Consumer Law & Policy Blog

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?

Gerardi & Willen on Subprime Mortgages, Foreclosures, and Urban Neighborhoods

Kristopher Gerardi and Paul Willen, both of the Boston Fed, have written Subprime Mortgages, Foreclosures, and Urban Neighborhoods. Here's the abstract:

This paper analyzes the impact of the subprime crisis on urban neighborhoods in Massachusetts. The topic is explored using a dataset that matches race and income information from HMDA with property-level, transaction data from Massachusetts registry of deeds offices. With these data, we show that much of the subprime lending in the state was concentrated in urban neighborhoods and that minority homeownerships created with subprime mortgages have proven exceptionally unstable in the face of rapid price declines. The evidence from Massachusetts suggests that subprime lending did not, as is commonly believed, lead to a substantial increase in homeownership by minorities, but instead generated turnover in properties owned by minority residents. Furthermore, we argue that the particularly dire foreclosure situation in urban neighborhoods actually makes it somewhat easier for policymakers to provide remedies.

News Flash: Lawyer Jobs Available at Public Citizen Litigation Group

    For the first time in five years, Public Citizen Litigation Group is hiring staff lawyers -- two in fact. If you are interested in doing cutting-edge consumer and other public interest litigation, take a look at the job announcement. And pass the announcement along to anyone you think may be interested. To learn more about the Litigation Group, go here.

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.

President Obama To Nominate New CPSC Commission Chair and Fill Another Commission Slot; Announces Intention to Increase Commission Size and Seek Greater Funding

This article explains that President Obama will nominate Inez Moore Tenenbaum as the new Chair of the Consumer Product Safety Commission. If confirmed, Ms. Tenenbaum would replace Acting Chair Nancy Nord. Ms. Tenenbaum served two terms as South Carolina's Superintendent of Education. The President also announced that he will name long-time consumer advocate and University of North Carolina professor Robert Adler to fill an empty seat on the 3-member Commission. Finally, the President announced that the number of CPSC commissioners will increase from 3 to 5 and that he is seeking a 71% budget increase over the agency's FY 2007 budget. (Even with the increase the agency's budget would be only $107 million.)

For an overview of key CPSC personnel and to learn more about the agency's mission and structure, go  here.

Ray Brescia on the Community Reinvestment Act's Link to the Financial Crisis

Ray Brescia of Albany has written Part of the Disease or Part of the Cure: The Financial Crisis and the Community Reinvestment Act, 60 University of Sourthern Carolina Law Review 617 (2009).  Here's the abstract:

Some commentators charge that the federal Community Reinvestment Act of 1977 (CRA) spurred the mortgage crisis and the financial fallout that has followed. Born out of the Civil Rights Movement, Congress adopted the CRA at a time when many low- and moderate-income communities, often communities of color, were denied basic banking services such as home lending and small business investment. Advocates argued that when the federal government guaranteed bank deposits through federal deposit insurance, it created a social compact that served as a justification for expecting that institutions accepting such insurance should have to meet the needs of the communities making those deposits. Federal deposit insurance made bank customers confident in their bank’s holdings, which in turn made the business of banking -lending - possible and became a justification for the adoption of the CRA.

In the thirty years since the CRA’s adoption, the banking industry has been transformed. Banks are global in their reach and their outlook. Banks, in all of their forms, are no longer brick-and-mortar institutions on Main Street that take deposits from the grocer and lend to the baker. The CRA, which Congress designed to ensure that banks would meet the credit needs of the low- and moderate-income communities from which those banks take their deposits proved a weak bulwark against the subprime mortgage crisis; unsafe and unsound lending practices carried out by mortgage companies (i.e., entities not covered by the CRA because they are not depository institutions) have decimated the same communities that the CRA was supposed to protect.
The argument that the CRA is to blame for the financial crisis is hard to reconcile under any reading of the statute’s terms and after any assessment of the CRA’s true reach. As this article explains, the CRA was not too strong, but rather too weak. Designed to fight the last war, the CRA became the financial equivalent of the Maginot Line: easily circumvented, lightly defended, and quickly overrun.

An appreciation for the true causes of the financial crisis, together with the fact that the federal government has expended billions to bail out the financial industry, offer strong justifications for expanding the reach of the CRA to cover all financial institutions, not just those that take deposits. This Article begins with a brief overview of the subprime mortgage crisis and its impacts. Following this overview, it outlines the legislative history and structure of the CRA as well as the enforcement mechanisms Congress adopted to carry out the CRA’s core purpose. Next is an assessment of whether the manner in which the Act was enforced may have contributed to the subprime mortgage crisis followed by an examination of the failure of the courts to serve as a check on weak regulatory enforcement of the CRA. It concludes with the development of a series of principles to inform efforts to modernize the CRA to bring it in line with the nature of banking in the twenty-first century. While such CRA modernization might not correct the worst abuses of the subprime mortgage market from the past, it might help to avoid similar crises in the future.

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?")

More on the Credit Card Holders' Bill of Rights

We reported yesterday on the House's overwhelming passage of this legislation. Read the statment of Rep. Carolyn Maloney (D - NY), the principal sponsor of the legislation. Another note: While there was substantial difference of opinion among Republicans (voting in favor by 105 to 69), there was almost none among Democrats (voting in favor by 252 to 1).