintiffs and the other putative class members must expend time and money to monitor their credit, check their bank statements, and modify their financial accounts.”

The primary focus of the dissent was that it was unnecessary for the Court to reach the issue of Article III “injury” because the plaintiffs had failed to satisfy the separate traceability/causation requirement for standing (i.e., that there is a sufficient connection between the defendant’s actions, or inactions, and the plaintiff’s injury).  The dissent reasoned that any injury suffered by the plaintiffs was “at the hands of criminal third-party actors” and that the plaintiffs failed to allege facts that fairly traced their injury to Nationwide.  In contrast, the majority emphasized the low-threshold nature of the traceability inquiry and found the requirement satisfied because “but for Nationwide’s allegedly lax security, the hackers would not have been able to steal [p]laintiffs’ data.”  The dissent argued that the plaintiffs’ allegations about lax security were conclusory statements, not factual allegations entitled to deference.

Car Dealership That Sets Terms of Credit Must Comply With Equal Credit Opportunity Act

Under the Equal Credit Opportunity Act (“ECOA”), creditors who deny credit or change the terms of credit arrangements must notify applicants of the specific reasons why.  At issue in the Sixth Circuit’s recent decision in Tyson v. Sterling Rental, Inc. is whether a “middle man” like a car dealership is a “creditor” that must meet the ECOA’s notice requirement.  The Sixth Circuit held that yes, car dealerships and other intermediaries qualify as “creditors” that must provide notice of adverse actions if they participate in financing arrangements for their customers.

In Tyler, the Plaintiff made a down payment for a used car from defendant Car Source.  For the rest of the car’s cost, Plaintiff was put on a financing plan.  Plaintiff provided pay stubs and bank statements to Car Source, and Car Source set the terms of the financing agreement by inputting Plaintiff’s financial information into a computer program.  Car Source then assigned the agreement to a third party, Credit Acceptance Corporation (“CAC”), which ordinarily would provide Car Source an advance if it was satisfied with the financing terms.  In this case, however, the terms were based on an overestimation of Plaintiff’s monthly income, either due to an error by the salesperson or the computer program.  Discovering the discrepancy, CAC refused to pay Car Source an advance.

Car Source demanded that the customer come back to the store and pay an additional payment of $1,500 to keep the car.  It is undisputed that Plaintiff was never provided with written notice explaining why the terms of her credit arrangement were changed.  The primary issue on appeal was instead whether Car Source is a “creditor” for purposes of the ECOA who was required to provide notice.  The statute defines such creditors as those who “in the ordinary course of business, regularly participate[] in a credit decision, including setting the terms of the credit.”

Car Source argued that it was merely a middle man between the applicant and CAC, to whom the financing agreement was assigned.   The Sixth Circuit disagreed, noting that Car Source set the terms of the deal, bore the consequences of the financing falling through, and made the unilateral decision to change the terms of the existing credit arrangement.  Adopting the Seventh Circuit’s “continuum” analysis, the court held that even “middle men” such as dealerships are required to provide notice so long as they regularly participate in credit decisions.  The court also concluded that injunctive relief is available to private parties under the plain language of the ECOA, and it reinstated Plaintiff’s statutory claim for conversion under Michigan law.

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