CL&P Blog

White House Proposal Includes Authority to Ban Forced Arbitration

by Deepak Gupta

Included in President Obama's proposed Consumer Financial Protection Agency Act of 2009 is the following provision giving the new agency the authority to ban pre-dispute mandatory binding arbitration clauses:

SEC. 1025. AUTHORITY TO RESTRICT MANDATORY PRE-DISPUTE ARBITRATION.

The Agency, by rule, may prohibit or impose conditions or limitations on the use of agreements between a covered person and a consumer that require the consumer to arbitrate any future dispute between the parties arising under this title or any enumerated consumer law if the Agency finds that such prohibition, imposition of conditions, or limitations are in the public interest and for the protection of consumers.

This is a big step forward for arbitration fairness.

The measure follows up on a specific recommendation in the Treasury Department's blueprint for financial regulatory reform, which also suggests that the SEC should explore banning forced arbitration . (Jump to pages 62-63 and 72 of the report.) The Wall Street Journal wonders whether this is "The Beginning of the End of Mandatory Arbitration."

NPR's All Things Considered recently ran this excellent report on the forced arbitration debate, featuring Public Citizen's David Arkush.

Supreme Court Takes Arbitration Case

The Supreme Court yesterday granted cert in Stolt-Nielsen S.A. v. AnimalFeeds International, which raises the question, according to SCOTUSblog, of "when two companies agree to send their disputes to arbitration, may a court order that process to go forward as a class action, if the contract says nothing on that issue."  Because consumer arbitration clauses never provide for class actions, the case might have consequences for consumer contracts which provide for arbitration, but do not expressly bar class actions. Here is the question presented, as framed in the cert petition:

In Green Tree Financial Corp. v. Bazzle,  539 U.S. 444 (2003), this Court granted certiorari to decide a question that had divided the lower courts: whether the Federal Arbitration Act permits the imposition of class arbitration when the parties’ agreement is silent regarding class arbitration. The Court was unable to reach that question, however, because a plurality concluded that the arbitrator first needed to address whether the agreement there was in fact "silent." That threshold obstacle is not present in this case, and the question presented here--which continues to divide the lower courts--is the same one presented in Bazzle:

Whether imposing class arbitration on parties whose arbitration clauses are silent on that issue is consistent with the Federal Arbitration Act, 9 U.S.C. §§ 1 et seq.

More on Arbitration Opt-Outs and Opt-Ins

by Jeff Sovern

Earlier this week, my co-coordinator Deepak Gupta suggested that instead of adopting a so-called compromise providing that consumers agree to arbitration unless they affirmatively opt out, Congress should provide that litigation is the default choice, and consumers should have the opportunity to opt in to arbitration after receiving notice.  I imagine this was a tongue-in-cheek suggestion designed to indicate that the compromise was no compromise at all, but I thought it worth pointing out how changing from an opt out to an opt in changes the incentives for businesses.  In most opt-out scenarios, businesses fare better if consumers stay with the default, which means businesses have an incentive to reduce the likelihood that consumers opt out.  That in turn gives businesses an incentive to present opt-out notices in a way that is likely to get them overlooked.  Accordingly, as I noted in an earlier post, businesses write dull, lengthy opt-out notices filled with as much legalese as they can fit in, print them in one color, and adopt other strategies to reduce the likelihood that consumers notice or plow through them.  But with opt ins, such as Deepak suggested, businesses benefit if consumers depart from the default. As a result, instead of conveying the information in a way that reduces the chances that consumers will actually take it in, businesses present the information in a fashion that will maximize the likelihood that consumers notice it and opt in.  Here's an example I wrote about in 1999:

After the FCC ruled that phone companies seeking to use phone-calling patterns for marketing purposes must first obtain the consumer's permission, the telephone company in my area attempted to secure that permission.  Its representatives called and sent mailings to subscribers. The company also set up a toll-free number for consumers with questions.  The mailing I received was brief, printed in different colors, and written in plain English. . . . A postage-paid envelope and a printed form were included for consumers to respond.  Consumers who accept the offer need only check a box, sign and date the form, and print their name.

