Consumer Law & Policy Blog

A Tale of Two UDRP's

by Paul Alan Levy

I have recently had some involvement with two proceedings under the Uniform Dispute Resolution Policy ("UDRP"),  a procedure for deciding trademark disputes about domain names.  The International Corporation for Assigned Names and Numbers ("ICANN"), which controls the system of assigning domain names, requires all domain name registrars to force domain name registrants to submit themselves to the UDRP as a condition of registering a domain name.  These two proceedings help illustrate the bias of the UDRP against those who register domain names to criticize trademark holders, and the resulting lack of utility of the procedure to resolve cases in which the “griper” is determined to defend himself.

Construction Arbitration Services’ Arbitrator Allegedly Destroys Evidence, Faces Motion for Contempt

By Matt Melamed and Paul Bland

Among consumer advocates, advocates for home buyers and home owners, and lawyers who represent consumers, Construction Arbitration Services ("CAS") is notorious for being cozy with the home construction industry and for often ruling for builders and against home buyers and home owners. In 2004, consumer advocates Public Citizen issued a report raising a number of concerns about CAS. [<a href="http://www.citizen.org/pressroom/release.cfm?ID=1775">Read the report here</a>.] While we at Public Justice don’t know of any broad study of outcomes in CAS arbitration cases, we have been contacted over the years by many home owners and home buyers who strongly believed that CAS had ignored the evidence in their cases and ruled against them inappropriately. (We have never taken a case for one of these consumers, in large part because the legal standards for challenging an arbitrator’s ruling are generally almost impossibly high – arbitrators’ decisions are frequently not overturned even when arbitrators get the law or the facts wrong.)

In a recent case in Louisiana, though, court filings suggest that CAS has clearly crossed the line into inappropriate behavior. According to court documents, the arbitrator provided by CAS, Ben DeVries, destroyed all evidence submitted during an arbitration hearing within days of issuing the arbitration award. Worse, the pleadings in the case set out that DeVries destroyed the evidence AFTER the plaintiffs had told him in writing that they planned to appeal the award and AFTER DeVries had promised to safeguard the evidence. CAS and DeVries now face a motion for contempt in the 26^th Judicial District Court, Bosser County, Louisiana – a motion supported by an affidavit in which opposing counsel, the builder’s attorney, states that he also heard DeVries promise to safeguard the evidence. In response, CAS has graciously offered . . . a free arbitration proceeding.

The underlying matter, Gilbert v. Robert Angel Builder, Inc., was initiated by a husband and wife seeking completion of their new custom-built home and repair of damages resulting from alleged deficiencies in the construction that had been completed. The deficiencies and damages specified include, but are not limited to:

A leak in the master shower led to massive structural damage in the home’s walls and floor. The seat was not placed in the shower pan, causing the leak. Angel’s own subcontractor testified that he was instructed by Angel to build the shower improperly because Angel did not have enough money built into the contract to build the shower properly.

The front doors leaked and water intrusion damaged the interior flooring and door frames. The front doors lacked sill pans and were not properly designed, composed, or installed.

Replacement of the hardwood floor (required due to the above-described water damage) was complicated because the floor was improperly installed. The Angel glued the floor, contrary to national guidelines for hardwood floor installation.

Water intrusion through the bedroom doors, which Angel suggested curing by sealing the doors shut. Angel invited the Gilberts to avoid local code violations and minimize potential resale value by re-labeling the room as a study.

The finish on the front door and windows failed to last six months. Protective stain was only applied after significant moisture intrusion that resulted from Angel leaving the doors and windows exposed to the elements prior to finishing.

The Gilberts’ expert witness – George "Geep" Moore, President of the Louisiana Home Builders Association – examined the house and testified in detail about the substandard workmanship and materials that led to the defects. The Gilberts contracted to spend more than $550,000 for construction of a new, custom-built home. They spent nearly $200,000 in addition on repairs and completion of construction (a sum that does not include legal fees and arbitration costs).

