The Fine Print: How Big Companies Use "Plain English" to Rob You Blind (27 page)

That is what happened to Ernestine Strobel, known as Mabel. She worked as a government secretary starting in 1944 and, after going to college at night, did drafting work for the navy. She never married. Having to support herself, Strobel lived frugally, saved and bought real estate. In 1998, when she was seventy-nine, she put more than $645,000 into the hands of a Morgan Stanley broker. Her broker then persuaded her to sell her real estate and entrust the half-million-dollar proceeds to Morgan Stanley, too.

Now you might think the firm would have bought some blue-chip stocks that paid dividends or a lot of bonds paying interest for the retired Strobel. Instead, Morgan Stanley put the old lady’s money into risky technology stocks and into Morgan Stanley mutual funds that charged a load (translation: commissions for the broker). Her accounts soon lost $281,000. In contrast, court records show, had the money been conservatively invested 15 percent in stocks and 85 percent in bonds her accounts would have grown by $11,000.

Strobel demanded recompense. After a five-day hearing before an arbitrator she was awarded just $5,000 in damages, with no explanation of how that figure was determined. But what was revealing about that award was how the three arbitrators, none of them lawyers, split the costs of the arbitration. Strobel was ordered to pay $10,350 in fees, more than twice the damage award, but Morgan Stanley paid only $6,900 in fees. This looks a lot like mitigating the damages award by shifting more of the arbitration fees onto Strobel. Morgan Stanley called the outcome a “fair and complete arbitration.”

Strobel did not agree and hired Jeff Lendrum, a San Diego lawyer who specializes in such cases, to get the arbitration award overturned as unconscionable.

The federal judge who heard the case, Roger T. Benitez, wrote that he was “troubled by the severe disparity” between the huge loss and the tiny damages the arbitrators awarded. The judge also dismissed Morgan Stanley’s claim that Strobel was rich and sophisticated and could ride out a ten-year slide in the markets. He also rejected as irrelevant Morgan Stanley’s suggestion that rather than being a frugal government employee who saved, Strobel had struck it rich in a rising real estate market.

Judge Benitez said he would award Strobel the entire $281,000, but the law did not allow him to do that. Indeed, he showed that he had only a very limited power even to review the case. He sent it back to the arbitrator. Eventually a settlement was reached, its terms confidential at Morgan Stanley’s insistence.

None of this would have happened had Strobel not had enough money to hire Lendrum. He believes brokers should have to put advice in writing and be held to a duty of loyalty to the customer, putting their interests ahead of their fees. Lendrum said he has seen many cases of elderly people who were put into speculative stocks and mutual funds that rewarded brokers with fat sales commissions instead of conservative portfolios appropriate to their age and need for income.

Strobel was disillusioned. “Before this happened, I thought that Morgan
Stanley was a company that is fair and honest. And I don’t trust arbitration anymore, believe me.”

She was lucky in another sense. Lendrum has San Diego-area clients in their seventies and eighties who have had to go, at their brokerages’ insistence, to Las Vegas or Phoenix for arbitration hearings, adding travel costs as well as risks for those not in good health. He sees distant forums as just another way to discourage complaints and challenges for recompense.

Paul and Pamela Casarotto got a costly taste of this after they bought a Subway sandwich shop franchise in Montana. They opened their Missoula eatery in 1988 at a location that was not the best, but one they agreed to when Subway’s franchising agent promised that when a better location became available, they could move. But when they tried to move, Subway said no. The Casarottos then sued Doctor’s Associates, the Connecticut firm that owns the Subway name.

Montana law required that any mandatory arbitration requirement be “typed in underlined capital letters on the first page of the contract.” Subway disclosed the requirement for arbitration on the ninth page of fine print.

The Casarottos also complained that they should not be required to go to Connecticut to have an arbitrator hear their case under Connecticut law because the travel posed an unreasonable and costly burden on their small business. They said Montana law should prevail and the case should be heard in Montana. The case worked its way through the courts until it came before the Montana Supreme Court in 1994. Subway’s lawyer, Alan G. Schwartz, opened his argument with a casual remark that unwittingly helped make the Casarottos’ case.