Opting In, Opting Out, or No Options at All: The Fight for Control of Personal Information, 74 Washington Law Review 1033, 1102 (1999). The point is that switching from an opt out to an opt in increases the likelihood that businesses will present the information in a way that gets consumers' attention, which in turn increases the likelihood that consumers will make decisions that reflect their actual preferences, rather than blindly doing what businesses want them to do.

Opt in systems do have costs, though. One is the cost to businesses of getting consumer attention and providing a system for the opt in. U.S. West claims that when it tried to get permission from its customers to use their calling patterns, the cost per positive response from consumers reached over the phone was $20.66 while the cost per positive response of consumers reached via direct mail was over $29.  And that was back in 1997.  The reality, of course, is that probably businesses wouldn't even try to persuade consumers to opt in to pre-dispute arbitration clauses.  Not only would they have to incur those costs, but they don't have a persuasive story to tell consumers about why pre-dispute arbitration is in their best interests.  And if that's so, then why would anyone ever think an system that imposes arbitration on consumers---whether through an opt out or the current system--serves consumer interests?

ABA Dispute Resolution Section Appears to Be Backing Down From Arbitration "Opt Out" Proposal

by Deepak Gupta

Today, the ABA's Dispute Resolution Section issued a statement suggesting that it may be backing down from its ill-advised "opt out" proposal on forced arbitration (which we've criticized on this blog here, here, and here.) The memo says that the section's Executive Committee members had a conference call yesterday at which they agreed to recommend that the section "not go forward with the April 15 recommendation that dealt with the enforceability of pre-dispute arbitration clauses in consumer, employment, and civil rights cases."  It also says, somewhat cryptically, that the section's Council will "act" on that suggestion "and consider other options" by the end of this week.

This is encouraging news, and it suggests that the criticism on this blog, and feedback from the consumer and civil rights community, has had an impact. Paul Bland deserves a lot of credit for sounding the alarm. We may not be out of the woods yet, however. Our understanding is that ABA sections wishing to propose resolutions for the August 2009 meeting of the House of Delegates have until May 15 to do so.  And based on the memo, it appears that readers of this blog who are ABA members have until at least May 8 to let the Council know their thoughts on the resolution. You can find a list of the current council members here.

If you're reaching out to those in ABA leadership, it's worth pointing out that the ABA has already taken a position on arbitration fairness legislation. In February, the House of Delegates approved a recommendation to support the Fairness in Nursing Home Arbitration Act. Following up on the recommendation, the ABA sent letters to the House and Senate. The Dispute Resolution Section's "opt out" proposal can't be reconciled in principle with the February resolution. 

Default Rules and the Arbitration Fairness Debate

by Deepak Gupta

Jeff Sovern and Paul Bland have contributed thoughtful posts on a proposal being pitched as a "compromise" in the debate over arbitration fairness.  It goes something like this: Instead of passing a law like the Arbitration Fairness Act that would make arbitration voluntary, let's just allow consumers to "opt out" of mandatory arbitration clauses, presumably by means of fine-print notices that nobody will actually read, let alone respond to. Professor Sovern rightly describes this as illusory consumer protection and, as Paul Bland notes, it's a technique that many corporations are already employing to try to defeat unconscionability arguments.

The proposal strikes me as a great illustration of the importance of default rules in choice architecture, a subject explored in the literature of law and behavioral economics and discussed in Cass Sunstein and Richard Thaler's recent book, Nudge.  Their argument revolves around a pretty simple empirical premise: “[I]f, for a given choice, there is a default option—an option that will obtain if the chooser does nothing—then we can expect a large number of people to end up with that option, whether or not it is good for them.”  Corporations take advantage of this insight all the time in consumer transactions. Thaler and Sunstein give the example of offers for magazine subscriptions that consumers continue to receive unless they take affirmative steps to cancel them; Sunstein says he himself has been paying for subscriptions for years because he hasn't gotten around to canceling them. Another example is employer retirement plans; research shows that participation is greatly increased by making it the default instead of requiring employees to opt in.

