Terra Extraneus

NewsOK.com reported on December 2, 2008 about a Jackson County man ripped off by BlueHippo, a company that sold inexpensive electronics at inflated prices and then never delivered about a third of the sales, continued to dun checking accounts and generally practiced economic vampirism.

This sad story was not just about a victim in Jackson County, but about a sad news heritage gone and lost forever. NewsOK.com did not seem to know the Attorney General of Maryland forced BlueHippo to mend its ways in May 2007, did not know that a class action law suit against BlueHippo also endangered Gateway, a computer manufacturer, and did not know that at least one ABC affiliate in Baltimore had already done an expose on Blue Hippo many months ago.

At least, none of that was in the story by NewsOk.com.

The other sad part of the story is that NewsOk.com could have used the fact that there have been “thousands of complaints nationally against the company” according to the Central Oklahoma Better Business Bureau as a case study of consumer protection. The Oklahoma Attorney General received twelve complaints in 2008, but there was no action taken. Thus, clearly, there is no consumer protection.

Finally, it seems unlikely the victim in Jackson County will be able to engage a tort reformed lawyer to address the fraud. The legal profession does not have the capital any longer to address such small claims which would require multi-state suit and collection efforts.

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I received an email from Jim Guest, President, Consumers Union, as did probably every subscriber to Consumer Reports. Mr. Guest was appealing for a petition to Congress to get these dangerous products off the market. What products? Toys containing lead; Sesame Street’s Elmo, Dora the Explorer, Winnie th Pooh “and more.” 20 million got through.

Well, Jim, all I can say is America got what America asked for. America wanted tort reform. America got tort reform. America made products liability cases against sellers of poisonous toys nearly impossible. If the sellers were afraid, from fear of a products liability lawsuit, to offer their products for sale without have them tested in a lab first, your campaign might be unnecessary.

One thing bears scrutiny: Is the official Consumer Reports position that government bureaucrats will police the system better than products liability lawsuits?

“We played the flute for you, and you did not dance, we sang a dirge, and you did not mourn.” Matthew 11:17 (NIV)

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The number of incarcerated persons in 2006 was 2,245,189 according to a department of the DOJ, found here. At the end of 2005, there were 4,900,000 persons on parole or probation. Of the offenders on probation, half were felons. 94% of parolees had been sentenced to more than a year in prison.

Anyway you look at it, that is at least 3 or 4 out of every 100 persons, 3% to 4%, is a felon in the United States.

Who cares? Trial lawyers had better.

What prevents felons from registering as voters? What prevents felons from being selected for jury duty?

The answer to both questions is: almost nothing.

Federal statutes preclude persons charged (not convicted) or convicted of a crime punishable by more than a year in prison from serving on a jury in a federal court house. But, the law requires the local federal district court to implement the statute. Most local federal district courts in the United States rely upon jury questionnaires to weed out felons. The assumption is that felons will not return the questionnaire and not show up, or will truthfully disclose their status. The assumption is that voter registration systems will, relying on the same approach, weed out felons. Both assumptions are going to be tested as the number of felons in our society escalates at rate of several percentage points per year. This is especially problematic in federal court trials on the civil side wherein voir dire is the exclusive province of the federal judge.

The voir dire problem, too, will aggravate the problem because even more prospective jurors than ever before will have friends or family that have been caught in the judicial machinery. There is no longer a complete consensus in society that predominately governs how people will react to felons.

State and federal court clerks are going to have to be given computer access to the criminal record databases used by law enforcement to track arrests, convictions, paroles and probation. State and federal court clerks are going to have to screen prospective veniremen.

Arbitration forums are going to have to implement criminal record disclosure into their systems, too. While arbitration forums may not have access to criminal record databases in every instance, they will in some instances. For example, nearly all adult criminal convictions are accessible on line to the public in Oklahoma. In some states like Texas, there is much less access publicly available. While it may not be illegal for an arbitrator to be charged with or convicted of a crime involving more than a year of imprisonment, it probably should be. Indeed, some courts would likely impose that standard on arbitrators simply because it is already imposed on federal jurors.

