Class Dismissed?

The school year still has more than a month to go, but class actions in consumer cases may be near an end under yesterday’s U.S. Supreme Court ruling in AT&T Mobility LLC v. Concepcion.  The five member conservative majority of the Court struck down California’s law barring arbitration clauses that contained waivers of class action rights in consumer cases because it is preempted by the Federal Arbitration Act (FAA).  The four liberal justices dissented.  Consumer advocates claim this case will immunize corporations from liability to consumers for unfair trade practices because it is too expensive for individual consumers to pursue such cases alone, even in arbitration. 

But a closer look at the decision reveals that such immunity does not come without price.  In this case, AT&T Mobility’s cellular phone sale and servicing agreement provided that customers could initiate dispute proceedings by completing a one-page Notice of Dispute form available on AT&T’s Web site.  If the dispute is not resolved within 30 days, the customer can invoke arbitration by filing a separate Demand for Arbitration, also available on AT&T’s Web site.  In the event the parties proceed to arbitration, the agreement specifies that AT&T must pay all costs for nonfrivolous claims; that arbitration must take place in the county in which the customer is billed; that, for claims of $10,000 or less, the customer may choose whether the arbitration proceeds in person, by telephone, or based only on submissions; that either party may bring a claim in small claims court in lieu of arbitration; and that the arbitrator may award any form of individual relief, including injunctions and presumably punitive damages.  The agreement, moreover, denies AT&T any ability to seek reimbursement of its attorney’s fees, and, in the event that a customer receives an arbitration award greater than AT&T’s last written settlement offer, requires AT&T to pay a $7,500 minimum recovery and twice the amount of the claimant’s attorney’s fees.

It would have been nice if AT&T gave its customers a choice to opt in or out of the arbitration clause, but I suspect many if not most consumers would opt in.  In this case, the lead plaintiff’s claim was that AT&T improperly charged him about $30 sales tax for a free phone.  How many consumers in such a situation would not opt for a dispute resolution mechanism that is free (to the consumer) and relatively simple?  AT&T built into the agreement adequate incentive for it to pay or settle most claims.  Class action litigation, either in court or in arbitration, usually ends in a settlement, but only after the consumption of large amounts of attorney fees, costs and time.  The policy question that remains after the Supreme Court’s decision in this case is whether the additional deterrent effect of a possible class action is worth the expenditure of those fees, costs and time. 

I am not a fan of arbitration clauses imposed on unsophisticated parties in contracts of adhesion.  But the arbitration clause and class action waiver in this case were hardly one-sided.  They provide incentives and benefits, as well as detriments, to both parties.  Neither the parties nor the Court addressed this aspect of the unconscionability issue in this case, but it may still be possible to argue that some arbitration and class-action waiver clauses are so one-sided as to be unenforceable, even under the FAA.  So, as long as this decision is not used to validate every arbitration clause and class action waiver in all consumer contracts, it may not mean the end of consumer class actions in all cases. 

The law isn't justice

The title of this blog, Law Rules, has two meanings. First, the law is composed of rules about what we must and must not do in our daily and business lives as citizens of a civilized society. The rules also define how we resolve disputes about who has complied with the law and who has not. Second, it is often said that no one is above the law, and we are governed by laws, not by men. Of course, people make the laws. So the law, like people, can never be perfect.

Recently, I ran across the following quote by Raymond Chandler, author of private detective novels:

The law isn’t justice. It’s a very imperfect mechanism. If you press exactly the right buttons and are also lucky, justice may show up in the answer. A mechanism is all the law was ever intended to be.

Those of you who have read any of my previous posts have probably figured out that I agree with this thought completely. Litigation and arbitration are win-lose propositions. They are designed to search for the truth and put an end to the dispute. The dispute ultimately ends. Sometimes, truth and justice prevail. Justice requires that people treat each other fairly. The law can be one mechanism that occasionally helps us achieve justice, but it is not the only one. To achieve justice more frequently, our tool box must be much broader.

Lose-Lose

I often tell people that the difference between mediation and arbitration is that arbitration, like litigation, is a win-lose proposition, while mediation is a search for the win-win solution. 

Earlier this month, I served as the arbitrator for a home construction dispute.  The home owner wanted to recover the cost of repairing alleged construction defects and completing items the contractor failed to do.  The contractor wanted to recover the alleged balance due on the contract price plus extras.  Each side wanted the other to pay its attorneys fees. 

