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Law Enforcement Systems, Inc. v. American Express Co.

July 17, 2006


The opinion of the court was delivered by: Dora L. Irizarry, United States District Judge


Presently before the Court is defendants' appeal, pursuant to Fed. R. Civ. P. 72(a), from U.S. Magistrate Judge Kiyo A. Matsumoto's decision dated August 4, 2005 insofar as it granted plaintiffs Law Enforcement Systems, Inc.'s ("LES") and Richard K. Carrier's ("Carrier") motion to compel production of discovery in connection with defendants' impending motion to compel arbitration. Because the discovery at issue is relevant to plaintiffs' defenses against a motion to compel arbitration, the Magistrate Judge's decision is neither clearly erroneous nor contrary to law and, therefore, is affirmed.


Plaintiffs bring this putative class-action alleging that defendants have engaged in a pattern of fraudulent billing in its fee-based travel-related insurance programs. (Compl. ¶ 49.) Plaintiff LES is a licensed debt collection agency incorporated under the laws of New York. Plaintiff Carrier, as the president of LES, is authorized to use an American Express ("Amex") card that was issued to LES in 1991. (Id. at ¶ 9.) Additionallly, Carrier is also an individual Amex cardmember. (Id. at ¶ 11.)

Defendants include American Express Company ("Amex"), which is incorporated in New York State, and its subsidiaries, American Express Travel Related Services Company, Inc. ("TRS"), and AMEX Assurance Company ("Amex Assurance"). (Id. at ¶¶ 12--14.) Defendant Countrywide Industries, Inc. ("Countrywide") is engaged in mortgage banking and other banking related services and is the parent corporation of defendant Balboa Insurance Group ("Balboa"). Defendant Balboa Insurance Group is the parent company of defendant Balboa Life & Casualty Insurance ("Balboa L & C"). (Id. at ¶¶ 15--16.) Plaintiffs allege that Balboa and Balboa L & C were the underwriters of "one or more of the fee-based travel-related insurance plans during some or a part of the relevant time period complained of here." (Id. at 16.) For purposes of this appeal, the defendants shall be referred to collectively as "Amex" or "defendants."

Plaintiffs' claims arise out of the alleged fraudulent billing practices by Amex in its fee-based travel related insurance programs. (Id. at ¶ 49.) Plaintiffs assert that, from January 2003 to March 2003, they were either mislead into paying or double charged for numerous travel-related services including, but not limited to, Air Flight Insurance, Baggage Insurance, and Travel Delay. (Id. at ¶¶ 68, 70--73.) Plaintiffs argue that these billing practices, together with defendants' subsequent attempt to modify the cardmember agreement to waive class action claims and adopt an arbitration clause, amount to a civil racketeering enterprise in violation 18 U.S.C. § 1962(c). Plaintiffs also assert state law claims for fraud, breach of contract, conversion, and violations of the New York General Business Law § 349 based on the same conduct.

At a pre-motion conference held on February 16, 2005, the district court ruled that, prior to allowing Amex to file a motion to compel arbitration, the court would allow discovery to the extent that the discovery sought is relevant to the motion to compel arbitration.*fn1 The matter was referred to the Magistrate Judge for discovery purposes.

Discovery Hearing

On August 3, 2005, the Magistrate Judge held a discovery hearing as a result of plaintiffs' letter motion seeking to compel discovery.*fn2 At the hearing, the Magistrate Judge compelled the production of documents relating to (1) Amex's adoption of a code filter ("TAA filter") in 2000 that could have "substantially reduce[d] the incidents of improper charges" (Pl.'s June 3, 2005 letter Req. # 7; Disc. Hr'g 28:19--29:7); (2) prior judicial or arbitral findings denying the enforcement of Amex's arbitration clause (based on Amex's assertion that it intended to rely on such rulings to show that its arbitration clause has been held enforceable) (Pl.'s June 3, 2005 letter Req. # 9; Disc. Hr'g 29:9--25); (3) financial information regarding the number of cardmember arbitration claims and cardmember costs relating to arbitration (Pl.'s June 3, 2005 letter Req. # 12; Disc. Hr'g 35:13--20); (4) information reflecting cardmember awareness of the arbitration clause (Pl.'s June 3, 2005 letter Req. # 23; Disc. Hr'g 61:15--16); (5) information reflecting Amex's awareness of the effectiveness or ineffectiveness of communicating with cardmembers via "envelope stuffers" (Pl.'s June 3, 2005 letter Req. # 26; 64:20--22); and (6) witness depositions relating to the last two document requests. (Pl.'s June 3, 2005 letter Req. for Witnesses 3B--3D.)

Defendants appeal these specific rulings on the grounds that the compelled discovery goes beyond the "gateway issues governing the outcome of the motion to compel arbitration." (Defs.' Objections 1.) Plaintiffs argue that the requested discovery is necessary to establish plaintiffs' defenses against arbitration. (Pls.' Resp. 2.)


Standard of Review

"A party seeking to overturn a discovery order . . . bears a heavy burden." AMW Materials Testing, Inc. v. Town of Babylon, 215 F.R.D. 67, 70 (E.D.N.Y. 2003). Nondispositive pretrial orders, such as rulings at issue here, are reviewed under a "clearly erroneous or contrary to law" standard. 28 U.S.C. § 636(b)(1)(A); Fed. R. Civ. P. 72(a); Thomas E. Hoar, Inc. v. Sara Lee Corp., 900 F.2d 522, 525 (2d Cir. 1990).

Furthermore, in ruling on defendants' objections, the court is mindful of the broad discovery standard set forth in Fed. R. Civ. P. 26(b)(1), that "[p]arties may obtain discovery regarding any matter, not privileged, ...

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