COURT-ANNEXED MEDIATION AND CONSUMER ARBITRATION: DEVELOPMENTS IN UNITED STATES LAW - Judicium

1

R

G. B

COURT-ANNEXED MEDIATION AND CONSUMER ARBITRATION:

DEVELOPMENTS IN UNITED STATES LAW **

I want to start by thanking the conference organizers, and especially Professor Dalfino, for the opportunity to participate in this very interesting conference. It’s an honor to address such a distinguished group of scholars, judges, and lawyers. This is the second time I’ve attended a conference in this beautiful part of Italy. Six years ago, I gave a lecture on the class action shortly after adoption of Rule 140 bis, and it’s wonderful to be back. I’m also glad to have an opportunity to see my former student and now friend and fellow academic, Angelo Danilo De Santis. Danilo studied American civil procedure with me when he visited Boston University Law School many years ago, and he has taught me a great deal about Italian standing law.

In my remarks today, I will focus on two important types of alternative dispute resolution in the United States: (1) court-annexed mediation and (2) consumer arbitration. These two types of ADR have had a major impact on American litigation, and both are related to the conference topic: access to justice. For example, court-

* G., Rollie White Professor of Law, The University of Texas School of Law. This is the written draft of a lecture that I delivered on October 12, 2013 to a conference entitled “Accesso Alla Giustizia E Tutela Dei Diritti,” held in Bari, Italy. The lecture as delivered differs somewhat from this draft.

**

2

annexed mediation might increase access to justice, but it is not clear by how much or what sort of “justice” it increases access to. Moreover, the developments in consumer arbitration that I’ll discuss risk denying access to justice in an important set of cases.

My plan is to start with court-annexed mediation and then discuss some recent developments in consumer arbitration. For each of these topics, I plan to give a descriptive overview and then offer some critical remarks.

A caveat at the outset. As a civil procedure specialist, I’m familiar with court- annexed mediation and domestic U.S. arbitration, the two topics I address today. But I know far less about private ADR, and many of you probably know more than I do about international commercial arbitration, investment arbitration, and other specialized arbitration processes.

I. Court-Annexed Mediation A. An Overview

1. A Brief History

The United States litigation system has undergone a profound change over the past thirty-five years. More and more cases are being shifted from traditional adversarial litigation to some form of alternative dispute resolution. This development began in the 1970s, when many distinguished judges and commentators, including the Chief Justice of the United States Supreme Court, voiced concerns about a “litigation crisis” in the federal courts brought on by high litigation costs, mounting case backlogs,

3

and lengthy litigation delays. Many of these critics blamed the traditional adversary system. They complained that adversarial process encourages excessive and abusive strategic behavior, compounds costs and slows litigation, increases antagonism, and deprives parties of genuine participation in the process. For these critics, the answer was clear: Many disputes should be removed from the adversary process and redirected to alternative methods of dispute resolution that better fit the structure of the underlying dispute.

It is important to emphasize that the enthusiasm for ADR has never been just about reducing litigation costs and speeding up case disposition. ADR advocates also believe that alternatives to the adversary system produce better outcomes and achieve a higher degree of party satisfaction—a better quality of justice, as they say. In fact, one popular vision, known as the “multi-door courthouse,” holds that an ideal court system would offer a menu of dispute resolution options and assign each lawsuit to the option best suited to handle it. Indeed, many of the advocates of this model prefer to translate ADR as “appropriate dispute resolution” rather than “alternative dispute resolution.”

Enthusiasm for ADR increased markedly during the 1980s and 1990s. Today, ADR is an established feature of the litigation landscape, and it is even mandated for the federal courts by a congressional statute.¹ One point is important to emphasize here.

With fifty separate state court systems and ninety-four different federal districts, each

1 Alternative Dispute Resolution Act, 28 U.S.C. § 651 et seq.

4

with latitude to design its own ADR options, there are quite a few different court- annexed programs and significant innovation with different ADR techniques. In addition, the states and some federal courts have experimented with modifying the regular litigation process to reduce case backlogs and delay, such as by implementing a fast track option (the so-called “rocket docket’), simplified procedures for smaller cases, limits on discovery, and fixed trial dates. Thus, ADR has expanded alongside other innovations directed at the regular litigation process.

2. Court-Annexed Mediation Today

The rest of my remarks will focus on official court-annexed ADR programs—and mediation in particular. It is worth noting, however, that the private market for ADR services has also greatly expanded over the past thirty years, and companies sometimes use private ADR providers to help them resolve their disputes.

