1.       Status as a Member, Manager, Director or Executive of an LLC is not sufficient to incur personal liability for wrongdoing attributable to the LLC or another Member, Manager, Director or Executive.

 N.C. Gen. Stat. § 57C-3-30 provides:

 A person who is a member, manager, director, executive, or any combination thereof of a limited liability company is not liable for the obligations of a limited liability company solely by reason of being a member, manager, director, or executive…

 Citing § 57C-3-30, the Revolutionary Concepts court looked beyond the mere status of the individual defendants as members of the law firm to determine whether they had any liability related to the failure of a patent agent employed by the firm to file a patent application.  Revolutionary Concepts, 2012 NCBC 14 at ¶ 39.  Similarly, the court in Babb v. Bynum & Murphrey, 182 N.C. App. 750, 643, S.E.2d 55, cert. denied, 362 N.C. 233, 659 S.E.2d 434 (2008) looked beyond the status of the defendant lawyer as a member of the law firm to determine any liability related to the transactions made by his partner that amounted to fiduciary fraud, embezzlement, conversion and other unlawful conduct. 

 2.       A Member, Manager, Director or Executive does not become liable for wrongdoing attributable to the LLC or another Member, Manager, Director or Executive of the LLC simply by participating in the management or control of the business.

 N.C. Gen. Stat. § 57C-3-30 further provides:

 A person who is a member, manager, director, executive, or any combination thereof of a limited liability company … does not become [liable for the obligations of the LLC] by participating, in whatever capacity, in the management or control of the business.  

 In citing the statute, both the Revolutionary Concepts and Babb courts, recognized that more than general participation in management or control of the LLC law firms was required to impose individual liability on the defendants for the wrongdoing at issue.  Revolutionary Concepts, 2012 NCBC 14 at ¶ 39; Babb, 182 N.C. App. at 753.

 3.       A Member, Manager, Director or Executive becomes personally liable for wrongdoing attributable to the LLC or another Member, Manager, Director or Executive only by that individual’s “own acts or conduct”.

 N.C. Gen. Stat. § 57C-3-30 also provides:

 A member, manager, director, or executive may, however, become personally liable by reason of that person’s own acts or conduct.

 The critical inquiry the court will engage in is whether the plaintiff’s basis for attempting to impose personal liability on a defendant implicates that defendant’s own acts or conduct.    Plaintiffs may allege that an individual’s affirmative acts constitute the basis for liability or, as in Babb and Revolutionary Concepts, that an individual’s failure to act constitutes the basis for liability. 

 4.       Acts of Other Members:  A Member, Manager, Director or Executive of an LLC does not have an affirmative duty to investigate the actions of another member in the LLC if they do not have actual knowledge of the wrongdoing.

   In Babb, one member of a law firm affirmatively engaged in transactions that amounted to fiduciary fraud, embezzlement, conversion and other unlawful conduct.  Plaintiffs sued another member of the law firm for (1) for negligence in supervising an employee of the firm; (2) for negligence in carrying out his responsibilities in the firm; and (3) for breach of fiduciary duty, gross negligence, malpractice and willful and wanton conduct, all related to the wrongful transactions of the other member attorney.  Plaintiffs conceded that there were no direct acts committed by the defendant attorney, but rather based their claims on his failure to act.  The court rejected the plaintiffs’ attempt to impose liability on the defendant attorney, finding that § 57C-3-30 does not impose a duty on a member of the LLC to investigate wrongdoing of another without having actual knowledge of the wrongdoing.  Babb, 182 N.C. App. at 753.

 5.       Supervision of Employees:  A Member, Manager, Director or Executive of an LLC cannot be held liable for malpractice, failure to supervise, or respondeat superior if (1) they had no knowledge that the individual at issue required supervision and/or (2) they had not been assigned or accepted responsibility to supervise the individual at issue.

