Corp Reform - Not Tort Reform

Why are mandatory arbitration clauses so prevalent in consumer credit card agreements?

Mandatory arbitration agreements have been getting a lot of attention lately, particularly because of the high rate of "wins" when a creditor is a plaintiff.  This win rate has been placed as high as 95%.  The "reform" movement is quick to suggest that the reason the win is artificially high because there are so many default judgments in credit card agreements.  I agree with that hypothesis.  The vast majority of debtors will simply not respond when sued or taken to arbitration.  Generally, people who get 3-6 months behind in their bills do so because they don't have enough money to pay their bills - let alone to hire an attorney to defend them for not paying their bills.  But where I disagree with the "reform" crowd is why I believe mandatory arbitration clauses are so prevalent in credit card agreements. 

The "reformers" suggest that credit card companies favor arbitration because it is (a) cheaper and easier than court proceedings, and (b) prevents "deadbeats" from driving up the cost of litigation.  Note that the latter claim acknowledges that defendants can and do drive up the cost of litigation; reformers usually attribute such tactics to plaintiffs, when it's actually plaintiffs who have the greatest incentive to move litigation along. 

Credit card companies know that perhaps 90 out of 100 people aren't going to respond to legal action.  Knowing this, the credit card companies obviously have an incentive to use the cheapest legal method to collect the debt.  That's arbitration, right?  Wrong.

The process of suing a debtor or taking a debtor to arbitration is so similar that there won't be any difference in legal costs for the creditor.  In either case, the creditor's attorney will have to draft a 1-2 page complaint that alleges a few basic facts: That the debtor has an account with the creditor and that the debtor owes the creditor X amount of dollars.  Any competent lawyer can draft such a complaint in 30 minutes.  Any competent lawyer who does collection work routinely can draft such a complaint in 5 minutes - debt collection firms have automated software that can crank out complaints that quickly. 

Once the complaint is drafted, the next step is to either file it with the court and serve it upon the debtor, or to initiate the case with the arbitration agency and serve it upon the debtor.  The National Arbitration Forum is the largest arbitration company in the country, and is used by many, if not most major credit card companies.

Let's compare the cost of taking a debtor to arbitration vs. taking a debtor to court in the two populous states of Texas and California.  The table below indicates the cost of filing and serving a complaint requesting $4,999, $7,499, and $25,000 in an NAF arbitration proceeding, in a Texas court, and in a California court: 

In California and Texas, it is much cheaper to commence an action in court as opposed to arbitration.  I have been unable to find a comprehensive listing of court filing fees by state, but the handful of states I checked are in line with the pricing of these states.  As the table shows, it can be over five times as expensive to take a debtor to arbitration than it does to take him or her to court.  So just to initiate the legal action, the courts have a substantial cost advantage over the arbitration system. 

Again, recall that evidence suggests over 90% of these actions result in a default judgment.  It's also not cheaper to obtain a default in arbitration than it is in court.  In arbitration or in court, the procedure to get a default judgment is the same: File a motion requesting a default judgment.  The motion in either forum will be a one or two page document that explains that the debtor failed to respond to the lawsuit/claim in the required amount of time.  The motion will then ask the court or arbitrator to grant a default judgment.  An arbitrator will generally grant a default judgment without the necessity of a hearing.  Many judges will grant a default judgment without a hearing, but some won't.  If a judge does require a hearing, it will be very quick- 15 minutes or less.  I've seen them done in as few as five.  Even if it takes an attorney a full hour at $200 an hour to get through the hearing, getting a default judgment through arbitration is still more expensive than getting a default in court.  Plus, it's easier to enforce a default judgment from a court (levying bank accounts, etc.) than it is to enforce a default from an arbitrator.  All of this evidence suggests that if you're planning on winning a majority of your cases through default judgments, it's smarter to go to court to do so.  So why do creditors put in mandatory arbitration clauses that prevent them from taking debtors to court? 

