Date: 07-10-2007

Case Style: Aviation Data, Inc., et al. v. American Express Travel Related Services, Inc., et al.

Case Number: A111602

Judge: Unknown

Court: California Court of Appeal, First Appellate District on appeal from the Superior Court of Alameda County

Plaintiff's Attorney:

David Fried, Law Offices of David M. Fried, San Leandro Theodore W. Phillips of Phillips, Greenberg & Hauser, Placerville, California Max Folkenflik of Folkenflik & McGerity, New York, New York

Defendant's Attorney:

John J. Bartko, Charles G. Miller, Christopher D. Sullivan and Jae S. Yi of Bartko, Zankel, Tarrant & Miller, San Francisco, California

Jerome B. Falk, Jr. and Steven L. Mayer of Howard Rice Nemerovski Canady Falk & Rabkin, San Francisco, California

Description:

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? Here the trial court refused to approve a class action settlement when it concluded that counsel for defendant American Express Travel Related Services Company, Inc. (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. Accordingly, we affirm.

BACKGROUND

Amex offers flight and baggage insurance programs, under which cardholders are automatically charged a premium from $4 to $14 for each flight they charge. In September 2001, William Hoffman sued Amex on behalf of the general public of California under the California Unfair Competition Law (Bus. & Prof. Code, §§ 17200, 17500.) The complaint, as ultimately amended,1 alleged that Amex represented to card members enrolled in its flight and baggage insurance programs that it would bill them for travel insurance only when they actually flew and that it would refund or credit premiums assessed for cancelled flights and unused tickets. Instead, the complaint alleged, 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. Plaintiffs further alleged Amex deliberately exploits the fact that many cardholders do not notice that promised refunds never materialize, and improperly places the burden on millions of cardholders to apply for individual refunds, knowing that most will not apply.

A key issue in early discovery was whether it was technically possible for Amex to modify or reprogram its computer system to prevent many of the improper premium charges. Plaintiffs deposed Amex's director of systems development, Scott Butler, whom it designated as the person most knowledgeable about its computer system for travel insurance programs. At his November 20, 2002, deposition, Butler and Scott Pearson, Amex's lead counsel, claimed that transaction processing for the travel insurance programs did not utilize the Transaction Advice Addendum Record (TAA code), a travel industry code that in many cases distinguishes between flight and non-flight charges, in order to help identify charges that should trigger an insurance premium. Both Butler and Pearson denied that Amex's computer system could be reprogrammed to identify improper charges by employing TAA codes or to automatically refund improperly assessed charges. 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. Amex had also been using the TAA code on its separate "hospital cash" insurance program since 2000.

Unaware of the facts surrounding Amex's deployment of the TAA code, plaintiffs urged Amex to begin screening improper charges and provided them with draft computer code that would accomplish that purpose. In or around January 2003, Amex vicepresident and chief litigation counsel Stuart Alderoty agreed to research the capabilities of the Amex computer systems in order to evaluate whether the proposed new TAA screen and an automated refund procedure could be put in place. On February 18, 2003, Amex informed class counsel that Amex "is prepared to use" the TAA code "as an additional criterion that must be satisfied before a premium is charged. . . . While this may result in premiums not being charged for some miscoded flight charges, coverage still would be provided for an otherwise valid claim where a premium is not charged due to the miscoding. This would reduce the number of occasions on which a premium is triggered for miscoded charges. As you know, this is a change suggested by your expert witness." The modification of Amex's computer system to deploy TAA code became a principal anticipated benefit of settlement.

In March 2003, successful mediation resulted in the parties' agreement to the terms of a settlement that contemplated amendment of plaintiffs' complaint to allege a nationwide settlement class.2 Plaintiffs believed from information obtained in discovery that Amex's computer systems could not be modified to identify past improper charges, and the settlement therefore did not provide any monetary recovery to class members. Instead, its key terms were Amex's prospective agreement to use the TAA code to screen improper charges; automatically refund premiums for unused tickets; raise the minimum amount that would trigger a premium from $40 to $75; and modify its refund coupons and disclosures. Amex promised 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.