   In Revolutionary Concepts, one attorney was deemed responsible for supervising the activities of the patent agent working for the law firm.  The plaintiff attempted to impose liability on two other defendant attorneys who were members of the law firm based upon the defendant attorneys’ failure to detect and supervise the activities of the patent agent. “The critical inquiry then is whether [the defendant attorneys’] failure to supervise [the patent agent] can be considered their ‘own acts or conduct’ within the meaning of the statute.” Revolutionary Concepts, 2012 NCBC 14 at ¶ 40.  There was no evidence that the defendant attorneys had accepted or had been assigned the responsibility to supervise the patent agent.  Further, consistent with Babb, the Revolutionary Concepts court held that without evidence of actual knowledge of the need for supervision, the failure to supervise does not constitute one’s “own acts or conduct” within the meaning of the statute.  Revolutionary Concepts, 2012 NCBC 14 at ¶¶ 41-42.

   Although Revolutionary Concepts and Babb analyze the liability of lawyers, the principles we glean from these cases are not limited to law firms operating as LLCs.  And these principles even extend to corporate members of LLCs.   For example, see Spaulding v. Honeywell Int’l, Inc., 184 N.C. App. 317, 646 S.E.2d 645 (2007), in which the court found no liability for a corporate defendant member of an LLC because the corporate defendant member had not affirmatively acted and had not undertaken an independent duty to guarantee worker safety at the LLC’s plant.   Understanding these cases will help individual and corporate members, managers, directors and executives of LLCs protect against attempts to circumvent the limited liability protections provided under N.C. Gen. Stat. § 57C-3-30.

 Zubulake established that “[o]nce a party reasonably anticipates litigation, it must suspend its routine document retention/destruction policy and put in place a “litigation hold” to ensure the preservation of relevant documents.”  220 FRD at 218.  In Zubulake, the duty to preserve information relevant to reasonably anticipated litigation began at least four months prior to any administrative action being filed with the EEOC and nearly a year prior to initiation of a court action.  The court noted that “because one or two employees contemplate the possibility that a fellow employee might sue does not generally impose a firm-wide duty to preserve.”  Id. at 217. However, based on emails labeled “Attorney Client Privileged” and the subject matter of the emails being legal in nature and calling for plaintiff’s termination, the court explained “it appears that almost everyone associated with Zubulake recognized the possibility that she might sue” prior to filing the EEOC complaint.  Id.  The defendant had failed to take any steps to direct that information be preserved until after the EEOC complaint had been filed and failed to suspend deletion of required backup tapes until a year after litigation had commenced.

 The unquestionable deterioration of the business relationship was the trigger identified by the court in EchoStar.   In EchoStar, the parties were engaged in back and forth communications regarding potential breaches of their agreement as early as June 2007 and internal emails with counsel reflected potential litigation was contemplated.  The plaintiff had initiated a litigation hold in July 2007, while the defendant failed to initiate a litigation hold until January 31, 2008, the day after the complaint was filed.  Further, the defendant failed to suspend routine deletion of electronic documents until four months after the complaint had been filed.  The court imposed an adverse inference charge as a spoliation sanction, reasoning that “[t]he destruction of emails during the critical time when the parties’ business relationship was unquestionably deteriorating reflects, at best, gross negligence. Further, the destruction of e-mails after litigation had been commenced, when EchoStar was unquestionably on notice of its duty to preserve, was grossly negligent, if not intentional.”   EchoStar, 2012 NY Slip Op 00658.  EchoStar had been sanctioned for similar conduct in a prior litigation. 

 Federal courts and now state courts are looking to Zubulake for guidance on defining “reasonable anticipation.”  North Carolina’s Rules of Civil Procedure, as revised in 2011, address deletion of electronically stored information:

 NC Rule Civil Procedure 37(b1): Failure to provide electronically stored information. – Absent exceptional circumstances, a court may not impose sanctions under these rules on a party for failing to provide electronically stored information lost as a result of routine, good-faith operation of an electronic information system.