Because mandatory arbitration clauses prevent debtors from taking creditors to court.  Credit card companies get sued routinely for violations of such acronyms as the Truth in Lending Act (TILA), Fair Credit Reporting Act (FCRA), Fair Debt Collection Practices Act (FDCPA), Deceptive Trade Practices Act (DTPA), and a variety of other state and federal laws.  In addition, many of these lawsuits turn into class action lawsuits, which the "reformers" constantly argue are an affront to God.  By placing mandatory arbitration clauses in their contracts, credit card companies get to eliminate those evil class action lawsuits before they're even filed. 

I was inspired to write this post because the "reform" movement has been making a false argument.  They've been arguing that mandatory arbitration clauses are used because it's so much cheaper to "go after deadbeats" in arbitration than it is to court.  Therefore, mandatory arbitration clauses benefit consumers who do pay their bills because the cost savings is passed on to them.  This is plainly false because it's more expensive to "go after deadbeats" in arbitration than it is to use the court system. 

* In Texas, the jurisdictional limit for the Justice of the Peace courts is $10,000.  Thus, any suit for $10,000 or below can be brought in JP court, where filing fees are between $10 and $20, depending on the county.  Sheriffs will personally serve a defendant for fees ranging from $50 to $70, depending upon the county.  The figure of $72 assumes a filing fee of $17 and a service fee of $55.  Depending upon the county, filing and service costs may differ by $10 or so.  The filing fee in all County Courts of Law in Texas is $232, and the jurisdictional limit of those courts are $100,000.  The $287 figure was derived by adding $55 for service of process to the $232 filing fee.

** In California the jurisdictional limit of small claims court is $7,500.  Filing fees vary from county to county, but not by more than a few dollars.  I used an average fee and estimates the service of process fee of $50.00, which seems to be the going rate in most major metropolitan areas of California.  Sometimes this means using the Sheriff, other times it's a third party process server.  For more information on California court filing fees, visit http://www.courtinfo.ca.gov/selfhelp/lowcost/getready.htm#fees

Sad, but true fact about tort "reform" laws

A gentleman by the name of Bob Cardenas emailed me the other day about the state of the civil justice system in Texas.  Bob does trial presentations for both plaintiffs and defendants.  And Bob's business has undergone a change.  Since Texas voters were hoodwinked into passing tort "reform" measures in 2004, fewer injury cases are being filed, and few of those are going to trial.  So most of the business Bob gets these days is business v. business litigation, especially patent lawsuits.  In other words, the reformers got their way: Texas courts are now mostly a tool for businesses to settle disputes.  Injured citizens are getting shut out. 

In discussing this problem, Bob wrote the following to me:

"Until a lawmaker’s child is run over by a drug taking driver of a Wal-Mart 18 wheeler and the emergency room team compounds the injury with administering the wrong treatment, will the laws stand a chance of changing back."

It's sad, but Bob is right.  When tragedy strikes a lawmaker, tort "reform" no longer appeals to them. Remember former Senator Rick Santorum?

Technorati Tags: Texas, tort reform, trial presentation

Damage caps would protect this guy, too.

...and anyone else sued for sex crimes.  Should someone who molests teens or rapes women only be liable for $250k per victim?  Well, noneconomic damage caps would do just that.

MADISON, Wis. (AP) - Two boys are suing a former youth group leader and coach who is criminally charged with plying teens with money, liquor and drugs in exchange for sex.

The lawsuit filed Thursday seeks unspecified compensatory damages for mental and emotional distress from 52-year-old Greg E. Francis. It also seeks unspecified punitive damages for actions Francis allegedly took that were considered malicious in their disregard for the boys' rights.

WBAY-TV Green Bay-Fox Cities-Northeast Wisconsin News: 2 boys sue former youth leader accused of paying teens for sex

But the "reform" movement never mentions that, do they?

Technorati Tags: tort reform, damage caps, rape, noneconomic damages, molestation

Yes, Walter - judges are supposed to uphold the constitution.

