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Journal of Law & Business NEW YORK UNIVERSITY JOURNAL OF LAW & BUSINESS VOLUME 12 SPECIAL ISSUE 2016 NUMBER 3 AGGREGATING CONSUMER ARBITRATION CLAIMS AFTER ITALIAN COLORS THROUGH LITIGATION FINANCE AND SECURITIZATION OF LEGAL CLAIMS TOM COYLE* INTRODUCTION ......................................... 834 I. THE “ITALIAN COLORS PROBLEM” . 836 A. Background: American Express v. Italian Colors ...................................... 836 B. Defining the Italian Colors Problem and the Constraints on Potential Solutions . 838 II. SOLVING ITALIAN COLORS . 840 A. Aggregation .................................. 841 1. Proposed Aggregation Technique . 841 * Copyright © 2016 by Tom Coyle. Tom Coyle is an associate in Wachtell, Lipton, Rosen & Katz’s corporate department. Mr. Coyle received a B.B.A. cum laude in actuarial science from the Fox School of Business at Temple University in 2012. He received a J.D. magna cum laude from New York University School of Law in 2015, where he was a Notes Editor of the New York University Law Review, a Butler Scholar, a Bradley Foundation Fel- low, and a member of the Order of the Coif. I would like to thank my family and friends for their constant love and incredible support prior, during and after law school. Additionally, I would like to thank Professor Sam Isaacharoff for his guidance while I wrote this paper, for getting me involved with the NYU Center on Civil Justice and for his tolerance of my somewhat unorthodox approach to scholastic endeavors as it related both to this paper and my attendance of his class. Similarly, I would like to express my deepest gratitude to both Professor Arthur R. Miller, whose philosophy towards civil justice has all but become my own, and Professor Richard A. Epstein for constantly challenging my then-resolute ideologies and always reminding me that foolish consistency is the hobgoblin of little minds. 833 834 NYU JOURNAL OF LAW & BUSINESS [Vol. 12:833 2. Practical Barriers to Proposed Aggregation. 848 3. Legal Barriers to Proposed Aggregation. 854 a. Contractual Barriers . 854 b. State Law Barriers . 858 B. Securitization ................................ 860 1. Why Securitization is Necessary . 860 2. Why Securitization is Possible . 870 C. Settlement.................................... 872 III. DESIRABILITY OF THE PROPOSED SOLUTION TO A TRADITIONAL CLASS ACTION . 875 A. Agency Incentive Problems Mitigated. 875 B. Proposed Solution ............................ 877 C. Market-Based Filtering Mechanism . 879 D. Aggregation Will Lower Cost of Representation and Increase Recovery . 881 CONCLUSION ........................................... 882 APPENDIX A: ITALIAN COLORS SETTLEMENT MARKET SIZE . 884 APPENDIX B: AVERAGE ITALIAN COLORS CLAIM SIZE . 888 INTRODUCTION Professor Arthur R. Miller once told me that he views ag- gregate litigation—and, consequently, civil justice—as a pen- dulum: When an aggregation technique is first developed to ferret out some evil hiding behind the practicalities or eco- nomics of individual litigation, the pendulum swings from in- justice towards justice. However, the pendulum will continue to swing past justice and towards vexatious litigation as the new technique of aggregation inevitably begins to be employed abusively. Once abuse is apparent, courts, legislators, and in- terested parties will intervene and the pendulum swings back until use of the abused aggregation method is all but cabined off. And, after its return swing, the pendulum of civil justice will remain fixed until enterprising lawyers and litigants dis- cover a new claim aggregation mechanism and set the pendu- lum into motion once more. This paper seeks to swing the pendulum back into motion in the context of consumer arbi- tration. In June of 2013, Justice Scalia, writing for a majority of five, found a contractual waiver of class arbitration enforceable under the Federal Arbitration Act (FAA) even when a plain- tiff’s cost of individually arbitrating a federal statutory claim 2016] AGGREGATING CONSUMER ARBITRATION CLAIMS 835 exceeds her potential recovery.1 More bluntly, the Court held that there is no bar to prohibiting class arbitration in con- sumer contracts with knowledge that individual arbitration is economically unviable. This decision, American Express Co. v. Italian Colors, was the logical add-on to the Supreme Court’s 2011 decision in Concepcion and 2010 decision in Stolt-Nielsen. In Concepcion, the Court found the FAA to preempt a state law doctrine that essentially prohibited waivers of class arbitration in consumer contracts.2 In Stolt-Nielsen, the Court concluded that “a party may not be compelled under the FAA to submit to class arbitration unless there is a contractual basis for con- cluding that the party agreed to do so.”3 Taking these deci- sions together, it is clear that consumer class arbitration is dead.4 However, it does not necessarily follow that corpora- tions are now free to compel consumers to arbitrate and then hide from liability behind the economics of individual litiga- tion. Aggregation is still possible because of a litigation