The Flight From Arbitration

For years, arbitration clauses have been popping up in the fine print of consumer contracts almost to the point where it is hard to find a consumer contract that doesn’t require mandatory arbitration. If you have a potential claim against a credit card company, bank, phone provider, architect, or even an attorney (and shame on the attorneys putting arbitration clauses in their contract), then that claim is likely subject to an arbitration clause. We’ve even had drawn out fights over an arbitration agreement in a contract to purchase logs for a client’s log home.

According to the businesses inserting the clauses, arbitration should be used because it is more efficient and can reduce the cost of litigation for all parties. If that is true, you would expect businesses to insert arbitration clauses into all the contracts that businesses use between one another. According to a study done by two professors of law, that expectation is wrong.

Theodore Eisenberg, a Cornell Professor of Law, and Geoffrey Miller, a professor of law at NYU, have recently released a draft of their study The Flight From Arbitration: An Empirical Study of Ex Ante Arbitration Clauses in Publicly Held Companies’ Contracts. In the study, the professors analyzed 2,414 contracts that were filed with the Securities and Exchange Commission, and found that companies that were quick to use arbitration agreements in disputes with consumers rarely used arbitration agreements in contracts with one another. The study found:

The most striking result is the paucity of arbitration clauses, even in international contracts. Our results contradict some received wisdom but are consistent with the 1998 Cornell University survey finding that relatively few large corporations use arbitration frequently…

Our arbitration clause rate findings contrast with the widespread use of mandatory arbitration clauses in certain standardized consumer contracts, such as credit card and mobile phone agreements…

Some suggest that arbitration clauses in some consumer contracts may be being used for some other purpose, such as a mechanism to completely avoid dispute resolution, leaving consumers with no effective remedy, or to gain advantage in dispute resolution over parties who cannot realistically negotiate. In this view, arbitration clauses are being used to avoid class actions, regardless of the effect on the fairness of the dispute resolution process.

These findings don’t surprise us. We think most consumer attorneys agree with us that arbitration clauses aren’t put in place for efficiency, but to make it more difficult for consumers to bring claims, and when they do, more difficult for them to prevail. Although arbitration can be good for the right case if done in the right manner, we continue to believe that mandatory arbitration agreements unnecessarily take away our clients’ rights to a jury trial.  Apparently, some businesses agree.

Homeowners’ Association Litigation

Our firm has represented homeowners and homeowners’ associations in numerous matters for years. One of the things we have learned is that there are few places with more petty politics than homeowners’ associations. A recent case from one of the Houston Court of Appeals demonstrates that point nicely.

In the lawsuit, the HOA claimed that the homeowners were not adequately concealing their trash cans. The case went to mediation in 2002, and the parties settled their claims. The settlement agreement had four main provisions: (1) the HOA would pay the homeowners some amount of money; (2) the HOA would plant additional shrubs that matched existing shrubs to help conceal the trash cans; (3) the HOA would pay the homeowners up to $100 for a planting box to use to conceal the homeowners’ trash cans; and (4) the homeowners agreed to conceal their trash cans behind the landscaping. The settlement agreement also had an arbitration clause.

But that was not enough. The parties still could not agree whether the homeowners were adequately concealing their trash cans. In October 2003, the HOA filed a petition to start the arbitration process. The claim went through arbitration, and the arbitrator ruled in favor of the HOA. The HOA then filed a suit to enforce the arbitration agreement. The court affirmed the agreement, but also added $5,386.83 in attorneys’ fees and costs for the HOA. The homeowners’ appealed. The case was finally resolved on July 20, 2006, four years after the dispute started.

Admittedly, this case is atypical. But it demonstrates several important points. First, it confirms how small disputes can escalate. These parties undoubtedly spent tens of thousands of dollars on a dispute involving an estimated $500 in plants. Second, it can be an important lesson on arbitration. Even after the arbitrator made an award, the HOA was required to file suit to enforce the award and still went through the appellate process. Arbitration is not the panacea that many would like consumers to think it is. Finally, it can be a lesson on how not to proceed. We pride ourselves on being problems solvers and our ability to help clients avoid putting themselves in these positions in the first place. 

Troubles at the Food & Drug Administration

Last Friday, the Institute of Medicine, part of the National Academy of Science, released a report titled The Future of Drug Safety: Promoting and Protecting the Health of the Public. According to the IOM’s summary, the report findings include:

There is a perception of crisis that has compromised the credibility of FDA and of the pharmaceutical industry.

Most stakeholders–the agency, the industry, consumer organizations, Congress, professional societies, health care entities–appear to agree on the need for certain improvements in the system.