Walter Olson at Point Of Law attempts to use sarcasm to question court rulings in Illinois:

A right under the state constitution to unlimited damage awards, permanently and forever, no matter what elected state lawmakers may have to say about the matter?

PointofLaw.com | PointOfLaw Forum: Illinois judge strikes down med-mal caps

As Walter no doubt knows, this is the way the system is supposed to work.  No matter what state lawmakers may desire, the courts are not supposed to uphold laws that are unconstitutional.  The fact that (as Walter points out) this is the third time this has happened in Illinois shows two things:

1. The "reform" movement can't afford to buy a constitutional amendment to get their way;
2. A group of state lawmakers doesn't give a damn about the Illinois constitution.

There's absolutely nothing wrong with judges refusing to trample the constitution.  You would think that would be obvious, given the constitutional crises here and in Pakistan.

On a related matter, I just noted at TortDeform, insurers don't need "reform" to operate profitably in Illinois.

Technorati Tags: Walter Olson, Point of Law, Illinois, medical malpractice, insurance cartel, tort reform

Have John Engler and the National Association of Manufacturers been naughty?

Technorati tags: John Engler, NAM, ATRA, ATRAF, tort reform, illegal contributions, Grover Norquist, bad guys

I haven't fact checked any of this, but one blogger points out the possibility that the NAM is illegally funneling money to other tort reform groups.

In 2005, the National Association of Manufacturers (NAM) funneled $870k through the American Justice Partnership (AJP) to American Tort Reform, according to the 2005 AJP 990.  Another $451k went to pay a "service fee". Total AJP expenditures were only $1.7 milllion.

Was AJP set up in 2005 to facilitate NAM's contribution to American Tort Reform? Is NAM legally prohibited from contributing directly to American Tort Reform?

The answer could, in part,  depend on which American Tort Reform received the $870k, the American Tort Reform Association (ATRA) which is a 501(c)(6) or the American Tort Reform Foundation (ATRAF), a 501(c)(3).

This is not the first time that I have suspected NAM of disguising illegal contributions. Last year, I speculated here in the TPM Cafe about whether the 2004 $650k grant made by Grover Norquist's Americans For Tax Reform to the National Alliance for Worker and Employer Rights (NAWER) was funded by NAM. NAM is prohibited from contributing directly to NAWER by law

Source: American Justice Partnership, Another NAM Scam | TPMCafe

I'll do a little digging and keep my eyes open for more about this story.

How it was in the good old days - before greedy trial lawyers ruined America

The problem with trial lawyers is that they think they have the right to tell business owners how best to run their businesses.  With the benefit of 20/20 hindsight, trial lawyers point the finger of blame whenever an unfortunate business makes a prudent, but incorrect decision.

Greedy trial lawyers meddle in virtually every industry and drive up the prices of all our products and services.  Every business decision made has to take into consideration the predatory litigation lobby, and not what's best for the business.  No wonder so many businesses are driven into bankruptcy!

The situation is only as bad as it is because activist judges and politicians in the wallet of the trial bar extended tort doctrines to dubious causes of action.  It didn't used to be this way.  There once was a time when corporations were free to run their businesses as they saw fit, and when entrepreneurs weren't held hostage by trial lawyers. 

If only we had meaningful tort reform, we could return to a time of fairness and efficiency in commerce.  A time perhaps best exemplified by the manner in which White Star Lines handled the tragic loss of the Titanic.  Thanks to a common-sense attitude towards compensating the victims, the management of White Star saved the company from ruin.  Were an identical tragedy to occur today, the company would surely be devoured by ravenous trial lawyers and greedy family members unwilling to accept reasonable compensation.

Let's take a trip back to the good old days and see how White Star Lines handled the crisis:

In 2002, new evidence surfaced, revealing that the Titanic’s owners expected, and in fact demanded fees for the return of bodies.White Star was the Enron of its day; a succession of callous acts without end. Through letters that still survive, historians have long known that Ismay’s line notified the widows of the Titanic’s bandsmen (notwithstanding the fact that their husbands did much to prevent panic on the port side by playing cheery ragtime music) that 75% of the money owed them was being withheld, based on the premise that their husbands had entertained passengers only halfway through one leg of what was to have been a two-way trip. Furthermore, White Star judged that it was only fair to warn the widows that there would be little left over from the remaining 25% because they would have to “settle a bill” for the loss of their husbands’ uniforms.