 Commentary to NC rule 37 explains, however:

 The good faith requirement of subsection (b1) means that a party is not permitted to exploit the routine operation of an information system to thwart discovery obligations by allowing that operation to continue so that specific stored information that it is required to preserve will be destroyed. When a party is under a duty to preserve information because of pending or reasonably anticipated litigation, intervention in the routine operation of an information system is one aspect of what is often called a “litigation hold.”  (Emphasis added).

 The Zubulake court explained that practically speaking “an adverse inference instruction often ends litigation — it is too difficult a hurdle for the spoliator to overcome. The interrorem effect of an adverse inference is obvious. When a jury is instructed that it may ‘infer that the party who destroyed potentially relevant evidence did so out of a realization that the [evidence was] unfavorable,’ the party suffering this instruction will be hard-pressed to prevail on the merits.”  220 FRD at 220. Given the magnitude of the consequences for getting it wrong, Zubulake and EchoStar should serve as guiding principles for companies potentially facing litigation in federal and state courts of North Carolina.

   Throughout this month, public hearings are being conducted by the Judicial Nominating Commission seeking comment on the best qualifications and methodology to use for identifying candidates and selecting judges.  One hearing took place on March 5th, with two more scheduled for March 13th and March 22nd.  The remaining hearings are scheduled to take place as follows:

   Tuesday, March 13, Greenville, NC: 2-4 p.m. at the ECUMurphyCenter, Harvey Hall (enter through Maynard Lobby).  For directions click here – the Murphy Center is just behind the Dowdy-Ficklen Stadium.

   Thursday, March 22, Chapel Hill, NC: 2-4 p.m. at the UNC Center for School Leadership, Room 111.  For directions click here.

   This is an opportunity for N.C. citizens to impact the manner in which our judges will be selected by the Governor going forward.  The implementation of the Judicial Nominating Commission is an important change in the North Carolinacourt system.

    I first became friends with Chris when we were undergraduate students at University of North Carolina at Chapel Hill.  Our paths continued to cross as we both went on to practice law, remained involved in the community and gathered periodically with friends from our college days.  I had the opportunity to watch a talented young lawyer develop into a sharp legal mind and leader on the bench.  His accomplishments at just 48 years old:  Iredell County Senior Resident Superior Court Judge (appointed 2001, elected since 2002); Assistant District Attorney. 

    It is a testament to the extraordinary character of Chris Collier that at the end of his journey he remained a man of integrity, and notwithstanding spending over a decade on the bench, has been described as a “good, kind man” and “a “gentle soul and a kind spirit.”  There is little I can say to fill the void left by Judge Collier’s absence.  He will be remembered fondly and greatly missed.

    Back of the Line Veterans:  Veterans’ rights could not be a more poignant and timely issue and it is one that is drawing a lot of attention.  On November 16, the Ninth Circuit Court of Appeals withdrew its initial opinion which held that veterans’ due process rights were violated by the long wait times associated with compensation and treatment for post traumatic stress disorder.  The case will be reheard en banc.

   Cable TV Class Action:  The Ninth Circuit’s initial thoughts about the class action antitrust suit brought against media giants including NBC, DirectTV, The Walt Disney Co., and Time Warner Cable, Inc.:  “This case is a consumer protection class action masquerading as an antitrust suit.” See the Court’s June 3, 2011 opinion which upheld dismissal of the class action.  However, on October 31, the court withdrew its initial decision after a barrage of petitions by plaintiffs and amicus organizations to reconsider its decision, several of which are discussed here and here. The panel will be reconstituted to reconsider the decision. 

   Show Me the Metadata: Where do E-Discovery and FOIA requirements meet?  In a decision rendered earlier this year by a District Court Judge for the Southern District of New York, metadata was deemed to be an integral part of electronically stored information that the government was required to produce in response to a FOIA request.  The court has since withdrawn its opinion, which it recognized was not based on a fully developed record.  Although withdrawn, the court’s opinion is expected by some to impact decisions moving forward: click here for example. 

