The Supreme Court and Arbitration

The right to jury trial in civil cases is fundamental. It is guaranteed in the Constitution. That right is becoming increasingly illusory, however. It is easily waived, and most litigants find themselves looking for alternatives to pursuing their rights to the end. Or they find they gave away those rights from the beginning. Just what does it mean to remind people that they retain the right to sue those whom they believe have violated their interests? That is what the Supreme Court considered last week in Compucredit Corp. v. Greenwood. In that case, the Court had to interpret the meaning of a statutory mandate enacted by Congress that credit repair companies disclose that consumers maintain the right to sue the companies. The Court held, 8-1, that this requirement did not preclude the credit repair companies from mandating instead that consumers arbitrate any disputes. So consumers are being told by these companies, yes you have the right to sue us, but sorry, you have to give up that right if you want to do business with us in the first place.

As a matter of statutory interpretation, the result is understandable. That it was decided by an 8-1 vote shows that it was not difficult for most of these Justices to wrap their heads around the concept that consumers are entitled to waive even fundamental rights. That is the whole point of the Federal Arbitration Act of 1925. We have the right to sue in many other circumstances, but we waive that right all the time. And if Congress had wanted to bar credit repair companies from requiring consumers to sign arbitration agreements, there were much more direct ways of accomplishing that than simply mandating disclosure of the right to sue. One could also interpret the "right to sue" as including the right to pursue claims in arbitration, although that may be a stretch.

On the other hand, you have to sympathize with the consumer's situation in being handed a contract with a credit repair company that on the one hand clearly guarantees the right to sue the company if the consumer is dissatisfied, and on the other hand, clearly requires that he or she waive that right. I believe the legal term for such a clause is "Catch-22."  Yet another example of how queasy we should feel in enforcing pre-dispute mandatory arbitration clauses that are contained in take it or leave it contracts that people are required to sign to engage in an increasing number of ordinary business transactions.  

Read more...

Brinker argument

Read more...

How Litigators Negotiate

I've been working on a case lately with a corporate lawyer, and we've been trading war stories about various negotiations in which we have participated. Most of the deals that this corporate attorney negotiates are deals for buying or selling properties or companies, but he has also been involved in some negotiations to settle lawsuits. He can't believe the difference. He is astounded that a plaintiff might start off a settlement negotiation in a litigated case by demanding, say, $2 million, while the defendant offers $25,000 for the same case. He can't believe that litigators make such off the wall opening bids, and are thereby forced, if they want to settle, to make tremendous concessions from their opening numbers. To him, it all seems like a ridiculous game, and calls into question the credibility of the negotiators for both sides. Litigators, however, know that this pattern is common.

In a business negotiation, parties are probably more likely to start the negotiations closer together, and are therefore forced to move proportionately less. This makes sense when you consider that when you are buying a business or a piece of property, both sides should walk in with a pretty good idea of its value. You can look at an appraisal. You can look at a business's profit and loss statement. In a lawsuit, on the other hand, the defendant may legitimately feel that the case is worth absolutely nothing, while the plaintiff feels it is worth millions. That is because there may be a real possibility of either a defense verdict, or a multi-million dollar verdict, in the same case.

I wonder whether the culture of litigation also contributes to some of the game-playing that is so astonishing to corporate lawyers. Do parties in litigation just like to posture more? Have they developed a different style of negotiation that lends itself to making grossly overvalued demands, and paltry offers, just to mess with the minds of their adversaries? Because even though a claim in litigation might be more difficult to value than a piece of property, both sides interested in settling a lawsuit should still be able to arrive at an approximation of the probabilities of winning and losing, and a realistic range of possible outcomes. It just seems to take more work to get to that point in litigated disputes.