The drug safety system is impaired by the following factors: serious resource constraints that weaken the quality and quantity of the science that is brought to bear on drug safety; an organizational culture in CDER that is not optimally functional; and unclear and insufficient regulatory authorities particularly with respect to enforcement.

FDA and the pharmaceutical industry do not consistently demonstrate accountability and transparency to the public by communicating safety concerns in a timely and effective fashion.

The report included several recommendations to help alleviate these problems. Those recommendations include:

Labeling requirements and advertising limits for new medications

Clarified authority and additional enforcement tools for the agency

Clarification of FDA’s role in gathering and communicating additional information on marketed products’ risks and benefits

Mandatory registration of clinical trial results to facilitate public access to drug safety information

An increased role for FDA’s drug safety staff

A large boost in funding and staffing for the agency

The New York Times ran an article describing the study and the FDA’s response this weekend.

The FDA, and these problems, are obviously important to the protection of the nation’s health. But they’re also important in drug litigation in Texas. As a result of 2003 legislative changes, drug manufacturers receive a rebuttable presumption that warnings with their drugs were adequate if the FDA approved the warnings. It can be very difficult for injured Texans to overcome this presumption. For example, an injured plaintiff can overcome this presumption by proving that the manufacturer withheld or misrepresented information to the FDA, by showing that the manufacturer continued to sell the product after the FDA ordered it withdrawn from the market, or that the manufacturer promoted or advertised the product for some unauthorized use. This is a complicated area of the law, and if you or someone you know has been injured as a result of medication, you should contact an attorney as soon as possible.

Legal Malpractice on the Biggest Stage

Legal malpractice comes in many forms, but one of the most common forms is the missed deadline.  Recently, one poor attorney had the misfortune of missing a deadline on the biggest stage there is — before the US Supreme Court. 

One upshot of the error is it demonstrates the collegiality among the Supreme Court bar, those lawyers who regularly practice before the US Supreme Court.  According to the article, several colleagues have written briefs on the attorneys’ behalf urging the court to accepted his late-filed document.

It is a shame, but that attitude is hard to find.  Instead, the trend is the opposite.  Parties too often rely on technicalities to prevail instead of really being interested in finding justice or the truth of the matter.

18 Wheeled Dangers — A Series on Texas Trucking Accidents

On a sunny December afternoon, Kim Hughes turned onto State Highway 114 in Wise County and headed west toward home in Paradise. Christmas was eight days away. Four generations were crammed into her GMC Yukon after a morning of holiday shopping.

In the cab of an 18-wheeler leased to TXI Transportation Co., Ricardo Rodriguez drove east on Highway 114, riding herd on 73,000 pounds of truck and a trailerload of sand. An illegal immigrant from Mexico, Mr. Rodriguez had used a fake Social Security number to get a Texas commercial driver’s license six years earlier. He had found steady work around North Texas driving rock trucks and other 18-wheelers, his history of immigration arrests and truck safety violations ignored or overlooked.

Just east of Paradise, on a flat stretch of road, the mom and the trucker met.

Mr. Rodriguez crossed the center line of the two-lane road and barreled head-on toward Ms. Hughes at 60 to 65 mph, a civil jury later concluded. With trees and a creek bed blocking her escape to the right, Ms. Hughes turned left, into the oncoming eastbound lane.

Just then, Mr. Rodriguez turned back toward his lane. Too late, Ms. Hughes swerved right. The Yukon struck the big rig on the driver’s side, scraped along the trailer and spun off the back. A Ford pickup behind the truck smashed into the Yukon, injuring the pickup’s occupants and nearly tearing apart the SUV.

Ms. Hughes’ 14-year-old son, Shiloh, and 70-year-old mother, Joyce Watkins, died almost instantly. Ms. Hughes, 38, and her 17-year-old daughter, Afton Hughes Royse, pregnant with twins, died later in a Fort Worth hospital, without regaining consciousness.

Amid the Christmas presents and holiday treats, the only sounds of life from the shattered SUV were the screams of Afton’s 14-month- old son, Jagr Royse, and the frantic shouts of a female voice on Shiloh’s cellphone.

Mr. Rodriguez climbed from his truck, uninjured.

That story is the beginning of a Dallas Morning News series on the dangers of trucking accidents.  The series confirms what many plaintiff’s attorneys have known for years:  the trucking industry is full of shady practices and abuses.  And while the trucking industry might not be significantly more tainted than other industries, due to the nature of truck accidents, the slightest mistakes can be deadly.  The series is both informative and scary for Texas drivers.

In the first installment of the series, the Morning News stated:

Trucking companies in Texas often gamble on drivers such as Mr. Rodriguez, a seven-month Dallas Morning News investigation has found. They hire illegal immigrants who struggle to read road signs and communicate in English with police and emergency personnel. They hire felons, drunks and drug addicts. Sometimes, they make only cursory checks of work history and driving records, then put the new hires behind the wheel of rigs with the destructive potential of guided missiles.

