Chronicling the high cost of our legal system
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Tucked away in the Obama administration’s proposals for revamping regulation of financial services is a provision that would apparently allow federal regulators to curtail or eliminate the preagreed arbitration of consumer complaints in stockbroker and other financial service disputes, thus shunting more cases as litigation to the civil courts. [Erin Geiger Smith, Business Insider]. Max Kennerly has a plaintiff’s-eye view.
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Not a misprint: the arbitration award in Chester v. iFreedom Communications Inc., (PDF), in favor of a former chief marketing officer fired without cause, was really $4.1 billion with a b. [Dennis Westlind, World of Work via Ohio Employer's Law; JAMS, Los Angeles]
P.S.: A commenter at an Alabama site: “So much for mandatory binding arbitration always favoring the big company.”
P.P.S.: More on how it happened, including serious lapses by the defendant in responding to the action, from AmLaw Litigation Daily, National Law Journal, and Daniel Schwartz.
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Today I testified before the Senate Republican Conference about the effect on the economy of excessive litigation. A podcast is available on-line and, for the insomniacs among you, the hearing will be broadcast on C-SPAN tonight at 10:56 PM Eastern and again at 2:09 AM Eastern. Also testifying was Life Without Lawyers author Philip Howard; Crystal Chodes, who lost her job because of the expense of a meritless ADA filing mill suit; Texas doctor David Teuscher; and arbitration expert and University of Kansas law professor Christopher Drahozal.
If you just prefer reading what I have to say, my written testimony is on-line also:
The total loss to the economy from excessive tort litigation above and beyond a baseline of an employment at will regime and an average industrialized tort system can be estimated at between over $600 billion and over $900 billion a year, 4.3% to 6.5% of GNP, or a tort tax of between $8,000 and $12,000/year for an average family of four. And this is very much a conservative estimate, as other economists find much stronger effects than I have estimated here, as I have not tried to estimate a number of identifiable secondary and tertiary effects of excessive tort litigation on allocation of economic resources, and as I have not tried to estimate the likely effect of recent Congressional expansions of tort liability in the last twelve months.
I was pleased to hear from multiple Congressional staffers who are regular Overlawyered readers: one even surreptitiously added the website into my official biography. Carter Wood talks about the hearing and Senator Cornyn’s remarks over at Point of Law.
Update: video on-line at C-SPAN; my segment begins at 43:15 or so. And C-SPAN2 is rebroadcasting at 4:16 pm Eastern on Tuesday, March 17, which suggests that my appearance will be at about 5 pm Eastern.
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The Searle Center at Northwestern is out with a new study of consumer arbitration that suggests it’s not the bogeyman trial lawyers have been painting it as (we’ve touched on the topic before). I’ve got a summary excerpt and a few more links over at Point of Law.
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The magazine’s “Top Political Bloggers” poll this morning quotes me (twice) on the subject of the horrible and misnamed Employee Free Choice Act, which would end employees’ right to a secret ballot on unionization and impose union contracts on unwilling employers through obligatory arbitration. Most of my blogging on the subject of EFCA and its “card check” provision is actually at my other blog, Point of Law, though.
Ohio State Law professor Sarah Cole and I have a piece in the Fall issue of Dispute Resolution analyzing the empirical data over consumer arbitration–especially the claims made by Public Citizen about it.
A couple of weeks ago I did a brief post, and guestblogger Victoria Pynchon did a longer one, on the unusual sequence of events by which American Apparel and its founder Dov Charney settled a sexual harassment lawsuit for an agreement to pay $1.3 million tied to an (abortive) agreement to send the case to what a judge characterized as a sham arbitration designed to end favorably to the company. The company hadn’t at that point (so far as I know) responded publicly to the controversy, but shortly thereafter got its side of the dispute more or less on the record as part of a lengthy post at the blog Jezebel (Oct. 31). There’s also a related Oct. 30 item on the case at Portfolio. It quotes ubiquitous NYU legal ethicist Stephen Gillers, with whose views this blog is frequently out of step, who “said he found no real ethical problems with the ginning up of a sham arbitration to issue a press release. ‘The lawyers had no duty to insure that the public got the facts or that the issues were resolved based on a real trial before a real tribunal with real evidence.’”