Of course, it would be an over-generalization to characterize all business negotiators as reasonable, and all litigators as posturers.  There are plenty of people in the corporate world who approach negotiations with a lot of swagger, and who start off with wildly off-the-mark numbers to try to gain some advantage. (See my prior post on the subject of anchoring.) And there are plenty of litigators who believe in presenting a reasonable number in a settlement negotiation to let the other side know that they are very serious about their number, and they are not likely to move very much. Both approaches can work in either context. My point is more about the clash of expectations when a negotiator who favors one style meets a negotiator with the opposite style. 

If you walk into a negotiation to settle a lawsuit with the expectation that both sides should start with numbers that bear some relation to reality, you may encounter frustration and delays. You might think it makes sense to offer a number that is close to the actual value of the case, and not move very much from that position. You might think that offering a number that is highly skewed in your own direction is a waste of time, and would reflect badly on your credibility. But if you do that, you run the risk that the other side perceives your initial offer or demand as something much further from the ultimate outcome than you do, and expects much more movement than you are prepared to make. To make the negotiation work in that scenario, you have to make the other side understand that your initial offer was not intended as an expression of your most optimistic forecast of the case. It has to be conveyed with the appropriate message about your intentions and seriousness. Otherwise, closing the deal may prove elusive.

Read more...

Class Actions

Let's say you sign a contract for a new cell phone. Maybe one reason you sign is that the phone company promises you a free phone. Your first problem is that you might not think the phone is actually free after you find out you still have to pay sales tax on the phone's value. Your next problem is that if you feel aggrieved or misled by this contract, the company requires you to arbitrate all disputes with them, and that just might not be worth the time and trouble over $30 in sales tax.

One solution might be better regulation, to determine whether the phone company has engaged in misleading conduct, and perhaps fine them or compel them to issue refunds if their conduct were found to have crossed the line. It could be argued that regulation is more efficient than forcing consumers to battle the telephone behemoths themselves. But that is not the American way. We distrust bureaucratic solutions. The American solution is the class action lawsuit, which incentivizes attorneys, with the promise of enormous fee awards, to aggregate thousands of small claims into gigantic lawsuits that generally get settled. Because they are expensive to litigate, they may act as a deterrent to improper corporate conduct, but they are generally regarded in corporate suites as a gigantic nuisance or worse. Consumers may not be as troubled because, well, who doesn't want to get one of those confusing legal notices in the mail, with the promise of a coupon or a small check down the road?

That solution ran up against a major roadblock this week, in the form of the United States Supreme Court, which held in the case of AT&T Mobility, LLC v. Concepcion, that the company's arbitration clause should be enforced. What seems notable as a matter of legal doctrine is that the Court went so far as to deprive state court systems of some of their power to develop the common law of contract, in this case the doctrine of unconscionability. If common law contract doctrine is deemed to run afoul of the Federal Arbitration Act, the California Supreme Court no longer has the power to prevent businesses from requiring arbitration of claims that could be brought as a class action. (For those who still think that this particular conservative Supreme Court favors state's rights, here is another example to show that they do not.) This case may be seen as one more battle in the ongoing war between judicial hostility to consumer arbitration clauses on the state level, and judicial favoring of arbitration on the federal level (especially the Supreme Court in recent years, as I have discussed in previous posts). So far the U.S. Supreme Court would seem to have more clout in this war, but they may go so far toward enforcement of consumer arbitration clauses that Congress will simply outlaw them altogether. In other words, if the Supreme Court is simply trying to prevent effective enforcement of consumer rights, that view seems short-sighted and likely to run up into a strong reaction.

It might be more constructive to step back and think more carefully about the problems we are trying to solve, and how to solve them. Is the real underlying problem mandatory pre-dispute arbitration? As I have argued previously, pre-dispute arbitration clauses in consumer cases are difficult to justify. On the other hand, if we view the problem more broadly, as a problem of law enforcement--whether we are talking about false advertising laws, or securities laws, or corporate codes, or labor laws--we might be looking at the problem too narrowly if we only see the options of arbitration of individual claims vs. class action lawsuits. Maybe there is a better way of enforcing the rules that now seem to call for enforcement by means of class action lawsuits. Maybe we only got to the point where consumer rights advocates think we need to outlaw arbitration because we haven't developed a better solution for protecting consumer rights than vindicating those rights in court, which in small cases, it only makes sense to do through the class action mechanism. In my proposed civil procedure rules for utopia, there is no provision for class actions. I left that out because such cumbersome, expensive litigation seems antithetical to the more streamlined procedures I was suggesting. But we can only leave the class action remedy out if we develop another more effective way of protecting the interests of masses of small claim-holders.

