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.

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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)

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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)

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