   Betty Boop Unprotected:  For six months this year, Betty Boop was exposed and not subject to trademark protection according to a Ninth Circuit opinion issued in February.  However, on August 19, that opinion was withdrawn and simultaneously superceded by a new opinion which remained silent on the issue of whether the Betty Boop image could be a protected trademark.  The original opinion received what has been described as a “firestorm of criticism,” see here.

   Courts rarely withdraw their opinions.  Although apparently acknowledging that it got it wrong the first time (by withdrawing its opinions), the Ninth Circuit did not provide us with an explanation or standard that it used in determining that withdrawal of its opinions was the appropriate course of action in these three cases.  We at least know from the Ninth Circuit’s Rule 35-1, that it considers rehearing en banc appropriate “when the opinion of a panel directly conflicts with an existing opinion by another court of appeals and substantially affects a rule of national application in which there is an overriding need for national uniformity.”  But the court is only rehearing the veterans’ rights case en banc, not the other two cases.  Could a “firestorm of criticism” be the subjective standard used by the Court?  The Southern District of New York, by contrast, expressly withdrew its opinion “in the interests of justice” upon learning that it was based on an incomplete record.     

Hypothetical Question: a contract contains an arbitration clause that requires the arbitration of all disputes and also prohibits the parties from arbitrating any claims as part of a class or representative action.  Is the class/representative arbitration waiver enforceable under AT&T Mobility LLC v. Concepcion, 131 S.Ct. 1740 (2011)?

  We discussed that there is a significant possibility that Concepcion will not preclude all class actions.  See here.  Lower courts, both federal and state, are in the process of testing exactly where the line will be drawn.  Several lower courts have taken the position that Concepcion did not create a blanket rule which validates all class arbitration waivers.  In their resulting “case-by-case analyses,” some of these lower courts have answered the question in the negative, relying on the view that a waiver interferes with the plaintiff’s vindication of a claim or of a particular right. 

  In one of the more interesting cases, the Massachusetts State Superior Court invalidated a class arbitration waiver and anchored its ruling on the small value of the individual claims at issue.  Why is this so interesting?  The Massachusetts court ruled in this manner despite the following statement by the U.S. Supreme Court in Concepcion which seems to reject this argument:  “[t]he dissent claims that class proceedings are necessary to prosecute small-dollar claims that might otherwise slip through the legal system. But States cannot require a procedure that is inconsistent with the FAA, even if it is desirable for unrelated reasons.” Concepcion, 131 S.Ct. at 1753 (citation omitted).   The Massachusetts Court declined to accept what it referred to as the “defendants’ invitation to magnify one sentence in Concepcion, into a broad rule preempting all state law unconscionability rules that prohibit use of Dell-like arbitration clauses,” and it held that the class arbitration procedure was necessary for plaintiffs to vindicate their rights because, absent a class procedure, there was no incentive for a plaintiff to pursue an individual claim. See Feeney v. Dell, Civil Action No. MICV 2003-01158, (slip opinion)(Mass. Sup. Ct. September 30, 2011).    

  The “vindication of rights” argument has been addressed by other lower courts with a focus on substantive statutory rights rather than procedure.  In these cases, the analysis has been directed at whether a class arbitration waiver would require the plaintiff to waive all opportunities to vindicate a substantive statutory right.  At issue in Chen-Oster v. Goldman, Sachs & Co:  the statutory right to be free from pattern and practice discrimination under Title VII and the corresponding prohibition from pursuing such claims on an individual basis.  Chen-Oster v. Goldman, Sachs & Co, No. 10 Civ. 6950, 2011 WL 2671813, *1, 3 (slip opinion) (S.D.N.Y. July 7, 2011).  The District Court for the Southern District of New York refused to compel arbitration of a plaintiff’s discrimination claims under Title VII where the employment agreement at issue contained a class arbitration waiver.  The court reasoned that because pattern and practice discrimination claims are prohibited by law from being brought as an individual claim, compelling arbitration in the face of the class waiver would require the plaintiff to forfeit the ability to enforce the right to be free from pattern and practice discrimination.  Id. at *3-4.  Not only did the court refuse to compel arbitration, but the court even dismissed Concepcion as a non-controlling decision since it did not address how the Federal Arbitration Act (“FAA”) affects arbitration with respect to federal statutory rights.  Id. at *5.