The Gilberts filed suit in Louisiana state court. Angel countersued for the last remaining construction payment, which the Gilberts had placed in escrow to be released when construction was complete as agreed by the parties in the construction contract. The Louisiana Court of Appeal consolidated the claims and sent them to CAS.

The Gilberts’ attorney – David Szwak, Chairman of the Consumer Protection Section of the Louisiana State Bar Association – hired a court reporter to create a transcript of the arbitration hearing. After the hearing, arbitrator DeVries took the entire body of original evidence submitted during the arbitration hearing with him to Texas, where he lives, including the original copy of the transcript from the first day of the two-day arbitration hearing (Szwak maintains a duplicate copy) and the original plans for the Gilberts’ house. DeVries allegedly told attorneys for both the Gilberts and Angel that he’d "safeguard" the evidence.

While the arbitration award ultimately ordered Angel to pay the Gilberts some of the damages they sustained, it appears from court documents to be deficient. In a ruling that Szwak argues is contrary to the Louisiana Home Warranty Act ("NHWA") (La. Rev. Stat. Ann. § 9:3141, et seq.), DeVries ruled that the Gilberts were in default for not paying the final $20,000 under the construction contract, $20,000 that the parties had contracted would be held in escrow until construction was completed and all defects were cured. Angel admitted during the arbitration hearing that he never completed construction nor repaired all defects.

Further, DeVries awarded a mere $9,000 to the Gilberts for the shower repair, relying on an estimate by Angel’s expert – who had never seen the damage, was unaware that the Gilberts had submitted numerous punch lists, did not know of or account for the structural damage to the walls resulting from the leak, and was shocked at the facts established at trial that Angel had not previously disclosed – over testimony from plaintiffs’ expert witness Moore and Angel’s own subcontractor that more than 80 hours of labor plus new materials were required. DeVries did not award anything to address the damage to the doors and windows and awarded only a portion of the attorney’s fee which the Gilberts said they had incurred. Even when DeVries was right, he was wrong: while he properly awarded $48,580.74 for replacement of the hardwood floor, he decided – over testimony by both the Gilberts’ and Angel’s expert witnesses – that gluing the floor down was not improper. Thus, DeVries failed to award damages for the increased labor to remove the damaged floor.

In sum, the evidence set forth in the pleadings indicates that arbitrator DeVries awarded the Gilberts $114,000 to fix nearly $200,000 of what the Gilberts argued were clearly established damages.

Under Louisiana law, the Gilberts had three months to challenge DeVries’ award, and on June 28, 2008, 78 days after the award, the Gilberts filed a motion to vacate or modify and correct the award. Szwak, the Gilberts’ attorney, also took the unusual step, within days after the award was entered, of asking the court to order the arbitrators not to destroy the evidence. On July 1, 2008, in response to a discovery motion filed by Szwak, the Louisiana District Court issued an order that defendants CAS and DeVries deliver all evidence submitted during arbitration to the court. In response, DeVries sent a letter to the clerk saying he’d destroyed all the evidence "after 20 days" from the date of the award.

Not only had Szwak given clear notice to DeVries during the arbitration hearing that the Gilberts intended to file a motion to vacate or modify and correct the award, and not only had DeVries promised to safeguard the evidence (a promise opposing counsel has attested to), but Szwak had sent a letter by fax and email to CAS directing them to file the arbitration evidence with the district court 18 days after the award was entered. Accordingly, the documents demonstrate that DeVries destroyed the evidence after CAS received the fax asking for the evidence to be delivered to the district court.

In response to the contempt motion [<a href="http://www.myfaircredit.com/forum/viewtopic.php?p=14691&sid=f6a95cb07e14bdda804a1e38aed293c0">read the motion here</a>] CAS has offered to pay for the time and cost it takes the Gilberts to reconstruct the evidence and for the cost of the original house plans destroyed by DeVries. In addition, CAS has tentatively agreed to a no deference referral for the appeal and a refund to the Gilberts for all costs of the arbitration. Mysteriously, CAS has also offered help in trying to "locate" the destroyed evidence, which begs the question whether something even stranger than DeVries’ destruction of evidence is going on. And finally, CAS has offered a free arbitration proceeding. (Thank you sir, may I have another.)