“It is a pleasure to be here in Montana after my trip from Connecticut,” Schwartz said, introducing himself to the court.

“Was it a long trip, counselor?” Justice Terry N. Trieweiler asked.

“A very long trip,” Schwartz said.

“Well, counselor,” Trieweiler responded, “that’s how far these plaintiffs would have to travel to have their case heard by an arbitrator.”

The Montana Supreme Court ruled against Subway because it did not disclose the arbitration requirement prominently on the front page of the contract, as state law required. When Subway appealed to the United States Supreme Court, which takes only a tiny minority of the cases presented to it each year, the court took the case. Its ruling? Eight to one in Subway’s favor.

Justice Ruth Bader Ginsburg held that the Montana law requiring the
front-page disclosure was invalid. Why? Because the disclosure requirement applied only to arbitration and not to all types of disputes, making it discriminatory and thus invalid. The decision invalidated similar notice laws in Georgia, Iowa, Missouri, Rhode Island, South Carolina, Tennessee, Texas and Vermont.

Business lawyers hailed the decision—it obviously enhanced corporate power in such disputes—but not so consumer advocates. Deborah Zuckerman, a lawyer for the American Association of Retired Persons, which filed a brief in support of the Casarottos, described the decision as an “unfortunate ruling for consumers” because “the Montana statute at issue in this case is merely an attempt to ensure that parties are aware that a contract contains an arbitration clause.”

This decision illustrates how the Supreme Court focuses on legal formalism without context and often without recognizing how the law operates in the real world. It is part of a long line of decisions that skew economic power toward corporations that use contracts of adhesion. It also erodes the ancient legal concept that courts must look out for the interests of less sophisticated, less informed and weaker parties if the law is to be merciful and thus widely respected. Ginsburg, a liberal long known for taking a sharp look at discrimination, in this case hurt many buyers not as sophisticated as she is about discrimination.

Justice Trieweiler got another chance to express his views when the case came back to the Montana Supreme Court. He went right to the heart of the issue—unequal power between a big corporation and its customer.

“What I would like the people in the federal judiciary, especially at the appellate level, to understand,” Trieweiler wrote, is that they make a “naïve assumption that arbitration provisions and choice of law provisions are knowingly bargained for” when in fact “these procedural safeguards and substantive laws are easily avoided.”

He added that “any party with enough power over the other” can “stick…an arbitration provision in its preprinted contract and require the party with inferior bargaining power to sign it.”

Justice Trieweiler wrote that the idea that “people like the Casarottos have knowingly and voluntarily bargained and agreed to resolve their contractual disputes or tort claims by arbitration, is naïve at best, and self-serving and cynical at worst. To me,” Trieweiler continued, “the idea of a contract or agreement suggests mutuality. There is no mutuality in a franchise agreement, a securities brokerage agreement, or in any other of the agreements that typically impose arbitration as the means for
resolving disputes…. These provisions, which are not only approved of, but encouraged” by federal judges and others, “subvert our system of justice as we have come to know it. If any foreign government tried to do the same, we would surely consider it a serious act of aggression.”

Plain and simple, that is the issue—mandatory arbitration is being used to enhance the power of corporations over people, and in ways that make it likely corporate power will prevail.

DID I SAY THAT?

The Casarotto case revealed another problem—that the law allows corporations to make promises they have no intention of ever fulfilling and, further, to use those promises to induce people to do all sorts of things, from buying a sandwich shop franchise to accepting a buyout package from a job.

A company can put promises in writing and then not fulfill them—without consequence. Curtis Bridgeman and Karen Sandrik, law professors at Florida State University, call this “promissory fraud.” Unless one can prove “a positive intention to deceive, not just a lack of an intention to perform,” Bridgeman and Sandrik wrote, corporations and their agents can make promises to induce people to do business with them and then simply not perform as promised.

