The Corporate Observer Blog : Consumer Protection, Corporate Abuse : Class Action Lawyer & Attorney : Steven Berk Law Firm

David Rubenstein.  Here’s a guy who earned his money, and instead of buying yachts and sports teams and filling the gossip pages with lurid details of affairs with Hollywood stars (not that there is anything wrong with that), he has become a generous and often patriotic philanthropist.  Heck he bought the last known privately-held copy of the Magna Carta—yes the Magna Carta—and promptly lent it to the National Archives.  Oh, the pandas need a new home at the National Zoo?  “Here’s $15 million—will that cover it?”  Most recently, he opened his checkbook and paid to have the Washington Monument fixed after damage from our freakish earthquake last year.  (Okay, he only paid half—but you get the idea.)

But sadly we learned that under Mr. Rubenstein’s watch, Carlyle tried to slip a provision into the company’s soon-to-be-filed IPO documents that would slam shut the courtroom doors to all Carlyle shareholders.  I guess he was riding the wave (or should I say tsunami) of anti-class action sentiment.  Under the Carlyle plan, investors in the new “public” private equity firm would be left to file claims of misrepresentations or any form of corporate malfeasance in a private arbitration proceeding designed and selected by Carlyle.  And oh by the way, no class actions, because that will ensure you won’t have the resources to fight.  Don't think Rubenstein doesn't realize the strength of power in numbers.  How much trouble can one shareholder make?  Who better than a Carlyle founder to remind us that controlling the rules of the game is the essence of power?

Carlyle’s effort, surely approved by Mr. Rubenstein (which—thank goodness—was withdrawn after pressure from Congress and regulators), intrigues and troubles me on several levels.

1. I thought Mr. Rubenstein a true patriot.  He serves as Chairman of the Kennedy Center.  He has a special and long-time interest in the National Archives, which houses the parchment of our political and legal heritage.  So with that background, what’s with the distrust of the court system and ultimately the right to a jury?  You proudly protect and preserve our monuments and support our centers of culture; who better to show a little love for our court system and the idea that everyone is entitled to their day in court?  Sure, you can fix the cracks in the Washington Monument, but how noble is it to strip shareholders of rights that were given to them by Congress.  Aren’t you ripping down something far more profound than the few slabs of marble you aim to fix?
2. By the way, what is so wrong with the system we have in-place?  By any estimation, a kid from Baltimore like Mr. Rubenstein has fared quite well.  Can we be as confident when corporations don’t have to answer to judges and juries?  Do you really want to change the rules of a game you have played so well?
3. Finally, after Citizen’s United, Dukes v. Walmart, Concepcion, and scores of other pro-business decisions issued by the Roberts Supreme Court for Business, why would you really need private arbitration?  From where I sit, you might just do better in court.  All that fuss for nothing.

It is, to say the least, a discouraging contrast.

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Have you ever received mail from your bank or credit card company that includes a long, somewhat friendly letter saying benignly: “The terms of your agreement have been changed.”  “Huh, what terms?”  You read on looking for some clues but when you’ve determined that you haven’t bounced a check, your credit card was not stolen (as you feared) and your account has not been hijacked to buy a dozen bottles of Cristal at a Moscow nightclub for $25,000, you’re like “whatever” and throw out the letter with a sigh of relief.

But should you be relieved?  More often than not, that “change” to the terms means you can no longer sue your bank in court or file a class action.  You’re stuck with something called “arbitration.”  “Oh, who cares, I don’t plan on suing my bank or filing a class action.”  But you never know, and just the threat could keep your credit card company honest. (Click here to read about the Supreme Court’s decisions on Arbitration in Concepcion and CompuCredit.)

So to all the average Joes out there: Arbitration is all they get and the Courts have said it's good enough.  But for the folks in the know, it ain’t.  That’s exactly what Merrill Lynch was saying when it decided to ignore FINRA’s arbitration regulations and instead file collection suits against its employees in New York State Courts.  In response, FINRA slapped the firm with a $1 million dollar fine.

Strangely, I can’t help but empathize with Merrill Lynch and its executives.  I want to console them, to reach out and say, “I know, it’s excruciatingly frustrating to have a legitimate claim and be forced to arbitrate instead of pursuing real justice.  I know, Doug Preston (Chief of Compliance), you had no choice but to agree to arbitration – it was required by FINRA if you wanted to do business.  There, there, no need to sob, but I told you and your pals that this was unfair from the beginning.”