Until better screening tools are available, trial lawyers, when they have sufficient resources, are going to have to screen jurors and arbitrators as best they can. In many cases, however, for the time being, it simply will not be possible.

Some wags will argue that it is not a problem until it happens. Too late, it has happened, and will happen with increasingly regulatory. Mistrial is a pretty expensive remedy.

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A new study reported today in On Wall Street confirms what the data on the NASD website has always indicated, that the whole process is tilted toward the brokerages, especially the largest ones. The study reports:

Investors who take on the largest brokerages for big claims — $250,000 or more — recover just 10% to 12% of the amounts for which they ask. For claims of less than $10,000, however, they recovered 30% on average. Against the industry as a whole, the recovery percentage was 34%. For all firms receiving claims greater than $250,000, investors’ recovery percentage was 20%.

According to reporter Tony Chapelle, the study also indicated that in customer claims against the major wirehouses, the customer only wins 38% of the time. That is not surprising given the quality of counsel the major wirehouses can afford, their ongoing influence with panelists they see often, and the sophisitication of inhouse counsel.

What does this mean for registered representatives? It means that things are NOT much better in employment disputes regarding commissions, forfeitures, and similar disputes. It means that arbitration does what it is supposed to do, which is to control the liabilities of the houses, and it means that arbitrators are statistically predictable in their decision making, even if not in every single case.

While I have been able to beat these numbers in my cases, I have often considered that to be more because of the integrity of arbitrators in individual cases rather than trial skills. Nevertheless, any decisional system that favors one side or the other so predictably over time is most assuredly skewed. It should be noted that the numbers shoot up against the smaller houses compared to the major wirehouses.

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Imagine the richest corporations suing individuals that these corporations know for certain do not have the resources to pay even a nominal judgment, much less attorney fees and costs, too. Further, imagine some of these corporations formed an industry association and funded it, not to conduct research and development to control access to their products and protect their copyrights, but to sue middle class individuals, individuals that do not have the financial ability to pay a judgment. Why would they do it?

Worse, imagine that it does not really matter to these corporations whether they can prove any case at all, much less actual wrongdoing. The important thing to these corporations is using these individuals as the pretext for media pronouncements about the lawsuits.

Imagine that both are pursuing the “weak, the lame, and the aged,” i.e., a slang term not meant to disparage anyone, but only a generic label used to describe those that simply cannot fight back or cannot get away from the corporate bloodhounds. After all, when reporting these lawsuits in the news media, the news media need not be told the true nature of those being pursued. The human factor in news reporting is that the news media sometimes does not realize it is being “played” by these entities.

If this story is unfamiliar, it proves one thing: these lawsuits are not generating enough news attention to accomplish the objective of deterrence.

The software industry and the recording industry are the two most egregious offenders at the present time. Their conduct is both perplexing and unjust. Further, they have alternatives.

However, a resistance movement has formed, at least against the recording industry. A blog has arisen that documents how these insidious cases are prosecuted, mostly without basis, and the effectiveness of resistance. It is Recording Industry vs People.

The Recording Industry, the Movie Industry and the Software Industry have legitimate reasons to pursue hackers and downloaders that are engaged in illegal mass production of their products without paying license fees or contractual permission to do so. But, simply suing every IP address that received a download, or pursuing every downloader with no inkling of whether its for personal use or mass distribution, invariably leads to suits against those who did not know any better, the young, and the unthinking.

Also, software and websites that make downloading a one click event fool the unwary into believing that the access granted is lawful. The result is that the downloader truly cannot distinguish illicit downloads from legal ones.

Litigation against these websites and software issuers by the offended industry might make sense. But, the individuals users are another matter. The users have been schooled by operating systems, for example, to believe that legal downloads contain “certificates” the computers use for validation. Every user of Microsoft XP has been confronted with a validation “certificate,” whether for compatibility or for proper access, it matters not.

