Six months ago the Delaware Supreme Court upheld the right of an enterprise to include a loser-pays provision in its bylaws, specifying that losing shareholder-litigants would have to contribute reasonable legal fees to compensate what would otherwise be loss to other owners. Since then there’s been a concerted campaign to overturn the ruling, either in the Delaware legislature or if necessary elsewhere. But as I argue in a new Cato post, allowing scope for freedom of contract of this sort is one of the best and most promising ways to avert an ever-rising toll of litigation. Contractually specified alternatives to courtroom wrangling have played a vital role, and are under attack for that very reason, in curbing litigation areas like workplace and consumer arbitration, shrinkwrap and click-through disclaimers of liability, and risk disclaimers at ballparks and elsewhere. (& Stephen Bainbridge).
To the extent America has made progress in recent years in rolling back the extreme litigiousness of earlier years, one main reason has been the courts’ increased willingness to respect the libertarian and classical liberal principle of freedom of contract. Most legal disputes arise between parties with prior dealings, and if they have been left free in those dealings to specify who bears the risks when things go wrong, the result will often be to cut off the need for expensive and open-ended litigation afterward.
More on the Delaware bylaw controversy: D & O Diary (scroll), Andrew Trask on state of the merger class action, WSJ Law Blog first and second, Daniel Fisher, and ABA Journal in June, Alison Frankel/Reuters (forum selection bylaws).
From James Taranto’s “Best of the Web” Wall Street Journal column, under his recurring “Two Papers in One!” series:
- “Buried in the fine print of most contracts for cellphones, health insurance and credit cards is a clause requiring that all disputes be decided by binding arbitration, rather than a court. Businesses love these provisions, because arbitrators act quickly and almost always rule in their favor, and many employers are requiring new hires to sign similar agreements. All of this sounds pretty unfair, but apparently not unfair enough for the Supreme Court, which has now made the arbitration process even more onerous.” — editorial, New York Times, June 27, 2010
- “In lieu of litigation and jury trials, each of which is expressly waived, any dispute concerning, relating or referring to this Participation Agreement, the brochure, or any other literature concerning your trip or the Tour shall be resolved exclusively by binding arbitration in New York City, New York, according to the then existing commercial rules of the American Arbitration Association. Such proceeding will be governed by the substantive law of the State of New York. The arbitrator(s) and not any federal, state, or local court or agency shall have exclusive authority to resolve any dispute relating to the interpretation, applicability, enforceability, conscionability, or formation of this Participant Agreement, including but not limited to any claim that all or any part of this Participant Agreement is void or voidable.” — Times Journeys Terms and Conditions, NYTimes.com, 2014
Coyote, updated, and Hans Bader write about yet another new burden loaded on federal contractors, involving the creation of separate affirmative action plans for each installation, including those that do no federal contract business. One result will be to pressure some firms that do only a little federal work to get out of the government contracting business entirely, rather than submit to escalating cost and open-ended legal consequences.
Meanwhile, notes Bader, another part of the Obama administration’s rapidly proliferating “pen and phone” regulation of the workplace “will make it very costly for employers to challenge dubious allegations of wrongdoing against them,” by “[allowing] the government to cut off the contracts of contractors and subcontractors that do not ‘consistently adhere’ to a multitude of complex federal labor, antidiscrimination, harassment, and disabilities-rights laws.” Even more damaging, it will forbid many applications of pre-dispute arbitration to workplace disputes, thus shunting grievances into courtroom litigation. “It will allow trial lawyers to extort larger settlements from companies, and enable bureaucratic agencies to extract costly settlements over conduct that may have been perfectly legal.”
Earlier on regulation of federal contractors, a program driven by executive orders and particularly at the mercy of White House discretion, here and here, here, here, here, and generally at this new tag.
Still pretty much the Litigation Lobby’s number one target, and still worth defending with appropriate vigor. [Andrew Pincus, American Lawyer]
For those who freaked out at those headlines Thursday, Daniel Fisher at Forbes has a corrective to the New York Times’ latest story advancing the trial lawyer campaign against arbitration. More: Eric Goldman. Sequel: General Mills quickly withdraws new policy, perhaps reasoning that even when the New York Times is wrong, a consumer marketing company really can’t win trying to argue with it. Yet more: Dave Hoffman with an analysis of whether the language actually creates a contract.