Merrill’s $1m penalty is pittance compared to what American consumers are losing every day as a result of Wall Street’s efforts to keep rightful claims out of court.  When Americans are wronged, they deserve the right to seek redress before a competent panel—the courts.  To be sure, arbitration has its place in the world—it is a remarkably effective means of resolving disputes between large corporations or equal parties who have both willingly agreed to it.  However, as Merrill Lynch’s own actions point out, a denial of access to the courts can be maddening when you didn’t choose arbitration.  In these cases (what we call adhesion contracts), the courts are more likely to offer a suitable remedy.  And everyone, corporation and consumer alike, should have the opportunity to select the forum for resolving disputes.

Corporate America claims to support arbitration.  Yeah, when it’s convenient.  In reality, they only support arbitration under their own rules, when the only person bearing the brunt of a systemic injustice is the American consumer.

Well, at least this week, the shoe is on the other foot. If Merrill’s actions are any indicator, it doesn’t feel nice.

Assisted by Zachary Kady

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A big shout out to the CEO and great protector of  Corporate America — oops, I mean Chief Justice of the United States  — John Roberts.  Yep.  Along with his floor mates, these fellas have crushed the rights of consumers this season (or term as they call it) going undefeated.  At Roberts side is  Antonin “Call me Nino” Scalia; Clarence “I never ask a question during oral argument” Thomas; the kid out of Hamilton Township, New Jersey, “I love big business more than Roberts and Scalia ever will,” swinging Sam Alito; and finally, Anthony “I play away from the basket because I’m afraid I’ll get smacked in the face” Kennedy.

In a huge blow out of consumer rights, the 2010 Supreme Court term saw these guys take away any meaningful right you have to file a lawsuit against your cell phone provider no matter how many drop calls you pay for or simply endure.  It is gone.  Poof.  April 27, 2011, was the last day.  It’s now open season, “Pillage me, oh Goddess of Verizon.  Make me Sprint through a trail of hot coals and burning embers.  You’re AT&T out of luck."

Here’s how this sinister game plan was put up on the chalkboard.  It starts with the cell phone providers.  We all get those little envelopes from our carriers, it’s now often in an email too.  Most of the time, it’s a bill with about a dozen mysterious taxes, fees and charges that add up to real money every month.  And sometimes, it’s not even a bill.  It’s just four or five single-spaced pages of indecipherable small print, known euphemistically as a “disclosure.”  It starts out friendly and all — “Dear Valued Customer,” or something — then deep in the fine print, they’ve added some new provisions to your agreement.

“Wait, don’t I have to sign something?”  Nope, Justice Scalia and his boys took care of that several seasons ago.  By using your phone, in fact, often by merely unwrapping the package it comes in, you’ve agreed to just about anything they add to your contract.  (“Say it ain’t so, Catherine Zeta-Jones!”)

What has been added?  Well it’s actually something that's been taken away: your right to file a dispute in court.  ("Cell phone owners, take the courthouse key off your key ring.  You won’t be needing it any longer").  Like many employers and security broker-dealers, the cell phone companies now require that you bring your claims in a private arbitration proceeding.

So what?  So what?  Lawsuits are the great equalizer.  In a court of law, consumers have a chance to identify, scrutinize and if skilled eliminate and curb bad corporate practices.  Time and again over the past one hundred years, aided by the courts,  consumers and employees have protected and strengthened their rights by availing themselves to the judiciary and the promise of justice.

Relegated to the more narrow constraints of a private (often confidential) arbitration proceeding, consumers rights are limited and getting more limited.  Two critical concerns come to light.  First, forcing arbitration eliminates a threat of a lawsuit, which is often more powerful than a suit itself.  Main Streeters need all the help they can get against the multi-billion dollar conglomerates. Guess what?  The threat is gone.  Heck the next thing you know they will force you to stay in your contract despite awful service based on a termination fee that equals a month’s salary.  (Oh, they already do that.)

Second, in April the Supreme Court, put on a full court press.  In a case called AT&T vs. Concepcion, the Roberts 5  ruled that even within this limited forum of private arbitration you cannot bring your claim as part of class.  In other words, trying to leverage the power of millions of consumers (indeed anymore than 2) is gone, history.