Ultimately, however, these industries will destroy the legal framework they lobbied for and are now misusing. While Court’s will generally enforce the law as written without remorse, Court’s will do so inequitably only for so long and up to a point. Eventually, the Courts will begin to wonder, and then begin to insist, regardless of the letter of the law, that these industries prove they were not, indeed, aiding and abetting one click downloading for their own profits, and imposing no protection on access to their products, and thus placing individuals at risk. After all, does anyone really believe the Recording Industry, the Software Industry and the Movie Industry do not have the resources to conduct the research and development to control their own “gate?” To control access? To require “certificates” of authenticity of licensure?

Lawyers have been painted with the crimson stain of “frivolous lawsuits,” regardless of the merits of the claim. Corporations that abuse the system will eventually face the public’s wrath for “frivolous lawsuits,” rather than generate enough knowledge to bring about genuine issue consciousness or deterrence, and this time the charge against the corporations will be true.

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One of the many consequences of the tort reform movement has been the practical elimination of the civil rights of the average consumer. The clock has literally been turned back to the era of frontier justice.

While it may seem a small consequence, one of these has been in the area of the extended automobile warranty or repair insurance contract. Unfortunately, Oklahoma is a state which permits this business to operate in a largely unregulated manner.

The average automobile owner and driver has no competence or ability to evaluate much less articulate the causation of a breakdown. Nevertheless, extended automobile warranties, or repair insurance contracts, increasingly have long lists of technical exclusions. In Oklahoma, these contracts can be underwritten by non-insurance companies, typically subsidiaries of insurance companies, and are often described by the sellers as non-insurance products to avoid insurance laws and regulators. Additionally, these contracts are becoming increasingly complex, such that non-lawyers will have difficulty evaluating them. Usually, these contracts are offered as “service agreements” and are offered with differing levels of “service,” but increasingly higher premiums are accompanied by promises of broader “service” coverage.

When these contracts were first introduced, they were offered by a limited number of companies and were an excellent way to protect against engine and transmission failures, economically crushing repair costs. Also, when these contracts were first introduced, the civil tort system was still intact, and these contracts could be enforced by the average consumer. I purchased several of these contracts and heartily recommended them to motorists who wracked up a lot of miles but could not tell a rotor from a distributor cap. However, beginning with tort reform statutes that limited or eliminated punitive damages and capped off by Campbell v. State Farm Insurance Co. (previously analyzed on this site), the fear of litigation once instilled in such companies is gone.

There are several reasons an insurance company would go to the trouble to set up a corporate subsidiary or other duck blind to issue automobile repair contracts and to label the contracts as anything other than warranties or insurance products. The reasons are interesting. If the issuer is not an insurance company, then the insurance commissioner of a state probably has no jurisdiction. If the contract is not an insurance product, same result. Also, if the contract is not an insurance product, then the consumer protection impact of the law of “bad faith,” the law of “reasonable expectations,” and attorney fee statutes may or may not apply. The short of it is the consumer is “toast.”

The car dealers have likewise protected themselves by adopting mandatory arbitration provisions, especially through the American Arbitration Association. While a biographical profile of each proposed arbitrator is presently available from the AAA, a decisional history is not. Thus, arbitrators who have never awarded money to anyone cannot be identified and eliminated any better than arbitrators who seem to have a fair and balanced decisional history can be selected or proposed. Arbitrators that have never awarded attorney fees or interest, or who rule in favor of businesses rather than individuals, cannot be stricken without that sort of information. As a result, AAA arbitration typically will make a consumer case uneconomic. The AAA will, of course, tell you that consumers win about half the time and lose about half the time. That statistic is meaningless if, in fact, the winners are not made whole because they had to absorb their own forum fees, attorney fees, interest or were awarded less than the loss.

The proof is in the reality of current events. In a case now pending in the state trial courts of Oklahoma, the used car purchaser thought she would buy her used car from Steve Bailey Honda and then purchase a Vehicle Service Contract offered by Steve Bailey Honda but issued by Westchester Specialty Insurance Services, Inc., a Nevada corporation. Westchester is owned by ACE USA, Inc., a Delaware corporation, which also owns Westchester Fire Insurance Co., a New York corporation.