Having been at times lacking in enthusiasm for the work of journalist Stephanie Mencimer, it’s only fair we credit her again with considerable courage for returning to the failed Jamie Leigh Jones case in a new article in Washington Monthly. (Jones alleged a brutal rape in Iraq for which her lawyers said employer Halliburton/Kellogg Brown & Root (KBR) should have been held responsible; the case served as a springboard for numerous misleading attacks on pre-dispute arbitration). Following the evidence wherever it leads against the likely inclinations of many Washington Monthly readers, Mencimer leaves Jones’ credibility in tatters and the various liberal and trial-lawyer sources that ballyhooed her case — including Sen. Al Franken (D-Minn.) and TV talker Rachel Maddow — looking highly gullible, to go with the kindest interpretation.
Most damning of all, as readers of posts in this space (especially those by Ted Frank) will recall, Jones was given center stage in Susan Saladoff’s film “Hot Coffee,” which periodically airs on HBO and on college campuses and has established itself as one of the litigation industry’s most durable and successful propaganda vehicles. All future discussion of “Hot Coffee” — and certainly any cable/broadcast airings or public screenings whose sponsors care about accuracy and fairness — will need to warn audiences that the Jones case can now be seen in retrospect as almost unrecognizably different from the picture of it presented in that trial-lawyer-produced “documentary.” If this is what becomes of one of Saladoff’s central cases, how reliable ought we to consider the rest of her film?
Left-leaning lawprofs like Erwin Chemerinsky and Arthur Miller regularly flog the idea that decisions they disagree with — such as Twombly and Iqbal on pleading, AT&T v. Concepcion and AmEx v. Italian Colors on arbitration, and Vance v. Ball State and Ledbetter v. Goodyear Tire on workplace liability — show the Supreme Court to be biased in favor of business defendants. Richard Epstein rebuts.
Today’s Supreme Court decision in American Express Co. v. Italian Colors Restaurant is a victory for freedom of contract, a boost for arbitration as an alternative to litigation, and a step forward in the Court’s ongoing recognition that the class action is just one legal vehicle among many, not some priority express train to be favored over other traffic. The restaurant had agreed with American Express to settle disputes by way of arbitration, and to waive any rights to have future disputes handled through class actions. When a potential antitrust claim arose, it nonetheless sought to slip out of its contractual agreement and invalidate the waiver. Split along familiar ideological lines with Justice Sotomayor not participating, the court ruled 5-3 that the Second Circuit erred in striking down the waiver as inconsistent with the Federal Arbitration Act. While the Court has previously held that arbitration agreements must be construed to provide “effective vindication” of statutory claims, the class action format — which did not even exist for these purposes until decades after the Sherman Act’s passage — was not so crucial to the restaurant’s legal rights as to be unwaivable.
A dissent by Justice Kagan — both longer and more spirited than Justice Scalia’s majority opinion — seeks to extend the Court’s earlier rulings that arbitration clauses cannot thwart “effective vindication” of statutory rights by such devices as requiring overly high fees for entry into arbitration. Interestingly, the dissent outdoes the majority in claiming to favor the true spirit of arbitration as an alternative to litigation; in that respect, at least, it departs from the tone of much commentary from the Legal Left which treats arbitration as an evil corporate plot to deprive the world of the benefits of zealous litigation. It also proposes two paths of argument that the majority declines to pursue: 1) that skepticism toward contractual waivers might be especially appropriate in antitrust contexts because the alleged monopolist under scrutiny may use its putative market power to put across unfair contract terms; 2) that confidentiality clauses in Amex’s contract (not addressed by the majority) might fail the “effective vindication” test by preventing Amex customers from joining forces to collaborate on expert reports to use on their behalf in individualized assertion of their disputes.
For years, organized trial lawyers have been publicly campaigning against arbitration — which keeps money out of their pockets by diverting disputes from knock-down litigation — claiming that it is unfair and one-sided. But many studies support the view that disputants’ overall satisfaction in arbitration compares very favorably to that in litigation, in part because it is a speedier and less acrimonious process. And consumers and small businesses by millions sign away their class action rights not because they are all hoodwinked or coerced, but because at some level they have rational grounds to recognize that those class-action rights are very unlikely to pay off for them in durable future benefits (as opposed to benefits for participants in the litigation industry). Congress will be asked to overturn Supreme Court decisions like Amex v. Italian Colors and the earlier, related AT&T Mobility v. Concepcion. It should resist. (expanded from an earlier post at Cato at Liberty; and welcome SCOTUSblog readers.)