Is that a fair fight?  In this corner we have AT&T, multi-billion dollar telecommunications giant; in the other corner, we have Natasha, one lone cell phone owner.  Well, the Supreme Court has said it is fair; it is the law.

So back to those dropped calls.  Those more than annoying daily occurrences.  What can consumers do when the promises of Catherine Zeta Jones, the Verizon network, and AT&T's slick new spinning globe don't pan out?  Instead you can't get through a business call or birthday wishes with your Mom without a shut down.  

First, a disclaimer: we are spoiled.  We have more technology at our fingertips than ever in history, than ever imaginable.  Do we recognize that cell phones do not perform perfectly?  Of course they don’t.  We do not expect Jack Bauer-esque smart phone service, downloading the bomb diffusing key in the baggage compartment of a jet at 30,000 feet.  Of course not.  As consumers, we expect to receive what has been promised and what is reasonable service. A dropped call here or there, no problem.  A bad day, OK it happens.  But to have every call you make “drop” once, twice, maybe even three times, is unacceptable.

A hypothetical: Let’s assume that AT&T has lousy, and I mean lousy, service in the Washington DC area (think every call you are on drops).  Your neighbor, a former AT&T engineer, tells you this poor service is a result of AT&T lacking the network infrastructure to provide the service. And significantly, they know they have the confidential engineering and network studies in-hand.  The report says it will take five more years to build out an adequate network.  Do they disclose this inadequacy?  Do they issue rebates?  Hardly.  They bury this information (a material omission) and to the contrary they keep on selling and keep on lying.

Try to file a lawsuit?  Nope, remember, you agreed you would not. Not only will your lawsuit be dismissed; AT&T might seek sanctions against you.  “Fine, I will file for arbitration, I can still do that right?”  Well yes, but only individually.  No class actions.  Good luck getting a lawyer.  AT&T owes you a couple hundred dollars for months where your service beyond awful, but you can’t find a lawyer to take on one of the world’s largest corporations for a $100 fee, particularly when the AT&T will be spending hundreds of thousands of dollars to defend itself.

And I'm here to report, we ain't seen nothing yet.  Get ready for a wave of new arbitration provisions blocking the courthouse steps for a wide array of consumer claims.  This subtle yet often dispositive form of power will keep corporate profits and CEO salaries high at the cost of who else -- the average consumer.  It's is just the way it was drawn up on the chalkboard.  

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AT&T takes to the Hill (that is Capitol Hill) with its phalanx of lobbyists, costing $15.3 million in 2010, to push through its mega-merger with T-Mobile.  The combined company will have an estimated 130 million subscribers in the U.S., approximately the population of Russia.  According to industry watchers, the going will be tough even though the behemoth and biggest kid on the block, "can you hear me know" Verizon, will remain on the sidelines -- a shrewd move to be sure.  Verizon worries that any restrictions it attempts to foist on AT&T will inevitably apply to them too.  So sit in the back of the room and maybe no one will notice this $63.4 billion per year behemoth.  But by all accounts the merger is no done deal.  Indeed, consumer groups may have some leverage.

To win those skeptical consumers, AT&T’s should agree to “voluntarily” forego arbitration provisions banning class actions in all of its consumer contracts.  I know they just won a hard-fought battle in the Supreme Court to win the right to kill most consumer gripes on arrival by forcing an arbitration proceeding that has no chance of ultimate success.  In the scheme of things it’s a throwaway.  They want the lines, they want the customers, they want the infrastructure. Agreeing to arbitrate claims, even on a class-wide basis, is a drop in the ocean.  And it provides competitive advantage over the rest of the industry.

Sometimes when you can’t win on the law, you have to resort to other means.  Here those means are the cold hard realities of politics.

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[T]he judiciary is beyond comparison the weakest of the three departments of power; that it can never attack with success either of the other two; and [ ] all possible care is requisite to enable it to defend itself against their attacks.

-          Alexander Hamilton, Federalist No. 78

Although referred to as the “weakest branch” by Hamilton (as well as Montesquieu years earlier), the Supreme Court has flexed some muscle over the last decade.  They elected a President (Bush v. Gore), infused corporations with full First Amendment rights akin to every American human being (Citizens United), and earlier this week denied consumers practical redress for corporate misconduct (AT&T v. Concepcion).  And the Roberts Court is just getting started.