  Within our own Fourth Circuit, the District Court for the District of Maryland recently looked to the Eleventh Circuit to support its proclamation that Concepcion did not create a bright line rule validating all class arbitration waivers.  See AT & T Mobility LLC v. Fisher, No. Civ. A. DKC 11-2245, 2011 WL 5169349, *6 (D.Md. Oct 28, 2011).  At issue in Fisher:  whether to issue a preliminary injunction preventing the compulsion of arbitration on the basis that an antitrust action under the Clayton Act is a representative action (although not a class action) and the parties did not agree to arbitrate representative actions.  AT&T Mobility argued that the class/representative arbitration waiver at issue prevented the plaintiff not only from arbitrating a representative Clayton Act antitrust action, but also from pursuing such an action in court.  The court granted the preliminary injunction preventing compulsion of arbitration, but declined to address whether the class/representative arbitration waiver at issue would be valid if taken to the extreme that AT&T Mobility advocated.  The court noted that “in the event the choice-of-forum and choice-of-law clauses operated in tandem as a prospective waiver of a party’s right to pursue statutory remedies for antitrust violations, we would have little hesitation in condemning the agreement as against public policy.” Id. at *5-6.

  Arbitration and the vindication of statutory rights is not a new issue, as the Circuit Courts and U.S. Supreme Court have established that agreements to arbitrate statutory claims may be unenforceable if the terms of the agreement prevent the plaintiff from effectively vindicating his statutory rights.   See e.g., Fisher, 2011 WL 5169349 at *5-6 (discussing Fourth Circuit and Supreme Court jurisprudence).  I highlight these federal cases to illustrate the courts’ analyses regarding limitations on the reach of Concepcion and to illuminate which substantive areas of the law may be subject to such limitations.  These limitations should be taken into account in assessing the enforceability of such a waiver prior to drafting an arbitration agreement and during the course of litigation.  The Massachusetts court’s decision, however, seems to be more at odds with the principles set forth in Concepcion.  Concepcion seems to make it clear that the preference for the availability of a class procedure over individual arbitration is not grounds enough to warrant obstruction of the FAA’s objectives.  I would expect to see challenges to state court rulings like this one.

Just three months prior to the U.S. Supreme Court’s ruling in Concepcion, the California State Supreme Court held that an arbitration clause in an employment agreement which would require the waiver of a state administrative wage dispute hearing was unconscionable and the California court’s holding was not preempted by the Federal Arbitration Act (“FAA”).­­­­ Sonic-Calabasas A, Inc. v. Moreno, 51 Cal. 4th 659, 684-687, 695 (Cal. 2011).  The California Supreme Court, however, did hold that the arbitration clause was enforceable to the extent that any “appeal” of the administrative hearing could be required to be heard by an arbitrator instead of the state court. Id. at 676.  The California court distinguished then-existing U.S. Supreme Court precedent that Sonic-Calabasas A, Inc. (“Sonic”) argued was controlling and reasoned:

 A public policy based solely on the supposed superiority of an administrative forum over arbitration could no more survive FAA preemption than could a policy based on the supposed superiority of a judicial forum. But neither do we understand the FAA to preempt a state’s authority to impose various preliminary proceedings that delay both the adjudication and the arbitration of a cause of action in order to pursue important state interests….The Supreme Court has never suggested that the FAA requires that these preliminary proceedings be bypassed in order to go directly to arbitration.

 Id. at 693 (citations omitted) (emphasis added). 

