Consumers turn tables against corporate defense in compelled arbitration of information privacy claims

Image via www.vpnsrus.com by Mike MacKenzie CC BY 2.0

Consumer plaintiffs turned the usual tables on corporate defense in the fall when a federal court in Illinois ordered Samsung Electronics to pay millions of dollars in arbitration fees in a biometric privacy case.

In the underlying arbitration demand, 50,000 users of Samsung mobile devices accuse the company of violating the Illinois Biometric Information Privacy Act (BIPA). BIPA is a tough state privacy law that has made trans-Atlantic waves as it fills the gap of Congress's refusal to regulate the American Wild West of consumer privacy.

Typically of American service providers, Samsung endeavored to protect itself from tort liability through terms and conditions that divert claims from the courts to arbitration. The (private) U.S. Chamber of Commerce champions the strategy. Arbitration is reliably defense-friendly. Rumor has it that arbitrators who don't see cases corporations' way don't have long careers. And companies bask in the secrecy that shields them from public accountability. (Read more.)

Resistance to compelled arbitration has been a rallying cause of consumer advocates and the plaintiff bar. For the most part, resistance has been futile. But consumer plaintiffs appear to have a new strategy. The Chamber is not happy.

In the instant case, consumers alleging BIPA violation were aiming for arbitration. Arbitration rules, endorsed by Samsung's terms, require both sides to pay toward initial filing fees, a sum that adds up when 50,000 claims are in play. The consumers' attorneys fronted their share, but Samsung refused. The company weakly asserted that it was being scammed, because some of the claimants were deceased or not Illinois residents, both BIPA disqualifiers.

Samsung must pay its share of arbitration filing fees for living Illinois residents, the district court answered, at least those living in the court's jurisdiction. Many of those consumer claimants were identified with Samsung's own customer records. A few whom Samsung challenged, the claimants dropped from their number. Even when the court pared the list to consumers in Illinois's federal Northern District, roughly 35,000 were still standing.

"Alas, Samsung was hoist with its own petard," the court wrote, quoting Shakespeare. The court opined:

Samsung was surely thinking about money when it wrote its Terms & Conditions. The company may not have expected so many would seek arbitration against it, but neither should it be allowed to “blanch[] at the cost of the filing fees it agreed to pay in the arbitration clause.” Abernathy v. Doordash, Inc., 438 F.Supp. 3d 1062, 1068 (N.D. Cal. 2020) (describing the company’s refusal to pay fees associated with its own-drafted arbitration clause as “hypocrisy” and “irony upon irony”).

The American Arbitration Association, the entity with which the claimants filed pursuant to Samsung's terms, estimated Samsung's tab at $4.125 million when the number was still 50,000 claims.

Attorneys Gerald L. Maatman, Jr., Rebecca S. Bjork, and Derek Franklin for corporate defense firm DuaneMorris warned:

As corporations who employ large numbers of individuals in their workforces know, agreements to arbitrate claims related to employment-related disputes are common. They serve the important strategic function of minimizing class action litigation risks. But corporate counsel also are aware that increasingly, plaintiffs’ attorneys have come to understand that arbitration agreements can be used to create leverage points for their clients. Mass arbitrations seek to put pressure on respondents to settle claims on behalf of large numbers of people, even though not via the procedural vehicle of filing a class or collective action lawsuit. As a result, corporate counsel should carefully review arbitration agreement language with an eye towards mitigating the risks of mass arbitrations as well as class actions.

Samsung wasted no time appealing to the Seventh Circuit. The case has drawn a spate of amici with dueling briefs from the Chamber and associates, favoring Samsung, and from Public Justice, et al., favoring the consumer claimants.

The district court case is Wallrich v. Samsung Electronics America, Inc. (N.D. Ill. Sept. 12, 2023), opinion by Senior U.S. District Judge Harry D. Leinenweber. The appeal is Wallrich v. Samsung Electronics America, Inc. (7th Cir. filed Sept. 25, 2023).

Shielding business from coronavirus torts neglects deep-seated dysfunction in litigation, health insurance

Amid reopening and the controversy over reopening, American private business is seeking legislative protection against coronavirus-related tort litigation.

To oversimplify, businesses are worried about being sued if a worker or customer contracts the virus in the workplace or in a retail space.  Tuesday morning, U.S. Chamber of Commerce Executive Vice President and Chief Policy Officer Neil Bradley told National Public Radio that the Chamber is not asking for blanket immunity, but "a safe harbor ... against frivolous lawsuits."

"No one wants to protect bad actors here," Bradley said.  He suggested that liability could be predicated on gross negligence or "willfully forcing workers to work in unsafe conditions," which, legally speaking, is recklessness.

Protecting business from litigation is the Chamber's bread and butter, and that doesn't make it the Big Bad Wolf.  Businesses, especially small businesses, represent real people, owners and workers, who, in the absence of any extended public safety net, need to work to make ends meet.  Facing bankruptcy because of prolonged closure or because of the inevitability of a contagious disease surmounting all precaution is a heck of a catch-22 to put a business in.  From that perspective, the Chamber's position seems a fair ask.

At the same time, the Chamber's advocacy highlights two enormous socio-legal problems in America: transaction costs in tort litigation and employment-based health insurance.  A safe harbor would brush both these problems back under the rug.

It isn't tort litigation per se that business fears; it's the cost of that litigation.  Corporate defense—that's the kind of law I practiced a million years ago—wins in litigation with an enviable record.  The burden of proof rests with the plaintiff, which means that even meritorious causes may fail upon the vagaries of evidence.  What's more, the usually superior resources of the corporate defense bar warp the playing field of an adversarial contest predicated on the fallacy that the truth will out.  But the defense's advantages don't change the fact, for many reasons I won't here explore, that litigation costs a fortune.