At the heart of every conservative jurist's philosophy is the belief that the federal judiciary, based on the Constitution (and specifically the language of Article III), must remain a court of limited jurisdiction.  It is state courts and legislatures that are to be protected from the reach of the federal government and allowed, unfettered for the most part, to make the rules that guide our daily lives.  No jurist has been more articulate, consistent and of late, more successful in making this very point than Antonin Scalia, the author of the Concepcion decision.

But in the Court's latest smack in the face to millions of consumers who—for crying out loud—just bailed out the entire financial industry, the Court abandoned this bedrock philosophy to reach a result that (surprise, surprise) was lobbied for in amicus briefs by one leading corporation after another.  It's a veritable who's who of businesses and pro-business groups: the Chamber of Commerce; DirecTV, Comcast and Dell; the American Bankers Association, American Financial Services Association and Financial Services Roundtable.  Even Verizon wrote in to support their archrival's cause—because they too stood to gain by a ruling favoring AT&T.

To accomplish its work, the Court blithely explained away a recent decision of the California Supreme Court in favor of an 80-year-old law called the Federal Arbitration Act—which has nothing to do with the contract signed by the Concepcions.  Joined by his conservative "running buddies" (Justices Alito, Thomas, Kennedy and Chief Justice Roberts), Justice Scalia made life just a bit tougher on hardworking Americans by finding that a practice deemed "unconscionable" by the California Supreme Court was just fine.

While often claiming to follow the "framers' intent" and railing derisively against so-called "legislating from the bench," the Court is doing just that as they aggressively pursue a political agenda that would make even the U.S. Chamber of Commerce blush.  Led by the "Umpire in Chief" Justice Roberts (who claimed with "a wink and a nod" in his confirmation hearings to be seeking a position where he would merely be "calling balls and strikes"), the Court, no matter the precedent or facts, and with no shame, finds a way to rule in favor of big business.  It was precisely what then-Junior Senator from Illinois Barack Obama feared when he voted against Chief Justice Roberts' nomination, presciently noting:

It is my personal estimation that he has far more often used his formidable skills on behalf of the strong in opposition of the weak.

Although subtle to most, the impact and consequences of Concepcion in particular could grow virally to impact a range of corporate conduct, causing consumers—rich and poor alike—to cry unfair.  The following example is hardly fanciful regarding the magnitude of the decision:

Let’s take an average American family: the Madisons.  They make $45,000 per year and the last two years have been… well… a struggle.  Despite losing a job (Mr. Madison was laid off from his state job as a Deputy Principal of the local high school because of budget cuts) they—like most American families—have a few cell phone accounts.  (How can they not, what with the 24/7 multimedia blitz targeting 12 year olds?)  Their account is coincidentally with AT&T.  Let’s say, for argument’s sake, they pay $150/month.  Last month, Mrs. Madison opens her bill online and the total is $200.  She immediately feels that familiar wave of anxiety rising from her abdomen.  An extra $50 is a lot of money, and what if it’s every month?  Her immediate thought is that Son Madison has downloaded more pricey ringtones or the latest version of “Angry Birds” despite being warned not to.

She doesn’t see any such downloads, but she does notice at the bottom of her bill a notation: “SPC Data SCharge: $50.00”.  Having no idea what that means, she immediately calls AT&T and after spelling her name seven times, listening to several ads and options to pay her bill, she is routed to a “customer care consultant”.  He advises her that the surcharge is based on increased advertising costs associated with sponsorships of hip hop sensation Wale.  “Wait, can you do that?  That’s not in the contract.”  Oh, we sent you something in the mail telling you… well… you have no contract.  We can do whatever we want.  Mrs. Madison, frustrated by the hours she spent to hear this callous explanation, yells: “I’m going to sue you, this is so unfair.  You can’t do this.”

Oh yes they can; in fact Mrs. Madison can’t sue AT&T because “she agreed to arbitration.”  Arbitration, what’s that?