 On October 31, 2011, in what is known as a GVR Order, the U.S. Supreme Court granted Sonic’s Petition for Writ of Certiorari, vacated the California Supreme Court’s decision, and remanded the case for further consideration in light of AT&T Mobility v. Concepcion.  GVR orders – grant, vacate, and remand orders – have been issued by the U.S. Supreme Court since the 1920s as a mechanism to allow lower courts to have an opportunity to review their own decisions in light of an intervening change in law or factual circumstances that may be outcome determinative.  The use of the GVR order has expanded over time, and there seems to be confusion in the legal community regarding the true meaning of GVR orders.  The GVR order is considered an indication that the U.S. Supreme Court believes that there has been a development in the law that warrants reconsideration of the lower court’s ruling, but the U.S. Supreme Court has not ruled in a manner that would predict how it would rule if a GVR’d case finds itself in front of the high court again.  An excellent discussion regarding the history and meaning of GVR orders can be found here.

So, is the U.S. Supreme Court now suggesting that the FAA may in fact require that such preliminary administrative proceedings be bypassed pursuant to a binding arbitration agreement?  If so, the implications of Concepcion could be far broader than most probably have considered. 

This question is apparently a novel one for the appellate courts, having first been directly addressed in 2010 by the Seventh Circuit Court of Appeals in American Honda Motor Co., Inc. v. Allen, 600 F. 3d 813, (7th Cir. 2010) (per curium). Although the Seventh Circuit used the phrase “full Daubert review” to describe the extensiveness of the court’s inquiry at the class certification stage, it expounded upon the depth and focus of such a review by explaining that “[i]f the challenge is to an individual’s qualifications, a court must make that determination ‘by comparing the area in which the witness has superior knowledge, skill, experience, or education with the subject matter of the witness’s testimony.’ The court must also resolve any challenge to the reliability of information provided by an expert if that information is relevant to establishing any of the Rule 23 requirements for class certification.” Id. at 816 (citations omitted). Although explicitly stating that it had doubts as to the reliability of the expert evidence offered to support class certification, and even in the face of a direct challenge by the opposing party to the scientific reliability of the evidence offered, the district court had failed to make a determination in that instance and certified the class anyway. The Seventh Circuit remanded the case and vacated the district court’s denial of Honda’s motion to strike and its order certifying a class. Id. at 819.

Ninth Circuit and Eighth Circuit cases decided since American Honda seemingly would produce the same result, although the courts have used phraseology that suggests a less extensive Daubert review may be required at the class certification stage. The Ninth Circuit in Dukes v. Wal-Mart Stores, Inc., 603 F. 3d 571, 602-03 (9th Cir. 2010) stated that, “[a]t the class certification stage, it is enough that [the expert] presented scientifically reliable evidence tending to show that a common question of fact … exists with respect to all members of the class.” (emphasis added). Notably, the court explicitly stated that the evidence must be scientifically reliable, in line with the Seventh Circuit’s ruling in American Honda.

In Dukes, it does not appear that the court concluded that Daubert does not apply at the class certification stage. Rather, it acknowledged that had the District Court conducted a Daubert analysis it would have been fruitless in that case because Wal-Mart did not challenge the expert’s methodology or argue that his findings were irrelevant. Wal-Mart “challenged only whether certain inferences can be persuasively drawn from his data. But because Daubert does not require a court to admit or exclude evidence based on its persuasiveness, but rather requires a court to admit or exclude evidence based on its scientific reliability and relevance… testing Dr. Bielby’s testimony for “Daubert reliability” would not have addressed Wal-Mart’s objections.” Id. at 602 (emphasis added)(citations omitted).