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Guest Post by Victoria Pynchon
This just in from my IP ADR Blog colleague Mike Young of Alston + Bird
I wish I was clever enough to make this stuff up, but I’m not. Only reality can be this bizarre.
A sexual harassment defendant settles the case for $1.3 million. Not satisfied with the usual “no admission of liability” clause found in most settlement agreements, Mr. Harasser insists on an adjudication of NON-liability as a condition to paying the $1.3 million.
Here’s how the parties work it:
As part of the settlement, the harassment dispute will be “arbitrated” based on stipulated facts. The defendant will have sole discretion in the selection of the “arbitrator” and will pay the entire fee. The stipulated facts are, essentially, “defendant is innocent and plaintiff is wrong.”
Not only does the settlement agreement set forth the stipulated facts for the “arbitration,” it also dictates the arbitration award, word for word (essentially “the defendant is innocent and the plaintiff is wrong), and then spells out the press release that will follow the “arbitration,” that the defendant was totally vindicated in the lawsuit by a defense award (leaving out, of course, the part about paying $1.3 million to the plaintiff).
With me so far?
A fake arbitration to be followed by a false press release…and then the defendant pays the $1.3 million.
This is pulling a fast one on the public and a perversion of the justice system since the fake arbitration award would inevitably be followed by an uncontested entry of judgment based on the arbitral award.
Were I the defendant, I would be pretty careful to select an arbitrator who I knew would go along with this, like my [hypothetical] sociopathic uncle. I certainly wouldn’t select a former judge and one of the State’s top private jurists.
But, what do I know. In this case, the defendant with the unilateral right to select the arbitrator for this “arbitration” selected a former San Francisco judge sitting on the prominent JAMS panel, Daniel Weinstein.
To no one’s surprise except maybe the defendant, the plaintiff didn’t show up for the “arbitration.” Why should she? Based on the stipulated facts, she already “lost” the “arbitration.” For reasons that are not fully explained in the subsequent legal opinion, but probably because Weinstein is smart and ethical enough to know a rat when he sees one running across his conference room table, Weinstein refused to participate in the sham proceeding.
As the defendant, what would you do now? I’d probably pay the $1.3 million and call it a day. Because the case had not been dismissed, the court called the parties in to see what was going on. The plaintiff said she wanted to enforce the settlement. The defendant said the plaintiff breached the settlement agreement by not showing up to the “arbitration,” and that the settlement agreement had a real arbitration provision so that any dispute over the agreement had to be arbitrated (the old fashioned way). The trial court read the settlement agreement for the first time, and then denied the defendant’s motion to compel arbitration.
Now would be a good time to pay up and move on. There’s been no publicity and no public disclosure of this bizarre effort to fool the press and public with a sham arbitration proceeding. But no. This defendant decided to appeal the denial of the motion to compel arbitration, making everything public.
Sure enough, the appellate court issued an opinion, not officially published but available on the web for the world to see at http://www.onpointnews.com/docs/charney2.pdf, in which this entire fake arbitration process is shared with readers like you and me.
Here you have an effort to create a false record for the purpose of issuing a misleading press release to fool the public into believing the defendant was exonerated. It’s certainly fraud but is it actionable by anyone? And because the attempt was foiled by this new Darwin Awards winner, no harm was ever done.
We praise the ethical decision of JAMS neutral Daniel Weinstein in refusing to join in this attempt to use JAMS, and eventually the Courts, to perpetrate a public fraud. Is there any question that an arbitrator who would go along with this sham would be violating his/her professional responsibilities (not to mention undermining JAMS’ sterling reputation)?