In the weeks that follow, the Madisons learn that proceeding with an arbitration, even by phone, will cost them at least $250 in fees (for filing and administrative costs) and no lawyer will take the case because they cannot bring a “class” claim and will be limited to a judgment of $50 representing the Madisons.  If the Madisons win without an attorney, their victory (+$50) is actually a loss (-$250), so it’s a classic no-win situation for consumers. 

Thanks to Justice Roberts and his crew, AT&T can earn—or steal—$50 from every one of its 100 million customers, and not one of them will have a practical redress.  That’s $5 billion ($50 X 100 million customers) out of the pockets of hardworking Americans.  No wonder AT&T can pay their CEO, Mr. Stephenson, his $20 million salary.  Perhaps the SPC Data SCharge is valid, but there is no recourse to even scrutinize.

And folks, this is not just cell phones.  Beleaguered consumers will be without recourse in connection with the purchase of a range of products: automobiles perhaps, computers and televisions, just to name a few.  And services too: banking, moving, home improvements.  No ability for your day in court.  No ability to have a lawyer.  Good luck and have a nice day.

While on its face the Supreme Court’s decision in Concepcion may look like just another welcome effort to bash lawyers and, better yet, class action lawyers (the sharks to the sharks), it must instead be viewed for what it really means for consumers now and for a generation to come.

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Berk Law reporting from the Supreme Court.

A major case involving the rights of consumers was argued in the Supreme Court this morning.  Consumers were represented by Deepak Gupta of Public Citizen.  You would never have known it was his first dance with the justices.  Despite his youth and rookie status, he was no less than brilliant—brilliant in a clear, plainspoken manner.  Winning by his thorough preparation and fearless yet respectful demeanor, he faced a cavalcade of hostile questions, particularly from Justice Alito, whose sneer shifted between disdain and anger, and did not crumble; instead like pitching ace Cliff Lee, he only got stronger as the argument progressed.  AT&T was represented by Andrew Pincus, an old hand at the Supreme Court.  We expected more from someone who appears before the Court on a regular basis.  Not only was he not smooth or flashy, that’s fine, but his arguments were largely convoluted and hardly persuasive; time and again he returned to “his example” – which was in a word: indecipherable.

What is this case (AT&T v. Concepcion) all about?  Specifically speaking it is about arbitration provisions in contracts between consumers and large institutions like your bank or cable company.  Did you know that most contracts with telephone and credit card companies include an arbitration provision, which in effect shields the company from liability for fraud, product defects and a host of wrongful conduct.  They force the consumer to forego any rights they have to file their grievance in court and instead relegate them to proceed before an arbitrator.  (OK no big deal – so what? An arbitrator, a judge—isn’t it all the same?).  No; in fact, in this and many other contracts a provision within the arbitration clause bans you from filing a class action either in court or before an arbitrator.  And the big deal about that is?

The problem is best illuminated with an example: let’s say AT&T has 10 million customers.  One day last summer, in an effort to beef up profits before earnings are announced, an AT&T team started adding a bogus “surcharge” to all bills.  It amounted to $10/customer X 10 million customers, or 100,000,000 bucks.  One hundred million dollars.  Nice work.  Well let’s say Nancy Jones, who is a very careful and diligent AT&T customer, reads the fifth updated AT&T agreement before recycling it and discovers the $100 million is an illegitimate charge.

What can she do?  If AT&T has its way in the Supreme Court she would be limited to filing a claim for her loss and her loss alone.  So let’s say she wins – and let’s say she tells her friends and they win.  Perhaps a couple hundred subscribers find out.  What about the millions of other consumers who for whatever reason are not so smart or diligent?  Bottom line: the company gains $99.9 million; consumers get next-to-none of their rightful money back.

But if there is no arbitration provision in place – and class actions are not banned – Nancy can file a case on behalf of all subscribers for the entire $100 million.

Which way is preferable?  Under California State law, a ban on class arbitration in a contract (as AT&T seeks) is deemed unconscionable and unenforceable.

The United Supreme Court will decide in this case what law applies.  Do they side with the consumers and allow states to prohibit class action bans within arbitration provisions?  Or do they once again subjugate consumer fairness to the interests of big business by overturning the lower courts’ judgments and allowing the bans?  My sense tells me that the anti-consumer, anti-class action bias will win this one.  Not so much on the merits, but because of the politics. 

We’ll know by spring time.

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