The Eight Circuit similarly ruled on a case in which there were no challenges raised to the reliability or relevance of the expert evidence offered to support class certification – which is the focus of a Daubert review. See In re Zurn Pex Plumbing Products Liability Litigation (8th Cir. 2011). The parties “agree[d] that [the experts] are well qualified in their respective fields and that they used generally recognized and reliable methodologies,” but they disagreed as to whether “the district court should determine at the class certification stage, and before merits discovery has even commenced, whether or not the expert opinions will ultimately be admitted at trial.” Id. The Eighth Circuit approved of what it referred to as the District Court’s “’tailored’” Daubert analysis, which “examined the reliability of the expert opinions in light of the available evidence and the purpose for which they were offered.” Id. (emphasis added).

This “tailored” analysis approved by the Eighth Circuit really does sound similar to the “full” review defined by the Seventh Circuit, i.e., that ‘’[t]he court must also resolve any challenge to the reliability of information provided by an expert if that information is relevant to establishing any of the Rule 23 requirements for class certification,” American Honda, 600 F. 3d at 816 (emphasis added). It also sounds similar to the standard set forth by the Ninth Circuit, i.e., “[a]t the class certification stage, it is enough that [the expert] presented scientifically reliable evidence tending to show that a common question of fact … exists with respect to all members of the class,” Dukes, 603 F. 3d 571 at 602 (emphasis added).

In an unpublished opinion, the Eleventh Circuit has agreed with the Seventh Circuit’s standard set forth for determining admissibility of expert evidence at the class certification stage, but it seemingly has gone further to explicitly state that the district court is required to determine the weight of conflicting expert evidence in a “Daubert-like critique” when conflicting expert testimony is offered to challenge the methodology and qualifications of a proffered expert. See Sher v. Raytheon Co., No. 09-15798 (11th Cir. 2011). The Eleventh Circuit acknowledged that the question before it – determination of the weight of expert evidence – was not the same as that before the Seventh Circuit in American Honda – determination of the admissibility of expert evidence. Id.

All-in-all, it seems that in the face of a direct challenge to the scientific reliability of expert evidence proferred in support of class certification, each of these Circuits will require a determination to be made at that point, regardless of whether the determination is coined a full or tailored Daubert review. The Supreme Court’s dictum in Wal-Mart Stores, Inc. v. Dukes, 131 S. Ct. 2541 (2011) indicates that the Circuit Courts are on the right track in applying Daubert at the class certification stage, although the extent of the Daubert review required is not clear. The Supreme Court simply stated “[t]he District Court concluded that Daubert did not apply to expert testimony at the certification stage of class-action proceedings. 222 F.R.D., at 191. We doubt that is so….” Id. at 2553 – 54.

   The Shady Grove plaintiff filed a class action in federal court based on diversity jurisdiction and sought state statutory penalties in spite of a New York state statute that prohibited class actions in cases where penalties or statutory minimum damages were sought. The Supreme Court permitted the plaintiff to pursue the federal class action, holding that the state law was procedural and did not trump Federal Rule of Civil Procedure 23 which provides the requirements for bringing a class action in federal court. Shady Grove was viewed as an important, albeit not exciting, ruling that may negatively affect corporate defendants and lead to forum shopping by plaintiffs. See discussion on Shady Grove by the Wall Street Journal here and Forbes here.

   Putative class action plaintiffs have attempted to rely on Shady Grove as authority to abandon all state procedural rules for the safe harbor of the federal class action. The Fourth Circuit admonished such putative class action plaintiffs in its recent unpublished decision, Mitchell-Tracey v. United General Title Insurance Co., No. 10-2387 (4th Cir. Aug. 2, 2011). The plaintiffs in Mitchell-Tracey had failed to exhaust all state administrative remedies required under the state insurance code prior to filing a federal class action, arguing that Shady Grove permitted them to proceed. The Fourth Circuit countered:

Plaintiffs read Shady Grove at a level of generality that is simply unsupported by its text. Shady Grove addressed an explicit state-law prohibition on class-action suits that expressly contradicted Fed. R. Civ. P. 23. [citation omitted]. The Supreme Court did not consider exhaustion or similar state-mandated intermediate procedures. Nor can we discern any basis on which to read it as excusing named class-action plaintiffs from the threshold procedural requirements that they would face as individual litigants.

