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).
8 Comments
Why hasn’t this been done before?
I agree with this post with one caveat: it should only apply to parties with equal sophistication and bargaining power in the marketplace. That is, arbitration should not be binding on consumers purchasing products or low-level employees signing work contracts. As for those buying shares of a company… Institutional investors certainly should be bound. Smaller investors… I am not so sure.
So, I would propose that the standard be: if a contract is negotiable, the parties can agree to whatever they want, including loser pays and binding arbitration. If not, then not. One simply cannot go through life without buying consumer goods. For the most part, there is no negotiation, except (on the rare occasion) over price.
I know this is inconsistent with the current state of the law. I would change the law. I do not think that the FAA was enacted to address mass consumer purchases. Rather, it was intended to do exactly what Mr. Olson proposes.
If you really want to institute binding arbitration, we must have impartial (or as impartial as possible) arbitrators. I don’t think we have that now for small consumer purchases.
One last thing: loser pays is not a bad idea. however, I would limit the fees payable to a reasonable amount, like the amount allowed in the Equal Access to Justice Act. This would significantly reduce fees in current loser pay situations, such as EEO claims.
I agree with Allan. It’s one thing when a contract is negotiated. It’s another when one side can simply impose terms.
If two sides agree to arbitration, great. But nobody should be forced to give up their right to a jury trial just because they have a cell phone, or use computer software, or have a job.
If discovery is too expensive and trials take too long, do something about that. Switching to a system where arbitrators can make a decision and refuse to say why, a system where a business can fire an arbitrator if they don’t rule in their favor (see the Ryan Braun vs MLB case – the arbitrator was fired when he ruled against MLB just the once) cannot be the way to go.
Nice idea, allan, but it’s worth noting that the Royal Bank of Scotland, an institution that has been around for getting on to four centuries, got back money from Goldman Sachs on the grounds they were financially unsophisticated. If RBS is not a party “with equal sophistication and bargaining power in the marketplace” after more than a third of a millennium, who is?
Bob
Allan, C, your proposed fixes would functionally end arbitration for everyone – since they pre-suppose a trial to determine whether or no parties are equally sophisticated/able to bargain equally. The vast majority of the consumer goods, etc we rely on day to day are so inexpensive that even answering the complaint costs more than the underlying product at issue (to say nothing of the mfg’s profits on that product). As well, C’s “parade of horribles” is equally applicable to the court system itself.
Judges often render rulings for no reason at all, at least, no reason they put into print. I’ve read “the Court, having heard the evidence of the parties, finds in favor of plaintiff. Defendant’s motion is denied.” on pre-printed post cards from more than one state, and with great frequency over the past few years. Additionally, any party can object to a judge without reason, so long as they do it promptly.
Finally, my experience (contrary to the common trial lawyer talking points) is that consumers generally do better in arbitration than they would do at trial, in that arbitrators don’t tend to be legally sophisticated and often allow in “evidence”, theories of relationships involving unnamed parties, or standards of proof inappropriate for a contract case. In my experience, that usually involved involved re-interpreting the limited warranty as a guarantee against the need for repairs for some period of time, rather than a promise to pay for repairs when problems arose; citing supposed dealer salesperson claims at the time of purchase (or worse, dealer performed vehicle modifications) as if they were manufacturer promises of future performance and reliability; or substituting a “consumer expectations test” for evidence of actual defect (i.e. “I expected the air conditioning to cool better/radio to get better reception/transmission to shift differently/engine to sound different/etc”).
Given the cost of a car as compared to the majority of consumer goods, if a manufacturer can’t afford the cost of maintaining more than a few standard warranties for its product lines, its hard to understand how they would be able to keep a veritable army of lawyers on staff to negotiate contracts with individual consumers as they purchased vehicles from independent dealerships – contracts subject to differing interpretations in each of the 50 states, and subject to reinterpretation (a different state’s set of rules) dependent upon actions of the consumer after the sale.
No one, except perhaps the trial lawyers specializing in such actions, benefits from a system that creates such uncertainty. They do quite nicely for themselves.
Finally, in the interest of full disclosure, I am not a lawyer, and while currently retired, I did work involving automobile limited warranties for roughly a decade for a major manufacturer. During that time I had input regarding the “lemon laws” and related legislation in roughly two dozen states plus two foreign nations, and have worked cases (a mix of pre-litigation demands, arbitration claims through both state-maintained programs and third party systems, and litigation through verdict) in every one of the 50 states here in the US, plus a couple overseas involving US service men and women.
My opinions are SOLELY my own, and should not be imputed to my past employer(s).
Only the pre-dispute arbitration. If there’s an ACTUAL complaint the parties are always free to agree to arbitration.
And it wouldn’t require a full trial, only a hearing, right? We sometimes have those anyway when determining if an arbitration clause is binding. After all, if a contract is invalid, then the arbitration clause IN the contract can’t be valid.
I had no idea that sort of thing happens.
True, and the consumer can’t afford an army of lawyers to review every contract they sign either (especially if things like website TOS are considered “contracts”.) But the unfairness comes in here: the car company can have its lawyers draw up and review one contract and have it apply to a million transactions. The consumer could theoretically have a lawyer review the contract – but from the consumer’s point of view, it applies to one single transaction, making it cost-prohibitive. (And if you declined the contract, you’d have to pay the lawyer AGAIN to review another car company’s contract.) The consumer is not informed to the same degree as the car company. Additionally, there are only a few car companies that exist. A consumer who objects to a provision might have literally zero alternatives.
In the extreme, you get something like Roca Labs where the company offers a contract stating that you cannot give their product a negative review and must like them on Facebook. Fortunately, such a contract is almost certainly not enforceable under current law, but there are many companies who would love to impose such terms, or even worse ones.
And in addition to everything else: even if you are correct about everything, this DOES NOT FIX the underlying problem. Unless you expect people to agree to a contract every time they buy a stick of gum, the majority of consumer products will continue to have no contract associated with them.
Carlitguy,
This is a balancing act. On the one hand, you want to save money. On the other hand, the sellers’ attorneys want to make contracts as favorable to the sellers as they can.
The problem is that companies get to write all the contracts. Us little guys have no bargaining power whatsoever, whether it is buying a car or a house or a little bouncy ball. Compound that with the fact that companies are happy to use their attorneys to enforce the terms of the contract, since, in many cases, they can transfer the cost of the attorneys to the consumers.
The bottom line is that consumers are in a very bad position vis a vis sellers. The only leverage consumers have is to band together and get themselves a lawyer. That is, class-action suits.
I would propose that, if companies don’t like class-actions suits, they propose a way to make sure that wrongdoers can be disgorged of their ill-gotten gains and that the proceeds go to consumers. Anything else is merely bitching about a system you don’t like and trying to be able to get rich by scamming consumers a penny at a time.
Finally, lemon laws are a good thing. But car companies fought them tooth and nail and continue to fight individual claims. If we could get something like that for consumer goods, it might be a solution.
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