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How we resolve our disputes

Entries in Federal Arbitration Act (3)


Class Dismissed?

The school year still has more than a month to go, but class actions in consumer cases may be near an end under yesterday’s U.S. Supreme Court ruling in AT&T Mobility LLC v. Concepcion.  The five member conservative majority of the Court struck down California’s law barring arbitration clauses that contained waivers of class action rights in consumer cases because it is preempted by the Federal Arbitration Act (FAA).  The four liberal justices dissented.  Consumer advocates claim this case will immunize corporations from liability to consumers for unfair trade practices because it is too expensive for individual consumers to pursue such cases alone, even in arbitration. 

But a closer look at the decision reveals that such immunity does not come without price.  In this case, AT&T Mobility’s cellular phone sale and servicing agreement provided that customers could initiate dispute proceedings by completing a one-page Notice of Dispute form available on AT&T’s Web site.  If the dispute is not resolved within 30 days, the customer can invoke arbitration by filing a separate Demand for Arbitration, also available on AT&T’s Web site.  In the event the parties proceed to arbitration, the agreement specifies that AT&T must pay all costs for nonfrivolous claims; that arbitration must take place in the county in which the customer is billed; that, for claims of $10,000 or less, the customer may choose whether the arbitration proceeds in person, by telephone, or based only on submissions; that either party may bring a claim in small claims court in lieu of arbitration; and that the arbitrator may award any form of individual relief, including injunctions and presumably punitive damages.  The agreement, moreover, denies AT&T any ability to seek reimbursement of its attorney’s fees, and, in the event that a customer receives an arbitration award greater than AT&T’s last written settlement offer, requires AT&T to pay a $7,500 minimum recovery and twice the amount of the claimant’s attorney’s fees.

It would have been nice if AT&T gave its customers a choice to opt in or out of the arbitration clause, but I suspect many if not most consumers would opt in.  In this case, the lead plaintiff’s claim was that AT&T improperly charged him about $30 sales tax for a free phone.  How many consumers in such a situation would not opt for a dispute resolution mechanism that is free (to the consumer) and relatively simple?  AT&T built into the agreement adequate incentive for it to pay or settle most claims.  Class action litigation, either in court or in arbitration, usually ends in a settlement, but only after the consumption of large amounts of attorney fees, costs and time.  The policy question that remains after the Supreme Court’s decision in this case is whether the additional deterrent effect of a possible class action is worth the expenditure of those fees, costs and time. 

I am not a fan of arbitration clauses imposed on unsophisticated parties in contracts of adhesion.  But the arbitration clause and class action waiver in this case were hardly one-sided.  They provide incentives and benefits, as well as detriments, to both parties.  Neither the parties nor the Court addressed this aspect of the unconscionability issue in this case, but it may still be possible to argue that some arbitration and class-action waiver clauses are so one-sided as to be unenforceable, even under the FAA.  So, as long as this decision is not used to validate every arbitration clause and class action waiver in all consumer contracts, it may not mean the end of consumer class actions in all cases. 


Shocking arbitration award reinstated

The ninth circuit court of appeals has reinstated a $6.4 million arbitration award against Lloyds of London for bad faith refusal to pay a medical doctor’s claim for benefits under a disability insurance policy. The case is yet another example of experienced attorneys overplaying their hand. All three arbitrators on the panel agreed that the insurance company had clearly breached the contract, but the company apparently believed its liability was nowhere near what the plaintiff was demanding. The insurance company challenged the award in the federal district court, which set aside the award because it was “shocking.” The ninth circuit held that was not grounds for setting aside an award under the Federal Arbitration Act.

A major 2008 study concluded that plaintiffs tend to make more errors more frequently in their estimates of the value of a case, but defendants do so with greater severity. The study found that when plaintiffs rejected a pre-trial settlement offer that was higher than the ultimate verdict or award, they were off by an average of $43,100. But when defendants rejected a pre-trial settlement demand that was lower than the ultimate verdict or award, they were off by an average of $1.14 million. Lloyds of London and other insurers might want to consider that before taking their chances in litigation or arbitration. A good mediator should be familiar with this study in order to make both parties fully aware of their risks and alternatives to a negotiated settlement.


No class arbitration

In a 5-3 decision, the U.S. Supreme Court recently reversed an arbitration panel decision that would have allowed antitrust claims to proceed to arbitration on a class action basis, Stolt-Nielsen S.A. et al. v. Animal Feeds International Corp.  The Court reversed the Second Circuit Court of Appeals that had upheld the arbitrators’ decision. The parties argreed that the arbitration agreement in this case was silent about whether class arbitration was permissible. The arbitrators and the Second Circuit reasoned that since it did not prohibit class arbitration, the arbitrators had discretion to allow it. The Supreme Court disagreed, holding that the arbitrators manifestly disregarded the law. Basing its decision on the Federal Arbitration Act, the Court decided that “the differences between bilateral and class-action arbitration are too great for arbitrators to presume, consistent with their limited powers under the FAA, that the parties’ mere silence on the issue of class-action arbitration constitutes consent to resolve their disputes in class proceedings.”

In most antitrust actions, the alleged violator reaps large monopoly profits by first undercutting competitors’ prices, and then raising prices after those competitors are driven out of business. Consumers are benefitted at first by the price-cutting competition, but ultimately they lose when competition ceases and prices rise. However, prices rarely rise enough to justify any one consumer in pursuing an antitrust case by himself. Most such cases have to proceed as a class action or not at all. Therefore, the Court’s decision in this case effectively allows monopolists to insulate themselves from antitrust lawsuits by incorporating arbitration clauses in their contracts. Under the Court’s decision, the only way consumers could proceed with an antitrust suit would be to negotiate an arbitration clause that specifically allows class arbitration, or else to exclude such actions from arbitration and allow them to proceed in court. I wonder how many consumers are so savvy and such good negotiators?