May a party lose its arbitration rights if it misrepresents the benefits of a proposed class settlement? In
Aviation Data, Inc. v. American Express Travel Related Services Co., ~ Cal. App. 3d ~, 2007 WL 1953916 (Cal. App. July 6, 2007), the court confronted exactly that issue and held that it could.
In that case, plaintiffs alleged that Amex's travel programs resulted in improper charges that would only be refunded if the cardholder complained. In deposition, Amex's director of systems development denied that its computer program could be modified to identify improper charges and thereby avoid billing those charges.
Later, Amex advised plaintiffs counsel that such to its systems could be made, and, at mediation, this prospective change served as the basis for the settlement. Throughout its submissions in support of preliminary -- and final -- approval of the settlement, Amex referred to the changes as being proposed modifications to its system. At the preliminary approval hearing, Amex's counsel told the court that this prospective change was the principal benefit to the class as no monetary relief was provided in the settlement, and notice was sent to the class.
However, plaintiffs withdrew from the settlement when it was learned that this change was not prospective at all. In fact, it had been implemented by Amex -- for reasons unrelated to the lawsuit -- even before the deposition of its systems development director. Amex's counsel acknowledged that he had become aware of that implementation after the settlement had been reached and several months prior to the preliminary approval hearing but had not disclosed it to plaintiffs' counsel or the court.
With the settlement having failed, the court granted class certification but Amex sought to invoke its arbitration provision to compel arbitration of the class members on an individual basis. The settlement agreement provided that, if the settlement were not approved, it would not be deemed a waiver of Amex's right to enforce its arbitration provision.
The trial court denied Amex's motion finding that it had waived its right to arbitrate because it had sought to resolve the claims on a classwide basis by misleading the absent class members and the court. The appellate court upheld this ruling. In so holding, the court recognized the basic principle that parties must be free to attempt to settle disputes without losing arbitration rights if settlement fails, but found "no policy justification to extend this principle to encompass attempts to secure judicial imprimatur and finality on settlements obtained through misleading or deceptive tactics."