When accidents occur, trucking companies defend their drivers and often blame other vehicles – and in many cases the dead occupants – regardless of the evidence.  They typically fight any release of information about their drivers and vehicles, and wage protracted battles to avoid blame.

Beyond that, the companies suffer few consequences, in part because the soaring number of trucks on Texas highways are overwhelming regulators and law enforcement officers.

The news in the series’ second installment is not any better for Texas drivers:

If the motoring public knew what was running down the road with them, they’d be really scared,” said Senior Trooper John Pellizzari, a DPS Commercial Vehicle Enforcement officer in Wise County, notorious among state and federal truck inspectors for deadly crashes involving rock haulers.

The third installment features the lack of resources that the Department of Public Safety has to enforce trucking regulations.  The installment notes:

By the time a state investigator visited SDS Trucking Inc. in April 2005, the Midlothian building materials hauler had been in 10 traffic accidents in 12 months. One accident killed a motorcyclist, and four others injured 12 people.

An in-depth examination of the company’s records found enough safety violations to earn SDS a rating of unsatisfactory, the lowest possible in the compliance review system that Texas uses to evaluate trucking company safety. Two months later, the Texas Department of Public Safety ordered SDS to cease operations.

Research suggests that the threat of shutdown implicit in a compliance review reduces truck-related accidents and saves lives. One expert called compliance reviews “the nuclear weapon” of safety enforcement.

DPS officials, too, regard compliance reviews as one of their most effective tools in improving the safety performance of high-risk motor carriers.

But last year in Texas – which leads the nation every year in deaths from large-truck accidents – DPS completed compliance reviews for only one of every 10 companies it identified as the biggest potential dangers on the road.

Unfortunately, it only appears that things will get worse before they get better.  In the Texas Dept. of Transportation Motor Carrier Division’s 2005 annual report, the division stressed the increasing demands of the trucking industry.  For example, nationwide in 2005 there were 250,000 new trucks added to the nation’s fleet, and registered intrastate carriers increased almost 50% from 2000 to 2005.  The report continued to emphasize the the demands of the transportation industry are outstripping the state’s ability to meet those demands, particularly when examined in terms of traffic congestion slowing transportation.  As these demands increase, it’s likely that carriers will find new ways to cut corners to do their job.

Katrina Insurance Litigation — With a Twist

We’re written previously on litigation against the insurance industry for claims relating to Hurricane Katrina, but now another type of lawsuit is in the news. Two homeowners have filed lawsuits against Rimkus Consulting Group, an engineering company hired by their insurance companies, alleging that the Rimkus engineers altered reports and forged signatures to make reports more favorable to the insurance companies. Last week, the US judge hearing the cases ruled that the cases would proceed to trial.

The case highlights two lessons in insurance litigation.  First, the case shows the crucial role that engineers end up playing in insurance litigation. Whether a loss is covered often depends on what caused the loss. In most cases, the parties retain dueling engineers to give opinions about the cause of the loss. The decision-maker (the judge, jury or arbitrator) is then left listening to the testimony and reading the reports of the experts and trying to decipher the causes of various losses. The credibility of the engineer often becomes a factor, and the attorney for the homeowner can often make some progress by showing the engineer’s repeated hiring by various insurance companies. In other instances, we are able to get other reports from the insurance company’s engineers and show the similarities in the reports despite the different cases and facts.

Second, the case serves to show homeowners that they should not throw in the towel when confronted by an unfavorable report from an engineer hired by the insurance company.  Indeed, contrary reports are not surprises, but are the norm. 

For those interested, the allegations against Rimkus are detailed in a CBS News report from August 16, 2006. Rimkus has created its own response that is available on its website.

Class Actions In The News

Joanne Doroshow, executive director of the Center for Justice and Democracy, has written an article for another website today discussing the role of class actions in the wake of corporate scandals such as those involving Enron or Worldcom. Of note, Ms. Doroshow pointed out:

Earlier this year, during the same week that the late Enron chief Ken Lay, and his colleague Jeff Skilling, were convicted of conspiracy and fraud, several banks agreed to compensate Enron shareholders to the tune of $6.8 billion. This added to a settlement pool from class action lawsuits that continues to grow. While the Enron criminal convictions were met with exclamations of “justice” and pronouncements that “the system worked,” the class action settlement was met with a far more uneven, even cynical response, with some coverage focusing more on fees to attorneys who represented the shareholders (under 10 percent in this case), rather than on the billions recovered for the investors themselves.

