The Law of Rule, Arbitration Edition

Note: This doesn’t have anything to do with criminal law, police misconduct or kittens, so most of you won’t have any interest in this post and should immediately avert your eyes.

The intrepid Frank Pasquale, at Concurring Opinions, raised a bit of a dilemma coming out of the Second Circuit in its curiously empathetic opinion on mandatory arbitration clauses in Duran v. The J. Hass Group.  From the recap by Public Citizen:

In Duran v. The J. Hass Group, a woman who is essentially on the edge of being destitute alleges . . .  that she was the victim of a last-dollar scam, promised services that she didn’t receive. It probably will not surprise anyone who follows consumer law (although it would come as a surprise to nearly any actual consumer) that the defendant had an arbitration clause.  What’s striking is that the clause requires consumers (including the New York resident Ms. Duran) to arbitrate their claims across the country in Arizona.

The Second Circuit required Ms. Duran to arbitrate her claim, and enforced the provision requiring it to take place in Arizona.  They noted that there is a “logical flaw” and an “unusual” quality to the result, because if Ms. Duran’s only remedy is to argue to the arbitrator that it’s unfair and unconscionable to require her to arbitrate in Arizona, she first has to go to Arizona to do it.  Oh well, the Court explains, this is what the Supreme Court would have wanted.

For all the virtues of arbitration, it’s hard to love when this is the game played.  Duran has to go to Arizona to fight the unconscionability of making her go to Arizona to challenge a “last dollar scam” that has rendered her destitute and precluded her from going to Arizona to fight?

It’s brilliant, in a Dr. Evil sort of way. And the Second Circuit says it’s the law.

The good news is that major corporations, and the major arbitration enterprises, don’t play this game, and won’t demand or sanction arbitration in far-away jurisdictions to make it absurdly onerous on consumers to challenge their schemes or failures.  The bad news is that decisions like this suggest that they should, as it’s a great way to make it untenable for anyone to fight.

The worse news is that smaller businesses are happy to include mandatory arb clauses that include such burdensome requirements as their hometown or favored jurisdiction, whether it’s meant to make it impossible for the other side to fight or just for their own convenience.  While major corporations have their share of issues with the products and schemes they sell, many of the smaller businesses, particularly in shady niches like “small lenders, credit repair organizations, and similar entities using arbitration firms with vague names and vague websites, about whom no one seems to know anything” tend to give rise to a far higher likelihood of consumer fraud and misery.

Shockingly, these tend to be the ones most likely to include “distant forum provisions, loser pays clauses, limitations on damages and attorneys’ fees,” the sorts of terms that render arbitration worthless, pointless or unconscionable.*  As Paul Bland at Public Citizen explains:

[T]hese had been disappearing from arbitration clauses a few years ago, and in the wake of the Rent-A-Center case my strong impression is that a growing number of smaller corporations are feeling adventurous and emboldened to use plainly terms.

They’re ba-aa-ack. The irony is that the Second Circuit recognized the “logical flaw in [its] result,” but didn’t let that stop them from reaching an absurd result.

As regular readers know, I often spend some personal capital on trying to level the playing field between the consumer and large corporations who do what they can to deflect responsibility for the crappy products hidden beneath their shiny promises.  When you’ve waited a half hour on hold for tech support outsourced to Banglanore by a person who has nothing more than the same instruction manual as handed out to the consumer, you begin to doubt they really care about your “inconvenience.”

Of course, consumers can read the arbitration clauses, except that they wouldn’t have an opportunity to see them until after they’ve purchased and, well, nobody reads them or makes buying decisions because of them anyway. So the argument that it’s just a free market at work falls a bit flat; the relative power of negotiation between major corporations and the individual is limited to the decision not to purchase and be the only kid on the block without a cool gizmo.

For the advocates of arbitration as a less expensive, more efficient means of dispute resolution, this doesn’t advance their argument very well. It’s not a level playing field, where consumers and producers get to haggle over the specific terms of such matters as arbitration.  And utterly absurd decisions like Duran aren’t going to help.