Before I discuss formal court-annexed programs, I should say a few words about another type of court-based ADR that is more informal. This involves trial judges promoting settlements in individual cases, a practice that I understand is well- established in Italian procedure as well. U.S. judges vary widely in what they are willing to do in this regard. Some limit their involvement to checking the parties’ settlement progress and perhaps offering a tentative assessment of the merits to help the parties reach agreement. Others take a much more aggressive role. For example, an active judge might suggest settlement terms, appoint third party neutrals to evaluate the case,

5

and pressure (some would say “coerce”) the parties to agree. Judges at this end of the spectrum sometimes even create new types of ADR, with the parties’ approval, such as convening a sample jury to hear the evidence and render a nonbinding decision to assist with settlement.

Court-annexed ADR also takes the form of official programs established by general rule. Today these programs tend to focus primarily on mediation (although some also include arbitration and other ADR methods). There is a great deal of variation in how the different mediation programs are structured. For example:

 Some programs make mediation a mandatory pre-requisite to regular litigation, while others make it only optional. Courts in the United States have been relatively receptive to the constitutionality of mandatory mediation as long as parties still have a right to litigate afterward.

 Some programs automatically channel entire categories of cases to mandatory mediation, while others rely exclusively on trial judges to make the referral decision on a case-by-case basis. And some mix the two approaches.

 In some programs, the parties pay for the mediation, whereas in others the court pays all or part of the cost (or relies on volunteer mediators), at least in some types of cases.

 Mediators vary, too, in how they approach court-annexed mediation. Some use facilitative techniques, while others use more evaluative methods. A facilitative mediator focuses primarily on helping the parties reach their own agreement, whereas an evaluative mediator also provides parties with an evaluation of their case and possibly even a suggested settlement.

There are also a number of unsettled legal issues regarding court-annexed mediation. One key issue has to do with the confidentiality of mediation proceedings.

There are some well-accepted restrictions, such as the inadmissibility of settlement

6

offers in later litigation, but there is no general agreement on the optimal scope of confidentiality. In particular, there is considerable disagreement about the desirability of a general confidentiality privilege. Many attribute this disagreement to what they see as a tension between encouraging frank mediation discussions, on the one hand, and ensuring access to necessary and important information on the other.

Furthermore, courts differ in their views about the appropriate degree of judicial involvement in regulating party participation in mediation sessions. Many courts recognize a general duty of good faith participation and are willing to impose sanctions when a party completely fails to comply with a mediation order. However, courts disagree about how far to go in regulating the manner of participation and also in sanctioning parties or their lawyers for participating in “bad faith.” Part of the problem involves difficulties inherent in defining “good faith” and “bad faith.” But a lot of the problem has to do with a deeper concern that regulating party behavior too strictly might undermine mediation’s informality and flexibility and interfere with party autonomy.

B. A Critical Analysis

What is one to make of these developments? Proponents argue that court- annexed mediation produces better outcomes for more parties, and does so faster and cheaper. But there are sound reasons to be skeptical about these claims. In the end, we

7

should be cautious about embracing court-annexed mediation and other forms of ADR too enthusiastically.

1. Reduce Cost, Delay, and Case Backlog?

First, consider the claim that mediation reduces cost and delay as well as case backlog. It is difficult to verify this claim empirically and the results of the empirical studies that have been done do not provide strong support. There are several factors that can explain this result.²

For one thing, mediation adds another layer of cost and delay to litigation, so it can reduce overall cost and delay only if it produces settlements in cases that would not otherwise have settled or produces settlements at an earlier stage. However, most cases

2 Several participants in the roundtable panel at the end of the first day of the conference made an important point. They argued that mediation cannot solve serious litigation problems because an effective court-annexed mediation system requires a reasonably well functioning litigation system. To see why, suppose that the litigation system suffers from serious delay and suppose that mandatory mediation is imposed in order to settle more cases. The defendant, who benefits from delay, has an incentive to refuse to settle in mediation and thus force the plaintiff to litigate and incur the lengthy delay. As a result, mediations should produce few successful settlements.

This is a useful insight, but I think it needs to be explored a bit more carefully. Since the plaintiff knows that the defendant will refuse to offer a reasonable settlement and since she also knows that a long- delayed litigation process will yield a very low recovery in present value terms, she should be willing to accept a small settlement, and the defendant, in turn, should be willing to offer a small amount just to resolve the dispute. As a result, one might expect cases to be settled in mediation, contrary to the panelists’ claim. There would still be a problem, but the problem is the settlement amount, not the settlement frequency. Settlement amounts are likely to be artificially depressed by the high delay costs of the litigation system—and thus unfair to plaintiffs. Of course, this line of reasoning also applies to the regular litigation process and predicts the same result even without mediation. In the end, if settlements do not occur in mediation, it probably has something to do with asymmetric information, irrational optimism, or attorney incentives.