The criminal justice system is not equipped to address the impact of these kinds of crimes on victims, their families and society. The civil justice system often can step in and help victims in ways that the criminal justice system cannot, while at the same time forcing changes in dangerous corporate behavior. It should be a source of national pride that the class action system does work, and that now and then, civil justice does indeed prevail in America.

Our firm has been on both sides of the class actions. We have represented consumers and businesses in pursuing class actions, and we have defended large corporations in class actions filed against them. With that experience, we recognize that there are potential abuses to the class action process. For example, those abuses may come from plaintiffs trying to use the class action as leverage to get an unjust settlement. Or those abuses may also come from sued corporations that use the process to overreach and wipe out claims of unsuspecting consumers or claims that were not even asserted in the class proceeding. Regardless, the class action procedure is critical in protecting the consumer in the small claim. As the 7^th Circuit stated in Carnegie v. Household Int’l, Inc., “The realistic alternative to a class action is not 17,000,000 individual suits, but zero individual suits, as only a lunatic or fanatic sues for $30.”

Prop 12 Revisited

We were reminded by Texas Watch that today is the third anniversary of the vote on the constitutional amendment to pass proposition 12, a key part of the legislature’s 2003 tort reform package.  Prop 12 remains the only time in state history that our citizens have voted to amend the constitution to give up their rights.  Texas Watch presents its view on the effects of Prop 12 in an editorial in this morning’s Austin American Statesman.

Arbitration — The $27,000 Answer?

A recent case from the United States Court of Appeals for the Fifth Circuit, which governs Texas, has demonstrated a potential problem with the cost of arbitration. In the case of Overstreet v. Contigroup Companies, Inc., the plaintiff was Gertrude Overstreet, a chicken farmer. Ms. Overstreet had an agreement with Contigroup and another defendant, Wayne Farms, LLC, that the defendants would provide baby chicks, feed and medicine, and that Ms. Overstreet would raise chickens for the defendants. The parties got cross-wise, and Ms. Overstreet ended up filing a lawsuit. Based on an arbitration provision in the contract, the defendants asked the court to send the claim to arbitration. Ms. Overstreet argued that it would be impossible for her to go to arbitration. The arbitration fees (not her attorney fees) would be over $27,000.00. Ms. Overstreet argued that she and her husband, who received less than $1,000.00 per month in social security benefits, owned no land, had no cash savings, received food stamps, and relied on medicaid for prescriptions, would not be able to afford arbitration, and a referral to arbitration would effectively preclude them from bringing their claims. The Fifth Circuit ultimately held that the case was required to go to arbitration.

The shame is that the defendants were not really interested in arbitrating the claim to achieve a just result; they were interested in making it economically impossible for Ms. Overstreet to pursue her claim. If the defendants were really interested in arbitration, they could have found a solution where arbitration was cost-effective. Indeed, we routinely arbitrate small claims in cases where we determine arbitration may be in the best interests of our client, including small cases where arbitration is chosen because it is cost-effective.

In addition to cost, there are other potential pitfalls of arbitration.  Unfortunately, it is difficult to know before a transaction whether the pitfalls or cost-issues will be present in any future dispute. As a result, consumers should be wary of pre-dispute arbitration agreements.   After all, if arbitration ends up being a good solution, the parties can always agree to arbitrate after the dispute arises.

Hourly Billing

You might remember John Grisham’s novel, The Firm.  Law school grad Mitch McDeere gets a job offer he can’t refuse from a “small” Memphis law firm.  Unfortunately, once employed, he learns that his firm is full of all types of unsavory characters.  Caught in their web, Mitch needs a way out and ultimately decides to cooperate with the FBI.  In the movie version, he turns his firm in not for murder, fraud, or any of the other outrageous forms of conduct the firm is involved in, but for inflated hourly billing. 

Although without much of that drama, the inflated billing story is being played out in a Chicago office of a large national law firm, where a junior partner has turned in his firm for what he believes were fraudulent billing practices.  The Wall Street Journal law blog has a fascinating discussion of the situation, with many insightful comments.

The billable hour billing system has become increasingly under attack because of its potential for abuse and because it might not truly reflect the value an attorney brings to cases or transactions. But despite the widespread belief that billable hours are not perfect, there is little momentum for change, particularly from traditionally defense-oriented firms.  Traditional defense firms are used to hourly billings, the constant cash-flow, and pursuing cases without taking on the risk of the case.  Thus, there is little incentive to change the system. 

On the other hand, firms, like ours, that have traditionally represented plaintiffs using contingent-fee arrangements are used to taking part of the risk in cases and are leading the way toward contingent or alternative billing arrangements in commercial litigation.  For example, for several years we have represented numerous commercial entities using contingent arrangements or hybrid agreements that would have traditionally been done on an hourly basis.