The contempt proceeding, originally scheduled for September 15, was continued due to inclement weather and will likely be heard in November. The matter is Gilbert, et al. v. Robert Angel Builder, Inc., No. 126,995-B, 26^th Judicial District Court, Bossier Parish, Louisiana.

Eighth Circuit Finds Class Action Aribtration Ban Not Unconscionable

by Brian Wolfman

In Pleasants v. American Express, No. 07-3235 (Sept. 8, 2008), the Eighth Circuit has upheld an adhesion contract requiring pre-dispute mandatory arbitration and banning class actions in arbitration. The case involved a dispute over pre-loaded store cards (or gift cards). Applying Missouri law on unconscionability, the Eighth Circuit held that the contract was not procedurally unconscionable because the relevant contractual provisions were conspicuous (although it appears that they would not have been seen by the consumer until after he or she had purchased the card) and was not substantively unconscionable because the contract did not waive the damages and fees available to consumers under applicable substantive law. The Eighth Circuit distinguished a Missouri Court of Appeals case finding a class action ban unconscionable (read the decision and decide for yourself whether the Missouri case was properly distinguished). The Eighth Circuit also noted that in deciding questions of state law it was not bound by the decisions of intermediate state appellate courts (as opposed to state high courts).

DOJ Disgraces Itself in Support of Nursing Homes

by Paul Bland

The United States Justice Department has completely disgraced itself. On July 30, 2008, Keith Nelson, Principal Deputy Assistant Attorney General of the United States, wrote a letter to the U.S. Senate Judiciary Committee in which he attacked S. 2838, a bill that would ban the use of pre-dispute mandatory arbitration clauses in nursing home contracts.

[Update: Yesterday, a coalition of consumer groups sent this response letter.]

Why does the United States of America oppose the idea that nursing home patients – perhaps the most vulnerable segment of our entire nation – should be given a choice of whether or not to take disputes (many of which involve medical neglect like untreated bed sores that become severely infected leading to serious disease or death, or elder abuse such as rape or murder of very old people) to court or arbitration?

Well, first Mr. Nelson argues that arbitration is better than the court system for nursing home residents. In his happy imaginary world, nursing homes insist that their patients submit to these contracts before they can receive medical treatment because the nursing homes WANT their patients to be able to get more money if the nursing home mistreats them. Mr. Nelson’s assertions on this point are actually contradicted by the nursing home industry itself – nursing home lobbyists and lawyers openly acknowledge that the entire POINT of their mandatory arbitration clauses is to reduce their liabilities (no matter what they have done).

The second point that Mr. Nelson makes is the really troubling one, though. According to Mr. Nelson, the United States Congress does not even have the POWER to regulate the contracts of nursing home residents, because nursing homes are supposedly not within the scope of the interstate commerce clause. This is not just misguided federalism, this is nonsense on stilts.

At the outset, his statement would only be true IF:

• Every patient in a nursing home had been born and raised in the state where the nursing home was based. (It’s like the U.S. hasn’t noticed that lots of retirees MOVE to states like Florida and Arizona.)
• All the employees in the nursing home would have to have been born and raised in that state. (A ridiculous assumption.)
• All the food, all the medicine, all the furniture, all the equipment in the nursing home would have to have been grown, manufactured, etc., in that state. (A ridiculous assumption.)

If a nursing home patient went into court and told a judge "the Federal Arbitration Act doesn’t apply to this nursing home’s arbitration clause, because nursing homes are not part of interstate commerce," the lawyer would run a serious risk of being sanctioned for making a frivolous argument. The U.S. Supreme Court has twice rejected this kind of argument (in the Allied Bruce v. Terminix and Alafabco cases).