So I wonder whether proponents of the "compromise" proposal on arbitration fairness would continue to support it if the opt-out mechanism stayed the same, but the default rule were switched: Instead of opting out of mandatory arbitration, consumers would have to read a notice and affirmatively opt in.  I suspect enthusiasm for the proposal would vanish--demonstrating that a truly voluntary system is not the true objective.

House Judiciary Holds Hearing on Credit Card Industry's Use of Arbitration To Quash Consumer Claims

David Arkush, the director of Public Citizen’s Congress Watch division, is testifying this morning at a hearing of the House Judiciary Committee, Subcommittee on Commercial and Administrative Law, on the need for arbitration fairness legislation. The focus of the hearing is how credit card companies use forced arbitration to avoid accountability for some of their worst practices. David will also explain how forced arbitration is tilted heavily toward businesses in the credit card collection industry, with a focus on the National Arbitration Forum (NAF), the collection industry’s go-to arbitration provider. A Public Citizen study found that in California arbitration cases heard by the NAF, the arbitrator ruled against the consumer 94 percent of the time. David’s testimony will counter the misleading arguments made by corporate lobbyists against giving consumers a choice to arbitrate. The other witnesses are Pennsylvania class action lawyer extraordinaire Mike Donovan, Prof. Rich Frankel (Drexel Law), and GOP witness Prof. Christopher Drahozal (Kansas Law). You can watch the hearing live at this link.

On Arbitration Fairness: Stop the ABA From Taking the Corporate Side Against Civil Rights and Consumers

by Paul Bland

I’ve gotten caught up in scores of e-mails and requests from angry lawyers asking "what can I do about the ABA getting hijacked?" This blog post has my answer.

It’s a pretty well-recognized phenomenon that lawyers who principally represent individuals against corporations have their own organizations, such as the American Association for Justice, state Associations for Justice and trial lawyers’ associations, the National Association for Consumer Advocates, and the like. Lawyers who generally represent corporations against individuals have their own organizations as well, such as the Defense Research Institute. In theory, the American Bar Association ("ABA") is supposedly an umbrella organization that welcomes all lawyers, and largely doesn’t take sides in the battles between plaintiffs’ lawyers and defense lawyers.

It sounds like all that’s right about to change. In the last week or so, the Leadership Council of the ABA Section on Dispute Resolution, has decided to inject the ABA into a major political battle entirely on the side of defense lawyers and their clients and entirely against plaintiffs’ lawyers and their clients. This Leadership Council has decided that the ABA should come in 100% against the civil rights community, every consumer rights organization in the United States, and a variety of other public interest organizations, and be 100% on the side of the American Bankers’ Association, the cell phone industry, and similar groups.

Background: The Battle Over Arbitration Fairness

The battle centers around the Arbitration Fairness Act ("AFA"), which would prohibit pre-dispute binding mandatory arbitration clauses in all contracts involving employment, consumer transactions, medical care, and franchise disputes. In the U.S. Senate, the lead sponsor of the AFA is Senator Russ Feingold (D-Wis.), and in the House, it is Rep. Hank Johnson (D-Ga). The legislation had more than 100 co-sponsors in the House. It is strongly supported by a large coalition of civil rights and consumer groups.  As the enforcement of fundamental civil rights laws and consumer protection laws has been increasingly undermined by pre-dispute binding arbitration, a large and rapidly growing number of persons have come to see this as one of the central civil rights issues of our time. There has been extensive testimony at Congressional hearings, extensive academic commentary, and a growing tide of rage from consumers and employees who are angry at the rapidly expanding use of mandatory arbitration.

