Oct 9 2018
Consumers and employees often believe that mandatory arbitration clauses drag them into a forum they didn’t choose, to be heard before an arbitrator whose powers are virtually unreviewable, who will award them a minimum of nothing and a maximum of less than they wanted. Once in a while, however, a “runaway arbitrator” appears, to let us all know that the arbitration system also can produce capricious, functionally unreviewable, results which favor down-and-out individuals. The $6 million punitive damages award in Stark v. Sandberg, Phoenix & Von Gontard and EMC Mortgage Corporation is a great example.
The Starks ran a business which was failing. To rescue it, they borrowed $56,900 and secured the loan with a mortgage on their house. Not too much later, the business failed anyway. They filed for bankruptcy. The original lender sold the note to the defendant EMC Mortgage Corporation. The couple moved out of their house into an apartment, anticipating the foreclosure which EMC commenced.
Maybe foreseeing publication of their case as a hypothetical question for law school examinations in the future with their lawyer named prominently in it, the Starks hired attorney Roy B. True (six degrees of separation, perhaps, from the former basketball player World B. Free). He notified EMC’s counsel, Scott Greenberg of the Sanders firm, that he represented the Starks and that EMC should not contact them directly. Nevertheless, while the arbitration was pending, EMC contacted Mrs. Stark at her apartment, contacted Mr. Stark at work, and wrote to them directly about keeping their insurance coverage. There were at least ten such contacts. In addition, EMC hired someone to forcibly enter the Starks’ home and put a sign in the front window, stating: “Property has been secured and winterized. Not for sale or rent. In case of emergency call 1st American (732)-363-3626.”
Those actions, and only these, cost the defendants $6 million. The arbitrator, justifying the award which amounted to one-tenth of one percent of EMC’s shareholder equity, wrote that it was “not great punishment but it should act as a deterrence [sic].” The arbitrator was particularly emphatic about the forcible entry, which he found “reprehensible and outrageous and in total disregard of plaintiff’s [sic] legal rights.” (The 8th Circuit added both the [sics].)
Can anyone imagine that this punitive damages award, if given by a jury in a federal district court, would have remained intact through an appeal to the 8th Circuit? The award of statutory damages for EMC’s violation of the Fair Debt Collection Practices Act was $1000 to each plaintiff, along with $1000 to each for actual damages. Costs and attorneys fees were assessed against the defendants, as well. Under the circumstances, defendants argued that the punitive award evidenced a manifest disregard for the law, because it conflicted with recent Supreme Court case law invalidating high ratios of punitive to compensatory damages, such as BMW v. Gore where a 500:1 ratio was vacated. A showing of manifest disregard, however, requires that a party had to make the controlling case known to the arbitrator during the arbitration, thus giving him a chance to disregard it. Here, probably relying on a clause in the arbitration agreement which precluded an award of punitive damages (the arbitrator correctly found that such a restriction was unconscionable), the law firm never argued how a proper punitive damages award should be measured.
The 8th Circuit panel concluded that EMC had mandated this form of dispute resolution for itself and its customers. It should have realized that “although this result may seem draconian… arbitration is not a perfect system of justice, nor is it designed to be.” Indeed, EMC itself had compelled the case (originally filed in court) into arbitration. So, it “got exactly what it bargained for.”
One rationale for imposing mandatory arbitration is that it avoids the “runaway jury.” Time will tell whether this rationale will hold up. If a jury in the 8th Circuit had awarded $6 million on these facts, it is more probable than not that the Starks would have been fortunate to retain $60,000. That is because the “runaway jury’s” award is subject to full appellate review. The “runaway arbitrator’s” award is not.