What’s even more troubling, is consider the implications of Mr. Nelson’s argument. If the position taken in the name of the United States to the Senate was true, then the federal government could not regulate ANYTHING that the nursing home does. So, under Mr. Nelson’s slipped-cog claims:

• nursing homes could refuse to hire, or treat, African-Americans, Latinos, or any other group, and none of the federal civil rights laws would apply. This is the official position of the United States in 2008? It’s almost as if Trent Lott got his wish and Strom Thurmond HAD won the 1948 Presidential election. It’s unbelievable that the United States of America would take this position today.
• nursing homes could pollute and be exempt from the environmental laws. A nursing home could take all of the sewage from its facility and dump it in a river just upstream from a school, and not be subject to the Clean Water Act.

It’s a pretty sad day when the official representatives of the United States will say pretty much anything in order to help the nursing home industry limit its liability, even in the ugliest cases. And these cases are ugly – we’ve helped families of nursing home patients who died after thousands of ANT BITES, we’ve helped families of women in their nineties who were trusted to a nursing home by their families, and then were RAPED by "caregivers" who never should have been trusted with such a position.

But it’s even sadder when the United States will go so far as to advance a theory which is not only demonstrably, obviously untrue as a matter of fact and completely unsupported as a matter of law, but that if it was true, would wind the clock back to the 1930s (or earlier).

The Justice Department disgraced itself when it let this letter out the door.

New Third Circuit Arbitration Decision Worth Reading

by Brian Wolfman

A construction company hires a new employee, Mr. Morales, who speaks only Spanish. Morales attends a company orientation session conducted only in English. The company employee who runs the orientation asks another, reasonably bilingual employee to explain to Morales what is going on at the orientation and to present him with an employment agreement that includes a pre-dispute mandatory arbitration clause. The agreement is in English. Morales does not ask what he is signing, and the other employee does "not specifically explain the arbitration clause to Morales.” (During the orientation session, the guy who is running the session does explain the arbitration provision in English.) Morales signs the agreement. Was there mutual assent such that the arbitration clause is binding on Morales? Yes indeed, says the Third Circuit in yesterday’s 2-to-1 decision in Morales v. Sun Constructors, Inc., No. 07-3806 (Aug. 28, 2008).

The Arbitration Trap Debate

[cross posted from Citizen Vox]

July 29, 2008   

By David Arkush, Taylor Lincoln, and Peter Gosselar

Last November, Public Citizen released “The Arbitration Trap,” a scathing report exposing the one-sided nature of “justice” for consumers trapped by the National Arbitration Forum. The report inspired a lawsuit against the NAF by the city of San Francisco, Watchdog Blog) and an in-depth examination of the practice by BusinessWeek (previous Watchdog Blog coverage here, Watchdog Blog’s analysis of NAF’s response to the article here).

“The Arbitration Trap” also prompted the Chamber of Commerce to commission a Catholic University law professor, Peter B. Rutledge, to write an official response. The Chamber also gave Rutledge financial support for a law review article in which he reviews empirical evidence on arbitration. These papers claimed that the broad sweep of serious academic research shows that our report was just plain wrong – “both on the facts and in its ultimate conclusions.”

[cross posted from Citizen Vox]

Times Articles on Mortgage Regulation, Privacy, and Marketing

by Jeff Sovern

Here is the article in today's Times on the new Fed rules that Alan blogged about yesterday.  Saturday's edition noted in "By Large Margin, Senate Votes to Help Homeowners and Overhaul Loan Agencies" that the Senate had approved the bill intended to help borrowers avoid foreclosure.  The bill now returns to the House.  Sunday's issue included "The Silence of the Lenders," which tells the story of the email Angelo R. Mozillo, Countrywide's chief executive called "[d]isgusting."  The email was from a borrower, Dan A. Bailey, Jr., and sought a loan modification that would permit him to keep his home.  As the headline implies, the article is about how borrowers are having difficulties getting the attention of loan servicers. Excerpts:

* * * As of the most recent quarter, 2.67 percent of the loans that Countrywide services were more than 90 days delinquent. (The Bank of America Corporation acquired Countrywide on July 1 and is now overseeing the Countrywide portfolio.)