The industry has fought back, of course. The Chamber of Commerce and its various allies have commissioned polls (which generally use extremely misleading questions to imply that the consumers, not the credit card companies and nursing homes, will be selecting the arbitration companies), have hired tons of lobbyists, and have funded studies designed to show that credit card companies are pushing their consumers into arbitration for their consumers’ own benefit.

The leading political strategy of the Chamber has been legislation introduced by Sen. Jefferson Sessions (R-Citibank) that supposedly is a "compromise." Leading bank defense lawyer Alan Kaplinsky has openly spoken of having drafted this legislation at several public events. The gist of the Sessions Bill is to permit corporations to continue to use pre-dispute binding mandatory arbitration (and particularly to use arbitration to ban class actions by consumers or employees), but to require (a) that a technical opportunity be given to "opt-out" of arbitration in advance; and (b) to list several vague procedural protections to make arbitration fairer.

It is safe to say that nearly every lawyer who represents individual consumers and employees strongly supports the AFA, and strongly opposes the window dressing Sessions bill. It is safe to say that the Chamber of Commerce strongly supports the Sessions bill, and that no defense lawyer eager to have any clients can speak out in favor of the AFA.

The ABA Dispute Resolution Section Steps Into the Fray

Amazingly--rather than staying neutral in the battle between corporate America and the civil rights and consumer community, rather than stay neutral in this battle between the defense and plaintiffs’ bar--the Dispute Resolution Section of the ABA has suddenly decided to weigh in and throw the weight of the entire ABA against the AFA and for the Sessions approach.

I’ve had several dozen plaintiffs’ attorneys tell me bluntly that if the ABA does, in fact, take the corporate position and oppose the civil rights community, that they will immediately resign from the ABA. It’s hard to say how many lawyers will actually resign from the ABA. For one thing, the corporate power grab is not yet that well known. But if the ABA follows the lead of the leadership of its Section on Dispute Resolution, it’s safe to say that the ABA will become less of an organization that can claim to represent and be comprised of lawyers of all stripes, and the ABA will become an organization of corporate defense lawyers. (Since the Defense Research Institute already serves that role, a good question at that point will start to be "what is the purpose of the ABA at all?")

Why Allowing Pre-Dispute Arbitration Opt-Out Clauses Is Not Effective Consumer Protection

by Jeff Sovern 

One possible alternative to the Arbitration Fairness Act is an approach that permits consumers, when entering into contracts that contain pre-dispute arbitration clauses, to opt-out of arbitration before a dispute has arisen. This approach permits the illusion of consumer protection without the reality. Here are some reasons why: 

There's reason to think most consumers simply don't opt out in consumer transactions. For example, each year, financial institutions bombard consumers with privacy notices informing customers that they have the right to opt out of the sale of their financial information to others. Yet the available evidence suggests that very few consumers have acted to prevent the sale of information about their transactions. See Testimony of John C. Dugan, Partner at Covington and Burling on behalf of the Financial Services Coordinating Council, Before the U.S. Sen. Com. On Banking, Housing and Urban Affairs, Sept. 19, 2002 (“opt-out rates have generally been low, and in nearly all cases under 10 percent.”); W.A. Lee, Opt-Out Notices Give No One A Thrill, 166 Am. Banker 1 (July 10, 2001) (“5% opt-out rate . . . has been circulating as the unofficial industry figure . . . .”); America’s Community Bankers, Wash. Perspective (Supp. Dec. 3, 2001) ("ACB Survey") (60% of financial institutions report that less than one percent of customers opted out). 