   Mitchell-Tracey, No. 10-2387 at *9. Shady Grove may have opened the door to federal class actions where a state class action could not persist, but it does not appear that the Fourth Circuit will treat it as a free pass to putative class action plaintiffs to bypass all state procedural barriers.

In particular, the following recent Supreme Court cases have bolstered arbitration in the employment and commercial contexts by permitting binding arbitration of statutory claims in collective bargaining agreements, permitting parties to give arbitrators the power to determine unconscionability of arbitration agreements, and permitting parties to preclude class arbitration of commercial and consumer claims:

• In 14 Penn Plaza LLC v. Pyett, 129 S.Ct. 1456 (2009), the Court ruled that a collective bargaining agreement which required union employees to resolve all employment discrimination claims through binding arbitration was enforceable with respect to the Age Discrimination in Employment Act claims at issue. The Court clarified that even in a collective bargaining agreement, an arbitration provision that explicitly requires arbitration of a type of dispute will be enforceable unless a statute precludes arbitration of such claims. This ruling has been seen by some as “undoing” what the Court established in its 1974 opinion in Alexander v. Gardner-Denver Co., 94 S.Ct. 1011 (1974); however, the Court views Pyett as consistent with its prior rulings. See Pyett, 129 S.Ct. at 1461, 1464-66.
• In Rent-A-Center West, Inc. v. Jackson, 130 S.Ct. 2771 (2010), the Court decided that an arbitration agreement provision which explicitly delegated to the arbitrator (and not the courts) the power to determine whether the arbitration agreement was unconscionable must be honored. The arbitration agreement in Jackson required the arbitration of all disputes arising out of Jackson’s employment with Rent-A-Center, including discrimination claims and claims for any violation of federal law. See Jackson, 130 S.Ct. at 2775, 2779-82.
• In Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp., 130 S.Ct. 1758 (2010), the Court took steps to preclude class arbitrations by prohibiting arbitrators from ordering class arbitration where the arbitration agreement is silent on the class issue. The Court reasoned that “a party may not be compelled under the FAA to submit to class arbitration unless there is a contractual basis for concluding that the party agreed to do so.” The claims at issue were antitrust claims. See Stolt-Nielsen, 130 S.Ct. at 1765-68, 1775-77.
• In AT&T Mobility LLC v. Concepcion et ux, 131 S.Ct. 1740 (2011), the Court held that the FAA preempts judicial decisions preventing the enforcement of class arbitration waivers agreed to by consumers, and upheld the enforcement of an arbitration agreement in a cell phone contract which included a waiver of class arbitration. The Court’s ruling in Concepcion has been considered by some to be the “death knell” of consumer class actions. For example, see the discussion in the Wall Street Journal’s blog post regarding Concepcion: http://blogs.wsj.com/law/2011/04/27/after-att-ruling-should-we-say-goodbye-to-consumer-class-actions/. There is, however, a significant possibility that Concepcion will not preclude class arbitrations in all situations, and a case-by-case analysis is of course always required. 

In light of these rulings, corporations can strategize with counsel to strengthen contractual arbitration clauses for employment, consumer, antitrust, and other commercial claims. Corporations should consider taking the following steps, among others, with the advice of counsel:

• Revising and drafting future employment and collective bargaining agreements to require binding arbitration of some employment discrimination and other federal claims that may be applicable to their lines of business.
• Including provisions that explicitly delegate to the arbitrator decisions regarding unconscionability of the arbitration agreement and whether the agreement is enforceable.
• Drafting or revising commercial, consumer and employment contracts, and collective bargaining agreements, to include binding arbitration provisions that preclude class arbitration. 

The nuances of the laws applicable to different lines of business (e.g., retail or manufacturing vs. mortgage banking or insurance) may alter the impact of the Court’s rulings discussed above. Therefore, corporations should be sure to consult with counsel about implementing these strategies.