8

already settle without mediation, and many settle early. So it is not clear how much of a difference mediation makes.³

Moreover, even if mandatory mediation does produce more and earlier settlements, the result could be an increase in court filings. With settlements more likely in general, plaintiffs will expect a higher probability of settlement in their own cases. This should lead them to predict lower litigation costs, which in turn should make them more willing to file suit, all other things equal. And if more lawsuits are filed, case backlog might not decrease as much as one would expect, and total litigation costs might even increase.

Finally, some U.S. jurists argue that constitutional due process safeguards are triggered when mediation takes place within the court system, and this calls for regulation of the process to assure that mediation is fair and mediators are competent and act properly. But if due process applies—and there is dispute about the matter—the result for court-annexed mediation could be problematic. Legal regulation might increase the costs of mediation and undermine the informality and flexibility that many believe is essential to its success. Thus, safeguards added to protect parties might end up frustrating mediation’s ability to reduce cost and delay.

I am not suggesting that mediation never reduces cost and delay. It probably does for some types of cases. My point is only that one should not simply assume that it

3 Also, given tight court budgets, the time allowed for publicly-subsidized mediation is likely to be limited, and a limited time for mediation can make it more difficult to achieve a successful result.

9

will and then rely on this assumption to require mediation in a wide range of cases.

Whether mediation is likely to reduce cost and delay depends, among other things, on the complexity of the case, the relationship of the parties to one another, the degree of acrimony between them, and the likelihood of settlement in the absence of mediation.

2. Improve Outcome Quality?

Whether court-annexed mediation produces better outcomes than adjudication depends on how one measures the quality of outcomes. Some mediation proponents argue that outcomes should be measured by how satisfied parties are with the result and the process. In my opinion, this is a mistake. Because the outcomes of court-annexed mediation substitute for the outcomes of formal adjudication, they should be evaluated by the same standards used to evaluate adjudicated outcomes. And those standards are not based on party satisfaction because adjudication is not about satisfying party preferences. The goal of adjudication is to produce outcomes that accurately enforce substantive rights by giving injured plaintiffs the compensation to which they are entitled and by deterring wrongful conduct to the extent the law provides.

There is good reason to worry whether court-annexed mediation produces good outcomes by this standard. The problem is not that mediators seek a compromise; in- court settlements do just that and no one argues that they should be banned. The problem is that mediation runs the risk of producing outcomes that favor the more powerful party. For example, in cases brought by individuals against corporations, the

10

corporate defendant is likely to have private information about liability as well as greater resources to invest in the case. If mediation takes place early, before the plaintiff has a chance to conduct discovery, the defendant can conceal any damaging information and use its resource advantage to push for a mediated settlement below the amount that the substantive law guarantees.

This risk can be reduced by postponing mediation until after core discovery has been completed, so the plaintiff has a chance to learn the damaging information (as you might know, discovery is very broad in the U.S.). But doing so will substantially undermine the cost-saving and delay-reducing benefits of mediation. The plaintiff could just refuse to settle in order to force litigation and get access to discovery. But this is not easy to do when discovery is costly and its results uncertain, and when the mediator, who is also in the dark about defendant’s conduct, is eager to settle the case. The upshot is that mediated settlements can end up systematically favoring the defendant, a result that weakens deterrence and shortchanges compensation.

On a more speculative note, I worry that too much enthusiasm for court-annexed ADR, including mediation, might alter perceptions of the judicial role. In my opinion, civil adjudication, at its core, involves enforcing the parties’ substantive rights by applying general principles in a consistent and coherent manner. If I am correct about this, it would do great damage to the institution if judges came to view their role

11

primarily in terms of facilitating private resolution of disputes by promoting mediated settlements.

These are not the only potential problems. Even some mediation proponents object to what they see as the over-legalization of court-annexed mediation and the excessive involvement of attorneys in the process. I’m skeptical about some of these objections, but that is not my point. My point is that we must be careful not to embrace court-annexed mediation too enthusiastically. It is more suitable for some cases than for others and we should be careful about when we require it.

II. Consumer Arbitration A. An Overview

One of the key issues in American civil procedure today involves the future of the class action, and one important aspect of this issue has to do with consumer arbitration.

In two lines of decisions, the United States Supreme Court has approved the use of arbitration in circumstances where it is likely to weaken the enforcement of consumer protection laws. As a result of these decisions, companies can now force consumers to arbitrate their claims individually simply by including an arbitration clause and a class action waiver clause in the sales agreement. It doesn’t matter that the agreement is a

“contract of adhesion”—i.e., a take-it-or-leave-it deal that allows no room for bargaining.

And it doesn’t matter that the consumer never even read the contract or knew that it included an arbitration clause.