But where is the judicial outrage? In the appellate court opinion, none of the justices took the defendant to task. There is no indication that the trial court was shocked or concerned by the possibility that it was overseeing a settlement whose goal was to defraud the public.
The “A” in ADR does not mean “A”nything goes in the pursuit of expedited calendars. It is alternative, not anarchic.
[editor's note: see also Nov. 16 (American Apparel's view of episode)]
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Earlier this year Ted wrote an item titled “Implausible defense department” about American Apparel founder Dov Charney’s efforts to explain away jaw-droppingly colorful facts in the latest of the multiple sexual harassment complaints he has faced. The sequel is worthy of what has gone before: it appears that Charney faked an agreement to send the case to arbitration to conceal a deal in which he agreed to settle the claim for $1.3 million. The deal later fell apart and the case is headed back for (presumably genuine) litigation. (On Point News, Workplace Prof Blog).
P.S. Overlawyered guestblogger Victoria Pynchon, of the IP ADR Blog, has now posted a more extensive and detailed report on the case, & see Nov. 16 update with company’s side of the story.
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18-year-old Lauren Crossan, captain of the Randolph (New Jersey) High School cheerleading squad on a trip to the Hula Bowl, plunged naked to her death from a ninth-floor hotel balcony in Maui in 2004. Police arrested two California men who were staying in the hotel room, but then decided that the death was an alcohol-related accident–Crossan had a BAC of 0.17. (The men told police that they fell asleep while Crossan was still in the room after one had sex with her, and didn’t know what happened to her. Police say there was no evidence of sexual contact or of a struggle.) (AP, “Police: Cheerleader’s death an accident”, Jan. 15, 2004; Gary T. Kubota, “Tests show cheerleader was not on illegal drugs”, Honolulu Star-Bulletin, Jan. 27, 2004; memorial site with obnoxious music).
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Overlawyered favorite Justinian Lane thinks he’s discovered a smoking gun in the Knology arbitration clause:
All disputes arising out of or relating to this agreement (other than actions for the collections of debts you owe us) including, without limitation, any dispute based on any service or advertising of the services related thereto, shall be resolved by final and binding arbitration… (Emphasis added.)
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At Bizarro-Overlawyered, Justinian Lane states:
Ted Frank at Overlawyered falsely claims that “In civil court, a default judgment can be obtained merely on a plaintiff’s say so. In contrast, most arbitration agreements require the arbitrator to scrutinize the evidence before granting an award, even when the debtor does not contest the arbitration claim…” A default judgment against a debtor will be based upon the same evidence in civil court or in arbitration: an affidavit or affidavits from the creditor alleging that the debtor owes a specific sum. Both the judge and the arbitrator will “scrutinize” the affidavit in the same way; they’ll check to make sure names and sums are correct.
It will be no surprise to long-time readers of Overlawyered that Justinian Lane is 100% incorrect.
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Arbitration opponents complain that mandatory arbitration clauses “deprive” consumers of a day in court. One such set of complaints was aired in a big Business Week story (to which NAF responded and refuted); CNN recently repeated these allegations in a one-sided story. So it’s worth taking a look at how well consumers do in court when it comes to debt collection:
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For those interested in an update on the Tracy Barker case, where litigation lobby activists falsely stated that an arbitration agreement prevented her from getting civil justice in the case of her alleged sexual assault, Barker’s suit against her alleged assaulter Ali Mokhtare proceeds before Judge Leonie M. Brinkema in the Eastern District of Virginia, case no. 1:07-cv-01231-LMB-BRP. Mokhtare denies the allegations. Barker appears to have fired Todd Kelly or vice versa. Discovery closed April 17. After discovery closed, Barker moved to amend her complaint a second time to add new allegations; Mokhtare moved to substitute the United States in his stead; the US rejected Mokhtare’s request and opposed the motion, arguing that he was not acting in the scope of employment. Judge Brinkema rejected both motions. Mokhtare is appealing the US’s decision to the Fourth Circuit (No. 08-1560).
Point of Law Volokh