In February 2002, documentary film-maker Rip Mackenzie sent a dispatch describing a letter demonstrating once and for all time that there was probably no subterranean marsh into which White Star was unwilling to descend.

Written on White Star stationary and dated two weeks after the sinking, the letter was addressed to Sarah Gill of Somerset, England, in reply to her inquiry about the fate of second class passenger John Gill, her childhood sweetheart and husband of two months.

The owners of the Titanic demanded of Sarah a fee of 20 pounds ($1400 in year 2002 dollars), or her husband’s body would “regrettably” have to be buried in Halifax. White Star used this letter as an opportunity to stress that the sinking of the Royal Mail Steamer Titanic was no one’s responsibility . . . as if driving a ship full speed ahead into the night, toward an ice field about which the bridge had been repeatedly warned . . as if . . .

--------------------------------------------------------------------------------

“The sinking was an unfortunate accident, [for which] we cannot be held responsible. We regret that we do not see our way to bring home the bodies of those recovered free of expense, and in cases where it is desired for this to be done, it can be carried out only if the body was in a fit state to be returned, and upon receiving a deposit of 20 pounds on account of the expenses.”

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Given the precedent of how White Star treated with widows of Wallace Hartley, Jock Hume, and the other bandsmen (whose families found settlement of the “uniform account” doubly difficult after corporate lawyers declared violinists and cellists “not crew, but officially passengers, therefore not covered under the Workmen’s Compensation Act”), the Sarah Gill discovery should bring no sense of surprise. The behavior of J. Bruce Ismay and his legal team at White Star begins to look increasingly analogous to a car thief who manages to get away with billing his victims for the labor of dismantling their cars and selling the parts.

Source: Charles Pellegrino Web Site

Remember White Star Lines the next time some corporate sock puppet tells you we need tort reform.  If it weren't for "greedy trial lawyers" it's entirely possible that airlines would bill the families of dead captains for the cost of their uniforms. 

Technorati tags: trial lawyers, greedy trial lawyers, tort reform, Titanic, White Star Lines, punitive damages, damage caps, predatory lawyers

Ralph Cook on the PRI "Study" that claims tort costs are pushing a trillion bucks a year

Ralph Cook wrote a letter to the editor in which he criticizes the propaganda  study issued by the Pacific Research Institute:

The $865 billion figure PRI advertises contains a long list of costs not at all associated with the civil justice system. For example, the Tillinghast study which PRI calls the "gold standard" and bases much of its study on, says tort costs in the United States are around $279 billion. Business Week, one of the corporate community's most trusted publications, said Tillinghast's total included "everything from payouts for fender-benders to the salaries of insurance CEOs," and is "a wild exaggeration." With Tillinghast's grossly exaggerated total tort costs of $279 billion, PRI's total, largely based on and more than three times Tillinghast's, is even more far-fetched.

Source: montgomeryadvertiser.com ::  Inflated figure undercuts premise

The "reform" movement has a history of relying on made-up data.  Regular readers will recall Professor Fink's take on another bogus study.

Technorati tags: PRI, Pacific Research Institute, propaganda, Ralph Cook, Tillinghast, tort tax, tort reform

" 'Reform' is Republican for 'screw the poor and the middle class.' "

 If you're looking for a great f-bomb laden critique of the Bush administration and its pro-business, anti-consumer policies, Lance Mannion just posted a good one: 

Don't worry.  The market will take care of it.  When enough people get sick and know what companies' products made them sick and stop buying from them and when enough stores that carry those products close and enough lawsuits are filed, then all that tainted and spoiled food will just magically vanish from the marketplace.

