Trial Lawyer Armageddon?

Class action lawyers had a very bad week at the U.S. Supreme Court. In American Express Co. v. Italian Colors Restaurant (previously discussed here) the justices deemed enforceable a clause, contained in a private arbitration agreement, precluding class action arbitration. Plaintiffs had claimed that the prohibition effectively deprived them of any effective means of asserting their antitrust claims: the potential recovery was far, far smaller than the cost of hiring an expert to prove up the claims. (In addition to providing for arbitrability and prohibiting class arbitration, the agreement also blocked other means of sharing expenses among potential plaintiff-firms.)  Under the Court’s precedents, the general principle that arbitration agreements must be enforced does not apply where an agreement effectively blocks the prosecution of valid claims in any form or forum. However, the conservative majority (Justice Scalia writing for the Court) read that “effective vindication” exception very narrowly. It applies to arbitration waivers of substantive (statutory) rights and perhaps to exorbitant filing fees—but not to situations where, as here, the vindication of such claims is economically unattractive. As Justice Kagan’s dissent (joined by Justices Breyer and Ginsburg) described the majority’s holding, “too darn bad.” In light of the Court’s consistent pro-arbitration position, the ruling comes as no great surprise. Still it has the plaintiffs’ bar reeling.

In another, quirkier case, Maracich v. Spears, the justices actually let a class action go forward, but with a highly ironic twist. Here’s the gist of it:

Richard Harpootlian is a kind of low-grade, South Carolina version of John Edwards. His law firm picks up the odd million here or there for the occasional paraplegic, and the firm is closely tied to the Democratic Party apparatus. (For example, it filed suit to compel then-Governor Mark Sanford to accept federal stimulus funds.) But the real money is in class actions. One fine day, the firm’s partners—who are the defendant-appellees in this case—concludes that car dealers who hit purchasers with certain administrative fees thereby violate a state statute against fraud, and they try to cobble together a class action. That does not go so well. Among other things, they have a standing problem: none of the named plaintiffs has actually bought a car from any of the named defendant dealers. So the lawyers go trolling for clients. To that end, they obtain (through FOIA requests) car owners’ information (addresses etc.) from the state DMV and, based on that information, send a series of solicitation letters. They manage to recruit a bunch of plaintiffs, and after additional wrangling, the case goes forward.

The defendants, to their credit, put up a fight and hit on a terrific idea. The federal Drivers Privacy Protection Act (DPPA) makes it unlawful “for any person knowingly to obtain or disclose personal information, from a motor vehicle record, for any use not permitted” under the act. Among the statutory exceptions is the disclosure and use of data “in connection with any civil, criminal, administrative, or arbitral proceeding in any Federal, State, or local court or agency or before any self-regulatory body, including the service of process, investigation in anticipation of litigation, and the execution or enforcement of judgments and orders, or pursuant to an order of a Federal, State, or local court.” But that (and another) exception, say the Maracich plaintiffs, can’t be read to cover solicitation letters. The Supreme Court, 5-4 (Justice Kennedy writing for the Court), agreed.

Here’s the kicker: the DPPA provides that a person “who knowingly obtains, discloses or uses personal information, from a motor vehicle record, for a purpose not permitted under this chapter shall be liable to the individual to whom the information pertains.” The plaintiffs here are seeking $2,500, on behalf of over 30,000 claimants, for every letter mailed—something in the neighborhood of $200 million. Oops.

It’s unclear whether the plaintiffs will be able to collect. For one thing, the Supreme Court said, there might be contexts in which information might be permissibly used for letters that serve both solicitation and other, legitimate purposes (for instance, investigation to prove a case). And there might be due process problems with a judgment of this magnitude. Having thus muddied the waters, the Court remanded the case to the lower courts to clear this up.

To be candid, I’m not a big fan of in terrorem statutes like the DPPA or of the class actions they have spawned. But the fact is that just about every industry except the trial bar is subject to such statutes, and has been hit with actions that are the equivalent of Chinese organ harvesting: you’re presumptively guilty and we could kill you, but we’ll settle for a liver. Some good may come from seeing this particular worm turn.