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.’”

• Christopher Hitchens: once utopian electoral buzz wears off, nation’ll face pretty much same set of problems as before [Slate] #
• Business preparing to play defense in D.C. on 3 big battlefronts: labor/empt law, arbitration, preemption [NLJ] #
• Pretty neat, Google Reader now translates foreign-language blogs for you [SearchEngineLand h/t @mike_elgan] #
• @gideonstrumpet it’s one of the “laws” of blogging — very hard to predict beforehand which posts’ll draw the biggest traffic #
• “Lawyer Hausfeld Learned of Firing as Chairman From Note on Seat” [Securities Docket] #
• If transcript “is held face down and shaken, thousands of confusion flakes will drift to the ground like snowflakes” [Lowering the Bar] #
• Jamie Gorelick, mentioned as possible AG pick, would bring baggage [Althouse] #
• GM-Chrysler merger = idea that pair of boozers can fix drinking problem by getting married to each other [McArdle] #

If you’re not visiting my other site — or subscribing to it in your RSS reader, or following its Twitter feed — here’s some of what you may have missed lately:

• Sen. Obama’s “I voted for tort reform” talk: maybe not so serious;
• Assaults on arbitration and pre-emption are just the start of the Litigation Lobby’s big plans for next year;
• A new featured column by Richard Epstein on the peculiarly named Employee Free Choice Act;
• Manhattan Institute’s Trial Lawyers, Inc. project is out with a new report on West Virginia;
• U.S. Department of Commerce: foreign investors fear our litigation climate;
• Albany plaintiff’s firm Powers & Santola ladles out campaign money to judges it practices before;
• Through the wringer? Judge Posner is quite severe on a clothes-dryer class action.

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)]

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.

• If you’re claiming benefits for “total and permanent” disability it’s probably best not to enter bodybuilding competitions [Boston Globe and more, firefighter Albert Arroyo] More: GruntDoc;
• From 1884 Montreal: actionable to snub a parishioner while taking collection in church? [Volokh]
• Follow the bouncing venue in lawsuits against Rick Frenkel and Cisco over Patent Troll Tracker blog [Texas Lawyer "Tex Parte" blog]
• Individual liberty was one reason Bill Gates was free to earn his billions, too bad he’s not doing more to advance it with his philanthropy [NYTimes, Bloomberg and "tobacco control"]
• Andrew Giuliani, son of the mayor, is suing Duke University for kicking him off its golf team [Newsday, Henican] More: complaint at Popehat;
• New at Point of Law: AAJ, formerly ATLA, has its convention in Philadelphia (more); bogeyman of supposedly ultraconservative Roberts Court; why must “trophy” federal courthouses have such soulless and uncomfortable design?; Congress gunning for arbitration; too bad NYT’s enthusiasm for transparent public contracting on corporate monitors doesn’t carry over to other lawyer-hiring; the Delaware advantage in court organization; as we keep asking, what happened to Ron Motley’s yacht? and much more;
• Dr. Anna Pou, New Orleans cancer surgeon whose prosecution after Katrina roused intense controversy, recounts her experience [AP via Folo]
• “Unreal world of greed”: California appeals court throws out $88 million fee-arbitration award to Milberg Weiss and other firms following challenge to “smog impact fees” [six years ago on Overlawyered]

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).

Public Citizen’s attack on arbitration highlights the case of Alex Karakhanov. Public Citizen’s take on the anecdote demonstrates why Public Citizen has no business calling itself a consumer advocacy group.

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ABC Good Morning America signs on to the litigation lobby war against freedom of contract by parroting a Public Citizen anecdote about the supposed horrors of arbitration–though the underlying problem (mistaken identity of Anastasiya Komarova) had nothing to do with the arbitration proceeding. Needless to say, none of the benefits of arbitration to consumers was mentioned, and only Public Citizen’s one-sided and misleading statistics were used. Nathan Burchfiel is on the case.