Many consumers stay with the default, whatever that default is. As we wrote in our casebook: 

[S]ome evidence suggests that many consumers choose the course of least resistance. An unintentional experiment in automobile insurance in New Jersey and Pennsylvania illustrates the point. Pennsylvania policies provided that consumers could bring a certain claim, but offered them the choice of paying lower rates in exchange for foregoing the right to bring the claim. Approximately 75% decided to keep the right to sue. By contrast, New Jersey policies did not permit drivers to bring the claim, but offered them the right to do so if they paid higher rates. About 20% agreed to pay the higher rates. In other words, most motorists did not deviate from the default choice. Eric J. Johnson, John Hershey, Jacqueline Meszaros and Howard Kunreuther, Framing, Probability Distortions, and Insurance Decisions in CHOICES, VALUES, AND FRAMES 224-40 (D. Kahneman and A. Tversky, eds. 2000). 

The reasons for this tendency to stay with the default are unclear, and may vary in different contexts. My own belief is that one reason is that businesses increase consumer transaction costs in opting out; that is, they make it harder for consumers to opt out. One form this takes is to adopt strategies that reduce the likelihood that consumers even notice that their rights are at issue. For example, in Ting v. AT&T, 319 F.3d 1126( 9th Cir.), cert denied, 540 U.S. 811 (2003), (litigated by co-blogger Paul Bland), AT&T sent consumers a Customer Service Agreement (CSA) containing in bold text a disclaimer that service and billing would not change under the new CSA. The CSA also contained an arbitration clause. The court wrote: 

AT&T's market study concluded that most customers “would stop reading and discard the letter” after reading this disclaimer. AT&T did not change the substance of the letter as a result of its market research -- indeed, internal AT&T documents indicate that the letter was specifically intended to make customers less alert to the details of the CSA. 

Outrage in Ohio: An Unfair Decision on Arbitration

by Paul Bland and Tami Alpert (Power-Cotchett Felow, Public Justice)

Something really crazy has happened in Ohio. Last summer an Ohio State Court of Appeals held that, under Ohio law, if a company claims there is an agreement to arbitrate, then the plaintiffs can be automatically kicked out of the courtroom without being given a chance to respond.  The decision is Garber v. Buckeye Chrysler-Jeep-Dodge of Shelby, 2008 WL 2789074, No. 2007-CA-0121 (Ohio. App. 5 Dist. 2008). We urged the Ohio Supreme Court to review and overturn this decision, but several months ago it refused to hear the case.  For now, at least, this decision is the law in one part, and possibly all, of Ohio.  Under the Garber rule, a plaintiff can be forced go before a private arbitrator picked by the company they are suing, without ever being given an opportunity to respond.

This new decision in Ohio is a complete aberration – court cases are normally like a game of chess in the sense that parties are given a chance to respond whenever the other side makes a move.  But now, in Ohio, if a corporation simply claims that there’s an agreement to arbitrate, the corporation gets to have the legal equivalent of a checkmate on the first move.  Under the Garber ruling, the consumer immediately loses and is kicked out of court.  Under this decision, no matter how unfair a given arbitration clause may be, the consumer has no meaningful chance to appeal.

Fair Arbitration Coalition, Website & Blog Announced

A newly formed coalition is calling on Congress to stand up for employees and consumers and ensure companies are held accountable for misdeeds by passing legislation to end forced arbitration.  The goal of the Fair Arbitration Now Coalition is to pass the Arbitration Fairness Act (H.R. 1020).  Participants represent consumers, employees, homeowners, franchise holders and more. They range from Public Citizen, the National Association of Consumer Advocates, the National Employment Lawyers Association and the American Association of Justice to the National Consumer Voice for Long-Term Care, Home Owners for Better Building and the Leadership Conference on Civil Rights.

Website & Blog:  The coalition also has launched a blog that keeps readers up-to-date on the latest arbitration news and a web site, explaining what forced arbitration is, outlining the kinds of contracts in which forced arbitration clauses appear, providing links to news articles and telling stories of arbitration horrors.

Arbitration Fairness Day (April 29): The Fair Arbitration Now Coalition will hold a press conference and lobby day on Wednesday, April 29, with more than 50 consumers, employees and their representatives, who can speak about the injuries people suffer when they are forced into arbitration in an attempt to hold companies accountable for wrongdoing.