Aviation Data v. American Express Services

• Decision Date: 06 July 2007
• Docket Number: No. A111602.,No. A114182.,A111602.,A114182.
• Citation: 62 Cal.Rptr.3d 396,152 Cal.App.4th 1522
• Court: California Court of Appeals Court of Appeals
• Parties: AVIATION DATA, INC, et al. Plaintiffs and Respondents, v. AMERICAN EXPRESS TRAVEL RELATED SERVICES COMPANY, INC, et al. Defendants and Appellants. William D. Hoffman et al. Plaintiffs and Respondents, v. American Express Travel Related Services Company, Inc., et al. Defendants and Appellants.

62 Cal.Rptr.3d 396

152 Cal.App.4th 1522

AVIATION DATA, INC, et al. Plaintiffs and Respondents, v. AMERICAN EXPRESS TRAVEL RELATED SERVICES COMPANY, INC, et al. Defendants and Appellants.

William D. Hoffman et al. Plaintiffs and Respondents, v. American Express Travel Related Services Company, Inc., et al. Defendants and Appellants.

No. A111602.

No. A114182.

Court of Appeal, First District, Division 3.

July 6, 2007.

John J. Bartko, Charles G. Miller, Christopher D. Sullivan, Jae S. Yi, Bartko, Zankel, Tarrant & Miller, San Francisco, Jerome B. Falk, Jr., Steven L. Mayer, Howard Rice Nemerovski Canady Falk & Rabkin, San Francisco, for Defendants and Appellants.

David M. Fried, Law Offices of David M. Fried, San Francisco, Theodore W. Phillips, Phillips, Greenberg & Hauser, Placerville, Max Folkenflik, Folkenflik & McGerity, for Plaintiffs and Respondents.

SIGGINS, J.

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 vice-president 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 mil 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...