• More on that New Mexico claim of “electro-sensitive” Wi-Fi allergy: quoted complainant is a longtime activist who’s written an anti-microwave book [VNUNet, USA Today "On Deadline" via ABA Journal]
• Your wisecracks belong to us: “Giant Wall of Legal Disclaimers” at Monsters Inc. Laugh Floor at Disneyland [Lileks; h/t Carter Wood]
• New at Point of Law: AAJ commissions a poll on arbitration and gets the results it wants; carbon nanotubes, tomorrow’s asbestos? California will require lawyers operating without professional liability insurance to inform clients of that fact (earlier here and here); and much more.
• Actuaries being sued for underestimating funding woes of public pension plans [NY Times via ABA Journal]
• City of Santa Monica and other defendants will pay $21 million to wrap up lawsuits from elderly driver’s 2003 rampage through downtown farmers’ market [L.A. Times; earlier]
• Sequel to Giants Stadium/Aramark dramshop case, which won a gigantic award later set aside, is fee claim by fired lawyer for plaintiff [NJLJ; Rosemarie Arnold site]
• Privacy law with an asterisk: federal law curbing access to drivers license databases has exemption that lets lawyers purchase personal data to help in litigation [Daily Business Review]
• Terror of FEMA: formaldehyde in Katrina trailers looks to emerge as mass toxic injury claim, and maybe we’ll find out fifteen years hence whether there was anything to it [AP/NOCB]
• Suit by “ABC” firm alleges that Yellow Book let other advertisers improperly sneak in with earlier alphabetical entries [Madison County Record]
• Gun law compliance, something for the little people? A tale from Chicago’s Board of Aldermen [Sun-Times, Ald. Richard Mell]
• Think twice about commissioning a mural for your building since federal law may restrain you from reclaiming the wall at a later date [four years ago on Overlawyered]

The law firm of Leeds Morelli & Brown has recently been embroiled in controversy over episodes in which it has settled batches of employment discrimination claims while contemporaneously entering agreements in which the defendants agree to hire it (the Leeds Morelli firm) for substantial sums. Now an African-American woman who was once a vice president at Prudential Insurance and then sued the company for racial bias as a Leeds Morelli client “is asking a federal judge to set aside an arbitration award, alleging her lawyers were given improper financial inducement to keep her claim and hundreds of others out of court. According to Linda Guyden, the company paid $5 million to the law firm representing her and 358 other employees, in return for which Prudential’s total exposure was capped at $10 million and the claims were kept secret just as the company was about to be taken public.” (Mary Pat Gallagher, “Bias Plaintiff Says Lawyer Sell-Out Warrants Vacating of Arbitration”, New Jersey Law Journal, Apr. 8). For a cognate controversy over Leeds Morelli’s settlement of employment claims with Nextel Corp., see Leigh Jones, “Columbia’s Simon Blasts Professors’ Role in Nextel Bias Case”, National Law Journal, Nov. 26; Bluestone, New York Attorney Malpractice Blog, Feb. 12, 2007.

Professor Peter Rutledge takes on the infamous Public Citizen Report: “There is only one little problem with the Public Citizen Report - it is wrong, both on the facts and in its ultimate conclusions.” More from ILR. Earlier on Overlawyered.

Blogger Rogier van Bakel is furious (via Balko (h/t Slim)) at his local SPCA because they would rather put a dog to sleep than place it with his family with small children. See, they’re worried about getting sued if the dog bites one of the children. van Bakel can’t believe it: he’s even willing to sign a waiver!

His anger is misdirected. The SPCA didn’t kill his dog; trial lawyers did. Courts’ failure to recognize the right of parties to contract out of excessive liability means that the SPCA has to protect itself against attorneys, and can only do so if they avoid situations where they might be sued. With 20/20 hindsight, the would-be John Edwards will say to a jury: “The SPCA has placed other dogs that bit small children and has been sued for it, yet they continue to place dogs with small children!”, and demand punitive damages. Between judges who won’t recognize the right of contract when it interferes with a lawyer’s paycheck, and legislative efforts to prevent parties from agreeing to contract out of the high costs of the liability system, von Bakel cannot distinguish himself from the families who would blame the SPCA if a dog-attack occurs. The offer of a waiver does not help: the SPCA can’t afford to take the risk that an adoptive family will renege on its agreement not to sue if the dog attacks a child.

Now, perhaps we as a society do not want shelters to place animals in homes with small children. Or perhaps we do. But shouldn’t that be a decision that rests with a legislature, rather than random chance and a jury? But when a jury has the power to exact uncapped damages, an SPCA has to anticipate the regulation through litigation.

van Bakel and Balko direct readers to other organizations that have not yet been saddled with a lawsuit demanding such practices, but they will surely follow in the SPCA’s footsteps when the lawyers get a hold of them. The long-term solution is to insist on elected officials who will appoint judges who respect freedom of contract, and who will pass tort reform measures that put common-sense limits on the power of courts to interfere with every-day activity. Even now in Congress is debating S. 1782, which would put further limits on the power of consumers to opt out of expensive litigation, and receive the benefits of lower costs and increased choice; while President Bush will veto such legislation, an Obama administration with a Democratic Congress would surely vote it into law.

For more on the Congressional and trial-lawyer campaign to reduce consumer choice, see the Overlawyered arbitration section.

Apologies to Mr. van Bakel for the misspelling of his name in the original version of the post.