by Jeff Sovern
In a recent American Banker essay, I argued that businesses praise arbitration not because they genuinely value it, but because it enables them to block class actions. I said that for two reasons: first, that if businesses truly believe arbitration is superior to litigation, as they say they do, they should prefer arbitration even for resolving disputes in individual actions when class actions are not available. Yet financial industry organizations have stated that if they cannot use arbitration to block class actions, they will not use arbitration at all in consumer disputes. Second, a study found that in business-to-business contracts, where class actions are rare and so not relevant to deciding whether to use arbitration, companies use arbitration clauses far less often than in their consumer contracts, suggesting that they don’t see value in arbitration except when class actions are a possibility.
In return, Alan Kaplinsky, a leading arbitration advocate and financial industry lawyer, responded in an American Banker piece of his own. But he never actually grapples with my claim that the actions of businesses show they prefer litigation to arbitration when class actions are off the table. In fact, his argument proves my point.
First, Mr. Kaplinsky argued that “arbitration is superior to class action litigation for consumers and companies alike [emphasis mine].” The Consumer Financial Protection Bureau study disagreed, but I understand that Mr. Kaplinsky claims the bureau went off the track on that one. However, my essay was based on what businesses want to do with disputes when class actions are not involved. As I noted above, they want to litigate, not arbitrate.
Second, Mr. Kaplinsky wrote that I said “the evidence points to few individual arbitrations occurring in the first place.” He then stated that there had been thousands of such individual actions, including the 1,750 the CFPB studied. Well, that might have been a good argument if I had actually said that few individual arbitrations have occurred. Except that I didn’t. It’s irrelevant.
Moving on from that straw man, Mr. Kaplinsky says that businesses incur extra expenses in defending claims in arbitration and that they would not be willing to incur those expenses if they must also pay for class actions. In other words, Mr. Kaplinsky agrees that if arbitration clauses can’t prevent the use of class actions, business won’t want to use arbitration. But as I said in my original piece, if businesses genuinely believe arbitration is superior to litigation, shouldn’t they choose arbitration whenever they can, whether or not it enables them to avoid class actions?
But what about the arbitration expense Mr. Kaplinsky cites? Is that the explanation? Ask yourself why businesses are willing to assume that expense now. It’s not to sell their products: no business advertises that you should choose them because they pay for arbitration if you have a dispute with them. Rather, it’s because they get some other benefit out of assuming that expense. And that benefit, of course, is blocking class actions. What else could it be?
In short, businesses prefer arbitration because, as CFPB Director Richard Cordray said, it gives them a “free pass” to avoid accountability to their customers. It enables them to block class actions. Maybe it’s time they admitted it.