“It is possible to make a promise without having an intention to perform or not to perform,” they note, and yet under the law not commit fraud. That is because fraud requires “an intention to deceive” when the promise is made. Unless you can prove that the company or its agent intended to defraud you, the company and its agents “will not be liable for promissory fraud in courts today.”

How are you going to prove, though, what the company’s agent intended? How can you establish what the courts call a scheme to defraud? It can be done, but it is extremely difficult unless you can afford, and get a court to approve, subpoenas for company records and you have the time and resources to go through what could be a huge pile of unsorted raw data. Even then, you would likely need to turn up something damning, such as an e-mail boasting about a plan to deceive. Absent such a smoking gun, a company and its agents can explain that they never intended to deceive you, they just did not do what they promised.

Buried in the fine print of many agreements are the promises about what a company will do and when, but look even deeper and you’ll often
find that the company reserves the right to change the terms of the agreement any time it wishes. Bridgeman and Sandrik call these “pseudo promises.” Read through the notices you get from your bank, mutual fund company, insurer and others and you will almost always find language that says the company reserves the right to change its policies and the terms of its agreement with you. After reading over innumerable such notices, I have yet to find one that grants
you
an equal right to change the terms.

ARBITRATION GONE AWRY

There are many significant issues of unfairness when customers are forced, often unknowingly, into mandatory arbitration. Let’s take a quick look at two of them.

One arises from the acceptance by the courts of arbitration clauses that require that each case be heard separately, even when the facts are basically the same. Imagine, for example, that a company promised free oil changes every four thousand miles for as long as you own a car bought this year. Then next year the company reneges. The situation is the same for everyone who bought a car from them, but if the contract used to sell each car says each dispute must be handled individually, then you must spend hundreds and perhaps a few thousand dollars to go to arbitration. Nobody is going to do that for oil changes, not even if they plan to keep the car for fifty oil changes.

Requiring separate arbitration for each and every small case is an open invitation to the unscrupulous to steal modest sums from many individuals, none of whom has enough at stake to justify the costs of arbitration, but all of whom, acting together, might. Only instead of the penny or three the pipelines collect from each of us every day for a tax they do not owe, this technique can be used to steal any sum lower than the cost of hiring a lawyer to fight individually. This is another example of how the courts generally, and the United States Supreme Court in particular, favor corporations over people.

The courts are increasingly hostile to class actions, taking their cue from the Supreme Court, especially under Chief Justice John Roberts. When a class action case brought on behalf of 1.5 million women workers at Walmart came before the Supreme Court in June 2011, it was rejected in a 5-4 decision. The court ruled that the women’s cases did not have a common thread, but needed to be adjudicated individually. The majority
opinion, by Justice Antonin Scalia, said that the women could not achieve “a common answer to the crucial question,
why was I disfavored?
” because millions of decisions were involved and they lacked “some glue holding the alleged reasons for all those decisions together.”

Scalia relied heavily on the fact that Walmart had a written policy against discrimination at its 3,400 stores, while also giving each store manager broad discretion. Scalia called this “the opposite of a uniform employment practice that would provide the commonality needed for a class action.” Justice Scalia wrote, “It is a policy
against having
uniform employment practices.” His interpretation favors discrimination by companies that adopt Walmart’s written policy and toss in a few words about giving each manager discretion.

Scalia also wrote that statistics showing discrimination in pay were not worth considering because managers in different stores may have been faced with potential workers who had very different skills and work habits.

What the Court did was force individual actions, which are much less likely to come about because the stakes for each woman are small. It has taken a similar stance in arbitrations; at best, in the eyes of the Court, it’s class arbitrations,
bad
; individual cases,
maybe
.

Now let’s look at how arbitrators get paid. Judges, paid by taxpayers, have no financial interest in cases before them. In contrast, parties pay the arbitrator. You might think that if each side pays half, the arbitrator is economically neutral. Not necessarily.