Arbitration|Conflict Resolution|Courts|Employment|Europe

Consumer Arbitration in Context

The publication by the New York Times of a series of highly-critical front-page articles on arbitration of consumer and employment disputes has stirred the pot among practitioners, academics, and others with a stake in Alternative Dispute Resolution.  The reportage was flawed, as some in our community were quick to point out.  Data took a back seat to anecdotes; perspectives of individual “victims” were given more ink than perspectives of companies; and the reporters failed to note that the Times itself engages in the very practice that the stories condemn — requiring purchasers of “Times Journeys” to waive both the right to sue and the opportunity to seek collective redress.

The practice of class action waivers in arbitration contracts of adhesion has been the subject of several recent Supreme Court rulings and, while perhaps novel to some Times readers, ought to be familiar to readers of this and other blogs.  Nevertheless, two of the many strands emerging from the froo-frah that has accompanied this publication have struck me as worthy of particular note.  One strand places the development of consumer arbitration class action waiver in the context of the dysfunctional American judicial dispute resolution system, suggesting that the practice did not arise spontaneously from the thigh of Zeus, but rather  is a response to — and an indicator of — much deeper problems that bedevil civil justice in this country.  The other strand prompts a dispassionate assessment of collective redress itself, questioning whether the practice of initiating a civil action on behalf of oneself and “others similarly situated” — whether in court or elsewhere — is in fact an exercise reasonably calculated to serve the goal of social justice.

As to the first, Michael McIlwrath has articulated a sound and thoughtful point of view from his site of tranquility in Florence, Italy.  He notes that, in Europe, pre-dispute consumer and employment arbitration “agreements” are unenforceable.  But, he points out, in most of those jurisdictions collective redress is not practiced; contingency fees for claimants’ attorneys is not known; fee-shifting for unsuccessful claimants deters the assertion of weak claims; punitive damages are not available; juries are not appointed for civil cases; judges are not subject to election and thus dependent upon public approval and private financial donations; and civil litigants are not required to engage in prolonged and costly discovery.  To this list, others might add that the “social network” that is available to individual citizens in many European countries is often more robust than in the United States, and regulatory initiatives in Europe are often both more intrusive and more effective in identifying and punishing unfair or abusive policies by companies having an adverse impact on consumers or employees.

When placed in this context, the “access to justice through the American courts” that the Times reporters seek to protect is, as a practical matter, illusory.  Guraranteeing a “day in court” may be like promising someone scrofula.  Not only will an individual not sue in court for $30.00, she may be ill-advised to sue for $30,000.00.  And if, to borrow Churchill’s analysis, private arbitration is the worst form of dispute resolution except for all the others, then the prospect of its prohibition — and the introduction into the state and federal courts of thousands of claims that are now being resolved in other forums —  is worth serious contemplation before being endorsed.

(I’d like to see some data on the number of broker/customer claims, Title VII and ADA claims, and product defect claims that would be filed in court if pre-dispute arbitration agreements were to be unenforceable.  It would be all the more helpful if the data would also include the probable costs of discovery, motion practice, and other transactional and attorney fees relating to litigating those matters.  I wonder whether the Times reporters would be so clear in their assumption that going to court is a benefit.)

As to the second strand, an article by Judge Jed S. Rakoff in the current issue of New York Review of Books lends a thoughtful and experiential perspective to the American practice of collective relief.  Judge Rakoff notes that in several recent high-profile cases involving corporate fraud, the SEC settled for a fraction of  the money that private civil class action attorneys were able to obtain, suggesting that “the private class action was a much better vehicle for bringing justice to the victims of the alleged fraud… than the relatively paltry efforts of the SEC.”  Yet the Judge notes flaws in that conclusion.  For one thing, those settlements are paid by the company’s blameless shareholders, not by any culpable individual.  As a result, writes Judge Rakoff, long-term shareholders, “are now punished twice for the fraud they had no role in committing, first by the decline in the value of their shares upon the fraud’s exposure and second by the large payments subsequently made by the company they own to settle the class action.”  And, of course, the “prime beneficiaries appear to be the lawyers who brought the cases and who typically receive very large fees in return.  In the Tyco case the lawyers obtained $464 million of the $3.2 billion [private class action] settlement.”

Judge Rakoff commends the recent book, Entrepreneurial Litigation: Its Rise, Fall and Future, by John C. Coffee, Jr., for a more nuanced assessment of the distinctly American practice of collective redress.  Class actions were introduced into mainstream practice in the 1912 and 1938 revisions of the Federal Rules of Civil Procedure, and went hand-in-hand with another uniquely American practice: Ccontingency fees.  By the dual operation of these methods, an enterprising attorney could bring jurisdictionally diverse claims arising from a single practice before a single judge in a single jurisdiction, and get paid for doing so.  Class actions came into maturity in the 1960s, as a necessary weapon in the judicial enforcement of civil rights laws, because judicial rulings regarding unlawful discrimination could be effective only if they applied to similarly situated black persons who were affected by the racism that the legislation was intended to correct.

Civil rights class actions, however, were soon overtaken by the filings of securities class actions and antitrust class actions, and the impetus for lawyers became less the vindication of legal rights as it was entrepreneurial: “By combining contingent fees with class actions involving monetary damages, lawyers created a situation where, if they were successful, the financial return to them could be huge.”  And the risk of failure is hedged if many such claims are in the pipeline, leading attorneys to aggressively seek out claims that sounded as class actions, in the hope that, if several dozen are in the works, at least one will result in substantial fees. Rakoff specifically laments the “strike suit,” by which “a corporation facing a weak class action that nevertheless will cost millions of dollars to defend and, if somehow successful, will result in possible damages of hundreds of millions of dollars is motivated to settle the suit, even if the company has committed no wrong.”

One can (and many do) resort to ad hominum attacks, concluding that lawyers bringing such cases are either “private attorneys general” or scum-sucking opportunists; Rakoff’s experience lands him somewhere in the middle.  He is less ambivalent, however, in his view that “class actions are no real substitute for criminal and regulatory prosecution of the individuals actually responsible for corporate misconduct.”  And he joins Prof. Coffee in advocating the combining of public and private incentives and accountability, by agencies’ engagement of the private bar.

The first (McIlwrath) and second (Rakoff) strands above simply point to a plain and (I hope) unexceptionable conclusion:  Just as in 1976 with the Roscoe Pound Conference, there is profound and experience-based public dissatisfaction with judicial dispute resolution in the United States.  To single out private arbitration, or class waivers, is to pull only one thread of a meticulously woven garment, where dysfunction is deeply embedded like a dye in the wool itself.  It is time that responsible commentators in this field take a holistic view of restitution and prevention of civil disputes and, at the very least, recognize that each of the practices we now question arose in response to something else.

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