Except the Republican Free Marketeers want to take away your ability to sue.  They call it tort reform.  It's like Social Security reform.  "Reform" is Republican for "screw the poor and the middle class."

Nevermind.  At least on your sickbed or in your grave you'll have the satisfaction of knowing your suffering saved the rest of us a few pennies per pound on imported produce.

Source: Lance Mannion: They poison everything they touch

He's right.  A great many "reformers" do indeed think the invisible hand of the market will sort everything out and that government regulation will just cost money.  It seems all the invisible hand can do these days is flip us a very visible bird.

Technorati tags: Lance Mannion, tort reform, Bush, invisible hand

Enron-inspired policies net insurers billions

I haven't noticed attorney Chris Nichols' blog before, but it looks like one I need to pay attention to.  He's written an informative article that explains that A: juries never get to know about insurers or insurance policies, and B: that at the recommendation of a former Enron consulting company, insurers are denying more claims than ever... and making billions doing so.

As I'm getting ready for a trial, I'm constantly reminded that the "reason the case is going to trial" has more to do with the defendant's insurance company than anything else.  It's frustrating as an attorney fighting for justice because I have the burden of proof for the "facts" of the case, but what the jury really needs to hear, I'm not allowed to tell them.

Why?  Well, the insurance industry has effectively "gagged" anyone from telling the jurors why the case is going to trial.  Typically, the reason for that is that the insurance company who pulls the strings on the defendant, WANTS the case to go to trial, because they know that for every case that goes to trial, 99 just give up, and the insurance company gets to pay less than what is "fair and just" as the rules require...

Believe it or not, insurance companies have saved Billions of dollars since the mid 1990s, by improperly denying claims, and otherwise forcing litigation by paying far below the jury verdict average to settle claims. Frivolous defenses to legitimate claims have resulted in an increase in litigation, against people insured by these companies. This is part of a deliberate claim handling program implemented by McKinsey & Company, the same consulting firm that set up Enron's business model, at many of the nation's largest insurance companies. See "Record Insurance Profits" Article...

McKinsey & Company counted on this when they told Allstate Insurance in the mid 1990's to quit treating people with “Good Hands” and instead treat them with “Boxing Gloves.” When Allstate forced more litigation and posted record profits, the rest of the insurance industry followed their lead. It is now standard operating procedure in the insurance industry to spend multiple times what a reasonable settlement would be to fight the claim, simply to prove to injured people and their lawyers that filing a claim for injuries is more trouble than it is worth. Read a Transcript of Anderson Cooper's Interview with one of Allstate's Victims

Source: North Carolina Trial Law Blog: The Truth That Juries Never get to See

He's absolutely right about spending multiple times what a claim is worth.  They aim to intimidate attorneys into settling cases for less than the cases is really worth, rather than the time-and-money consuming trial process.

Technorati tags: Allstate, Enron, insurance, insurance cartel, improper claims denial, Chris Nichols

Better never than late...

The National Association of Manufacturers just yesterday posted about the incredibly flawed study done by the Pacific Research Institute about the supposed costs of the tort system:

"Out-of-control litigation and a broken legal climate cost Americans the equivalent of almost $10,000 for every family of four, a study by the Pacific Research Institute has determined. Here to describe his findings from "Jackpot Justice: The True Cost of America's Tort System" is the study’s author, Lawrence J. McQuillan, PRI’s Director of Business and Economic Studies. Renee Giachino of The American Justice Partnership adds the AJP's latest news and views on tort reform.

America’s aging infrastructure is a major factor in manufacturing’s ability to compete. John Horsley, executive director of the American Association of State Highway and Transportation Officials, highlights a new report that lays out the full scope of the problem." (Emphasis added.)

Source: This Week on America's Business

 

It would have been better if NAM had never cited the PRI's study, but it's embarrassing they cited it this late in the game.  Note that just one paragraph later they point out a real problem to manufacturers...

Technorati tags: NAM, National Association of Manufacturers, John Engler, Lawrence J. McQuillan, Pacific Research Institute, bogus study