In fact, despite Butler's sworn statement that "[a]s part of the proposed settlement American Express will begin using a second code known as the TAA" and similar representations by Amex in support of the settlement, Amex had been using the TAA code in its flight insurance program since November 2002. Sometime between the March 2003 mediation and July 6, 2003, Pearson learned that the TAA code had already been implemented. Pearson later testified he was "taken aback" by this information "because I thought it was a change. I thought it was new" when it was discussed at the mediation. He discussed with his supervising attorney, Julia Strickland, and with Alderoty his discovery that the TAA code was already in use, and its implications on the impending settlement. He did not, however, relate his discovery to plaintiffs' counsel. Pearson testified that plaintiffs should have learned the TAA code was already in use by examining the computer code Amex produced in discovery,3 and from Amex's revisions to a draft settlement that changed language from "American Express will modify its computer code" to "use and/or modify." (Italics added.)

Settlement negotiations continued over the next few months. On August 4, 2003, the parties signed a settlement stipulation that was filed with the court the next day. A preliminary approval hearing was conducted on August 7, 2003. The trial court questioned Amex's counsel about the benefits of the settlement: "The Court: It seems that this settlement contemplates some substantive changes in the way that American Express operates this program, 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?" Pearson responded: "That's correct." The court preliminarily approved the settlement and gave plaintiffs permission to file an amended nationwide class action complaint and set a final approval hearing for January 27, 2004. Solely for purposes of the settlement, the court certified a class of "All persons or entities who incurred per-trip premium charges in connection with their enrollment and participation in the airflight insurance, baggage insurance and/or travel delay insurance programs . . . at any time between September 1, 1997 and the date of preliminary approval of the settlement."

Plaintiffs filed their amended complaint that day, to allege a nationwide class action and add Carr as a class representative. The court approved a form of class notice as agreed by the parties in the Stipulation of Settlement. It stated: "If the settlement is approved, Amex will modify certain computer code to reduce the need for Program participants to request premium refunds in three ways: (1) Amex's computer systems will not charge a premium when a code known as the ‘transaction advice addendum record' (‘TAA') indicates that a charge is not for an airline ticket; (2) Amex's systems will not charge a premium for charges of less than $75; and (3) Amex's systems will automatically refund premiums when the TAA for a credit indicates that the credit is for an airline ticket refund. . . ."

The Stipulation of Settlement provided that if the court did not approve the settlement or it otherwise failed to become effective, "the Settling Parties shall be restored to their respective positions in the Litigation as of March 1, 2003." As to arbitration, the stipulation specifically provided: "Neither the Stipulation nor the settlement, including the agreement by American Express to stipulate to the certification of a nationwide settlement class, nor any act performed or document executed pursuant to or in furtherance of the Stipulation or the settlement: . . . (iii) is or may be deemed to be a waiver of American Express's right to seek to enforce its arbitration provision in other cases or against persons or entities who opt out of the settlement." A final approval hearing was scheduled for January 27, 2004.

A month before the preliminary approval, on July 10, 2003, ADI and other plaintiffs (jointly ADI) filed a similar nationwide class action in the United States District Court for the Eastern District of New York. The factual allegations in the New York suit are virtually identical to this one, with the addition of a racketeering claim (18 U.S.C. § 1961(1) (Racketeer Influenced and Corrupt Organizations Act) against Amex. Amex told the district court in New York that it intended to move to compel arbitration and that the preliminary approval order in the California action enjoined ADI from prosecuting the New York lawsuit.

ADI, along with various others, filed objections to the settlement in the California action and moved successfully to intervene. The objectors expressed concerns including that this was a "no dollar" settlement "and that there has been no meaningful effort to quantify the monetary losses to the class"; that certifying a nationwide class for nonmonetary settlement was "merely for the benefit of Amex in cutting off monetary claims and the potential for fluid recovery" and would implicate due process concerns given the lack of discovery concerning monetary damages; and that the named plaintiffs did not adequately represent the class.

On January 20, 2004, Amex filed a Memorandum In Support of Final Approval of the Settlement. In its memorandum, Amex described the case as having been "vigorously litigated." It stated that "[a]s consideration for this settlement . . . American Express has agreed to: (1) make extensive modifications to its data processing systems related to the assessment and refunds of Insurance Program premiums; . . . [] The proposed modifications to American Express's computer systems are extensive and of significant benefit to class members. First, American Express will begin using a second code, known as the ‘TAA,' to determine whether a premium should be charged. The TAA had been used only for purposes of adding detail regarding the airline charge to a cardmember's billing statement. . . . Under the new programming, rather than the burden resting on the cardmember to seek a refund if the charge was not for an airline ticket, the system will not charge a premium even if one should be charged." (Italics added.)

