Wednesday, August 3, 2016
Companies Hoisted by Arbitral Petards in Consumer Cases
A petard was a primitive bomb used to breach a wall. A bell-shaped iron casing would be filled with gunpowder and then affixed to the wall; a soldier would light the fuse, and the casing would direct the force of the blast toward the wall. Apparently, petards often exploded before the soldier could run away, hoisting (lifting) the soldier in the blast. Thus, the phrase "to hoist with his own petard" (Hamlet) means "to be harmed by one's plan to harm someone else".
That's an apt description for what seems to be happening now to many companies that have adopted consumer-arbitration clauses coupled with class-action waivers. A former student, now working at a large defense firm, describes how it's happening. Take a claim that's only marginally colorable and at face value worth only a few dollars, and file for arbitration. AAA rules impose on the company a $3400 arbitration fee plus attorneys fees. Settle for $3k. Repeat ad infinitum, thanks to the class-action bar contained in the company's arbitration clause. Company gets hoisted on its own petard.
Dennis Nolan and Marty Malin predicted several years back that something like this would happen, but this is the first report from the field I've heard. Dennis points out that companies may try work-arounds -- they might stop settling (which would force the hands of plaintiff mills, but wouldn't work on cases with claims that are low-dollar but at least colorably meritorious) or they might find an arbitral service provider cheaper than AAA (but courts might be reluctant to enforce arbitration clauses specifying arbitral service providers with close ties to the company -- see Hooters v. Phillips).
I think companies will attempt those two workarounds and come up with others. We should be slow to forget that logic of profit maximization demands at least the attempt to pay nothing for the harms one has caused. The ultimate question is whether there are going to be legally-mandated countervailing costs or not. In any "workaround" the sophisticated party will win big for a time and when those temporary winds are conjoined across decades they begin to look not so temporary.
Posted by: Michael C. Duff | Aug 4, 2016 7:42:57 AM