The Flight From Arbitration

For years, arbitration clauses have been popping up in the fine print of consumer contracts almost to the point where it is hard to find a consumer contract that doesn’t require mandatory arbitration. If you have a potential claim against a credit card company, bank, phone provider, architect, or even an attorney (and shame on the attorneys putting arbitration clauses in their contract), then that claim is likely subject to an arbitration clause. We’ve even had drawn out fights over an arbitration agreement in a contract to purchase logs for a client’s log home.

According to the businesses inserting the clauses, arbitration should be used because it is more efficient and can reduce the cost of litigation for all parties. If that is true, you would expect businesses to insert arbitration clauses into all the contracts that businesses use between one another. According to a study done by two professors of law, that expectation is wrong.

Theodore Eisenberg, a Cornell Professor of Law, and Geoffrey Miller, a professor of law at NYU, have recently released a draft of their study The Flight From Arbitration: An Empirical Study of Ex Ante Arbitration Clauses in Publicly Held Companies’ Contracts. In the study, the professors analyzed 2,414 contracts that were filed with the Securities and Exchange Commission, and found that companies that were quick to use arbitration agreements in disputes with consumers rarely used arbitration agreements in contracts with one another. The study found:

The most striking result is the paucity of arbitration clauses, even in international contracts. Our results contradict some received wisdom but are consistent with the 1998 Cornell University survey finding that relatively few large corporations use arbitration frequently…

Our arbitration clause rate findings contrast with the widespread use of mandatory arbitration clauses in certain standardized consumer contracts, such as credit card and mobile phone agreements…

Some suggest that arbitration clauses in some consumer contracts may be being used for some other purpose, such as a mechanism to completely avoid dispute resolution, leaving consumers with no effective remedy, or to gain advantage in dispute resolution over parties who cannot realistically negotiate. In this view, arbitration clauses are being used to avoid class actions, regardless of the effect on the fairness of the dispute resolution process.

These findings don’t surprise us. We think most consumer attorneys agree with us that arbitration clauses aren’t put in place for efficiency, but to make it more difficult for consumers to bring claims, and when they do, more difficult for them to prevail. Although arbitration can be good for the right case if done in the right manner, we continue to believe that mandatory arbitration agreements unnecessarily take away our clients’ rights to a jury trial.  Apparently, some businesses agree.

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Homeowners’ Association Litigation

Our firm has represented homeowners and homeowners’ associations in numerous matters for years. One of the things we have learned is that there are few places with more petty politics than homeowners’ associations. A recent case from one of the Houston Court of Appeals demonstrates that point nicely.

In the lawsuit, the HOA claimed that the homeowners were not adequately concealing their trash cans. The case went to mediation in 2002, and the parties settled their claims. The settlement agreement had four main provisions: (1) the HOA would pay the homeowners some amount of money; (2) the HOA would plant additional shrubs that matched existing shrubs to help conceal the trash cans; (3) the HOA would pay the homeowners up to $100 for a planting box to use to conceal the homeowners’ trash cans; and (4) the homeowners agreed to conceal their trash cans behind the landscaping. The settlement agreement also had an arbitration clause.

But that was not enough. The parties still could not agree whether the homeowners were adequately concealing their trash cans. In October 2003, the HOA filed a petition to start the arbitration process. The claim went through arbitration, and the arbitrator ruled in favor of the HOA. The HOA then filed a suit to enforce the arbitration agreement. The court affirmed the agreement, but also added $5,386.83 in attorneys’ fees and costs for the HOA. The homeowners’ appealed. The case was finally resolved on July 20, 2006, four years after the dispute started.

Admittedly, this case is atypical. But it demonstrates several important points. First, it confirms how small disputes can escalate. These parties undoubtedly spent tens of thousands of dollars on a dispute involving an estimated $500 in plants. Second, it can be an important lesson on arbitration. Even after the arbitrator made an award, the HOA was required to file suit to enforce the award and still went through the appellate process. Arbitration is not the panacea that many would like consumers to think it is. Finally, it can be a lesson on how not to proceed. We pride ourselves on being problems solvers and our ability to help clients avoid putting themselves in these positions in the first place.

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Troubles at the Food & Drug Administration

Last Friday, the Institute of Medicine, part of the National Academy of Science, released a report titled The Future of Drug Safety: Promoting and Protecting the Health of the Public. According to the IOM’s summary, the report findings include:

There is a perception of crisis that has compromised the credibility of FDA and of the pharmaceutical industry.

