July 3, 2018 / 8:40 PM / 5 months ago

Fitbit in ‘ugly truth’ case: We meant to say arbitration is irrational for us, not consumers

(Reuters) - Remember the case in which Fitbit’s Morrison & Foerster lawyers told U.S. District Judge James Donato of San Francisco that no rational party would pay hundreds of dollars in fees to initiate arbitration over a $162 fitness tracker? “A claim that is $162 - an individual claim - is not one that any rational litigant would litigate,” MoFo’s William Stern said at a May 31 hearing.

Fitbit now says it didn’t exactly mean that to come out the way it sounded.

Stern, you may recall, was trying to justify Fitbit’s assertion that it considered its customer’s American Arbitration Association proceeding “concluded” after she rejected Fitbit’s settlement offer of more than $2800. Her lawyers at Lieff Cabraser Heimann & Bernstein told the judge that their client, Kimberly McLellan, rejected the settlement offer for entirely rational reasons. She brought the AAA proceeding after Judge Donato ruled that it’s up to an arbitrator to decide the threshold question of whether disgruntled Fitbit buyers can sue as a class in federal court or must arbitrate their claims individually.

Fitbit, according to Lieff Cabraser, offered McLellan a settlement to evade an answer to that gateway question – and McLellan refused Fitbit’s settlement offer, according to Lieff Cabraser, because she wanted the arbitrator to determine whether Fitbit’s arbitration clause is unenforceable. (It probably goes without saying that Lieff Cabraser also represents the proposed class of Fitbit purchasers, who contend their fitness trackers miscalculated their heart rates; Judge Donato granted Fitbit’s motion to compel arbitration for everyone except the handful of consumers who affirmatively opted out of arbitration. The opt-outs are also represented by Lieff.)

Lieff Cabraser claimed at the May 31 hearing before Judge Donato, and in a subsequent June 14 brief, that Fitbit had inadvertently laid bare the “ugly truth” about the mandatory arbitration clause in its consumer contract: The company knew its customers wouldn’t go to the trouble and expense of bringing individual arbitration claims so requiring arbitration was effectively a way for Fitbit to avoid all accountability to consumers.

“Fitbit did not just admit that arbitration of these claims is irrational for Ms. McLellan alone,” Lieff Cabraser’s June 14 brief said. “It admitted that arbitration here is irrational for any consumer.”

Not so, according to a new brief from Fitbit. The company said it never intended to suggest that it wouldn’t make sense for its dissatisfied customers to bring the arbitration proceedings mandated in the consumer contracts Fitbit imposes on users. What the company meant, it told Judge Donato, is that it wouldn’t make sense for Fitbit to spend the money to arbitrate an individual customer’s $162 claim.

“Plaintiffs misinterpret counsel’s words,” the brief said. “(Fitbit) counsel was not speaking about Ms. McLellan. He was speaking about Fitbit specifically, and defendants generally…. Fitbit’s point was that in this case it didn’t make sense to pay the fees required to arbitrate Ms. McLellan’s claim if she was demanding less than what those fees would amount to and would entertain an offer to resolve her claims. And because Fitbit felt it had offered more than Ms. McLellan’s best-case award at arbitration, it considered the matter as concluded pending further guidance from AAA.”

Fitbit said it wasn’t trying to evade a determination of arbitrability when it offered McLellan more than $2800 to drop her arbitration case but simply “felt that settling Ms. McLellan’s monetary demands was the most rational strategy to determine the scope of her claims.” The company said Lieff Cabraser had misconstrued MoFo comments in a phone conference about the rejected settlement offer and at the May 31 hearing before Judge Donato: “Fitbit never took the position that its offer mooted Ms. McLellan’s claim or somehow terminated proceedings before the AAA,” the brief said. “When counsel remarked that Fitbit’s (terms of service) do not require what ‘no rational litigant would do,’ counsel was referring to Fitbit, not Ms. McLellan.”

Fitbit said it does not have the power unilaterally to end customers’ arbitration case. The company asserted that it’s ready to move forward with McLellan’s arbitration and will repay her the filing fee she submitted to initiate the proceeding. If anyone is playing games, Fitbit said, it’s Lieff Cabraser, which stayed McClellan’s arbitration in order to tell Judge Donato about Fitbit’s rejected settlement offer.

Lieff Cabraser wants the judge to sanction Fitbit by declaring the arbitration clause void for all of customers in the purported class. Fitbit said no sanction is warranted, although it did apologize “for any confusion or inconvenience it may have caused the court and the parties as it sought to clarify the rights and remedies available to Ms. McLellan.”

Here’s the thing, though: Fitbit’s comment about the irrationality of arbitrating small-dollar claims exposes the same truth regardless of whether the company’s lawyers were talking about what makes sense for businesses or consumers. Paying $700 or $1700 to arbitrate a $162 claim isn’t rational in almost any circumstance. So why would a rational company like Fitbit include a clause in its terms of service that, by the company’s own description, would require the company to behave irrationally – paying hundreds of dollars in arbitration fees to resolve individual customer disputes in the forum it has unilaterally imposed on its consumers?

I think we can all guess the answer. It’s only rational to impose costly arbitration on your customers if you’re pretty sure they’re not going to call your bluff and bring a proceeding. That’s the truth revealed in the Fitbit case. Its ugliness may in the eye of the beholder – mandatory arbitration looks like George Clooney if you’re a corporation – but that truth can’t be denied.

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