Read more...

Risk in Litigation

I have nothing substantive to add about the ups and downs of seven years of litigation in the Barbie vs. Bratz doll wars case. I'm not going to do an analysis of the legal issues in the case, even though they are somewhat interesting. All I want to do is remind people that this is the sort of thing that happens in litigation. Mattel won a $100 million judgment against its rival MGA a couple of years ago. That judgment was reversed last year, and in a new trial, MGA this week won an $89 million jury verdict against Mattel. In the same case.

Was it worth it? MGA may have won the case (of course it's not over yet), but it's brand may no longer be viable. Mattel shut down a competitor for a while, but may have to pay them more than the value to Mattel of doing that. The parties have already spent many millions of dollars litigating this case. If both sides had the option of doing the whole thing again, I have a feeling they both might decide to just not even bother to do it.

Parties to litigation, and their attorneys, should be reminded that results in any seriously contested case are a lot more difficult to predict than most of us care to admit. Here we had top notch trial attorneys on both sides. How well could they predict the outcome? Seemingly not very well. And how much can hiring the best trial attorney you can afford help in preventing loss, or insuring victory? The great trial lawyer Edward Bennett Williams guessed that hiring the best trial attorney in the world (him) might improve your odds in a case that could go either way, from 5 in 10 to 6 in 10. I think most experienced trial attorneys have enough humility to recognize that they cannot guarantee a victory in any case. Most have snatched victory from the jaws of defeat, and vice versa. Most have seen cases reversed on appeal, and most have seen trials come out differently, either for or against, than they expected. I have certainly seen all that, and in both directions. I used to think that the most valuable service I could perform for clients was to predict the results of taking a case to court. Now I lean more towards the view that the most valuable service I can perform as an attorney, is to remind clients of the costs and risks of continuing to litigate. In a case like the Barbie v. Bratz marathon, one hopes the parties would have the opportunity to understand that each of them might win $100 million or lose $100 million, and it is difficult to predict which outcome is more likely. Plus each side faced certainty of enormous legal bills, thousands of hours of distraction, and untold damage to each company's business. Parties need to compare those prospects to the deal that is on the table, and then make an informed decision about whether litigation presents a more attractive alternative.

I have nothing against trials. In fact, I love trials, and I'd like to do more of them. But people need to understand the risks and costs involved. I tell parties in mediations that I conduct, that if they still want to litigate after they have a full appreciation of the costs and risks, then God bless you. That is what the courthouse is for. Just don't walk into that casino unless you can afford to lose your stake and then some.

(also posted on my mediation blog)

Read more...

Condoning Fraud?

(also posted on my mediation blog)

Even if there hadn't been a movie making this whole story famous, those of us concerned with the law and mediation might still follow the saga of the lawsuit between Mark Zuckerberg and the Winklevosses with interest.  Yesterday the twins were dealt a setback in their efforts to overturn a settlement they claim was fraudulently induced. Here is the Ninth Circuit opinion's description of that settlement agreement:

Affter a day of negotiations, ConnectU, Facebook and the Winklevosses signed a handwritten, one-and-a-third page “Term Sheet & Settlement Agreement” (the Settlement Agreement). The Winklevosses agreed to give up ConnectU in exchange for cash and a piece of Facebook. The parties stipulated that the Settlement Agreement was “confidential,” “binding” and “may be submitted into evidence to enforce [it].” The Settlement Agreement also purported to end all disputes between the parties.