The purchaser suffered a catastrophic engine failure that Westchester alleged was triggered by the failure of a bolt. The Westchester Vehicle Service Contract contained an exclusion that stated “this Contract does not provide Coverage: (b) For any of the following parts: nuts, bolts, and fasteners…” The phrase “nuts, bolts, and fasteners” is proceeded by “upholstery and carpet, zipper” and followed by “cup holders, ash trays.” Thus, when I first read this, it seemed to me the “bolts” in question were in the trim and not in the engine. But, as this proud used car purchaser found out, after being hit with $1,700 in repairs (after already paying “premiums” of $1,600 for the contract), Westchester claimed that it meant all “bolts,” even those in the engine and transmission, and denied the claim because a “bolt” came loose and tore up the engine.

Steve Bailey Honda, the name of the selling dealership, which may be no more than its marketing nom deplume, was sued for selling the Westchester Vehicle Service Contract, too. But, Steve Bailey Honda was ready and invoked its arbitration clause, effectively deflecting any responsibility it has for the contract it sold.

The state regulators are ineffective or unable to regulate these contracts. If I can figure out how to do it, I’ll link this story to the state legislative representative for Canadian County, Oklahoma, Ray Young. But, there will be no meaningful contract or tort relief in the courts, even if the consumer wins the case, because the recovery will not make the case economic. Even a class action approach would be difficult to press to a conclusion meaningful to the consumer under present law.

Sadly, the car dealers make money on these types of products and will have no incentive to self-regulate them because there is no economically viable litigation threat (and only a few even make a pretense at caring about reputation, and fewer still actually do care). Companies like Westchester that can evade responsibility for claims by the use of exclusions that defeat the reasonable expectations of purchasers need only make certain their claims defense costs are less than their collected premiums in order to be motivated to continue to sell worthless embossed paper documents to consumers.

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“The first thing we do, let’s kill all the lawyers.” Dick the Butcher, King Henry VI – Second Part, Act 3, Scene 2.

Of course, Dick the Butcher meant it literally, murdering all the lawyers, because he was installing a new king. He was not considering installation of a Jeffersonian democracy. However, dismantling the ability to successfully sue insurance companies and other corporate giants has been the political and legal goal of these financial behemoths for the last thirty years. The status of that effort can be briefly summarized.

To a great extent, the diminution of the threat of a lawsuit, and especially the threat of awards of damages sufficient to be noted on a public company’s financial statements, has been achieved. In most states, “tort reform” has resulted in statutes that limit discovery (the means by which parties search for evidence from others unwilling to disgorge the information), limit damages awards, and limit punitive damages. These are topics for another day, and most of the changes to date have not been the sort over which any one would necessarily disagree.

However, as a society, we should have enough experience with these laws to determine whether the small policyholder or small tort claim has been rendered extinct, or placed on the endangered species list. If so, we should also be experiencing a relative increase in insurance company capacity because of reduced claim costs, resulting in reduced premiums for all of us.

The biggest change of them all came from the opinion of the United States Supreme Court in 2003 in Campbell v. State Farm Insurance Company. In that decision, the Supreme Court refined the law embodied in the Eighth Amendment of the Constitution. The Eighth Amendment limits the punishment that can be meted out by prohibiting “cruel and unusual” punishment. The Supreme Court applied this rule in the Campbell case in which State Farm Insurance Company suffered an adverse jury award against it of $145,000,000 in punitive damages, over and above a compensatory damages jury award of over $2 million. The actual damages award was reduced by the trial court to $1,000,000. The Utah trial court also reduced the punitive damages award to $25,000,000.

The Utah Supreme Court reinstated the punitive damages award of $145,000,000 and State Farm appealed to the United States Supreme Court. The United States Supreme Court reversed and concluded that pursuant to the Eighth Amendment, State Farm Insurance Company could not be “punished” for more than ten times actual damages. This decision has prompted a revision in “exposure analysis.” Because jury authority to punish is now limited to ten times actual damages, era of the unlimited exposure is now over.

