June 1, 2018 / 7:21 PM / 6 months ago

Fitbit lawyers reveal ‘ugly truth’ about arbitration, judge threatens contempt

(Reuters) - At a hearing Thursday in San Francisco federal court, a lawyer for the fitness tracking company Fitbit told U.S. District Judge James Donato that no rational customer would arbitrate a $162 claim against the company. The filing fee for a proceeding before the American Arbitration Association, said William Stern of Morrison & Foerster, is $750 - and that’s just to get the case started. It simply doesn’t make sense, Stern said no fewer than six times at Thursday’s hearing, to arbitrate a $162 claim.

Fitbit’s terms of service require customers to arbitrate their claims.

Quite simply, this is a Catch-22 for Fitbit customers. Fitbit imposes mandatory arbitration because it doesn’t want people who buy its fitness trackers to band together in a class action that would make their small claims economically viable. But Fitbit knows consumers, for the most part, won’t throw good money after bad to arbitrate their relatively small claims – and the company doesn’t want to lay out its money for small-dollar arbitration either.

Maybe we should give Fitbit’s lawyer points for honesty. Arbitration fans often insist that consumers get quicker, more efficient resolutions from private arbitrators than they could obtain in class actions. Stern didn’t bother to trot out that canard. He conceded the truth: “A claim that is $162 - an individual claim - is not one that any rational litigant would litigate.”

Stern’s blunt admission did not play well with Judge Donato, who is overseeing a class action alleging that Fitbit trackers miscalculated users’ heart rates. To understand why, you need some context. Last October, the judge granted Fitbit’s motion to compel arbitration for everyone except the handful of customers who affirmatively opted out of the arbitration clause.

Plaintiffs’ lawyers at Lieff Cabraser Heimann & Bernstein had argued the arbitration provision is unenforceable, but Judge Donato said Fitbit’s so-called delegation clause leaves it to an arbitrator, rather than a judge, to decide the threshold question of arbitrability.

A Lieff Cabraser client named Kate McLellan called Fitbit’s bluff. She filed a demand for arbitration to determine the enforceability of Fitbit’s clause. McLellan put up $750 to launch the arbitration, though AAA later determined she owed only $200.

Fitbit offered McLellan more than $2,800 to drop her claim, as Lieff Cabraser explained in a May 22 brief. She rejected the offer, insisting that she brought the proceeding to test the enforceability of Fitbit’s arbitration clause. Fitbit nevertheless informed AAA that the case was over. “The filing fee alone ($750) is almost five times her total out-of-pocket claim, were she to succeed. We believe Fitbit’s total offer of $2,814.75—which is more than 17 times what she paid — is many times more than what she could recover if she were to proceed to arbitration and prevail,” the company said in a May 16 letter to AAA. “Fitbit regards this matter as concluded.”

Lieff said it was anything but in its May 22 brief to Judge Donato. “Fitbit has acted to deprive Ms. McLellan of any opportunity to resolve her arbitrability challenges in any forum, including in arbitration,” Lieff argued. “Fitbit’s actions lay bare its strategy to use arbitration to deprive its consumers of even a modicum of due process. No authority permits a party to use a delegation clause to deny a party any opportunity to be heard. Yet this is exactly what Fitbit has done.”

Thursday’s hearing was supposed to be about the opt-outs’ class action, but Judge Donato quickly homed in on the arbitration controversy. He said Fitbit’s handling of the McLellan arbitration “appears to be an absolutely unacceptable level of gamesmanship” and ordered briefing from both sides on whether Fitbit had engaged in “a form of civil contempt.”

The judge said he had sent the case to arbitration because Fitbit said that’s where it belonged. It is “profoundly troubling,” Judge Donato said, that Fitbit unilaterally decided McLellan’s claim could not be arbitrated because, as he described the company’s position, “We think it’s a cheap case, and we offered her plenty money to get rid of it, and she said no, and she’s crazy as a result of that, so our hands are now tied.’”

It was not entirely clear from the hearing transcript whether Fitbit lawyer Stern was trying to argue that it would be economically irrational for the company, as opposed to an individual customer, to pay the cost of arbitrating a single claim. At different points, he seemed to suggest it wouldn’t make economic sense for either side to pay a $750 filing fee in a dispute over a $162 claim. He did not, as best I could tell, acknowledge that Fitbit’s own contract with consumers sets those terms by requiring customers to arbitrate their disputes.

Stern did say that if Fitbit had offered McLellan $2,800 to settle a $162 claim in Judge Donato’s court, “I have a feeling the court would look to the other side and say, “What is it you would get if you went fully to trial, and got everything you wanted, and then some? You would get less than $2,800.’” The judge reminded Stern that the U.S. Supreme Court put an end to the tactic of picking off lead plaintiffs in class actions. (Donato didn’t mention the name of the Supreme Court case but it’s 2017’s Campbell-Ewald v. Gomez.)

McLellan lawyer Jonathan Selbin of Lieff Cabraser told me in an email that his client is anything but irrational. “She chose to reject their offer because she saw it for what it was: an attempt to prevent her or anyone from holding Fitbit accountable,” Selbin said. Fitbit’s attempt to abort the arbitration, he added, exposes “the ugly truth” about why companies insist on arbitration provisions in consumer contracts: Because they know most people won’t arbitrate small claims. “ It’s not, as companies like to pretend, just about which forum those claims get litigated in,” Selbin said. “It’s about wiping out their liability for their own wrongdoing. It’s a get-out-of-jail-free card they write for themselves and impose on consumers.”

I emailed Fitbit’s lawyers at MoFo, who referred my inquiry to the company. Fitbit sent an email statement responding to my questions about its handling of McLellan’s arbitration: “Where disputes arise, we aim to find a clear path to resolution. Fitbit never intended to close off any avenues for consumers to take action, and we certainly never intended to disregard any aspect of the court’s order upholding our arbitration clause.”

About the Author

This post has been corrected. An earlier version contained a misspelling of McLellan's name.

The views expressed in this article are not those of Reuters News.

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