Butler filed a declaration in support of preliminary approval that referred repeatedly to the addition of the TAA code as a system change or proposed modification. Butler's words were that as part of the proposed settlement "American Express will begin using a second code, known as the ‘TAA,' to determine whether a premium should be charged"; and "will program its systems to issue automatic premium credits when airlines submit credits with TAA code . . . . This change will eliminate the need for cardmembers to request refunds when airlines submit sufficient information to enable American Express to determine that a premium should be refunded."

Pearson also offered a declaration in support of final approval. He stated: "Negotiation of the formal settlement agreement and related exhibits such as the class notice took several months, largely due to the technical nature of part of the settlement consideration and plaintiffs' counsel's insistence upon conducting substantial due diligence to confirm that the agreement adequately required AMEX to modify its data processing systems in the manner it had promised in the settlement negotiations." Regarding the lack of monetary relief to the plaintiff class, Pearson said that although plaintiffs' counsel had spent considerable time and effort to ascertain the improper charges imposed on class members, such information was simply not available absent a prohibitively cumbersome and expensive manual review of all customer billing statements for the relevant period. Pearson later testified that during this period he was under the impression his actions were consistent with his instructions from Alderoty and Strickland.

At the January 27, 2004, hearing, the court deferred approval of the settlement and allowed discovery "on all aspects of the proposed settlement and objections thereto." What that discovery revealed is critical to the issues in this appeal: Amex had in fact implemented the TAA code in November 2002. David Minerd, a lead programmer analyst for Amex, managed the implementation of the TAA code in Amex's flight delay, "hospital cash" and, later, baggage and flight insurance programs. He testified the TAA code had been incorporated in the flight and baggage insurance computer system since 2002 in the same form as the code Amex proposed to prospectively implement as consideration for the settlement. According to Minerd's testimony, Amex's representations that the proposed class settlement involved a code change were false. He testified: "[Q]: Let me read you a few sentences from a declaration filed by your colleague, Mr. Butler, in connection with a hearing that was held before the court on January 27, 2004 from paragraph 8. [] ‘As part of the proposed settlement' - and that's referring to the settlement of Hoffman versus American Express - ‘American Express will begin using a second code known as the TAA to determine whether a premium should be charged. The TAA had been used only for purposes of adding detail regarding the airline charge to card member's billing statement.' [] . . . Now, as of January 2004, that statement was false; was it not? American Express had begun using the TAA code as to airline flight and baggage in November of 2002 and as to hospital cash and travel delay as to the year 2000; right? [] A: That's my understanding. [] Q: Okay. So Mr. Butler's statement in January 2004 that they would begin using a second code as part of the settlement, that's a false statement? [] . . . [A]: That's my understanding."

Butler admitted that the statements in his declaration were "not accurate," because when he described it as a prospective change, Amex was already using the TAA code. Amex concedes there is "no dispute" that the TAA code had been implemented before the settlement was reached.

On December 15, 2004, Amex informed the court that plaintiffs had withdrawn their support for the settlement, and therefore approval would be impossible. Amex filed a Notice of Termination of Settlement. At a later case management conference, plaintiffs advised the court they were withdrawing support "because Counsel for the Class was allegedly misled by American Express in connection with the Settlement." The court agreed to "entertain motions relating to sanctions, the effect of disapproval of the Settlement, if disapproval occurs, and any other matters relating to the future conduct of this action," and authorized discovery related to potential sanctions.

Plaintiffs did move for sanctions and, after hearings, on April 28, 2005, the court issued an order addressing those motions. It found Pearson's representations at the August 7, 2003, preliminary approval hearing were "misleading with reference to the changes in the operation of the AMEX insurance program to be ‘prospective.' " It similarly found language in the published class notice that Amex promised to "modify" its computer codes "suggests a prospective modification of AMEX's computer codes when in fact AMEX has implemented the code changes for AMEX's Travel Delay and Hospital Cash Insurance programs as early as the year 2000 and had implemented the code changes for its airflight and baggage programs in November of 2002. Although the earlier implementation of these programs was arguably beneficial to the class, it was misleading to characterize them as prospective in nature and part of the current consideration for the settlement."

