Tuesday, August 21, 2007

Class Action Arbitration

Like many others, I tend to concentrate on the negative things in life.

One of the positive things in our culture is that more and more people use arbitration and mediation to resolve disputes than litigation. Mediation Now from Boulder lists mediators throughout the United States.

With litigation, two people face each other in court. When the judge slams down the gavel, there is a winner, a loser and one very rich lawyer. In arbitration, a mediator (who is eking out an upper middle class lifestyle) sits down with the parties of the dispute and tries to find the most equitable solution ... all things considered.

Since product liability is one of the primary components cost of goods in the US. Corporations have been looking to use arbitration in lieu of litigation for product disputes. For that matter, we are finding more and more companies writing arbitration clauses into their contracts.

Back of the envelop calculation tells us that if we took the billions that go to lawyers each year in class action suits and gave that money back to business or to the consumer, we would see a major drop in the cost of goods and an over all improvement in the quality of life. (For everyone but the lawyer).

In an overt effort to protect the billion dollar trial lawyer industry, the 9th Circuit Court Of Appeals in San Francisco ruled that the use of arbitration in consumer contracts is "unconscionable." The court makes the claim that no consumer would consciouslt enter a contract where they paid a lower price for a product contingent on resolving disputes via arbitration instead of litigation. After all, consumers want a big portion of every product they buy to go to lawyers. We all love having an elite ruling class of trial lawyers that we must bow before.

To defend the courts actions, a large number of progressives have been running around to blogs and forums claiming that arbitration helps big corporations. The logic of this argument is that, since the damages done by winner-take-all litigation are generally greater than arbitration, litigation must be more harmful to "The Corporation."

I find this logic faulty. Hurting one member of a class does not necessarily hurt an entire class.

I think George W. Bush makes a similar logical fallacy when he assumes that killing terrorists will reduce terrorism. It is possible that killing a terrorist just increases hatred and division, and inspires others to become terrorists. Hurting a member of a class does not necessarily hurt the entire class.

Lets say that there was a class action suit large enough to destroy company A.

Yes, the investors in company A would lose their entire investment. The legal system might even reduce these people to abject poverty. The assets of company A, however, won't vanish. They will simply be bought up by company B. Company B would then jack up the prices to cover the cost of the liability exposure and proceed.

Although the litigation has reduced one group of people into poverty. The end result of the litigation is simply that the costs are passed on to the consumer. In most cases the vulture company that buys up the assets is larger than the first company.

Litigation might destroy A Corporation. It does not destroy the progressive bugaboo* of "The Corporation." Litigation actually makes The Corporation bigger.

Litigation not only directly increases the size of corporation. The mere threat of litigation increases the size of corporations indirectly.

Lets say you have a legal system that is punctuated by random six million dollar law suits. These suits are an annoyance to billion dollar firms. Such suits are guaranteed to wipe out a small ten million dollar firms.

When investors assess risk, they often decide that taking a few hits by investing in big corporations is a better choice the risk of total loss of an investment in a small firm. In our litigious society, companies are often forced into consolidation by investors fear of exposure. Companies that have done nothing wrong consolidate simply because the mathematics says the liability exposure is too high.

The excessive litigation in our society leads directly and indirectly to bigger corporations.

Putting it another way: Litigation is a form of predation. If you go into the wild, you might see a pack of wolves go after a herd of elk. The wolves might separate out an kill a few young elk, but they never kill the herd.

Like other predators, litigators attack the weak. In the case of business, they take out the weak competitors, leaving the big firms standing.

Litigators are most successful when they attack the young. Most small entrepreneurial firms lack the political contacts and experience to stave off nuisance law suits. The litigation society does its greatest damages simply by locking a large number of small companies out of the market.

For that matter, you will notice many entrepreneurs have the strategy of growing rapidly to a given size, then immediately seeking protection by merging with a larger firm with legal resources to fend off the packs of trail lawyers.

