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

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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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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                The people of Massachusetts have spoken.  Change.  It’s not happening fast enough.   That sentiment was strong enough to elect an obscure, and a little known State Senator whose only claim to fame is a mostly nude centerfold in Cosmopolitan magazine. Oh poor Ted Kennedy must be rolling in his grave. 

 Well … these change seekers are not going to be particularly happy with Barney Frank and his steerage of H.R. 4173, which includes the Investor Protection Act of 2009. Is this really the best he can do?  It’s the classic inside the beltway compromise.  The lobbyists for the financial services industry sure had their say. At best, any protection for main street investors is subtle and at worst pyrrhic.

 This is a horrible conclusion to a story that should have turned out much better. One glaring example of this weak compromise is a provision seeking to curtail the lock that brokerage and securities firms have over any customer dispute:

Home field advantage

We all know its potential importance.  What football team wants to travel to hostile stadium for a crucial game? Well its worse for investors trying to recover for valid claims against their brokerage firms.  Not only must they play on the enemy’s turf but the enemy also gets to select the referee.

 As it currently stands, brokerage firms require customers by standard agreements to arbitrate their disputes over broker misconduct (like putting grandma in a deferred annuity that has limited liquidity and no tax benefits while reaping an excessive commission). 

The forum is the Financial Industry Regulatory Authority (FIRNA). The arbitrators are too often sympathetic to the industry and their attorneys.  So, in this season of change what does the great champion of the common man push for?  A ban on these one sided arbitrations?  Well no not exactly.  The reform we’re seeing in this area is a “punt” at best.  The legislation grants new powers to the SEC to control, limit and even prohibit the use of mandatory arbitration agreements in brokerage contracts.  The SEC?  The same SEC that missed Madoff even when he was delivered on a silver platter by the insights of Mr. Markopoulos? The same SEC that dawdled and debated as the financial sector headed toward the abyss?

            Take it from me – from someone who spent some time at the SEC and saw how slowly it works – nothing will change for years; and by the time it does, the result will be more of the same. 

             More is needed faster. 

 Private Pursuit of Accomplices:

              On the Senate side there is more room to be optimistic. In nearly all of the Ponzi schemes and widespread frauds of the last several years, the bad guys could not do it alone.  They were all helped by the blind-eyed or negligent banker and accountant who, recklessly or with actual knowledge, placed investors in harm’s way and too many times was integral in creating or hiding a fraud. Arlen Specter to the rescue. The Pennsylvania Senator has introduced a bill which states that those individuals who knowingly or recklessly provide assistance to fraudsters whose actions are in violation of securities regulations will be held responsible as if they were committing fraud themselves.

Lawyers and accountants who may unwittingly enable fraud will still be exempt from legal pursuit, but banks, traders, and other individuals whose actions have led to the loss of billions of investors’ dollars in the past may soon be held responsible.

Significant and fervent legal action against accomplices of securities fraud will lead to reform of industry practices. The expected provisions in the Senate bill will enable trial lawyers to protect consumers by forcing the industry to regulate itself for fear of prosecution by a vigorous private bar.

The Future

After a long healthcare battle, recent struggles with terrorism, and a battle with a still fledgling economy, we hope that Congress does not lose its steam in pursuing fairness and justice for American investors. We at The Corporate Observer know that the best reform is increased involvement of investors in the financial system. If the Senate passes the reforms that we are seeking, the investors of America can look to the future of investing with increased confidence in their own ability to pursue fraud and protect themselves from unjust practices.

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