Freedom Line Blog

The Center for Individual Freedom (CFIF) today joined a coalition made up of more than two dozen free-market organizations on a letter urging Congress to use the Congressional Review Act to reverse a new rule by the Consumer Financial Protection Bureau (CFPB) that prevents financial services companies from using arbitration to resolve customer disputes.

The letter, which was organized by the Center for Freedom and Prosperity, can be read in its entirety here (PDF).

The 2010 BP oil spill in the Gulf of Mexico is by now a fading memory for most Americans.  The U.S. Supreme Court, however, will soon decide whether to hear a case stemming from the spill that could, at long last, restrain abusive trial lawyers who game our legal system.

The case involves BP, which immediately accepted responsibility for the spill and asked attorney Kenneth Feinberg to handle claims on a rapid and completely independent basis. Ultimately, Feinberg ordered more than 200,000 payments totaling $6 billion over 16 months.

The problem at issue arose when opportunistic plaintiffs’ lawyers decided that they weren’t receiving their customary windfall.  Consequently, they rushed to court and demanded a class-action settlement, which a federal district court in Louisiana granted.

Then the court appointed a well-connected local Louisiana lawyer to administer claims for what are broadly categorized as “business economic losses.” For example, a restaurant owner on the coast could demonstrate damages by comparing pre-spill revenues and profits versus post-spill revenues and profits. Victims who could establish a decline in revenues and confirm a causal connection between the losses and the spill itself, were entitled to payment.

Unfortunately, the claims administrator also steered vast sums toward businesses whose losses clearly had nothing to do with the spill. BP’s lawyers cite 64 representative examples of such abuse in their writ to the Supreme Court, including:

• A real estate rental company that leased properties to two Saturn dealerships, which both went out of business because GM stopped making Saturns in 2009, put in a claim and received $238,000.
• A group of emergency room physicians received $2.3 million after claiming that revenues dropped sharply, but that decline resulted not from the spill, but from a one-time earnings adjustment to accounts receivable over a period of five years.

BP appealed the awards to the Fifth Circuit, but lost in a sharply-split decision. Judge Edith Clement, a highly-respected appellate judge appointed by President George W. Bush, minced no words in her dissent.  She warned that the judiciary itself was becoming a “party to the fraud” against BP

Citing Judge Clement, Cardozo School of Law professor Lester Brinkman, a premier authority in the academic study of plaintiffs’ lawyers, wrote, “Make no mistake; fraud it is.  The settlement agreement entered into by BP to provide compensation to those that suffered loss from the spill, states that in order to be eligible for compensation, claimants must affirm under penalty of perjury, that they suffered ‘damages arising from’ the Deep Water Horizon incident.  But the Louisiana legal system has obliterated these words from the agreement.”

So why should informed citizens care? After all, BP admitted to doing great damage to the Gulf of Mexico.

We should care because if the abusive and greedy plaintiffs’ lawyers triumph in this case, few restraints will remain. If ever there was an example of discarding the rule of law in favor of enriching a politically-powerful group, this case is it.

At issue in this case is a straightforward proposition. Namely, a class-action settlement is grossly inappropriate where large numbers of that supposed class have even not suffered harm. That seems elementary

Unfortunately, different federal courts of appeal have ruled inconsistently in similar cases. That inconsistency alone constitutes one reason the Supreme Court could and should accept the case. Another reason is the important and fundamental legal issue at stake: people who haven’t suffered actual harm should not receive unjustified windfall damages.

Whatever one thinks of BP, the case now before the Supreme Court is a critical one, and its legal position is the correct one. Accordingly, the Justices should take the important step of granting cert.

The United States Supreme Court’s recently-completed term provided those who treasure individual freedom with much reason to celebrate, including the affirmation of Second Amendment protections against state infringement in McDonald v. City of Chicago.

Another 5-4 decision announced the same day as McDonald received less celebration, but not because it was any less worthy.  In Rent-a-Center, Inc. v. Jackson, the Court dealt a justified and much-needed blow against the hyper-litigious trial lawyer industry in America.   At issue in Jackson was whether the threshold question of enforceability of voluntary alternative dispute resolution agreements could be decided by arbitrators, or instead by already-overburdened courts.

Naturally, trial lawyers loathe alternative dispute resolution agreements because they reduce the likelihood of runaway “jackpot jury” awards and reduce the oppressive costs of litigation, thereby lowering settlement value.  Although the trial lawyers’ bar dishonestly claims that alternative dispute resolution “deprives plaintiffs of their day in court,” that is simply not true.  Arbitrators who decide such cases are typically experienced judges rather than random jurors off the street, and the full array of discovery and remedies are typically available to plaintiffs who have truly suffered.  The deciding arbitrator is also agreed upon mutually by the parties beforehand, thus ensuring an unbiased decisionmaker.  But because the chance of a runaway jury award is reduced, ambulance chasers absolutely loathe them.  And had the Supreme Court ruled that overburdened courts must determine threshold questions of enforceability of such agreements, trial lawyers would have reason to cheer.

Fortunately, the Supreme Court ruled correctly, albeit by only a frightening 5-4 margin.  Writing for the majority, Justice Antonin Scalia noted that plaintiff Jackson signed the alternative dispute resolution voluntarily, and it made no sense to distinguish enforceability questions from other matters on which disputes center.  For the dissenting minority, Justice John Paul Stevens claimed that the result was “unfair,” as if the plaintiff had no ability to walk away from the agreement when it was offered to him.

Alternative dispute resolution is an underappreciated way to reduce outrageous “jackpot justice” awards in a fair, speedy, inexpensive way, which is why trial lawyers detest them.  Come to think of it, trial lawyers’ hysterical opposition to alternative dispute resolution is evidence enough of their value.  A hearty “bravo” to the Supreme Court.