It is interesting to note that the Utah Supreme Court concluded that State Farm’s conduct was reprehensible. The Utah Supreme Court concluded that State Farm engaged in a nationwide effort to meet corporate fiscal goals by means of a company wide cap on claim payouts. This scheme was referred to as the Performance, Planning and Review program. Because State Farm’s program to reduce amounts paid on claims to boost company financial performance was secretive, the Utah Supreme Court determined that State Farm would get caught once in 50,000 cases. The Utah Supreme Court was so offended by State Farm’s conduct, it reinstated the $145,000,000 punitive damages award.

The funny thing at the time was that State Farm Insurance Company never made much mention of the findings of the Utah Supreme Court, and the $145,000,000 punitive damages award, in any of their reports to policyholders. Maybe State Farm forgot it was a mutual insurance company and should report little things like that. Indeed, according to the United States Supreme Court opinion, State Farm failed to report a similar judgment in Texas in favor policyholders, too.

The case in question, Campbell, however, did not just involve greedy claimants demanding to be paid the full and fair value of their claims. State Farm ignored the advice of its own staff investigators to settle a case brought against its own insured, the State Farm premium paying policy owner, took the case, and thus its insured it was sworn to protect, to trial, and lost a judgment against their own insured for more than three times his policy limits.

Afterwards, State Farm’s advice to this family, that State Farm had agreed to defend and insure, was to put For Sale signs on everything they owned as quickly as possible. State Farm also refused to post a bond and appeal, violating the terms of its standard auto policy which guaranteed a defense through the appellate process. State Farm made much of the fact that the insured originally wanted to fight the claims, but, under most policies, and this one was no exception, the insurance company controls the defense and is the one that is supposed to view the claim with clinical detachment, especially when an emotional insured cannot. State Farm, which had control of the defense, tried to put the blame for its decision to defend the claim on the policy owner, the insured. In all, the United States Supreme Court characterized State Farm’s handling of the claim as one that “merits no praise.” Indeed, the “trial court found that State Farm’s employees altered the company’s records…”

This should have been an easy case for State Farm to evaluate because State Farm’s insured driver was passing on a two lane highway and ran out of room before endangering oncoming traffic, resulting in serious injury and death to the greedy claimants. Serious injury and death have a tendency to make claimants believe they should be fully compensated by the wrongdoer, i.e., greedy, in technical insurance parlance. Also, the State Farm policy insuring the wrongdoer was only worth $50,000, and most detached observers would suspect the policy would not be adequate to compensate the family of the deceased or the seriously injured claimant driver. Thus, State Farm’s evaluation of the accident and the injuries, including death, had to have been suspect. But, State Farm did not get it, and the evil and greedy lawyers representing the dead and injured just could not take a joke.

The United States Supreme Court could not seem to sympathize with the Utah Supreme Court’s obvious chagrin at State Farm. The United States Supreme Court justices probably are not allowed to drive or receive mail from their insurers. The Utah Supreme Court justices probably have to drive themselves to work, insure their own cars, and receive mailings from insurers twice a year at renewal time complaining about greedy claimants, introducing new policy language reducing coverage because of greedy policyholders, and increasing premiums because of both, i.e., the same stuff the rest of us have to look at about twice a year.

Two years have passed. Have insurance companies, led by State Farm’s example, become bolder in denying claims and offering lower amounts to settle claims? Have they become bolder in implementing programs to reduce claim payouts in order to strengthen their own balance sheets? Can individual policyholders find affordable legal counsel to handle their typically modest insurance claims? Under some state tort reform laws, limits on recoveries might even reduce the value of the claim further under the right circumstances. In most recent years, the largest corporate law departments were maintained by insurance companies, and State Farm was no exception. [Most recent surveys are either on pay for view sites or unavailable to the public.] Will the combined effect of tort reform and Campbell make small insurance claims so uneconomic to purse that affordable counsel will be a thing of the past? In other words, have they succeeded in killing all the lawyers?

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