People might be surprised to learn that this sort of thing happens in mediation. Even in a dispute worth tens of millions of dollars, the parties sometimes conclude a day of mediation with nothing but a hastily-prepared handwritten term sheet, leaving a number of items open for future clarification, and contemplating a further long form agreement.  They do that because they do not want to leave the table without some documentation of the deal, otherwise the deal might fall apart. But they don't have time to think about all the details required to finish a complete agreement. In this case, where the parties scrawled out a document that was labeled both a term sheet and a settlement agreement, and that said it was both confidential as well as admissible in evidence, the agreement seems to express contradictory purposes. What happens when the parties sign such a flawed document, and never sign the final agreement they were contemplating? Two questions were decided by the panel in the Winklevoss v. Facebook case. (1) Was the handwritten agreement definite enough to be enforceable? and (2) Does the parties' agreement to maintain mediation confidentiality bar a claim to set the agreement aside based on alleged fraudulent inducement?  The panel answered "yes" to both questions.

Mediation participants, and mediators, sometimes worry whether the agreements they commit to paper after a long day of negotiation will contain enough of the necessary verbiage to make them enforceable. (See my previous post on that topic.) This case illustrates a variant of that concern. Here the parties signed a document that was sufficiently vague that at least one of the parties thought (perhaps only in hindsight) that it should not be enforceable if the parties never completed a more detailed agreement. This problem is not confined to mediation. Here in Hollywood, players are used to making handshake deals, or sending quick letters confirming their participation in large projects. These short form deals omit many important points, and do not always make clear what happens if the parties fail to sign a fully-detailed, heavily-lawyered document. Both in that context, therefore, as well as the mediation context, it is a good practice to specify what happens in that event. It is not difficult to include a sentence that says that if the parties fail to complete a long form agreement, the term sheet either is, or is not, intended to be binding. (It might be enough to just label it as either a binding agreement, or as a non-binding term sheet.) There is really no excuse for not covering that point in even the briefest of documents. Parties should understand that if there is language expressing the intent that the document is intended as a binding settlement, then it probably will be held binding even if the parties fail to complete a longer agreement, and even if the term sheet has holes and ambiguities in it.

Another point mediation participants should understand, as is also illustrated by this case, is that mediation confidentiality can preclude evidence of all kinds of alleged wrongdoing that may have occurred in the context of a mediation session. The Cassel case, discussed in a previous post, shows that even claims against a party's own attorneys may be barred by mediation confidentiality. (In that state court case, it was a strict state statute that barred evidence of alleged attorney misconduct, while interestingly in this federal case, it was the parties' mediation agreement that precluded evidence of the alleged fraud.) This case, which I don't think raises quite the same troublesome questions as Cassel, holds that because of mediation confidentiality, parties may not use evidence of anything said in the course of a mediation to overturn the agreement itself. That result is not as troublesome, because it is based on a rule, similar to the parol evidence rule, that may apply in other contexts as well. And also because parties should understand that they always have the option not to close, and that if they do sign a binding agreement at the mediation, then the agreement is all they have. That means that if somebody lied to the Winklevosses to induce them to accept shares in Facebook in settlement of their claims, whether their own attorneys or their adversaries, it is tough luck for them, but they should have been aware of that.

The court is not too sympathetic to the Winklevoss twins, given their ability to obtain expert counsel and perform their own due diligence, and given the court's evident feeling that the value of the settlement may have turned out to be better than they should have expected even if allegedly crucial information had not been withheld. In other cases, however, enforcing mediation confidentiality may prevent less sophisticated parties from obtaining redress for fraud or other trickery in the course of mediation. Parties therefore may have to approach mediation as they would a game of poker. They may need to understand that the law of the jungle applies in mediation, even more so than in court, or in transactions out of court. That means you should be cautious about taking anything the other side says at face value. You may have no recourse if someone lies to you. People can bluff, and they can hide material facts. (Parties can lie and cheat in court also, but there is a record of it, and a right to appeal.) If we apply the principle of mediation confidentiality strictly, parties have little protection against fraud or abuse. That means that if you walk out of mediation without a deal, then no harm, no foul. And if you walk out of mediation with a deal, the deal is all you have. Your complaints about the process will not get you far in court. That is why, as I've argued previously, mediators should take some time and trouble to make sure the parties understand and are satisfied with whatever result they obtain in mediation.