The court observed that Amex's counsel continued to insist the concept of using the TAA codes to filter out inappropriate insurance charges was suggested by plaintiffs' experts, not Amex, long after he knew that Amex had been using TAA codes in the travel insurance programs since 2002.

The court also found Amex's sworn statements that it could not access sufficient data to calculate specific damage claims and thereby award monetary relief to the class were "inaccurate and untrue."

The court concluded that "it was not well served and fully informed by counsel in this case. The clear import of the representations of class counsel and defendant's counsel was that the sole benefit to the class was a material and significant prospective change in the technical and business practices of AMEX concerning its travel related insurance programs. The Court was comforted by the declarations of due diligence by plaintiffs' counsel and similar assurances of defense counsel that no monetary relief was attainable because the data necessary for such a determination was not available and could only be discerned by a laborious, manual search of individual customer billings during the period in question. The Court now has serious doubts about such representations. [] The Court finds Plaintiffs' counsel were mislead by defense counsel as reflected in the foregoing findings. However, Plaintiffs' counsel also bears some responsibility in being complacent in its due diligence, particularly with reference to the searchability of AMEX's database insofar as determining the possibility of a claim for damages or restitution for the alleged over billing of insurance premiums by AMEX."

Despite its conclusions and reservations, the 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. However, it granted plaintiffs' motion to require Amex to send a curative notice correcting erroneous information in the class notice of settlement and accurately describe the current status of the case to all putative class members

Plaintiffs filed the fourth amended complaint on July 18, 2005. The court set dates for defendants to file responsive pleadings and their anticipated motion to compel arbitration, and set a hearing on a motion for class certification for December 14, 2005.

Amex moved to compel arbitration as to ADI in August 2005. The court denied the motion, because Amex had waived arbitration by (1) invoking the litigation process to settle the claims of ADI as part of a nationwide class; and (2) failing to take affirmative steps to implement the arbitration process until August 2005. Amex appealed from this order.

On December 14, 2005, the trial court granted in part plaintiffs' motion to certify a nationwide litigation class of all present and former cardholders enrolled in its fee-based travel-related insurance plans from September 6, 1995, to the present. Specifically, the court certified a "California Class" of all persons who held American Express charge cards with billing addresses in California and purchased Amex's travel insurance plans, and a "49 State Class" of non-California cardholders to pursue New York contract and common law claims. It declined to certify a class to pursue claims on behalf of persons who held American Express credit cards, which, unlike charge cards, are said to be governed by Utah law.

Amex moved to compel arbitration as to members of the "49 State Class"4 on February 2, 2006, and to exclude from the class all members subject to arbitration agreements with Amex. The court denied the motion on the ground that Amex had waived its right to compel arbitration. It noted that a party generally does not waive its right to arbitrate by invoking the judicial forum to pursue settlement. Amex's misrepresentations about the TAA code as part of the settlement process, however, gave rise to unique considerations. "[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. Diaz v. United States (1911) 223 U.S. 442, 458 (‘Neither in criminal nor in civil cases will the law allow a person to take advantage of his own wrong.'); Riggs v. Palmer (1889, 115 N.Y. 506, 511 (‘No one shall be permitted to profit by his own fraud, or to take advantage of his own wrong, or to found any claim upon his own iniquity, or to acquire property by his own crime.'). 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. Order of April 28, 2005. 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 when it 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 court further found a nexus between the failed settlement and the arbitration clause "because [Amex] intended to use the settlement to resolve tens of thousands of claims that it otherwise would have had to resolve in individual arbitrations." In light of its finding of waiver, the court commented on but did not decide remaining issues including the application of Code of Civil Procedure section 1281.2, subdivision (c)5 and the enforceability of the arbitration agreement under New York law.

Amex appealed this order as well and we consolidated the two appeals for briefing, argument and decision.

* * *

Outcome: The orders are affirmed.

Plaintiff's Experts: Unknown

Defendant's Experts: Unknown

Comments: None