Most stakeholders–the agency, the industry, consumer organizations, Congress, professional societies, health care entities–appear to agree on the need for certain improvements in the system.

The drug safety system is impaired by the following factors: serious resource constraints that weaken the quality and quantity of the science that is brought to bear on drug safety; an organizational culture in CDER that is not optimally functional; and unclear and insufficient regulatory authorities particularly with respect to enforcement.

FDA and the pharmaceutical industry do not consistently demonstrate accountability and transparency to the public by communicating safety concerns in a timely and effective fashion.

The report included several recommendations to help alleviate these problems. Those recommendations include:

Labeling requirements and advertising limits for new medications

Clarified authority and additional enforcement tools for the agency

Clarification of FDA’s role in gathering and communicating additional information on marketed products’ risks and benefits

Mandatory registration of clinical trial results to facilitate public access to drug safety information

An increased role for FDA’s drug safety staff

A large boost in funding and staffing for the agency

The New York Times ran an article describing the study and the FDA’s response this weekend.

The FDA, and these problems, are obviously important to the protection of the nation’s health. But they’re also important in drug litigation in Texas. As a result of 2003 legislative changes, drug manufacturers receive a rebuttable presumption that warnings with their drugs were adequate if the FDA approved the warnings. It can be very difficult for injured Texans to overcome this presumption. For example, an injured plaintiff can overcome this presumption by proving that the manufacturer withheld or misrepresented information to the FDA, by showing that the manufacturer continued to sell the product after the FDA ordered it withdrawn from the market, or that the manufacturer promoted or advertised the product for some unauthorized use. This is a complicated area of the law, and if you or someone you know has been injured as a result of medication, you should contact an attorney as soon as possible.

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Legal Malpractice on the Biggest Stage

Legal malpractice comes in many forms, but one of the most common forms is the missed deadline.  Recently, one poor attorney had the misfortune of missing a deadline on the biggest stage there is — before the US Supreme Court.

One upshot of the error is it demonstrates the collegiality among the Supreme Court bar, those lawyers who regularly practice before the US Supreme Court.  According to the article, several colleagues have written briefs on the attorneys’ behalf urging the court to accepted his late-filed document.

It is a shame, but that attitude is hard to find.  Instead, the trend is the opposite.  Parties too often rely on technicalities to prevail instead of really being interested in finding justice or the truth of the matter.

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Hourly Billing

You might remember John Grisham’s novel, The Firm. Law school grad Mitch McDeere gets a job offer he can’t refuse from a “small” Memphis law firm.  Unfortunately, once employed, he learns that his firm is full of all types of unsavory characters.  Caught in their web, Mitch needs a way out and ultimately decides to cooperate with the FBI.  In the movie version, he turns his firm in not for murder, fraud, or any of the other outrageous forms of conduct the firm is involved in, but for inflated hourly billing.

Although without much of that drama, the inflated billing story is being played out in a Chicago office of a large national law firm, where a junior partner has turned in his firm for what he believes were fraudulent billing practices.  The Wall Street Journal law blog has a fascinating discussion of the situation, with many insightful comments.

The billable hour billing system has become increasingly under attack because of its potential for abuse and because it might not truly reflect the value an attorney brings to cases or transactions. But despite the widespread belief that billable hours are not perfect, there is little momentum for change, particularly from traditionally defense-oriented firms.  Traditional defense firms are used to hourly billings, the constant cash-flow, and pursuing cases without taking on the risk of the case.  Thus, there is little incentive to change the system.

On the other hand, firms, like ours, that have traditionally represented plaintiffs using contingent-fee arrangements are used to taking part of the risk in cases and are leading the way toward contingent or alternative billing arrangements in commercial litigation.  For example, for several years we have represented numerous commercial entities using contingent arrangements or hybrid agreements that would have traditionally been done on an hourly basis.

To contact Austin Personal Injury Lawyer, Austin Personal Attorney, Austin Accident Lawyer, Austin Injury Lawyer Perlmutter & Schuelke, PLLC or to learn more about Austin Personal Injury visit

Schuelke Law maintains offices in Austin, Texas. However, our attorneys and lawyers represent clients throughout the state of Texas, including Dallas, Houston, San Antonio, Forth Worth, El Paso, New Braunfels, San Marcos, Kyle, Buda, Round Rock, Georgetown, Lockhart, Bastrop, Elgin, Manor, Brenham, Cedar Park, Burnet, Marble Falls, Temple and Killeen. By Brooks Schuelke

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