It’s fine to adore the concept of arbitration and expound upon its virtues, but the devil is always in the details.  When the details make it ridiculously onerous to use, then arbitration is just as evil, if not more so, than any other means of dispute resolution.  If arbitration is to be favored, then it can’t be predicated upon such one-sided, impossible to perform terms.

* Edit to include funny tangential story: Back in the early 80’s, when I was a punk kid lawyer, I shared a suite with a couple of guys named Arthur and Lenny. Lenny represented a business about to put its product on the market, and was told to create the terms and conditions of sale.

He cracked open a bottle of cheap wine, which was something that happened with regularity in this particular suite, and we all had a glass or two, sat around Lenny’s office and tried to see who could come up with the most ridiculously outrageous terms.

The more we drank, the wilder the terms became, as we all realized that nobody would ever read the terms and conditions before buying and, afterward, it didn’t matter. Even so, it never occurred to anyone in the room to require arbitration in Arizona. We did, however, require that demands for arbitration be signed in blue ink on 20 lb. Esquire Bond. Yeah, well, so we weren’t that wild after all.

12 comments on “The Law of Rule, Arbitration Edition

    1. SHG Post author

      That’s brilliant! Anyone complaining about it could be labeled racist. And there isn’t a google translate for Navajo.

      1. Jeff Gamso

        And any challenge to the rule would, of course, have to be in Navajo, which I suppose was implicit.

        By the way, I’m suing over the use of “Law of Rule,” a term on which I hold copywrite. Feel free to arbitrate in Vladivostok.

        1. SHG Post author

          I’m sorry, were you referring to the Law of Rule™, available at a store near you, operators are standing by?

          Actually, I am deeply ashamed of having brazenly stolen Jeff’s phrase and, though you can’t see it, I am self-flagellating as I type.

  1. Christopher G. Hill

    Of course this is illogical, if it were logical, it never would have gone to the Court of Appeals. While arbitration makes sense as an option, more often than not I find that it is the company/party that has the most resources that wants arbitration because the rules, venue provisions, etc. have become so onerous that these provisions become a club to discourage claims in the first place or cause well below value settlements.

    Where certain expertise is necessary for a “judge” to have in order to make the resolution of the matter more efficient, then arbitration can be a welcome and efficient manner of dispute resolution. In most other cases, at least in my experience, paying the judge or forcing onerous venue does nothing but give the big dog another set of teeth to go after the little dog.

    Great post Scott

    1. SHG Post author

      Arb has two virtues, and only two. It’s faster and less expensive than full scale litigation. If either of those are undermined, then it no longer serves its purpose. So to the extent advocates of arbitration complain about those who claim it’s owned by the big boys, captive to corporate interests because the corporations are there all the time, paying fees all the time and selecting arbitrators all the time, they lose all mojo when these two virtues are lost. It’s in their interest to keep arbitration affordable and fast.

      1. Christopher G. Hill

        All of that is too true. I have even found that for many claims (at least in my world of AAA arbitration), the speed of resolution is not significantly greater, especially with lower claim amounts where court filing fees are consistently lower than those for an arbitration.

        1. SHG Post author

          Funny you should mention this. For years, I was a small claims court arb, and people would sue corporations all the time, and most wouldn’t bother to appear to defend, so the consumer would go to inquest and, upon a proper showing, get a judgment. At that point, there’s no complaining about the arbitration clause.

  2. Marc R

    Local LEOs use JAMS/AAA in union/agency disputes. It’s just a matter of time before the 6th amendment parameters include a 6 person arbitration panel in lieu of a jury. Maybe just for misdemeanors, at first. We privatize prisons and allow civil legal disputes decided by any phd who becomes a licensed arbitrator (law degree, law license optional).

    1. SHG Post author

      Online. You forgot online, where you never actually know who your arb is, see evidence or examine witness. The future belongs online.

      1. Marc R

        “After the arbitration final order, please click “next” for a brief survey. Completed surveys are entered in a bi-monthly drawing for a 20% discount off your next civil forfeiture judgment.”

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