My ultimate decision awarded some money to the home owner after offsets for money due to the contractor.  I denied both requests for attorney fees.   Both parties submitted requests for reconsideration.  Obviously, neither side was satisfied with the result.  In other words, it was not a win-lose decision.  It was a lose-lose decision.  If either of these parties, or their attorneys, knew what was good for them, they would have negotiated a settlement long ago.  I know a mediator who would have been happy to help them. 

Anti-Social Network

I can’t wait to see the movie Social Network, about the Winklevoss brothers’ lawsuit against Mark Zuckerberg, the CEO of Facebook. The brothers, who claim that Zuckerberg stole the Facebook idea from them when they were students at Harvard, reportedly reached a mediated settlement of that lawsuit for $65 million worth of Facebook stock. Then, their attorney commenced arbitration proceedings against the brothers to receive their 20% contingent fee. The attorneys succeeded and a U.S. District Court judge confirmed the award, but the brothers are appealing to the Ninth Circuit Court of Appeals. This morning, the brothers appeared on NBC’s Today Show and announced that they were going to try to reopen the settlement and the lawsuit because the stock was worth only about 22% of what Facebook (which is not publicly traded) lead them to believe it was worth. Of course, none of this information was supposed to be public because the mediation and arbitration were both confidential. So the veracity of the movie will remain questionable. Nonetheless, it should be fun to see how a nerdy Harvard student came up with, or stole, the idea to build and market Facebook, turning it into a multibillion dollar enterprise in a few years.

But several things bother me about the reporting of the lawsuit.

• First of all, numerous reports state that the brothers “won” their settlement in mediation. Apparently, some reporters still do not understand the difference between mediation and arbitration or litigation.
• Secondly, we’ve seen this movie at least twice before—Bonfire of the Vanities and Wall Street. And, like Wall Street, there is sure to be a sequel to Social Network because the Winklevoss brothers and Zuckerberg apparently are not done with each other yet. But what stands out, to me, in all of these stories is that there are no good guys and no one wins. I have actually been involved in a few cases like that. Sometimes, the best you can hope for is that there will be an end to it. I don’t know if greed is good, but it certainly is back.
• Finally, what, if anything, does the settlement agreement say about future disputes? Is there no requirement that the parties return to mediation? With so much money at issue, “buyer’s remorse” should have been foreseeable. I wonder if the parties to the agreement, or the mediator, ever considered this. From now on, future dispute clauses may become routine.

Arbitration - the best and fairest option?

A Wisconsin trial court ordered a residential construction contract case to be resolved by arbitration after the parties’ attorneys told the court that they would agree to arbitrate.  However, the parties themselves were not in court when the agreement was reached and put on the record.  After the homeowner found out what her attorney had done, she discharged him and retained a new attorney, who promptly filed a motion to vacate the arbitration order.  The trial court denied the motion, stating that “arbitration remained the best [and] fairest option” to resolve this case “given its nature and the posture … right before the jury trial” was to begin.  The homeowner appealed.

The Wisconsin Court of Appeals reversed, holding that the trial court had no authority “to order arbitration based on what it opines is the best way to resolve a case.”  The appeals court remanded the case for the trial court to determine whether the homeowner had authorized her attorney to agree to arbitration.  On the record before the appellate court, the homeowner had already made a prima facie showing that she did not agree to arbitrate.

I have written several times about the costs and benefits of arbitration.  It can be faster and less expensive than litigation in court.  There is usually no hearsay rule in arbitration, so evidence can be summarized or presented by affidavit.  Only the most important witnesses need to appear in person.  The parties can agree on whether the proceedings and the decision will be confidential or open to the public.  But parties to a lawsuit do not have to pay the judge’s salary.  In arbitration, the parties have to pay the arbitrator’s (or panel of arbitrators’) fees.  There is usually no appeal from an arbitration award.  But motions to vacate an arbitration award based on arbitrator bias or exceeding their authority can be lengthy, expensive, and acrimonious. 

Arbitration can be the best and fairest option when the parties consider the costs and benefits in advance.  The eve of trial—with a jury sitting in the box—is not a good time do that.  And it should not merely be a device for trial judges to clear their dockets.