12

The Supreme Court has produced this result through its interpretations of the Federal Arbitration Act (FAA).⁴ The FAA is a congressional statute that governs most arbitration in the United States. It was adopted in 1925 to counteract judicial hostility to arbitration. Since the 1970s, the Supreme Court has interpreted the FAA very broadly to favor the enforcement of arbitration agreements.

Two lines of decisions, in particular, are responsible for the current situation.

The first line includes a number of decisions handed down over the past thirty years that make clear that arbitration agreements must be enforced even when those agreements require arbitration of claims involving public rights, such as civil rights, antitrust, and consumer protection laws. The second line includes two important cases decided recently—one in 2011 and the other just last June.⁵ These two cases hold that class action waiver clauses in arbitration agreements must be enforced in most situations.

The result is that consumers must litigate their disputes in arbitration, and they must do so without the use of a class action. The problem is that arbitration without a class action threatens to weaken enforcement of consumer protection laws. To see why this is so, it is important to understand why class actions are so vital to enforcement. In the United States more than in many other countries, there is a longstanding practice of

4 9 U.S.C. § 1 et seq.

5 See American Express Co. v. Italian Colors Rest., 133 S. Ct. 2304 (2013); ATT Mobility LLC v.

Concepcion, 131 S. Ct. 1740 (2011). Before these two decisions, many courts invalidated arbitration clauses with class action waivers on the ground of unconscionability, which is a defense to a contract claim in U.S. law. To be sure, Concepcion and American Express still leave some potential room for invalidation, but only in extreme cases and on very narrow grounds.

13

relying on private litigation to supplement public enforcement of the law. This is true for consumer protection laws as well as for securities, antitrust, and other statutory protections. In many of these situations, however, injured parties have too little at stake to bring individual suits. For example, a rational consumer with a loss of only thirty dollars, say, is not willing to incur the thousands of dollars required to litigate a claim, nor is an attorney willing to take such a suit on contingency.

The class action overcomes this impediment to suit. By aggregating hundreds of thousands of individual consumer claims into a single lawsuit, it attracts the interest of attorneys who anticipate earning a large fee if they are successful in representing the class. Assuming the judge approves the class action—and class actions are much more freely available in the U.S. than in Italy and many other countries—a settlement is almost certain to follow, and the attorney will take what is often a very large fee from the settlement proceeds—a fee that can be as much as 20% to 25% of a multi-million dollar settlement. In effect, the prospect of a substantial fee incentivizes lawyers to bring class actions that deter wrongdoing by holding the wrongdoers accountable when their illegal conduct produces very small losses to large numbers of individuals.

This combination of forcing consumers into arbitration and forcing them to do without the class action threatens to destroy the deterrent effect of private enforcement.

Firms routinely add clauses to arbitration agreements that waive class actions in arbitration. Sometimes individual arbitrations are feasible because the cost is much

14

lower than for litigation, but this is not always the case, especially for disputes that require expensive expert testimony. Moreover, even if an individual arbitration is feasible, many claimants might not bother to file when the claim is worth only a few dollars. This is not so much a problem for compensation given the very small losses at stake, but it is a potentially serious problem for deterrence when the defendant ends up paying for only a small fraction of the harm it causes.

B. Critical Analysis

There are good reasons to be concerned about this development. When firms can use arbitration clauses and waivers to ban class actions, private enforcement is placed in jeopardy. Still, we should be careful not to exaggerate the magnitude of the problem.

First, it is not necessarily the case that the class action is the only way that lawyers can make arbitrations viable. For example, a lawyer might join enough individual claimants as actual parties to a single arbitration to produce a large aggregate award capable of supporting a sizeable fee.⁶ Or a lawyer might sign lots of individual clients, invest in an expert witness report that can be used in all the cases, and spread the cost.

Second, sellers have market incentives to maintain good reputations with consumers. It would not take too many unhappy customers, upset that the contract forces them into arbitration on unfavorable terms, to produce lots of negative publicity, especially in this Internet age. This risk, coupled with the admittedly small, but still

6 Although companies sometimes include clauses that ban joinder as well as class actions.

15

significant, possibility that an arbitration clause with a class action waiver will be invalidated, could encourage firms to provide consumer-friendly arbitration terms. This is what happened before the two recent Supreme Court decisions and some firms still use favorable clauses, although this practice could change now that the risk of invalidation is much lower.

Finally, the seriousness of the adverse effect on deterrence depends, among other things, on whether public agencies will pick up the enforcement slack and whether Congress will be moved to create an exception to the FAA. I would be surprised if agencies increased their enforcement efforts, given funding constraints. And it seems highly unlikely that Congress will exempt consumer protection laws from FAA coverage or authorize class actions in arbitration. This Congress is just too polarized.

Thus, these developments are likely to have a serious effect on enforcement. Still, the magnitude of the problem depends on a number of factors that cannot be fully understood without more empirical work.

Thank you.