Lenders and servicers like Countrywide are inundated with requests for help from borrowers who cannot afford their loans. Alas, these companies’ operations weren’t set up for such work; servicing units were originally intended to collect monthly checks from borrowers and then disburse the payments to mortgage holders. During the boom years, there was little need to advise borrowers or restructure loans.

* * *

That said, foreclosures are vastly outnumbering loan workouts today, a year and a half after the subprime mortgage debacle began creeping into the headlines. In May, for example, even as Hope Now conducted 70,000 loan modifications, an estimated 85,000 families lost their homes to foreclosure. That same month, 276,000 loans either entered or completed foreclosure.

Prima Paint applies to confidentially agreement

by Richard Alderman

In an interesting case, ITT Educ. Serv. Inc. v. Arce, the Fifth Circuit has held that parties to an arbitration may not disclose a copy of the arbitrator’s findings in an independent proceeding involving the same defendant. The consumer appellants argued that the arbitrator’s findings constituted a finding of fraudulent inducement. Accordingly, the consumers argued, the entire Enrollment Agreement–including the confidentiality provision–was void under Texas law, such that the consumers may disclose the results of the prior arbitration. The defendant, IRR, disputed that the arbitrator made a finding of fraudulent inducement.

New Mexico Supreme Court strikes down class-action ban

by Deepak Gupta

On Friday, New Mexico's highest court unanimously handed consumers an important victory, holding that, "in the context of small consumer claims that would be prohibitively costly to bring on an individual basis, contractual prohibitions on class relief are contrary to New Mexico's fundamental public policy of encouraging the resolution of small consumer claims and are therefore unenforceable in this state."  New Mexico joins a unanimous and growing group of state and federal courts in declaring that the Federal Arbitration Act does not preempt such state-law rulings--a question the U.S. Supreme Court refused to hear last month.

The New Mexico case involved allegations that Dell misrepresented the amount of memory in its computers--a misrepresentation that was widespread, but which cost each customer only $10-$20 each.  The opinion has some great language about the value of the class action device in cases involving small consumer claims.  The court recognized that "the class action functions as a gatekeeper to relief when the cost of bringing a single claim is greater than the damages alleged." Dell's class-action ban had "essentially foreclosed the possibility that Plaintiff may obtain any relief," such that "enforcing the class action ban would be tantamount to allowing Defendant to unilaterally exempt itself from New Mexico consumer protection laws." Congratulations go to Paul Bland and Amy Radon of Public Justice, who argued the unconscionability issue as amicus curiae.

Study Finds that Firms That Use Arbitration Clauses in Consumer Contracts Often Do Not Use Such Clauses in Nonconsumer Contracts

In "Arbitration's Summer Soldiers: An Empirical Study of Arbitration Clauses in Consumer and Nonconsumer Contracts," Theodore Eisenberg of Cornell, Geoffrey P. Miller of NYU, and Emily L. Sherwin of Cornell report that firms that use arbitration clauses in consumer contracts often do not use arbitration clauses in nonconsumer contracts.  Here's the abstract:

We provide the first study of varying use of arbitration clauses across contracts within the same firms. Using a sample of 26 consumer contracts and 164 nonconsumer contracts from large public corporations, we compared arbitration clause use in consumer contracts with their use in the same firms' nonconsumer contracts. Over three-quarters of the consumer agreements provided for mandatory arbitration but less than 10% of the firms' material nonconsumer, nonemployment contracts included arbitration clauses. The absence of arbitration provisions in nearly all material contracts suggests that, ex ante, many firms value, even prefer, litigation over arbitration to resolve disputes with peers. The frequent use of arbitration clauses in the same firms' consumer contracts appears to be an effort to preclude aggregate consumer action rather than, as often claimed, an effort to promote fair and efficient dispute resolution. Other common features of civil litigation reform discussion, avoidance of juries and loser-pays attorney fee rules, find little support in the pattern of contractual terms we observe.