As a result of runaway transaction costs, everyone loses.  Plaintiffs and would-be plaintiffs with meritorious complaints wind up not suing, winning nothing, or winning far less than will make them whole.  Plaintiffs without meritorious complaints may nevertheless win in settlement.  Meanwhile the cost of defense in every scenario, from insurance in anticipation of litigation to fees in its management, is visited on American business and passed on to the American consumer.  And the mere risk of those costs results in over-deterrence that burdens the American marketplace, distorting economic behavior.  This dysfunction renders the U.S. personal injury system a laughingstock elsewhere in the world.

So if the deck is so stacked against plaintiffs, why do they sue anyway, courting an invariably unfulfilling outcome and burdening even prevailing defendants?  That leads us to the second problem, our dysfunctional health insurance system.

An injured person might wish not to sue, yet become a plaintiff anyway; if the person is insured in any measure, the insurer will make the choice.  And notwithstanding the intervention of insurance, our healthcare system usually leaves an injured, would-be plaintiff holding a bag of devastating, bankruptcy-inducing invoices.   (I asked, rhetorically, earlier this week, what perversion of American values causes a working person diagnosed with terminal cancer to have to spend his precious last year of life carving out time from family and chemotherapy to do fundraising.)  In the American litigation and health insurance systems, a plaintiff sues against all odds because the plaintiff has no other choice.  And in a perverse feedback loop, plaintiff and plaintiff's insurer are permitted to pin their hopes on the likelihood that the threat of excessive transaction costs will shake loose a settlement upon even the weakest of claims.

The problem of healthcare costs is compounded by America's stubborn insistence on employer-based health insurance.  Focused on the bottom line, employers effectively make advance healthcare decisions for workers, which, naturally, increases incurred costs for the workers who become patients.  With precious little control over their healthcare choices, but afraid of wholly losing coverage, risking food and shelter for themselves and their families in a country that eschews social safety nets for people while bailing out corporations, workers make irrational market choices, such as working for less than a living wage, accepting a salary to obviate overtime, going to work in unsafe conditions, and going in sick.  We got into this mess entirely by accident, as Planet Money reported in 2009, and we seem helpless to get out of it.  Ironically, now, the Chamber seeks to protect business against a litigation problem that results in large part from employers' own choices, however economically rational, to leave workers unprotected from catastrophe and trapped in a job by an unlevel labor market.

In the theoretical American tort system, the way it works when I teach its rules and policies to law students in America and Europe, the businesses represented by the U.S. Chamber should not be worried about tort lawsuits.  The test for negligence-based liability in American tort law is simply unreasonableness.  A business that takes reasonable measures to protect workers and customers against infection would suffer no liability, even given the inevitability that contagion will still happen in the face of reasonable precautions.

The truth of the matter is quite different from the theory, and Bradley's statement to NPR demonstrates the divergence.  On the one hand, Bradley said that business must be protected against "frivolous lawsuits."  The problem with that rationale is that the legal system already provides for potentially hefty penalties and sanctions against any plaintiff or plaintiff's lawyer who would try to prosecute a truly frivolous lawsuit.

On the other hand, Bradley said that businesses should be liable only upon a heightened culpability standard, gross negligence or recklessness.  "No one wants to protect bad actors here," he said.  Someone who is grossly negligent or reckless is not necessarily bad; bad is a normative judgment and not a workable legal standard.  Colloquially, he is equating bad with culpability, and that's fair.  But if the equation holds, why is a negligent business not also bad?  Is every negligence lawsuit necessarily a frivolous lawsuit?

Bradley made a strategic semantic choice.  Mention of the "frivolous" is calculated to evoke a gut reaction of displeasure in Americans who have been conditioned by the heavy media messaging of tort reform advocacy.

But let's for the moment cut Bradley and the Chamber some slack.  From where they sit, frivolous cases and negligence claims are equally problematic.  That's because plaintiffs are compelled by the circumstances of our dysfunctional systems to sue in negligence even when the merits might not bear out the claim.  In other words, the brokenness of our litigation and healthcare systems over-incentivizes injured persons to litigate.  A plaintiff decides to sue because of desperate need for compensation, not because of the strength of the claim that the defendant is blameworthy.

Negligence isn't the thing that's broken.  For my money, negligence, meaning the reasonableness test, applied by a Seventh Amendment jury, remains one of the greatest innovations in law in the last two centuries and has proved a worthy American example for the world.

Our litigation system is broken.  And our health insurance system is broken.  Adoption of a safe harbor for defendants within those systems as they exist now will just mean that when a business is negligent, and a person gets sick as a result, the sick person will bear the cost of the illness and of the business's negligence.  That's not how American civil justice is supposed to work.  That's not how it was ever supposed to work.

So many pundits, so many of us, Americans and people around the world, have wondered aloud whether this crisis might at last precipitate real and meaningful change, change that might bring people's standard of living into correlation with our fantastic global wealth and technology.  We've wondered whether, and we've dared hope that, we stand at the threshold of the Great Realization, from which humankind will never turn back.

In that frame of reference, the safe harbor proposed by the Chamber, or moreover statutory immunity from tort liability, would be a profoundly disappointing portent of business as usual.

My thanks to Professor Rebecca Crootof at Richmond Law for an email that got me thinking about this.  Thanks also to any loyal reader who made it this far without pictures.  My "Report from a Social Distance Week 7" is delayed but not forgotten; look for it this weekend.