(AFP/Getty image from Forbes website)

Read more...

Rules for Utopia

In an ideal world, we would have fewer and simpler rules. In that spirit, I offer the following rough draft of my proposed new rules of civil procedure. Some of these ideas might even work in the real world, and they are not as different from current practice as may first appear. As shown by the links, I have discussed many of these ideas in previous posts.

1.  A case is initiated by filing a "notice of dispute."
2.  The notice may be served by any means reasonably calculated to give actual notice.
3.  The respondent must either (1) acknowledge there is a dispute,  or (2) deny there is a dispute. This can be indicated by checking the appropriate box at the bottom of the notice of dispute form.
4. If the respondent denies there is a dispute, the parties must submit an agreed form of resolution to the court within 30 days.
5. If the respondent fails to respond, the court will require preparation of a default judgment with appropriate notice determined by the court, and an additional opportunity for the respondent to be heard.
6. If the respondent agrees that there is a dispute, the parties are required to confer prior to the first court appearance to determine an appropriate means of resolving the dispute, and submit their preferences by form.
7.  After filing this preference form, the parties must appear before a facilitator to determine an appropriate means of dispute resolution.  These include mediation, arbitration, and trial with or without a jury. If the parties cannot agree, the facilitator will determine the initial means of dispute resolution.
8.  Parties choosing arbitration, or ordered to arbitration, have the option of making it binding or advisory.
9.  Parties choosing mediation, or ordered to mediation, retain the right to trial if they are not able to resolve the dispute in mediation.
10. There will be no additional pleadings unless allowed by the court.
11.  No motions of any kind will be filed except by court permission.
12.  The parties must disclose all documents they intend to use at trial, and identify all witnesses. The parties may have only whatever additional discovery they can agree upon, or whatever the court allows. All discovery disputes will be resolved by mediation, except that the court of course retains the power to enforce its orders allowing additional discovery.
13.  No expert witnesses are allowed except by agreement, or by court permission.
14. Parties may be required to submit a list of the factual issues in dispute, and the legal issues that must be determined by the court. The court may allow either or both parties to submit a request that the case be adjudicated without trial, which is subject to the standards formerly applicable to summary judgment motions.
15. All trials must be concluded within 5 court days, unless the court allows a longer time.
16. Appeals will also be first submitted to a facilitator, who will assist the parties with compiling the issues on appeal, determining an appropriate briefing schedule and other requirements, and recommending mediation or another procedure for resolving the appeal.

I think that about covers it. The law book publishers might not like these rules, but everyone else might appreciate being able to carry around the entire code of civil procedure on a handy card. I recognize that there are certain necessary procedures, such as injunctions and class actions, that don't fit comfortably within the spirit of these rules. I'm going to continue to ponder those issues and perhaps deal with them in a later post.

Read more...

We have not moved!

I apologize to anyone who has had mail addressed to me, returned to sender.  This is the Post Office's mistake.  We have not moved to Monrovia!  What happened is that one of our sub-tenants moved out quite some time ago.  After his forwarding order expired, the Post Office now returns his mail to the sender.  Apparently some of the Postal Service employees can't seem to read beyond the words "Law Offices of . . ." and are sending some of my mail back to the senders also.  I have made efforts to correct this problem, but it still seems to happen sometimes.

If anyone who has sent me mail, has had it returned to them, please re-send it, if possible with a copy of the first returned envelope, suitable for use as evidence in my ongoing dispute with the Post Office.  I apologize again for any inconvenience this problem has caused.

Our address is still:

Law Offices of Joseph C. Markowitz
444 S. Flower St., Suite 1750
Los Angeles, CA 90071

Read more...