finan- cier’s ability to aggregate outcome-correlated arbitration claims and securitize their proceeds. This paper proceeds in three parts. Part 1 defines the “Italian Colors problem.” Part 1.A briefly sets out the factual scenario in Italian Colors. Part 1.B defines the Italian Colors problem and lists the constraints with which any proposed “Italian Colors solution” must comply. Part 2 offers a complete solution to the Italian Colors problem in three steps. Part 2.A explains how a litigation financier can profitably and legally serve as an aggregatory mechanism. Part 2.B discusses why securitization of litigation proceeds is both necessary and pos- sible and how it creates a risk-return profile for the aggregat- 1. Am. Express Co. v. Italian Colors Rest., 133 S. Ct. 2304, 2311 (2013) (upholding the contractual waiver and noting that “the individual suit that was considered adequate to assure ‘effective vindication’ of a federal right before adoption of class-action procedures did not suddenly become ‘inef- fective vindication’ upon their adoption”). 2. AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740, 1753 (2011) (“Because it ‘stands as an obstacle to the accomplishment of the full pur- poses and objectives of Congress,’ California’s Discover Bank rule is pre- empted by the FAA.”). 3. Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp., 559 U.S. 662, 684 (2010). 4. CFBP Finds Few Consumers File Arbitration Cases, CONSUMER FINANCIAL PROTECTION BUREAU (Dec. 12, 2013), http://www.consumerfinance. gov/ newsroom/the-cfpb-finds-few-consumers-file-arbitration-cases. 836 NYU JOURNAL OF LAW & BUSINESS [Vol. 12:833 ing financier that makes such an undertaking economically desirable. Part 2.C explains how after aggregation and securi- tization occur, the financier and American Express can engage in a more informed and less pressured settlement negotiation. Finally, Part 3 discusses reasons why the proposed solution is in fact superior to a Rule 23 class action proceeding. I. THE “ITALIAN COLORS PROBLEM” A. Background: American Express v. Italian Colors At issue in Italian Colors were two of American Express’s business lines: charge cards5 and credit cards.6 American Ex- press built its business around the issuance of charge cards to corporations, businesses, and high net worth consumers. By focusing on the high end of the market, American Express was able to charge supracompetitive merchant discount fees “at least 35% higher than competitive rates.”7 After building up its brand in the charge card market, American Express began is- suing various revolving credit card products and the dispute in Italian Colors eventually followed. In its Card Acceptance Agreement (CAA), American Ex- press included a provision that required merchants who ac- cepted one type of American Express card (for example, cor- porate charge cards) to accept all other American Express cards (for example, consumer credit cards) at the same supracompetitive merchant discount rate.8 The plaintiffs al- 5. A charge card is a method of payment: the full outstanding balance must be paid at the end of each billing cycle. In re Am. Express Merch. Litig., 667 F.3d 204, 207 (2d Cir. 2012). 6. A credit card is a method of financing: only a portion of the out- standing balance must be paid at the end of each billing cycle and interest accrues on any unpaid balance. In re Am. Express Merch. Litig., No. 03-CV- 09592, 2006 WL 662341, at *1 n.6 (S.D.N.Y. 2006). 7. American Express is able to charge such supracompetitive merchant discount fees because charge card holders’ purchases are generally 17% larger than credit card purchases. In re Am. Express Merch. Litig., 667 F.3d 204, 207–08 (2d Cir. 2012). 8. The American Express “Honor All Cards” provision states, in perti- nent part, that a merchant’s “acceptance of American Express© Cards . shall mean any card or other account access device issued by American Ex- press Travel Related Services Company, Inc., or its subsidiaries or affiliates or their licensees bearing the American Express name or an American Express trademark, service mark or logo.” Id. at 208 (quoting the CAA). 2016] AGGREGATING CONSUMER ARBITRATION CLAIMS 837 leged that this “Honor All Cards” provision constituted an un- lawful tying arrangement in violation of the Sherman Act and filed a class action lawsuit in the Southern District of New York.9 However, the CAA contained two other relevant provi- sions: (1) a provision that allowed either party to compel arbi- tration;10 and (2) a provision that prohibited any type of claim aggregation for purposes of litigation or arbitration.11 Invok- ing these clauses, American Express sought to dismiss the class action suit and compel individual arbitration.12 In opposing the motion to compel, the plaintiffs argued that the effective vindication doctrine—a judge-made exception to the FAA that prohibits prospective waiver of statutory rights in contracts of adhesion—precluded enforcement of the class waiver provi- sion.13 After a Southern District opinion and two Second 9. First Amended Complaint at ¶ 2, In re Am.
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