A good example of the legal system attacking weak firm is the recent case where Judge Roy L. Pearson went after a dry cleaning firm with a $54 million suit for losing his pants. The dry cleaners had worked hard and earned enough assets where they were a good mark, but they spoke Engrish poorly, and did not have good legal representation.

This case was thrown out as it provided a rallying cry for the extremely large number of people who've been attacked in similar fashion.

Had the judge won his case, he would have destroyed the investors in the dry cleaning chain. In the process of collecting the prize rewarded to the judge, the court system would have sold the assets of the chain to a competing chain, reducing competition in the industry. The new owners would pass the cost of increased liability risk onto consumers.

Litigation might destroy some of the people associated with a specific corporation. It does not destroy the abstract bugaboo called "The Corporation" any more than culling the herd makes the herd go extinct.

Litigation has other adverse affects. When business leaders are in an adversarial environment and find themselves staring down the barrels of litigation, they start behaving like the Bob Murray character of the Huntington Cave disaster. These people find themselves in a trap where they cannot openly discuss the cause of the disaster. They cannot openly discuss the safety of the rescue effort. They cannot even openly address the possibility that the miners died in the accident. Every word has to be measured in anticipation of the law suits to come.

Notice how the press attacks Bob Murray for his "contradictory statements." Contradictory statements are common in open discourse. In open discourse, you are supposed to examine different possibilities.

Attacking a person because they make contradictory statements is absurd, yet the litigators drool with anticipation at each contradictory statement, since they can be used against Bob Murray in the litigation to come.

In order to figure out what went wrong, Bob Murray needs to explore both the argument that it was his mine that caused the problem and the possibility that it was a natural fault. Exploring both ideas will lead to contradictory statements.

The mere fact that anything said during the rescue effort will be used in the litigation negatively affects the rescue effort. It makes the effort more dangerous and less likely to succeed.

In some cases, you will find companies failing to take common sense actions after a problem simply because taking such actions is viewed by litigators as an admission of guilt.

If we moved from litigation to arbitration as our primary means of dispute resolution, we might move the dialog from simply trying to protect ourselves to one where we try to find the right course of action.

The massive Mattel Toy Recall is a good example of a company taking proactive steps in dealing with lead contamination. Mattel is a five billion dollar company. Their legal department is probably larger than Bob Murray's mining operation. However, they were pulling things off the shelves and actively engaged in internal investigations when the story broke.

Even the Mattel toy story is marred. An executive in China committed suicide rather than face the impending attacks that because a contractor he selected sold the company lead based paint.

China is the third most progressive country on the planet (behind Cuba and North Korea). When you read the historical accounts of the People's revolution, Zhang Shuhong is correct in deducing that suicide is preferable to being struggled against.

It turns out that China also is suffering a mine disaster at the moment. Much of the thought in China is still based on Marx's material dialectics. Reports claim that the mine leaders aren't even engaged in an awkward Bob Murray style conversation with the workers. They are holed up while the families riot.

I wish people understood this. The confrontational style that underlies leftist thinking leads directly to people separated in warring camps.

Sadly, the left seems to have found the perfect tact for preventing the use of arbitration in class action style lawsuits. What they do is find cases where a monopoly (or even a former monopoly) wants to use an arbitration clause in a contract. By using monopolies as the case study for arbitration, they can trigger wealth envy and set the legions of progressive thugs on the net and in the media against arbitration. Most progressive bloggers are simply too dense to realize that the same ruling in the ATT Wireless case applies to all companies.

Small companies that were hoping to gain a competitive advantage by leaning on arbitration are now in a situation where their liability exposure suddenly skyrocketed with this ninth district court ruling.

Although ATT Wirelss lost this case, they actually won it because it mainstains the litigation barrier that helps keep small, nimbler firms out of the lucrative cellular market. ATT Wireless need simply raise their price to cover the cost of the ruling and The Corporation is as large and as entrenched as ever.

1 comment:

Scott Hinrichs said...

Another gem from the 9th Circuit; the most overturned circuit court in the nation. I wonder what happened to the Bush administration plan to split it into three smaller geographical areas in order to reduce its adverse impact.